by Lee Gesmer | Nov 5, 2012 | Corporate Law, Noncompete Agreements, Trade Secrets, Trademark
Oriental Financial Group, Inc. v. Cooperativa De Ahorro y Crédito Oriental (1st Cir. October 18, 2012) — In this case the First Circuit adopts the trademark law “progressive encroachment doctrine,” joining the 6th, 7th, 8th, 9th and 11th circuits. The progressive encroachment doctrine may be used as an offensive countermeasure to the affirmative defense of laches (delay in brining suit) where the trademark owner can show that “(1) during the period of the delay the plaintiff could reasonably conclude that it should not bring suit to challenge the allegedly infringing activity; (2) the defendant materially altered its infringing activities; and (3) suit was not unreasonably delayed after the alteration in infringing activity” (quoting Oriental Financial).
Harlan Laboratories, Inc. v. Gerald Campbell (D. Mass. October 25, 2012) — Applying Indiana law, Judge Patti Saris issues a preliminary injunction enforcing a one year non-compete agreement. However, the opinion makes liberal use of Massachusetts and First Circuit precedents.
Blake v. Professional Coin Grading Service (D. Mass. October 6, 2012) — In this case, which involves alleged trade secrets associated with a method to grade the “eye appeal” of coins, Judge William Young concluded that the “method” was not subject to trade secret protection due to the fact it had been publicly disseminated before being disclosed to the defendants. However, Judge Young ruled that the case could proceed based on the alleged misappropriation of a proposed marketing plan. In addition to his analysis of trade secret law, the case contains an extensive discussion of Lanham Act issues including “reverse confusion” (which is always confusing) as well as the application of Massachusetts law to the intellectual property issues raised in the case (conversion, breach of contract, the covenant of good faith and fair dealing, unjust enrichment and civil conspiracy).
In DeJesus v. Bertsch, Inc. (D. Mass. Oct. 16, 2012) Judge Young conducts a detailed analysis of corporate successor tort liability under the Massachusetts “de facto merger” and “mere continuation” exceptions. In this case he concludes that the defendant corporation is not subject to successor liability.
by Lee Gesmer | Oct 31, 2012 | Copyright, Litigation
In Third Degree Films v. Does 1-47 (D. Mass. October 2, 2012), Judge William Young took on the “copyright trolls” in the adult film industry as best he could, holding that the plaintiff (a publisher of copyright-protected adult films that are being shared on the Internet) cannot join 47 “John Doe” defendants in a single action — it must instead file 47 individual suits.
The issue here is part of a larger controversy, the “porn film copyright shakedown.” The way this works is as follows. Copyright holders file Doe suits, which identify defendants only by IP address (all the plaintiff knows at that point). They then subpoena the ISPs and identify the owner of the IP address. Having identified the owners, they tell them that, absent a quick settlement (typically under $5,000), they will name them in the suit and serve them. Most people, rather than suffer the embarrassment (or what Judge Young calls the “reputational cost”) of having court records show that they downloaded films with titles like “Big Butt Oil Orgy 2,” settle out-of-court. Judge Young describes this process as “misusing the subpoena powers of the court, seeking the identities of the Doe defendants solely to facilitate demand letters and coerce settlement, rather than ultimately serve process and litigate the claims.”*
*As one court put it, a defendant – “whether guilty of copyright infringement or not — would then have to decide whether to pay money to retain legal assistance to fight the claim that he or she illegally downloaded sexually explicit materials, or pay the money demanded. This creates great potential for a coercive and unjust ‘settlement.'” SBO Pictures, Inc. v. Does 1-3036.
Why do the plaintiffs in these cases name tens, hundreds, sometimes thousands of Doe defendants in one suit? Money, money, money. By filing claims against multiple John Does, as Third Degree tried to do in this case, the plaintiff avoids a separate filing fee for each defendant (currently $350 per complaint). If Third Degree were required to file 47 separate cases, it would cost $16,450. Filing one case — $350. Assuming an average settlement of $2,500, joinder results in a gross of $117,500, while separate suits would yield a gross of only $101,050. Some porn film copyright cases name thousands of defendants. At $350 a pop, this can start to add up and the number of defendants climbs. In one case, for example, the plaintiff sought (unsuccessfully) to join 3,036 separate defendants.
No doubt, it’s more profitable for a copyright holder to be able to file a single case against multiple defendants and save money on filing costs, but that begs the legal question: why should this be permissible? Why shouldn’t porn film plaintiffs be required to file separate cases, like everyone else? The answer lies in the federal rules of civil procedure, which allow multiple defendants to be joined in a single case where the claims arise “out of the same transaction, occurrence, or series of transactions or occurrences.” (Fed. R. Civ. P. 20(a)(1)). How do the copyright plaintiffs claim the benefit of this rule?
The answer lies in a variation of the BitTorrent peer-to-peer file-sharing technology known as “BitTorrent swarm” or segmented file transfer. Simplified, a BitTorrent swarm distributes parts of a file among mutiple users. The file is downloaded from various sources simultaneously and assembled on the destination computer. Because movie files are very large (as compared with mp3 files, for example), this provides a faster, more efficient way to distribute these files.*
* BitTorrent swarms in the context of mass copyright filings are discussed on Slashdot here. For a semi-technical discussion in a court filing see the John Doe filing in Malibu Media v. John Does 1-5, here.
Although the 47 alleged downloaders in the Third Degree Films case may never have met each other or know each other’s identities, they all downloaded the same adult film and (according to Third Degree) were part of the same swarm. Perhaps any given member of the “swarm” interacts with electronically another participant, perhaps not. The larger the swarm (and a BitTorrent swarm can include thousands of users), the less likely that any one defendant will share part of the file with another. However, unbeknownst to them, using BitTorrent swarm technology made them susceptible to the “swarm joinder theory.”
Whether a plaintiff can name many defendants in a single suit based on swarm joinder is highly controversial. Judge Young issued an opinion on this issue a year ago in Liberty Media Holdings v. Swarm Sharing Hash File. In that case he permitted the “swarm participants” to be joined in one case, concluding that the Doe defendants’ behavior satisfied the “same transaction or occurrence” requirement. In the current case Judge Young stands by his reasoning in Liberty Media. He discusses the technological complexities of this issue, and concludes that even indirect interactions between swarm defendants may constitute “shared, overlapping facts” sufficient to establish a “series of transactions or occurrences.”*
*Judge Young noted it gave him “pause that district courts are so divided over whether file sharing via the BitTorrent protocol constitutes a series of transactions or occurrences . . . The inquiry is so fact intensive, and the BitTorrent protocol so technologically complex, that no principled conclusions have emerged from the abundance of recent case law and this Court is not entirely comfortable hanging its hat on its own understanding of the process.” Indeed, some of the discussion of whether an initial seeder indirectly uploaded pieces of a work to every peer in the swarm is surprisingly abstruse.
However, judges are not always bound by the letter of the law, and when it comes to multi-defendant joinder, Judge Young decided to take full advantage of his discretion. In this case, Judge Young expressed “serious concerns regarding the propriety of joinder of tens, hundreds, or thousands of Doe defendants” in adult film mass copyright infringement cases. He noted that each case would require a mini-trial (for example, one defendant suggested that her tenant, who occupies the other half of her two family house, must be responsible for the download). Combining 47 defendants with different defenses into one case was likely to create a “procedural albatross. Judge Young also took a dim view of the use of joinder to create a “low-cost, low-risk revenue model for the adult film companies.”
There have been many adult film (and conventional film) “copyright troll” cases in the last couple of years, and Judge Young’s decision collects court decisions in many of them. It appears that this phenomenon may be close to running its course. Many courts now see the issue the way Judge Young sees it, and are denying joinder in BitTorrent cases. Some plaintiffs have been sanctioned for abusing the joinder process. Bellwether trials are pending to test the extent to which an IP address can be used as the basis for legal wrongdoing, and whether the plaintiffs in these cases are correctly representing the technological properties of BitTorrent. Class action suits have been filed against Third Degree Films and other adult film companies based on their litigation practices. The easy money has been made, people are getting wise to the risk associated with these downloads and the courts have wised-up. The end may be in sight.
by Lee Gesmer | Oct 16, 2012 | Contracts
It’s easy to create an enforceable online “click-wrap” agreement. But, as two recent cases remind us, it’s also easy to do it wrong. Two recent cases are a reminder of this.
In the first case, In re Zappos.com Security Breach Litigation, Zappos was sued in connection with a large data security breach. Responding to the predictable class action lawsuit, Zappos argued that the plaintiffs were required to arbitrate under Zappos’ online user agreement. However, Zappos didn’t have a ‘user agreement,” it only had terms and conditions. And, it did not require purchasers to “click through” to indicate acceptance of those terms. The terms, which included the arbitration requirement, were under a link users were not even required to access while making a purchase, much less consent to. Quoting the court:
we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use. The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use. No reasonable user would have reason to click on the Terms of Use, . . .
. . . The arbitration provision found in the Zappos.com Terms of Use purportedly binds all users of the website by virtue of their browsing. However, the advent of the Internet has not changed the basic requirements of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent. A party cannot assent to terms of which it has no knowledge or constructive notice, and a highly inconspicuous hyperlink buried among a sea of links does not provide such notice. Because Plaintiffs did not assent to the terms, no contract exists, and they cannot be compelled to arbitrate.
To make those terms enforceable Zappos needed to require purchasers to affirmatively signal their assent by “clicking” their agreement to be bound. It failed to do this, and therefore the terms were not binding. Zappos might have been better off in arbitration, but it’s stuck in court.
The second case, Schnabel v. Trilegiant (2d Cir., Sept. 7, 2012), is not an online license case per se, but it makes the same point. In this case the web site, a membership organization, emailed (or, if the email bounced, snail-mailed) terms and conditions to new members after they had already joined. The terms contained an arbitration clause. Could the plaintiff be required to arbitrate based on this “after the fact” mailing? Not under the circumstances in this case. The Second Circuit held:
a reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship he or she may have with the service provider, especially where the enrollment required as little effort as it did for the plaintiffs here. In this context the email would not have raised a red flag vivid enough to cause a reasonable person to anticipate the imposition of a legally significant alteration to the terms of conditions of the relationship with [the defendant].
Much of the case law on online contract formation between vendors and purchasers comes from the Second Circuit. See: Specht v. Netscape Communications Corp., 306 F. 3d 17 (2nd Cir. 2002); Register. com, Inc. v. Verio, Inc., 356 F. 3d 393 (2nd Cir. 2004).
You might not know it from these two cases, but this is not rocket science: require customers to affirmatively consent to online terms before they perform the transaction, and the agreement likely will be enforceable.
Oh, one more thing – don’t state that the terms can be changed at any time, at the whim of the site owner, without obtaining new assent by the customer. A lot of terms contain a provision to this effect, but as the court noted in the Zappos case, where the site owner reserves the unilateral right to revise the online terms the contract becomes “illusory, and therefore unenforceable.” The district court in Zappos cites many of the cases applying this principle to online agreements. For a 2009 blog post discussing this aspect of online agreements, see here.
by Lee Gesmer | Sep 13, 2012 | Trademark
One of the thorniest issues in trademark law is whether and when trademark law will protect the use of a single color. After all, there are an infinite number of colors, and it would hardly be fair if one company could obtain a theoretically perpetual right to exclude others from using a color. So, the law makes it difficult to achieve this.
Cases involving color marks are rare, but the Second Circuit released an important decision last week in Christian Louboutin S.A. v. Yves Saint Laurent Am., Inc., (2nd Cir. 2012). The court held that Louboutin’s trademark, consisting of a red, lacquered outsole on a high fashion woman’s shoe (the “Red Sole Mark”), has acquired limited “secondary meaning” as a distinctive symbol that identifies the Louboutin brand, but (oddly) only where the red outsole contrasts with the color of the remainder of the shoe.
The heart of the decision is the court’s functionality analysis. Trademark law recognizes two types of functionality, “utilitarian” functionality, and “aesthetic” functionality. Utilitarian functionality occurs when a product feature is essential to the use or purpose of the article, or if it affects the cost or quality of the article. The court had no difficulty finding that the red outsole was not precluded from trademark protection by reason of utilitarian functionality, since the color serves no utilitarian purpose.
However, that did not end the inquiry. The court had to determine whether Louboutin’s Red Sole Mark was barred under the doctrine of “aesthetic” functionality.
Enforceable
In doing so, the court noted the “counterintuitiveness” of this inquiry: “how can the purely aesthetic be deemed functional, one might ask?” The court answered its own question by noting that “the doctrine of aesthetic functionality bars protection of a mark that is “necessary to compete in the [relevant] market.” A mark is “aesthetically functional, and therefore ineligible for protection under the Lanham Act, where protection of the mark significantly undermines competitors’ ability to compete in the relevant market.” The Red Sole Mark easily passed muster under this test.
Unenforceable
The district court had applied a per se rule that assumed functionality (and therefore unenforceability) for color marks in the fashion industry. The Second Circuit disagreed, stating that Supreme Court precedent “requires an individualized, fact-based inquiry into the nature of the trademark, and cannot be read to sanction an industry-based per se rule.” After reviewing the record, and Louboutin’s extensive evidence supporting secondary meaning for the Red Sole Mark, the court concluded that the color mark could be asserted as a trademark only when used as a red outsole contrasting with the remainder of the shoe; it could not be used when both the sole and the remainder of the shoe were red.
by Lee Gesmer | Sep 12, 2012 | Copyright
In late August Massachusetts U.S. District Court Judge Rya Zobel refused to remit $675,000 in statutory copyright damages that a jury awarded (long ago, pre-appeal) against Joel Tenenbaum, and held that the award did not violate Tenenbaum’s constitutional rights under the Due Process Clause. (Blog post on Tenenbaum here).
Yesterday, in a case involving essentially identical issues, the 8th Circuit affirmed a $220,000 jury verdict against Jamie Thomas-Rasset.
Ms. Thomas-Rasset has had a rough six years since she was first sued for downloading 24 copyrighted songs. She has been through three jury trials, resulting in verdicts of $220,000, $1.92 million and $1.5 million.
The federal district court trial judge in Minneapolis seemed to be sympathetic to her plight, setting-aside or reducing the verdict each time. However, the recording companies persisted, and it appears that her luck may have finally run out. The Eighth Circuit Court of Appeals ordered the trial judge to enter judgment against Ms. Thomas-Rasset in the amount of the original, $220,000 verdict (as requested by the record companies). Importantly, the court rejected Thomas-Rasset’s claim that a statutory damages award of $9,166 per song violated the Due Process Clause.
Just as importantly, the court declined to be the first federal circuit court to rule on whether making sound recordings available for distribution on a peer-to-peer network (as Ms. Thomas-Rasset did) violates a copyright owners’ exclusive “distribution” right under section 106(3) of the Copyright Act, regardless of whether actual distribution (in this case downloading by third parties) has been shown.
Unless Ms. Thomas-Rasset can persuade the Supreme Court to take review (or the Eighth Circuit to reconsider it en banc), this case is over. Whether the record companies will recover any part of their judgment is an open question, given that Ms. Thomas-Rasset works as a natural resources coordinator for the Mille Lacs Band of Ojibwe Indians and reportedly has been represented pro bono in this long-running case. Nevertheless, in this case, and in the Tenenbaum case, they have made their point. However, it comes a bit late, given that the record company downloader suits have slowed, if not ceased altogether.
Meanwhile, the decision doesn’t bode well for Joel Tenenbaum, who, presumably, is weighing a Due Process Clause appeal of Judge Rya Zobel’s August decision in his case.
Capitol Records Inc et al v. Thomas-Rasset (8th Cir., September 11, 2012)
