February 2010

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

File Sharing Sites Induced Massive User Infringement
The operators of a peer-to-peer file sharing network were indirectly liable for massive infringement of entertainment companies' copyrights committed by the network's users, the federal district court in Los Angeles has ruled. The file sharing network operated on "BitTorrent" technology, which allowed users to download and share copyrighted movies and other large copyrighted files directly from the computers of several other users simultaneously. The parties did not dispute that the torrent network's users committed direct copyright infringement.

The evidence of inducement was so "overwhelmingly clear," according to the court, that there was no need to consider alternative contributory infringement theories. The network operators intentionally took affirmative steps to foster user infringement by: (1) using taxonomies and indexing systems featuring categories such as "Top 20 TV Shows," "Box Office Movies," and "Top 20 Downloads" from which users could select popular copyrighted works to download; (2) providing technical support and assistance to network users to help them with downloading or uploading copyrighted works; (3) implementing technical features to facilitate locating and downloading copyrighted works; and (4) implementing a business model that depended on massive infringement to sell lucrative advertising space on the websites.

The court also held that the website operators were ineligible for the service provider safe harbor defense under Section 512 of the Digital Millennium Copyright Act. Inducement liability—based on active bad faith in promoting infringement—and the DMCA safe harbor—based in passive good faith in operating a legitimate Internet business—are inherently contradictory, the court observed. (Columbia Pictures Industries, Inc. v. Fung, CDCal, CCH Computer Cases ¶49,870; IntelliConnect User Link).

Fair Use Was Not Valid Defense to Unauthorized File Sharing
A file sharer's downloading and distribution of 30 copyrighted songs did not constitute fair use as a matter of law, the federal district court in Boston has ruled. The court noted that a compelling case for fair use could be made in some instances, such as file sharing for the purpose of sampling music prior to purchase or space-shifting to store purchased music more efficiently. However, the file sharer here did not offer any facts that presented even a colorable legal defense of fair use.

The file sharer erroneously believed that he needed to show only that he did not make money from the files he distributed in order to put his fair use defense before a jury. More than 800 songs were downloaded in their entirety and made available to other Internet users. Although the purpose of the file sharer’s use may not have been commercial, it was likely to have a bigger market impact because there was no cost barrier, the court explained. The file sharer’s use displaced the copyright holders' exclusive distribution rights (Sony BMG Music Entertainment v. Tenenbaum, DMass, (CCH Copyright Law Decisions ¶29,869; IntelliConnect User Link).

TRADEMARKS

Software File Extension Was Functional, Could Not Be Mark
A software company could not assert common-law trademark rights in the software file extension ".dwg" because the file extension was functional, the federal district court in San Francisco has ruled. In a prior summary judgment hearing, the company had disavowed any claims to ownership of a ".dwg" mark when used as a file extension and asserted that it limited its trademark claims to "DWG" as a word mark. The company was judicially estopped from later maintaining that it had only disavowed uses of ".dwg" when needed to achieve interoperability with the DWG file format defined by the company, the court said.

The company had disclaimed any and all ownership of its putative word mark "DWG" with respect to its use by anyone as a computer file extension, regardless of the format of the file in question. Even if the company had not made such an unqualified disavowal, file extension designations are inherently functional and not subject to trademark protection, the court said. Even if a file extension served a tangential purpose of communicating the source of the file or file format to consumers, its primary purpose was to identify a file or file type to a computer and its user (Autodesk, Inc. v. Dassault Systemes Solidworks Corp. ND Cal., CCH Trademark Law Guide ¶61,548; IntelliConnect User Link; CCH Computer Cases ¶49,862; IntelliConnect User Link).

Webpage Did Not Need Picture to Qualify as Specimen
The Patent and Trademark Office erred by refusing an application to register the mark ONE NATION UNDER GOD for charity bracelets, on the ground that the applicant's specimen of use did not show a picture of the goods, the U.S. Court of Appeals for the Federal Circuit has decided. The specimen consisted of two pages from a website store, showing a product listing, "ONE NATION UNDER GOD™ CHARITY BRACELET >> for $2.00," with descriptive text and a shaded, square graphic that said "Photo not available."

There was no bright-line requirement that specimens of use from the Internet must always include pictures, the court said. There was no basis for such a rule in precedent, statutory language, or policy. The Lanham Act specified no particular requirements to demonstrate source or origin; for displays, the mark merely had to be "associated" with the goods. In the context of tangible, non-Internet-based specimens, showing use of a mark on packaging for goods has been held to be acceptable, the court noted. A picture of the product itself was not required. There was no reason for online specimens to be treated differently, in the court's opinion.

In addition, trade show displays bearing a mark for goods had been found adequate as a specimen of use, even though the goods themselves were not present or visible. On remand, the PTO was directed to consider the evidence as a whole to determine if the applicant's specimen sufficiently associated his mark with his charity bracelets to identify and distinguish the goods (In re Sones, Fed. Cir., CCH Trademark Law Guide ¶61,538; IntelliConnect User Link).

Retailer Awarded Attorney’s Fees Incurred in Defending Appeal
A retailer of high-end kitchen and bath appliances was entitled to an award of over $178,000 in attorney's fees that were incurred in defending a district court judgment on appeal, the federal district court in Houston has ruled. In an earlier decision, the court had determined that a competitor was liable for engaging in trademark infringement and cybersquatting against the retailer. The U.S. Court of Appeals in New Orleans affirmed that decision.

At trial, a jury had determined that the case was "exceptional" for purposes of Lanham Act, Sec. 35(a) because the competitor had acted willfully, maliciously, fraudulently, or deliberately. The Lanham Act did not distinguish between an "exceptional case" at trial and an "exceptional case" for appellate purposes, the court said. Therefore, the retailer was not required to establish that the appeal itself was exceptional, such as by showing that the appeal was oppressive or brought for the purpose of delay.

The issues raised on appeal were similar to those that made the case exceptional at trial. The appellate court had determined that the competitor's arguments on appeal were mostly "irrelevant" or "without merit." The appeal unnecessarily prolonged the case without adequate justification (Kiva Kitchen & Bath, Inc. v. Capital Distributing, Inc., SD Tex, CCH Trademark Law Guide ¶61,550; IntelliConnect User Link)

COMPUTER AND INTERNET LAW

U.S. Consumers Must Sue Poker Website in Gibraltar
The forum selection clause in an online poker game website's terms of use, naming the British territory of Gibraltar as the forum for resolving disputes, was valid and enforceable against Ohio consumers' putative class action claims, the U.S. Court of Appeals in Cincinnati has held. The court affirmed the district court's dismissal of the consumers' suit against PartyGaming Ltd. alleging breach of contract, violation of Ohio consumer protection law, and tortious conduct.

Forum selection clauses are presumptively valid. To determine whether a forum selection clause is enforceable, courts in the Sixth Circuit consider: (1) whether the clause was obtained by fraud, duress, or other unconscionable means; (2) whether the designated forum would ineffectively or unfairly handle the suit; and (3) whether the designated forum would be so seriously inconvenient that requiring the plaintiff to bring suit there would be unjust. First, the consumers alleged general fraud only, rather than fraud in the inclusion of the clause itself. Second, the consumers failed to show that a Gibraltar court, applying English law, would ineffectively or unfairly handle their lawsuit. The unavailability of jury trials and representative actions did not make a forum “ineffective” or “unfair.” Most foreign jurisdictions did not provide jury trials, and the consumers were not prevented from filing suit, only from bringing it in class action form. Finally, the inconvenience of litigating in Gibraltar did not meet the "heavy burden" of showing that the forum was unjust, according to the court.

Moreover, several factors weighed in favor of a Gibraltar trial: (1) PartyGaming was a Gibraltar company, whose operations might be greatly affected by the suit; (2) other Gibraltar gaming companies could be affected by the suit; (3) the forum selection clause named Gibraltar law as controlling; (4) relevant evidence and witnesses would be located in Gibraltar; and (5) Gibraltar had an interest in hearing a case involving "a substantial player” in its “comparatively small economy” (Wong v. PartyGaming, Ltd., 6thCir, CCH Computer Cases ¶49,863; IntelliConnect User Link).

Order Against Website Users Did Not Apply to Website Operator
The operators of a complaint website did not have to comply with a permanent injunction ordering website users to remove defamatory postings, according to the federal district court in Chicago. The injunction authorized plaintiffs' counsel to "directly contact third party hosts of their websites, who shall make reasonable efforts to ensure the false statements are removed."

Federal Rule of Civil Procedure 65(d)(2) provides that an injunction binds non-parties who "act in concert or participation with," or are legally identified with, the named party. However, an injunction “may not be so broad as to punish the conduct of persons who act independently and whose rights have not been adjudged according to law,” according to the court. The plaintiffs argued that complaint website's terms of service—stating that material posted by users would not be removed from the website, even at the user's request—constituted a promise to “aid and abet” ongoing defamation, regardless of any court orders.

The court pointed out that the website’s terms of service expressly prohibited defamatory postings and required users to warrant and represent that posted content was "truthful and accurate." There was no evidence, beyond conjecture, that the website operators intended to protect defamers and aid them in circumventing court orders. The website operators' "tenuous connection" to the users was insufficient to compel them to comply with the permanent injunction, the court concluded (Blockowicz v. Williams, NDIll, CCH Computer Cases ¶49,865; IntelliConnect User Link).

Price Fixing Claims Against Music Labels Revived
Consumers who claimed they were overcharged for Internet music could proceed with an antitrust action against the country's four largest music recording companies for conspiring to fix prices and terms of use for music sold over the Internet, the U.S. Court of Appeals in New York City has decided. Judgment in favor of the recording companies was vacated, and the matter was remanded to the district court for further proceedings.

According to the consumers, the recording companies formed joint ventures to sell music online in an effort to control the price and terms of distribution for Internet music. When the recording companies eventually began to sell Internet music through entities they did not own or control, they allegedly agreed to a wholesale price floor for songs, enforced through most favored nation clauses (MFNs) in their license agreements. The MFN agreements specified that the retailers had to pay each recording company the same amount per song, according to the consumers. The four recording companies together controlled over 80 percent of digital music sold to end purchasers in the United States. Moreover, the alleged price fixing was the subject of state and federal investigations (Starr v. Sony BMG Music Entertainment, 2dCir, CCH Computer Cases ¶49,874; IntelliConnect User Link; CCH Trade Cases ¶76,866; IntelliConnect User Link).

Hot Topic of the Month

Justice Department Opposes New Google Book Search Agreement
The Department of Justice has advised the federal district court in New York City that, despite the substantial progress reflected in the proposed amended settlement agreement in The Authors Guild Inc. et al. v. Google Inc., class certification, copyright, and antitrust issues remain. The settlement agreement between Google and the authors and publishers aims to resolve copyright infringement claims brought against Google by The Authors Guild and five major publishers in 2005 arising from Google's efforts to digitally scan books contained in several libraries and to make them searchable on the Internet.

In a Statement of Interest filed with the court on February 4, the Justice Department said: “Although the United States believes the parties have approached this effort in good faith and the amended settlement agreement is more circumscribed in its sweep than the original proposed settlement, the amended settlement agreement suffers from the same core problem as the original agreement: it is an attempt to use the class action mechanism to implement forward-looking business arrangements that go far beyond the dispute before the court in this litigation.”

In its recent Statement of Interest, the Justice Department recognized that the parties made substantial progress on a number of issues raised in the agency’s September 19, 2009 filing. For example, the proposed amended settlement agreement eliminates certain open-ended provisions that would have allowed Google to engage in certain unspecified future uses, appoints a fiduciary to protect rightsholders of unclaimed works, reduces the number of foreign works in the settlement class, and eliminates the most-favored nation provision that would have guaranteed Google optimal license terms into the future.

However, the changes do not fully resolve the government's concerns. The agency also said that the revised amended settlement agreement still confers significant and possibly anticompetitive advantages on Google as a single entity, thereby enabling the company to be the only competitor in the digital marketplace with the rights to distribute and otherwise exploit a vast array of works in multiple formats.

Wolters Kluwer Law & Business Publications

Scott on Outsourcing Law and Practice, by Michael D. Scott
The 2010 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. Scott on Outsourcing Law and Practice provides the first comprehensive and practical guide to all of the legal issues involved in the outsourcing process. Whether you're just beginning to investigate the feasibility of outsourcing arrangements or an old hand at negotiating and structuring these complex deals, Scott on Outsourcing Law and Practice is your one-stop legal guide to the outsourcing process.

The 2010 Supplement brings you up to date on the latest developments and adds significant new and revised material on a number of critical topics, including: (1) The growth of cloud computing into an integral part of the U.S. economy, with implications for business development, security, and privacy; (2) Further discussion of the inclusion of methods of dispute resolution in outsourcing contracts; (3) Examination of trade secrets and the necessity that they have economic value to be protected; (4) The continued importance of privacy and security issues in outsourcing; (5) Analysis of the “red flag” rules that require each financial institution or creditor to develop and implement a written Identity Theft Prevention Program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts; (6) Use of the Payment Card Industry Data Security Standard, a worldwide information security standard developed by the Payment Card Industry Security Standards Council (PCI SSC), created to prevent credit card fraud and implications for outsourcing contracts; and (7) Tax issues, including transfer pricing, asset transfer taxes, and location issues.

For more information on Scott on Outsourcing Law and Practice, visit the Aspen Publishers website.