August 2009

From the editors of Wolters Kluwer Law & Business, this update describes important developments from CCH and Aspen Publishers intellectual property and computer law publications.

If you have any comments or suggestions concerning the information provided or the format used, we'd like to hear from you. Please send your comments to john.arden@wolterskluwer.com.

COPYRIGHTS

College Student Must Pay $675,000 for Downloading Songs
On July 30, 2009, the federal district court in Boston ordered graduate student Joel Tenenbaum to pay $675,000 for downloading and distributing several record companies’ songs—approximately $22,000 for each of 30 unlawful Internet downloads. The court ruled that Tenenbaum could not cite fair use as a defense. His attorney argued that he was “addicted” to downloading music, that he was only taking advantage of available technology, and that he was not attempting to deprive the record companies of profits. After several hours of testimony, Tenenbaum admitted liability for downloading and distributing the songs at issue. He said he was happy the verdict “wasn’t in the millions.” The jury could have imposed maximum damages of $4.5 million—$150,000 for each infringement. Tenenbaum’s attorney said he expects to appeal the judgment (Capitol Records, Inc. v. Alaujan, DMass, Civ. Action No. 03cv11661-NG).

Review of Section 114 Royalty Rates for Sound Recordings Denied
A performance rights organization’s petition to review a decision of the Copyright Royalty Judges (CRJ)—setting the 2007-2012 Section 114 royalty rate that satellite radio services must pay to copyright owners for use of sound recordings—was denied by the U.S. Court of Appeals for the District of Columbia. The court, however, granted the organization’s petition for review of the judges’ failure to set a royalty rate for “ephemeral copies” of sound recordings.

The appeals court found that, in setting the satellite royalty rate, the CRJ properly applied the four objectives set forth in Section 801(b)(1) of the Copyright Act: (1) maximizing the availability of creative works to the public; (2) ensuring copyrighting owners and users a fair rate of return; (3) reflecting the relative roles of the owner and the user in making the product available; and (4) minimizing the disruptive impact upon the industries involved. Set at an initial rate of 6% of revenue, increasing to 8% over the six-year term of the license, the determination was made in accordance with the law and was not arbitrary, capricious, or an abuse of discretion.

The CRJ erred, however, by not setting a separate royalty rate for ephemeral copies under Section 112. Without separate rates, the performance rights organization would not be able to properly allocate funds collected and distribute receipts to stakeholders. The matter was remanded for the CRJ to set the royalty rate in the first instance (SoundExchange, Inc. v. Librarian of Congress, DCCir, CCH Copyright Law Decisions ¶29,796; IntelliConnect User Link).

CRJ Process Challenge Untimely; CRJ Webcaster Rates Affirmed
An independent royalty organization forfeited its right to argue that the manner in which Copyright Royalty Judges (CRJ) are appointed violated the Appointments Clause of the United States Constitution because it failed to raise the issue in its opening brief, the U.S. Court of Appeals in the District of Columbia held. However, the court affirmed in part the rates and terms set relating to webcasting.

In ruling that the organization’s challenge had been forfeited, the court stated that this was not a rare case that compelled the court to exercise its discretion to consider the organization’s untimely objection. Moreover, the potential for far-reaching consequences counseled against resolving the Appointments Clause question.

The court affirmed the rate judges’ determination requiring the rate to be paid by commercial webcasters to increase from $0.0008 per play in 2006 to $0.0019 per play in 2010. The commercial webcasters did not show that the judges’ proposed rates were arbitrary, capricious, or otherwise not in accordance with law. The judges were required to set rates and terms that most clearly represented the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. If small commercial webcasters could not pay the same rates as other willing buyers and still earn a profit, the judges were not required to accommodate them. However, the judges’ determination that commercial and noncommercial webcasters pay owners of sound recording copyrights a $500 minimum annual fee to cover the owners’ costs of administering the license was vacated as arbitrary (Intercollegiate Broadcast System, Inc. v. Sound Exchange, Inc., DCCir, CCH Copyright Law Decisions ¶29,797; IntelliConnect User Link).

TRADEMARKS

Display of Goods Not Required for Counterfeiting Liability
An individual "used" counterfeit Louis Vuitton trademarks, for purposes of the criminal trademark counterfeiting statute (18 U.S.C. Sec. 2320) by purchasing knockoff handbags bearing a counterfeit "LV" logo in New York, and then carrying and transporting the goods in a motor vehicle, with the intent to sell them at his commercial venture in Indiana, the U.S. Court of Appeals in Philadelphia has held.

"Use" did not require the individual to actively employ the mark by showing or displaying the goods bearing the counterfeit logo. The "use" required by the statute was the use of the counterfeit mark, not use of the goods. The word "use," by itself, did not require an actual or potential sales transaction, in the court's view. Congress intended the statute to control and prevent commercial counterfeiting by reaching a stream of illegal commerce and not simply its point of sale.

The counterfeit logo was "used," in the ordinary meaning of the word, by being attached to handbags. Although the goods were packaged in plastic bags during transit, the marked handbags were part of the individual's inventory, and he was able to enjoy the benefits of the counterfeit "LV" logos that were on the handbags, the court said (U.S. v. Diallo, 3rd Cir., CCH Trademark Law Guide ¶61,472; IntelliConnect User Link)

Italian Manufacturer Infringed U.S. Accordion Seller’s Mark
Summary judgment in favor of a U.S.-based distributor of accordions on its trademark infringement claims against an Italian accordion manufacturer has been affirmed by the U.S. Court of Appeals in Chicago. A permanent injunction barring the manufacturer from using the mark "Gabbanelli" on accordions in the United States was affirmed, although the court vacated an award of damages to the distributor and remanded the case for redetermination of the proper amount of monetary relief.

The distributor began selling Gabbanelli-branded accordions in the United States for the predecessor of the Italian manufacturer in the mid-1960s. In 1996 and 1997, the distributor obtained trademark registrations for the Gabbanelli name and began importing accordions made by the Italian manufacturers as well as other companies. In 1999, the distributor sued the manufacturer in an Italian court for using the Internet domain name gabbanelli.com and advertising the Gabbanelli mark on the Internet without authorization. The manufacturer won that suit, and then each party filed an additional trademark suit in Italian court, which were settled. The settlement agreement gave the distributor the exclusive right to use the Gabbanelli name in North America and the manufacturer the exclusive right to use it in Italy. In January 2002, the distributor filed the current lawsuit in a federal district court in Texas, accusing the manufacturer of infringing the distributor's U.S.-registered Gabbanelli marks.

The district court erred by awarding both $151,000 in lost profits and statutory damages of $500 per infringing accordion sold in the United States by the Italian manufacturer, the court determined. Statutory damages may be awarded only in cases in which compensatory damages are not awarded for the same violation. In addition, the Lanham Act provided for statutory damages of "not less than $500 or more than $100,000 per counterfeit mark per type of goods or services sold," not per individual item bearing the counterfeit mark (Gabbanelli Accordions & Imports, L.L.C. v. Gabbanelli, 7th Cir. CCH Trademark Law Guide ¶61,471; IntelliConnect User Link)

XTENDED BEAUTY Mark Could Infringe XTREME LASHES
A cosmetics manufacturer could proceed with claims that a competitor's XTENDED BEAUTY trademark infringed the manufacturer's XTREME LASHES mark, the U.S. Court of Appeals in New Orleans has held. In addition, the manufacturer was entitled to protection under the Lanham Act for its mark EXTEND YOUR BEAUTY. Both parties sold kits used by professional cosmetologists to lengthen and accent clients' eyelashes.

Genuine issues of material fact existed as to whether confusion was likely between the complaining cosmetics manufacturer's XTREME LASHES mark and the competitor's XTENDED BEAUTY mark, the court said. The parties' respective marks had no common words and used different typefaces, but they both prominently featured a large, visually striking stylized letter "X." In addition, both marks suggested cosmetic enhancement. The marks appeared in near-identical contexts on the parties' kits. Consumers could believe that XTENDED BEAUTY was a product line offered by the makers of XTREME LASHES, in the court's view.

The court also determined that the complaining manufacturer's registered mark, EXTEND YOUR BEAUTY, could be deemed suggestive and, therefore, inherently distinctive. A genuine issue of material fact existed as to whether the mark was entitled to protection under the Lanham Act. The question of whether confusion was likely between the EXTEND YOUR BEAUTY mark and the competitor's XTENDED BEAUTY mark could not be determined on summary judgment, the court said. Both contained the word "beauty" and a form of the word "extend." The marks sounded similar when spoken aloud and had similar meanings. There was evidence that consumers had mistaken the competitor's products for the complaining manufacturer's (Xtreme Lashes, LLC v. Xtended Beauty, Inc., 5th Cir., CCH Trademark Law Guide ¶61,466; IntelliConnect User Link).

COMPUTER AND INTERNET LAW

Disabling DVD Copy Protection Violated DMCA, License
The federal district court in San Francisco has issued a preliminary injunction barring digital medial company RealNetworks from manufacturing and distributing its RealDVD player, which allows users to copy, save, and play DVD content onto a computer hard drive. The court ruled that the defendants—the DVD Copy Control Association (DVD CCA), motion picture studios, and other DVD content owners—were likely to succeed in proving that RealDVD violated the anti-circumvention provisions of the Digital Millennium Copyright Act (DMCA) and breached the terms of a license agreement.

DVD CCA is a non-profit corporation created for the sole purpose of licensing and administering DVD decryption technology, primarily Content Scramble System (CSS), to manufacturers of DVD players, drives, discs, and related products. One year after RealNetworks entered into a standard CSS License Agreement, RealNetworks developed and briefly sold its “RealDVD” product. PCs or other devices running RealDVD enabled users to (1) play the DVD, (2) play and save the DVD, or (3) save the DVD to a hard drive so that it could be played later, without the physical DVD disk. When a RealDVD player made a copy of a DVD, it removed most CSS technologies, such as DVD-drive locking and authentication.

By disabling CSS, RealDVD violated both the "access control" and the "copy control" provisions of the DMCA, the court found. The fact that RealNetworks was a CSS licensee did not foreclose DMCA liability in this case because RealNetworks acted outside the scope of the license. Moreover, the limited “fair use” exception to DMCA liability was not available to manufacturers or traffickers of illegal circumvention devices, according to the court.

The court also held that RealNetworks breached the terms of the CSS License Agreement. The Agreement's recitals stated that CSS was developed to "provide protection for copyrighted content against unauthorized consumer copying." Moreover, the CSS technical specifications, which were incorporated by reference into the License, clearly prohibited any circumvention of CSS technology. The fact that the License Agreement was a take-it-or-leave-it standardized form contract did not render it unenforceable. (RealNetworks, Inc. v. DVD Copy Control Ass'n, Inc., NDCal, CCH Computer Cases ¶49,785; IntelliConnect User Link).

Publicizing “Star Rating” Could Infringe Rating Firm’s Rights
Health Grades, a health care provider rating firm, could proceed with copyright and trademark infringement claims against a university hospital for publishing ratings it obtained from Health Grades' website in marketing materials, according to the federal district court in Denver.

Health Grades issued awards and assigned "1-3-5 Star" ratings to hospitals and health care providers based on its analysis of data and information obtained from a variety of mostly public sources. Members of the public could view the ratings, awards, and other information published on Health Grades' website by agreeing to a limited license agreement. Health care providers, however, were prohibited from using the ratings, awards, and other information to promote their health care services unless they paid a fee and entered into a separate licensing agreement.

The hospital copied and distributed in marketing materials information from the Health Grades' website, including the ratings and awards Health Grade assigned to the hospital. The court held that Health Grades sufficiently alleged copyright infringement because its star ratings and awards were not unprotected "discoverable" facts as the hospital argued, but rather qualified as “original compilations of facts” protected by copyright. However, Health Grades’ breach of contract claim based on unauthorized website copying was preempted by the Copyright Act.

Health Grades also alleged that the hospital's use of Health Grades trademark was likely to confuse consumers into believing that Health Grades endorsed the hospital or its services. The hospital argued that its use of Health Grades' mark as indicating the source of the ratings was a "nominative fair use" permitted by the Lanham Act. The "nominative fair use" doctrine, however, unlike traditional statutory fair use, was not an affirmative defense to infringement, but a three-part test created by the Ninth Circuit to assess likelihood of confusion, the court clarified. Health Grades could proceed both with its trademark infringement claim and with its claim that the hospital’s unauthorized trademark use breached the website term of use, the court held (Health Grades, Inc. v. Robert Wood Johnson Univ. Hospital, Inc., DColo, CCH Computer Cases ¶49,775; IntelliConnect User Link).

Hot Topic of the Month

Lawsuit Challenges Maine’s New Privacy Law
Maine’s controversial new privacy law (Public Law 230)—prohibiting the collection of health-related or other personal information for marketing purposes from a minor without parental consent and “predatory marketing” to minors—is being challenged on constitutional grounds. Media and online companies, including AOL, eBay, and Yahoo, filed a lawsuit in federal district court in Maine August 26 alleging that the law violates the First Amendment rights of adults, as well as minors and online operators.

In addition, Maine Attorney General Janet Mills has announced that—because of constitutionality concerns—she will not enforce the new law. According to a story posted September 2 on Digits, the Wall Street Journal technology blog, the attorney general indicated that, pending review of the law by the state Senate Judiciary Committee in January, she will not prosecute parties that fail to comply with the law. The attorney general’s refusal to prosecute, however, will not preclude enforcement of the law by private parties, who have a private right of action under the new privacy law and under the Maine Unfair Trade Practices Act.

The “predatory marketing” provisions of the new law prohibit a person from using any health-related information or personal information regarding a minor for the purpose of marketing a product or service to that minor or promoting any course of action for the minor relating to a product. Violations of the statute are deemed unfair trade practices under the Maine Unfair Trade Practices Act and are subject to civil penalties of up to $20,000 per violation. A person about whom information is unlawfully collected or who is the object of predatory marketing in violation of the statute may bring an action for injunctive relief and actual damages or up to $250 in statutory damages for each violation, whichever is greater. The statute also provides for an award of attorneys fees and costs upon the finding of a violation.

The “Act to Prevent Predatory Marketing Practices Against Minors” (Public Law 230) is to take effect on September 12, 2009 (CCH Privacy Law in Marketing ¶31,902; IntelliConnect User Link).

Wolters Kluwer Law & Business Publications

Drafting Internet Agreements by Gregory J. Battersby and Charles W. Grimes. The 2009-2 Supplement recently went live on the Intellectual Property/Computer and Internet Law tab of the CCH Internet Research Network and on CCH IntelliConnect under Computer and Internet Law. Although the law governing electronic transactions is maturing, innovation by businesses and continuing efforts at regulation by federal and state governments continue to raise new and challenging legal issues. To keep pace with all the new cases, statutes, proposals, commentaries, and model laws, there is no better resource than Law of Electronic Commerce --your guide to the implications of new technologies for commercial law and transactions.

The 2009-2 Supplement brings you up to date on the latest developments and adds significant new and revised material on a number of critical topics, including the following: (1) Discussion of employee privacy rights under EU Law; (2) Discovery of electronic data, including issues relating to metadata, search methodologies, and Internet archives; (3) Use of electronic communications by employees, including an NLRB decision relating to labor union organizing; (4) Discovery and sanctions, including the Qualcomm decision; (5) Electronic record retention principles; (6) Criminal law, including new anti-cyberbullying laws and a recent decision holding that running hash values on a computer is a search subject to the Fourth Amendment; and (7) Technology in legal practice, including attorney-client privilege when using new communications media, the enactment of Federal Rule of Evidence 502, and legal process outsourcing. For more information on Drafting Internet Agreements, visit the CCH Online Store.

Law of Electronic Commerce by Jane K. Winn and Benjamin Wright. The new Fourth Edition is now available under the Intellectual Property/Computer and Internet Law tab of the CCH Internet Research Network and on CCH IntelliConnect under Computer and Internet Law. The volume of trade done through electronic media continues to skyrocket, and the law evolves at a staggering rate. To keep pace with all the new cases, statutes, proposals, commentaries, and model laws, there is no better resource than the new edition of the Law of Electronic Commerce— your guide to the implications of communications technology for commercial law and transactions.

The new Fourth Edition has been completely revised to reflect the explosive growth of the internet and the one-to-many network model that has replaced older forms of electronic commerce. You'll find in-depth, up-to-the-minute analysis and coverage of: (1) security, including digital signatures, encryption, and biometrics; (2) traditional contract principles in the electronic environment, including the statute of frauds and the battle of the forms; (3) electronic records in litigation, including authentication, the best evidence rule, and special hearsay problems; (4) recordkeeping, including state and federal laws in areas such as taxation, banking, securities, and health care; (5) liability of service providers, confidentiality and control of data, and state and federal regulation of electronic markets; and more. For more information on the Law of Electronic Commerce, visit the CCH Online Store.