The second arbitration anecdote I’d like to share (see my first “sausage factory” anecdote here) involved, once again, a 3-person arbitration panel. The case arose out of a manufacturer-distributor relationship.
Here’s how the business worked.
The high-priced hardware product at issue was sold to businesses via a national network of dealers, and the dealers often encountered price competition from competing manufacturers of this type of product. If a dealer lowered its price to meet the competition, it reduced its profit margin. To give dealers an incentive to compete in those situations the manufacturer would lower its price to the dealer if the manufacturer received written certification, via fax, documenting the price competition. This allowed the dealer to maintain its profit margin, and the manufacturer took the hit to profits.
The manufacturer discovered that one dealer had been falsely representing price competition on a large scale for several years. The manufacturer brought an arbitration case against the dealer seeking to recover the profits it had lost as a result of this fraud. I was one of three arbitrators on the case. I’ll call myself Arbitrator 1 and the other two arbitrators Arbitrators 2 and 3. All three of us were lawyers with many years of experience.
There was a two-day hearing (arbitration-speak for a trial), and as it turned out the dealer didn’t have much of a defense. One defense theory asserted by the dealer’s lawyers was that the manufacturer’s sales people had encouraged this practice, presumably to encourage sales and pump up their commissions. However, it was unable to present even a shred of evidence to support this – no testimony, no documents, nothing. Of course, in a trial what the lawyers say is not evidence – evidence is the testimony of witnesses and documents.
When the panel met to decide the case, to my surprise Arbitrator 3 said that he was experienced with commission sales people in situations like this, and he believed that the manufacturer’s sales people had encouraged the fraud. Therefore, he argued, the dealer should win the case.
Arbitrator 2 and I pointed out that this might be true in some situations, but we couldn’t reach this conclusion when there was no evidence to support it in this case. Arbitrator 3 became angry with us and said that in that case he would not join in the award. He stormed out of the conference room (leaving Arbitrator 2 and myself with mouths agape), and we didn’t hear from him again before deciding this case. The two of us went ahead and issued the award for the manufacturer.
What struck me in this case was that Arbitrator 3 was willing to decide the case based on his personal experience, even though there was no evidence that what Arbitrator 3 claimed he had seen elsewhere had occurred here. Although a jury might conceivably do this, a competent, trained judge never would, and I felt that a party in an arbitration should expect no less.
Imagine if the arbitration agreement at issue had called for a single arbitrator and the sole arbitrator had been Arbitrator 3. The distributor would have won based on the preconceptions that Arbitrator 3 brought to the case. The arbitration agreement didn’t call for a “reasoned award” (most don’t, given the extra expense involved), and the manufacturer would never have known why it lost.
I believe that parties to arbitration should be able to count on arbitrators relying on the evidence put before them, and not have an arbitrator make it up, as Arbitrator 3 did in this case. Often the evidence is in dispute, and an arbitrator (like a judge or jury) has to evaluate credibility. But for an arbitrator to decide a case where there is no evidence to support the arbitrator’s theory, is simply wrong. And, as I’ll discuss in my next (and final) post in this series, there’s nothing to stop an arbitrator from doing that. If you elect arbitration you may encounter a situation like this, and even worse you may never know it.
What’s my take-away from this? You never know what you don’t know going into an arbitration. You may believe (or your lawyer may tell you) that you have a good case, a strong case, a great case, even a “can’t lose” case (no lawyer should ever tell a client this!), but in arbitration you just don’t know. So if you’re a client heading for an arbitration hearing, and your lawyer tells you it’s the strongest case s/he’s ever seen, with an 80% likelihood of success, maybe you should discount that to 70%, and factor that adjustment into your settlement strategy.
In the last post in this three-part series on arbitration I’ll provide a few observations about the decision whether or not to include an arbitration clause in a contract.
“The thing to fear is not the law, but the judge” Russian Proverb
I’ve been arbitrating legal disputes since the early 2000s. Here is the first of a couple of anecdotes I’ll share. I am referring here to my experience as the arbitrator, not an attorney arguing a case before an arbitrator.
My cases have varied enormously, from huge multimillion dollar disputes to relatively small cases involving under a hundred thousand dollars. You might think that when I look back on these cases I have interesting stories about the lawyers and the clients, but that’s almost never the case. My most vivid memories involve my co-arbitrators on 3-person arbitration panels. This is where I’ve seen the most surprising aspects of human nature. In this post I’ll describe one of these, and leave other cases for future posts. I’ve slightly disguised the parties and facts so that they would not be recognizable, even to the parties, but they maintain the essence of the case.
The case was a David Inc. v. Goliath Inc. arbitration that involved complex patent and trade secret misappropriation claims by David. The arbitration panel was unusual, in my experience – the parties agreed on a single neutral, and each party retained their own arbitrator who was, in effect, their advocate on the panel. So, it was a three-person panel with one neutral arbitrator, one arbitrator chosen by David and one chosen by Goliath. My “client” was Goliath Inc., the defendant (or in arbitration-speak, the “respondent”). There were no restrictions on my meeting with Goliath’s attorneys during the hearings – indeed, I had lunch with them every day of the hearings, and advised them on how I thought their case was proceeding. I assume the same was true of David Inc.’s chosen panel member. In this case David was seeking approximately $200 million in damages.
The hearings lasted about 20 days, spread out over several months. At the close of the case it was clear that the “neutral” thought that David had put on a very weak case. However, he insisted that David was entitled to an award of around $2 million, one percent of what it was seeking in damages. I disagreed, to the point that I told the neutral that I would not join in the $2 million award. I felt that the proposed award was legally defective, and that the neutral was wrong on the law in reaching it. I thought it was a “sympathy award” by the neutral – give David (and likely it’s contingent fee attorneys), something that they could perhaps break-even on in terms of fees and expenses.
At a meeting with the neutral and “David’s” lawyer I told them that although I would not write a dissent to the “reasoned award” the parties had requested that the panel prepare, neither would I join in the award. In other words, two of the arbitrators would sign the award, which would be legally sufficient for it to be fully enforceable. A couple of days later the neutral arbitrator called me one-on-one and told me that if I would not join in the award he would increase the damages against “my party” – Goliath – by millions of dollars. I was shocked, but I had no choice but to go along with what I viewed as little more than blackmail. I joined in the award, and I never told my party about this call.
What was the neutral’s motive for strong-arming me like this? I believe that given the size of the case and its complexity he wanted a three-person award, to avoid any chance it might be successfully challenged in court – he wanted a 100% appeal-proof award. End of my story. I hope it provides some insight into what can go on inside the “sausage factory” of an arbitration panel.
A final word on this case – I’ve never been on a “one-neutral, two-advocate” arbitration panel before or since, and I would advise against it. The neutral arbitrator is unlikely to be swayed one way or the other by the “party arbitrators” (after all, the lawyers for the parties do that job). In fact, as I will discuss in another post, I would stay away from 3-person panels altogether, except in cases where the economics of a potential dispute justify it.
Will the Supreme Court dodge the thorny copyright infringement issues in the long-running (ten year) Oracle v. Google case on a technicality? The case was originally scheduled to be argued in March 2020, but after Covid-19 it was deferred to the 2020-21 term. Then, on May 4, 2020 the Court ordered the parties to file supplemental briefs:
“The parties are directed to file supplemental letter briefs addressing the appropriate standard of review for the second question presented, including but not limited to the implications of the Seventh Amendment, if any, on that standard. The briefs, not to exceed 10 pages, are to be filed simultaneously with the Clerk and served upon opposing counsel on or before 2 p.m., Friday, August 7, 2020.”
The “second question presented” is Google’s appeal of the Federal Circuit’s 2018 decision reversing a trial jury’s fair use finding in favor of Google. The “standard of review” is a reference to the “de novo” standard used by the Federal Circuit in the opinion under review. The Seventh Amendment is the constitutional right to a jury trial (“the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States …”).
The Court gave the parties a long time to write those ten pages – three months. (Oracle’s Brief, Google’s Brief). Now that August 7, 2020 has come and gone, and the letter briefs have been filed, where does the issue stand?.
For brief background let me describe the events that led to this point.
After the Federal Circuit reversed the trial court on the copyrightability of the Java API declaring code there was a jury trial on Google’s fair use defense. The jury entered a general verdict in favor of Google. Oracle filed a motion for judgment as a matter of law before the case went to the jury, and renewed it following the verdict. The trial judge denied that motion, upholding the verdict.
Oracle appealed and in 2018 the Federal Circuit reversed, holding that Google’s fair use defense had failed as a matter of law. The Federal Circuit reviewed the verdict “de novo” – weighing the facts itself and giving no deference to the legal conclusion the jury had reached based its evaluation of those facts.
That decision (along with the Federal Circuit’s 2014 decision on copyrightability) is now before the Supreme Court.
As it turns out, the issue Oracle and Google focus on in their August 7th briefs is a legal technicality. The technicality arises from the Supreme Court’s conclusion, in a 1985 copyright case, that fair use is a “mixed” question of fact and law. However, mixed questions are not all alike, and may depend on whether a case involves primarily legal or factual work. Which predominates in this case – law or facts? Is Google right that factual issues predominate, in which case the Federal Circuit applied the incorrect standard of review? Is Oracle right that de novo review was appropriate here and that, more broadly, every fair case should be decided by judges alone?
Google argues that the Federal Circuit failed to give appropriate deference to the jury verdict and the trial judge’s post-trial decision in its favor. Google asserts that the correct legal standard, which the trial judge held favored upholding the verdict, is whether a “rational trier of fact” could have reached the jury’s conclusion. Under this standard, Google argues, the jury verdict for Google should be upheld.
On the mixed fact/law issue, Google argues that in this case factual questions predominated, and therefore the appeals court should have deferred to the jury and trial judge. To drive its point home Google provides this list of factual questions that were presented to the jury:
- “the significance of the common practice of reusing software interfaces;
- the extent to which Oracle made the declarations available to use without a license;
- whether or how Java SE was used in smartphones or was suited for that environment;
- how functional the declarations are, and thus removed from the core of copyright;
- how quantitatively or qualitatively significant the reused declarations were in comparison to the whole of the copyrighted work;
- how much Sun Microsystems (the original creator of Java SE) supported Google’s reuse;
- the degree of market harm, if any, suffered by Oracle;
- how transformative Google’s reuse of the declarations in a smartphone was;
- whether Google reused more than necessary to achieve an innovative purpose;
- whether Android competed with Java SE in the market for any derivative product;
- what were the reasonably likely future derivative markets for Java SE;
- whether the amount of creativity Android unleashed justified the reuse; and
- which of the four statutory factors or other unenumerated factors was more or less important in view of all other evidence in the record.”
Google asks the Court to find that when a jury renders a general verdict on disputed facts such as these a reviewing court must view the evidence in the light most favorable to the verdict, not perform its own de novo weighing of the evidence.
Oracle argues that fair use is a primarily legal, not factual, question properly determined de novo:
The ultimate determination whether a defendant’s copying qualifies as fair use entails primarily legal work because that analysis involves legal judgments balancing the competing policies embodied in the Copyright Act of rewarding innovation, protecting the author’s property rights, encouraging progress of science and arts, and safeguarding constitutional free expression. It is the job of a judge, not a lay jury, to calibrate these interests … Because fair use entails primarily legal work, it receives de novo review.
Based on this argument Oracle asks the Supreme Court to go one step further and hold that there is no right to a jury trial on copyright fair use, an issue the Court has never before directly addressed.
And, in case the Court doesn’t accept this argument, Oracle argues that in this particular case the balance of facts and law is mostly legal, and therefore the appeals court was right to review the jury verdict de novo.
WHAT WILL THE SUPREME COURT DO?
First, it’s unlikely that the Court will decide the broad issue of whether fair use should be tried by judge or jury. There’s no need to address such an important issue in this case, particularly when that issue hasn’t been briefed in depth and neither party raised it as a question on appeal.
However, there is a good chance the Court will decide that under the facts of this specific case the fair use determination was primarily factual, and therefore the Federal Circuit was wrong to review the case de novo – the jury verdict should have been reviewed under the “deferential” standard.
One incentive for the Court to decide the case in this manner is that it allows the Court to avoid the thorny Java API “copyrightability” issue, which is difficult both technically and legally. Deciding the case on fair use grounds avoids that issue. Deciding that the Federal Circuit failed to give proper deference to the fair use jury verdict for Google resolves the case on the narrowest possible grounds.
I’ll go out on a limb and predict that the Court will reverse the Federal Circuit based on its erroneous application of the de novo standard. I’ll also predict that rather than send the case back to the Federal Circuit for a third hearing it will uphold the verdict in favor of Google and end this marathon litigation once and for all.
Oral argument is schedule for October 7th, so stay tuned. In the meantime, the key legal documents in this case can be found on my Oracle v. Google Resource Page here.
(Bill Hilton, a partner at my firm, co-authored this post with me.)
On June 30, 2020, the U.S. Supreme Court held that the addition of “.com” to a generic term has the potential to create a protectable trademark. In so ruling the Court rejected the United States Patent and Trademark Office’s “nearly per se rule” that when a generic term is combined with a generic top-level domain the resulting combination is generic. The background of this case is discussed in detail in an earlier post, Supreme Court Will Decide if “generic.com” Trademarks Are Entitled to Trademark Protection. A few days after this case was decided Kevin Kickstarter scheduled a meeting with his long-time attorney, Mr. Jaggers, to discuss how he might be able to profit from this decision. Regular readers of this blog may recall Kevin and Mr. Jaggers’ past appearances. Kevin has little regard for the attorney-client privilege, and once again he recorded his meeting with Mr. Jaggers and gave us permission to share it.
KEVIN KICKSTARTER: Hey, Mr. Jaggers. Good to see you! Are you ready to help me make a lot of money? Still hoping to sell my business to Google someday, ha ha!
JAGGERS: Good to see you Kevin. What’s up?
KEVIN: Well, I was reading Barstool Sports and I learned about this Bookings.com case the Supremes decided. Hey, dude, just kidding, I read about it in the Wall Street Journal, not Barstool! Seriously, Mr. Jaggers sir, the Supreme Court seems to be saying that you can take a generic word, add a “dot com” to it, and maybe get trademark rights in the domain name. Am I understanding that right? J
AGGERS: Yes, you are, but like most Supreme Court IP cases, there’s more to it than that …
KEVIN: So tell me about it!
JAGGERS: Well, the court agreed with the Trademark Office’s argument that “booking” for a hotel reservation service is generic. For example, someone might say, “what booking service are you going to use for your trip?” But they disagreed with the Trademark Office’s argument that “booking.com” is generic – as they note, no one would say “what booking.com are you going to use for your trip?” While “booking” may be generic, Booking.com is not a generic term to consumers. Consumers associate Booking.com with a specific website. Booking.com proved this when it commissioned an extensive consumer survey that established that — to use some trademark law lingo — Booking.com has “secondary meaning.” However, keep in mind that Booking.com only achieved secondary meaning by spending many millions of dollars marketing the name over many years.
KEVIN: That makes a lot of sense. Someone might say “what dating service are you using,” but not “what dating.com service are you using.” And everyone knows that Booking.com is a popular business.
JAGGERS: Exactly. Not to get too technical, but the court recognized that a “generic.com” term – booking.com or dating.com, for example – can convey to consumers an association with a particular website, something the Trademark Office was unwilling to do. Not to get too legalistic on you, but the way the court described it is that “whether any given ‘generic.com’ term is generic depends on whether consumers in fact perceive that term as the name of a class or, instead, as a term capable of distinguishing among members of the class.”
KEVIN: OK, I think I get it. So, I have a few ideas for some “generic.com” domain names. I think I can develop these as trademarks by investing in them, and get them to the point where consumers distinguish them as members of a class, rather than the name of a class. It may take a few years and some bucks, but if Booking.com could do it, I can do it. What do you think?
JAGGERS: Well, what you describe is certainly possible, but it will take a lot of time and money, and ….
KEVIN: …. Yeah, I get that. But I have a couple of ideas, and I have financial backers. I think I can pull this off. What’s the downside? Why not give it a try?
JAGGERS: The downside is that you’ll spend a lot of money, invest a lot of time, and be unable to pull off what Booking.com did. It’s really a low percentage shot without a huge budget and years of brand development. Also, smart competitors could poach on you and frustrate your strategy. For example, they could use domain names so similar to yours that you’ll never develop secondary meaning. In other words, they could purposefully create confusion before you acquire trademark rights that would allow you to stop them.
KEVIN: OK Mr. Jaggers, thanks. You’re a lawyer, and you’re naturally conservative – very conservative. Fortunes aren’t made without taking risks. Booking.com is a private company, but its value is soaring following the Supreme Court’s decision. So, I’m gonna give it a try. I’ll keep you in the loop, and hopefully a few years from now I’ll be able to tell you that I got the last laugh on this. Ciao, dude!
United States Patent and Trademark Office v. Booking.com, June 30, 2020
After the Internet Archive launched a “National Emergency Library” the copyright community held its collective breath, waiting to see if the authors and publishers affected would tolerate it, or challenge it in court. Now we have the answer. On June 1, 2020, four major publishers — Hachette, HarperCollins, Wiley, and Penguin Random House — filed a copyright infringement suit against the Archive.
Background. In late March 2020, in response to the COVID 19 pandemic, the Internet Archive opened a digital “library” of 1.4 million books, to last until June 30, 2020 or the end of the emergency in the U.S., “whichever is later.” Anyone, anywhere in the world, can access this online collection. Users can “check out” (download) books for two weeks at no cost, with no limit on the number of copies that can be checked out at any one time. One thousand or ten thousand copies of The Catcher In The Rye could be downloaded and read simultaneously by different users. Authors and publishers receive no payments.
It appears that there was no effort to distinguish books that might be used in an educational setting from those that are unlikely to be used for education. The Internet Archive did not discriminate between books under copyright vs. books in the public domain, or popular books vs. obscure books.
The Archive explained its reason for taking this step as follows:
“to address our unprecedented global and immediate need for access to reading and research materials” . . . [to ensure] that students will have access to assigned readings and library materials that the Internet Archive has digitized for the remainder of the US academic calendar, and that people who cannot physically access their local libraries because of closure or self-quarantine can continue to read and thrive during this time of crisis, keeping themselves and others safe. . . . ‘In a global pandemic, robust digital lending options are key to a library’s ability to care for staff and the community, by allowing all of us to work remotely and maintain the recommended social distancing.’”
The Archive did offer authors and publishers an opt-out/takedown option.
Controversy. The Emergency Library immediately triggered controversy. The Archive asserted that the Emergency Library was protected by fair use. Authors and publishers disagreed. The U.S. Copyright Office analyzed the issue at the request of a U.S. senator.
The case brought by the publishers was filed in the federal district court for the Southern District of New York – a court, and an appellate circuit, that has deep experience in copyright law, and specifically copyright fair use when applied to digital copies of books.
1.4 Million Books or 127 Books? Despite headlines and press releases, the subject of the publishers’ suit is not the 1.4 million books in the Emergency Library or the Library as a whole. The four plaintiff-publishers do not own the copyright in many of these books. Many of the books may be in the public domain or may be “orphan works” whose owner is unknown. Some may not be registered with the Copyright Office, which is necessary to file an infringement action.
Rather, the complaint alleges infringement of 127 specific books, although this list may be increased by an amended complaint. Absent a class action, whether the Archive has infringed these 127 books must be considered on a work-by-work basis. Damages, if a judge or jury decides they are justified, must be decided as to each book individually, not the 127 books as a whole or based on the other 1.4 million books in the collection.
Fair Use. That said, for each book the question of infringement is likely to come down to the Internet Archive’s public justification – fair use. The answer will depend on a court’s (and possibly a jury’s) evaluation of four nonexclusive factors listed in Section 107 of the Copyright Act. The law requires an individualized analysis and weighing of the factors, making the outcome of fair use cases difficult to predict. However, the publishers have chosen carefully – the 127 books include works by authors such as Bill Bryson, Elizabeth Gilbert, Malcolm Gladwell, Erik Larson, Dennis Lehane, C.S. Lewis, Sylvia Plath, J.D. Salinger and Herman Wouk. Most of the books appear to be popular and in-print. Also, these are creative works, which are entitled to strong copyright protection.
Based on these facts, here’s my short take on the factors as applied generally to this group of books.
First Factor: the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes. Under Supreme Court precedent the central issue under this factor is whether the use is “transformative.” A number of cases point to the conclusion that merely reproducing the work in a new format (in this case moving the text from a physical book to digital format) is not transformative. The Archives’ lack of commercial motivation may help it on this factor, although the publishers’ complaint argues that in fact there is an underlying commercial motivation.
Because the transformative nature of the use is so important, this factor DISFAVORS FAIR USE.[efn_noteThe Second Circuit’s opinion in the “Google Books” case, Authors Guild v. Google, Inc. (2d Cir. 2015), is unlikely to help the Archive here. In that important case Google created a search engine that provided “snippets” from books, not full text. The court found making the books searchable via a full text index, but limiting access to “snippet views,” qualified as a transformative purpose. The Emergency Library, in contrast, provides unrestricted full text access.[/efn_note]
Second Factor: the nature of the copyrighted work. As noted above, many of the 127 books identified in the complaint are novels and similarly highly creative works. As to these books, this factor DISFAVORS FAIR USE.
Third Factor: The amount and substantiality of the portion used in relation to the copyrighted work as a whole. The books are copied in their entirety. This factor DISFAVORS FAIR USE.
Fourth Factor: The effect of the use upon the potential market for or value of the copyrighted work. It’s not clear that the Emergency Library has hurt sales of the books at issue. I expect this to be a subject of discovery and dispute on a book-by-book basis. Therefore, at present this factor is NEUTRAL.
On balance, under this analysis the Emergency Library is not protected by fair use.
As mentioned, these factors are not exclusive. In theory, a judge could rule, or a jury could find, that the emergency circumstances of a pandemic created a new fair use justification for online book sharing as to any one, or all, of these books. However, there is no legal precedent for such a ruling.
Controlled Digital Lending. It’s also notable that the suit includes a legal challenge to “controlled digital lending” (CDL) a process that the Internet Archive has permitted for some time and which publishers have objected to but not, until now, challenged in court. Under CDL the Archive lends digital copies of books as long as it owns a physical copy of the book for each copy loaned at any one time. For example, under this “owned-to-loaned” ratio if the Archive has ten copies of Catcher In The Rye in its warehouse, it will loan up to ten copies of the digitized book at any one time. The theory behind this is that it’s analogous to, or at least no more harmful than, the lending practices of a traditional library. The publishers’ challenge to controlled digital lending will require a separate copyright analysis. It appears to be a harder case for the publishers than their challenge to the Emergency Library. It may be that the publishers’ goal is to force the Archive to end the Emergency Library. Whether they will also force the Archive to stop controlled digital lending or back off on this issue is to be seen. Controlled lending may have been included as a negotiating card (“kill the Emergency Library but keep the controlled lending for now, without prejudice to our right to challenge it in the future”).
Where’s It All Going? It seems unlikely that the Internet Archive has the financial resources to defend a case of this magnitude, both in terms of defense costs and potential liability. Worst case, for the 127 books named in the complaint alone (which could be supplemented), statutory damages could exceed $19 million (127 books x $150,000 per book). The Archive could also be liable for the publishers’ legal fees.
Bottom line: one way or the other, I expect this case to settle quickly.
Update: On June 10, 2020, less than a week after I posted this article the Internet Archive announced that it was terminating the Emergency Library. Controlled digital lending will continue. (link)