Edited by Paul Devinsky and Rita Weeks
Copyrights / Unregistered Works / Class Action
Second Circuit Rejects $18M Settlement in Freelance Writers' Copyright Suit
By Whitney D. Brown
The U.S. Court of Appeals for the Second Circuit has rejected an $18 million settlement agreement in a class action copyright infringement lawsuit brought against database operators by freelance writers, on the grounds that the settlement failed to adequately represents those members of the class whose works were not registered with the U.S. Copyright Office. In re Literary Works in Electronic Databases Copyright Litigation, Case No. 05-5943 (2d Cir. August 17, 2011) (Winter, J.)
As the internet rose in popularity, works sold by freelance authors for publication in newspapers and other periodicals increasingly became reproduced electronically in electronic databases such as Westlaw and Lexis Nexis. In response to this electronic publication, a group of freelance writers sued the original print and subsequent electronic publishers, namely, The New York Times Company, Dow Jones, Inc. and database operators Reed Elsevier Inc. (owner of LexisNexis), and Thomas Corporation (owner of Westlaw). In 2001, these actions by freelance authors were consolidated into a single class action before the U.S. District Court for the Southern District of New York. The class was represented by 21 named plaintiffs, each of whom owned at least one copyright in a freelance article, and three associational plaintiffs, the National Writers Union, The Authors Guild, Inc. and the American Society of Journalists and Authors.
- The district court referred the parties to mediation, beginning in January 2002. By March 2005, the parties reached a comprehensive settlement agreement, that divided the works at issue into Categories A, B and C. Category A represented works that authors registered with the U.S. Copyright Office in time to be eligible for statutory damages and attorneys' fees under the Copyright Act. Category B represented works that authors registered before December 31, 2002, but not in time to be eligible for statutory damages. Under the Copyright Act, claims in Category B are eligible to receive only actual damages suffered by the author. All other claims from freelance authors belonged to Category C. While Category C claims comprised more that 99 percent of authors' total claims, none of the 21 named plaintiffs held a work in Category C only. The Settlement Agreement reached created a "damages formula" for each category, and awarded the most damages for those works belonging to Category A, followed by Category B works and finally those works in Category C.
Upon reaching the settlement, both parties moved the district court to certify the class for settlement purposes and approve the settlement. The district court approved the settlement over the objections of class members who authored works in Category C that the settlement did not represent their interests equally with Category A and B authors. In October 2005, the Category C objectors to the settlement appealed the district court's order. The Second Circuit ruled in 2007 that the district court lacked subject-matter jurisdiction to approve the settlement of claims for infringement of unregistered works because the registration requirement of the Copyright Act is jurisdictional. Following this ruling, authors and publishers sought review from the Supreme Court. In March 2010, the Supreme Court reversed the 2d Circuit, holding that the district court had jurisdiction over the settlement because the Copyright Act imposes only a "nonjurisdictional precondition" to filing a claim. The 2d Circuit remanded the case following the Supreme Court's decision, requesting that the parties file letter briefs addressing supplemental authority on the merits.
In its second opinion on the settlement agreement, the 2d Circuit addressed the Category C objectors' arguments that the settlement impermissibly released claims beyond the factual predicate of the case, that class certification was improper because subgroups within the class have conflicting interests and that the district court erred procedurally in reaching its decision. In its August 2011 opinion, the 2d Circuit agreed with the objectors that not all class members were adequately represented. The panel found that the settlement contravened Federal Rule of Civil Procedure 23(a)(4) because the named plaintiffs failed to adequately represent the interest of class members who authored only Category C works. The panel agreed with the Category C objectors that a "subclass" of plaintiffs should have been created, and found that "only the creation of a subclasses, and the advocacy of an attorney representing each subclass" could ensure that the interests of the Category C-only authors would be adequately represented. Though the panel found it appropriate that the authors of unregistered works in Category C receive less under the settlement, since these claims are "weaker" under the Copyright Act, it objected to the settlement because it provided "no basis for assessing whether the discount applied to Category C's recovery appropriately reflects that weakness."
Copyrights / Personal Jurisdiction
Third-Party Web Ads Confer Jurisdiction over Nonresident
By Eric W. Hagen
In a decision carrying significant jurisdictional implications for commercial websites, the U.S. Court of Appeals for the Ninth Circuit reversed a dismissal for lack of personal jurisdiction, ruling that an Ohio-based celebrity gossip site was subject to California jurisdiction based on its acceptance of third-party advertisements directed towards California residents. Mavrix Photo, Inc. v. Brand Techs., Inc., Case No. 09-56134 (9th Cir., Aug. 8., 2011) (Fletcher, J.).
Plaintiff Mavrix, a celebrity photo agency, sued Brand Technologies, owner of a popular website called celebrity-gossip.net. The suit, filed in the U.S. District Court for the Central District of California, alleged copyright infringement based on Brand's unauthorized posting of copyrighted photos of celebrity couple Stacy Ferguson, lead singer of the Black Eyed Peas, and Josh Duhamel, an actor well-known for his role in the Transformer movies. The defendant, an Ohio corporation with its principal place of business in Toledo, moved to dismiss for lack of personal jurisdiction.
Brand Technologies argued that personal jurisdiction was lacking for several reasons. Brand has no offices, real property or staff in California. It is not licensed to do business in California. It has no registered agent for service of process in California, and it pays no taxes in California. Also, Brand's website courts a national audience, not one restricted to California. Mavrix argued that nonetheless, the defendant was subject to personal jurisdiction in California because its website celebrity-gossip.net contained third-party advertisements that targeted California residents. The 9th Circuit agreed.
Although the court held that the defendant's contacts with California "fall well short" of the "continuous and systematic general business contacts" required for establishing general jurisdiction, the court ultimately concluded that the defendant's actions in reposting the photos of Ferguson and Duhamel justified the exercise of specific jurisdiction. The pivotal issue in the court's analysis was whether Brand Technologies had purposefully directed its activities toward California. To that end, the court found "most salient" the defendant's use of the copyrighted photos as part of its commercial exploitation of the California market.
Brand Technologies' business model relies on selling advertising space on its website to third parties. More traffic to celebrity-gossip.net results in more hits on the advertisements, which in turn results in more money paid by advertisers. Certain third parties buy advertising space on celebrity-gossip.net specifically to promote hotels, vacations and jobs in California. The defendant's California user base is therefore evident, the court explained, from these California-focused advertisements. As such, the court determined that Brand's reposting of the copyrighted photos to increase traffic to the site was integral to a business strategy of growing its California audience, thereby establishing the sufficient "minimum contacts" necessary for exercising specific jurisdiction.
Notably, on the same day, the same 9th Circuit panel ruled in CollegeSource Inc. v. AcademyOne Inc., Case No. 09-56528 (9th Cir., August 8, 2011) (Fletcher J.), that a nonresident defendant's purchase of Google AdWords that included the term "California" supported a finding of purposeful direction toward California, thereby conferring personal jurisdiction. Again, the outcome hinged on the defendant's actions in directing forum-specific traffic to its website for commercial gain.
Practice Note: The 9th Circuit acknowledged the burden its ruling could impose on popular commercial websites. Website companies with a national viewership need to be aware that if they profit from the actions of users in a particular state, they may be subject to personal jurisdiction in that state.
Employment / Non-Competition Agreements
EMC Corp. Should Have Drafted a Better Non-Competition Clause
By Hasan Rashid
Recognizing that plaintiff EMC Corp. could have better-worded its employment agreement, the U.S. Court of Appeals for the First Circuit affirmed the denial of EMC's motion to enjoin a former employee under the agreement. EMC Corp. v. Arturi, Case No. 11-1001 (1st Cir., Aug. 26, 2011) (Souter, J.).
In 2007, Christopher Blotto signed an employment agreement containing a one-year non-competition clause with EMC, a business and technology consulting firm. Blotto left EMC two years later, on December 4, 2009. Among other reasons, Plaintiff EMC sued because Blotto and other former employees formed a competing business. On November 8, 2010, EMC moved to enjoin Blotto from competing with it, soliciting EMC's customers and employees and possessing and using EMC's confidential business information. On December 15, 2010, over a year after Blotto left EMC, the district court denied the first two motions and granted the motion barring Blotto's use of confidential business information. EMC appealed the denial of the motion to no avail.
The district court and the First Circuit were bound by the precedent of the Supreme Judicial Court of Massachusetts, which precludes the equitable enforcement of an expired non-competition clause, even when the reason the clause was not previously enforced is because of the time spent for the legal process. The policy underlying this "frosty climate" for enforcement arises from the imbalance in bargaining power between an employer and employee—this imbalance demands construing an employment agreement against the employer and limiting the availability of equitable enforcement accordingly.
The court rebutted EMC's argument that Blotto should be precluded from escaping the non-competition clause with two points. First, although an injunction was unavailable to EMC, it could nevertheless obtain relief by proving a breach of contract and damages therefrom. Second, because Massachusetts precedent was clearly in effect at the time Blotto signed the employment agreement, EMC was forewarned and could have drafted the non-competition clause to toll its term of restriction during litigation.
The court disregarded the five unreported Massachusetts Superior Court cases EMC cited as examples of equitably extending enforcement of a non-competition clause beyond the terminal date of the restriction. In fact, the court questioned the harmony of those cases with the clear precedent of the state's highest court.
Practice Note: When drafting a non-competition clause and its term of restriction under the laws of Massachusetts, ensure that the period of restriction is tolled during any litigation that may delay the enforcement of such a clause.
Copyrights / Transfers and Licensing
SCO Can't Claim Ownership of the UNIX Operating System
By Ryan N. Phelan
The U.S. Court of Appeals for the Tenth Circuit upheld a district court finding that Novell, Inc. had not transferred its copyrights regarding the well-known UNIX computer operating system to The SCO Group, Inc. through a contract between the two parties during the mid-1990s. The SCO Group, Inc. v. Novell, Inc., Case No. 10-4122 (Fed. Cir., Aug. 30, 2011) (O'Brien, J.)
In 1993, Novell owned the rights to the UNIX operating system source code. At that time, Novell licensed the source code and, at the same time, developed its own customized UNIX platform named UnixWare. However, in 1995, Novell sought to exit the UNIX licensing business. Novell subsequently entered an agreement with The SCO Group (SCO), under which SCO would purchase certain assets from Novell, excluding "all copyrights and trademarks, except for the trademarks UNIX and UnixWare." Because SCO believed that this provision was too restrictive, preventing SCO from selling the UNIX and UnixWare products without fear copyright infringement of the underlying source code, the parties subsequently amended that provision to read, "[a]ll copyrights and trademarks, except for the copyrights and trademarks owned by Novell as the date of the Agreement required for SCO to exercise its rights with respect to the acquisition of UNIX and UnixWare technologies." (Emphasis added.) A key provision was that Novell retained the right to royalties collected by SCO on sales of original source code UNIX licenses. SCO received only 5 percent for administrative fees for any such sale.
By 2002, the UNIX business was not as profitable as SCO had hoped. So, SCO began an "aggressive marketing" campaign by seeking licenses from users of Linux, another computer operating system, on the theory that Linux incorporated portions of the UNIX source code. Novell was not interested in pursuing this approach, and a dispute arose as to who owned the copyright to the underlying UNIX source code: Novell or SCO via the 1995 agreement.
At trial, SCO testified that the purpose of the contract amendment was to correct the error under which Novell kept the UNIX copyrights in the original contract. SCO argued that UNIX copyrights were "required" for SCO to run its business. Novell countered that the amendment was never intended to transfer the UNIX copyrights to SCO. Rather, the amendment was to pacify SCO's fears about violating Novell's intellectual property rights in the everyday operation of the transferred portion of the business. Novell argued that the entirety of transaction consisted of a sale of the UNIX licensing business, which SCO would continue on behalf of Novell in exchange for 5 percent of total royalties while Novell retained the copyrights and 95 percent of the royalty stream, and the sale of UnixWare and the license to use the underlying UNIX source code to develop its own copyright material.
The court recognized that copyright ownership, in general, would be required to protect the existing UNIX licenses. Novell's interpretation that it retained ownerships of the UNIX copyrights and merely sold the right to SCO to license and develop the UNIX source code was not contrary to the original contract provision or the related amendment. The district court jury found the same. The Court of Appeals affirmed giving discretion to that finding.
Practice Note: Given its intangible nature, intellectual property is more indefinite than physical or tangible assets. Accordingly, transfers and licenses of intellectual property assets should first be clearly delineated and defined in contract. The metes and bounds, including ownership and control of that intellectual property, should be adequately defined as well so as to avoid later ambiguities or interpretations in any contract disputes.
Trade Secrets / Appeal
Defendant Not Allowed to Appeal Denial of a 12(b)(6) Motion to Dismiss After Trial
By Gregory D. Yoder
The U.S. Court of Appeals for the Tenth Circuit held that a defendant cannot appeal a pretrial denial of a FRCP Rule 12(b)(6) motion to dismiss after the plaintiff has successfully prevailed at trial on the claim at issue because the sufficiency of the allegations in the complaint is irrelevant. ClearOne Communications, Inc. v. Biamp Systems, Case Nos. 09-4097, 10-4090 & 10-4168 (10th Cir., Aug. 8, 2011) (Briscoe, J.).
Plaintiff ClearOne purchased proprietary source code from a third party in 2000. In 2001, one of ClearOne's employees with knowledge of the source code, and who had signed confidentiality and noncompetition agreements with ClearOne, began working for defendant Biamp. Another defendant, Wideband, then hired the same employee and began licensing the source code to Biamp. As a result, ClearOne filed a complaint for misappropriation of trade secrets under the Utah Uniform Trade Secret Act (UUTSA), among other claims. A jury awarded ClearOne $956,000 in compensatory damages for lost profits and $694,000 for unjust enrichment. Biamp then filed three appeals, addressing five issues.
In its motion to dismiss, Biamp argued that ClearOne failed to state a claim for misappropriation because Biamp lacked knowledge of the proprietary object code that was embedded in the products Biamp was selling. Object code is a sequence of binary number instructions for a computer which are meaningless to a human reader. Biamp only possessed the object code, not the human readable source code or the assembly code. However, the district court denied Biamp's motion to dismiss because there is no requirement of comprehension of a trade secret to state a claim for misappropriation under the UUTSA. Therefore, there was no requirement that Biamp be able to understand the underlying object code and algorithm for misappropriation. The district court ruled that additional factual development was necessary before it could definitely resolve ClearOne's misappropriation claim.
- After trial, Biamp appealed the district court's denial of the motion to dismiss. The appeals court held that a Biamp could not appeal the pretrial denial of its 12(b)(6) motion to dismiss after ClearOne had successfully prevailed at trial on the claim at issue. The 10th Circuit explained that because at trial ClearOne proved, not merely alleged, facts sufficient to support relief, the sufficiency of the allegations in the complaint was irrelevant. Accordingly, the court held that after a jury verdict, a defendant must challenge the legal sufficiency of a plaintiff's claim through a motion for judgment as a matter of law (JMOL). Biamp had filed a JMOL, but it did not reassert in that motion the arguments it made in its 12(b)(6) motion, nor did Biamp appeal the denial of its motion for JMOL.
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