by Lee Gesmer | Jul 20, 2012 | Technology
“The music business is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs. There’s also a negative side.”
Hunter S. Thompson
_________________
As the battle between online music companies and copyright owners has raged in the courts during the last decade many of us have wondered what was going on behind the scenes. How did the record companies and publishers assess the threat of digital music to their industry? Why did they react as they did? What effect did their decisions have on innovation and investment in online music companies?
Professor Michael Carrier, Professor of Law at Rutgers School of Law in Camden, has tried to answer some of these questions by conducting interviews with a range of influential people in the music industry — people who witnessed these events and decisions as they unfolded. He presents his results in a cutting edge law review article published on SSRN in early July: Copyright and Innovation: The Untold Story. This paper, which is forthcoming in the Wisconsin Law Review, is an inside look at these issues, through the eyes of 31 “CEOs, company founders, and vice-presidents from technology companies, the recording industry, and venture capital firms.” Of course, we can’t know the extent to which the opinions expressed by these individuals reflect reality. The battle between the labels and digital music companies is far from concluded, and it’s possible that these individuals were grinding their own particular axes, even in the semi-anonymous context user by Professor Carrier.* However, it has the ring of truth, and I discount it very little, if at all. Hunter Thompson must be nodding agreement from the grave.
*The interviewees are identified in the study, but specific quotes are not attributed to specific individuals.
After providing some background information on the seminal 2000/2001 Napster case, and more recent legal issues associated with online copyright law, Professor Carrier presents the results of his interviews with record labels executives, artists and venture capitalists. At the heart of his paper is the question of how the record industry confronted their own version of the “Innovators Dilemma” – the “dilemma” that an industry faces when it is confronted by an alternative technology (the so-called “disruptive technology”) that is less expensive and threatens to replace the status quo. Resist, adapt or some of each? These are the choices the record industry — no stranger to change throughout the late 20th century — was faced with by peer-to-peer technologies. However, this time the change went far deeper than it had in the past. How did they react?
Perhaps not too surprisingly, the answer does not do the labels proud. According to Professor Carrier the labels were completely blind-sided by digital music downloads, and they reacted defensively. Prof. Carrier quotes record label officials who described Napster as “terrifying,” and “devastating.” A “sudden shock to the system” that the labels “were not prepared for.” Although the record industry waged a massive, all-out legal war against Napster and services such a Kazaa, LimeWire, Morpheus and BitTorrent, as well as suing thousands of individuals, they have been unable to put the genie back in the bottle. By failing to strike a licensing deal with Napster in 1999/2000 the record industry forced file sharing to go underground, where it grew tremendously and eventually overwhelmed the labels.
Not surprisingly, the decision-makers within the record labe are portrayed unfavorably. These record company “tech gurus” turned out to be “old-school marketing people that had just come up through the ranks as enforcers.” They behaved as “irrational actors.”
Prof. Carrier paints a graphic picture of the extent to which the record labels were caught flat-footed. The labels didn’t view consumers as their customers, but rather viewed retailers, such as Walmart and Tower Records, as their customers. According to Prof. Carrier, one label spent $1 billion on trucks to distribute their CDs. The major labels were different because “they had trucks.” “No one else could put a CD in every record store in the country on the day of release.”
The labels were also confounded by the maze of copyright rights they were forced to deal with. The layers of copyright ownership are notoriously complex, and the labels had difficulties getting “all the stars to line up.” In many cases the labels themselves didn’t know “who owns what,” since older contracts were “vague or unclear.” In other instances, where the labels could identify the rights holders, they couldn’t find them.
Corporate inertia and self-interest played a major role in the labels’ reaction to digital downloads. Record labels often are part of large conglomerates, and the sheer size of the companies made it hard to adapt. Record company officials were always “discovering the Internet anew,” and “having to start from scratch.” Some in the recording industry viewed digital downloads as a “passing fancy” that they could survive by burying their heads in the sand. “Bonus inertia” discouraged the adoption of new business models: “incumbent senior executives whose bonuses are at risk and who have bosses to report to” are not “willing to take the career risk of being wrong.” In what appears to be the ubiquitous “I’ll be retired before the sh*t hits the fan” attitude, the industry suffered from “ignorant people just hanging on” who concluded they would be retired before the technology threatened their market positions and jobs.
Of course, the lawyers that work for the lables come in for scathing criticism. “Most labels are run by lawyers,” quotes Prof. Carrier. These lawyers focused on worst-case scenarios instead of business decisions that might exploit opportunities. The following is a quote from the paper:
Lawyers at the labels historically drove the digital agenda. There was no one there with a truly entrepreneurial spirit. Zero, zilch, zingo, nada. No one there whose entire initiative was not to hang on to the past.
Prof. Carrier’s interviews include venture capital investors, many of whom took a pass on digital downloads after Napster. He notes the critical role that venture capital has had in funding countless technology companies, listing examples such as Amazon, Apple, Facebook, Google and Microsoft. However the labels’ litigation strategy created “a wasteland with no music deals getting done.” “The graveyard of music companies was just overflowing.” The Napster decision led to a “lost decade.” To the extent the record labels were attempting to destroy the necessary “fertilizer” for the new online music industry — VC investment — it largely succeeded.
The ultimate beneficiary of this strategy was Apple’s iTunes service. Napster cleared the way for iTunes to establish a dominant position, locking the music industry into “the Apple ecosystem.” Apple launched the iTunes Music store in April 2003, and within seven years there had been 10 billion downloads. Illegal downloads from Napster seeded the success of Apple’s iPod, and the iPod prepared the market for Apple’s legal iTunes store.
There is much more in Professor Carrier’s law review article than I have been able to discuss in this brief summary. It tells a familiar and sad story. Examples of the “innovator’s dilemma” surround us today. It is obvious in computing (where it seems to be a constant), life sciences, the automotive industry and environmental sciences. Perhaps it is not an overstatement to say that, in this era of rapid technological and scientific advances, it is present in every industry. Human nature being what it is, the “status quo” often will fight a new paradigm, rather than adapt to it. The future is cloudy, and often that strategy will pay off. For the record industry, at least so far, it hasn’t.
Copyright and Innovation: The Untold Story
by Lee Gesmer | Jul 13, 2012 | Trials
I’ve written before about waiver. As I said back in July 2008, the “one thing that scares the bejesus out of trial lawyers is waiver.” Waiver is a constant risk in litigation, but nowhere is it more of a risk than during trial. Failure to object to improper jury instructions, or failure to follow the proper procedure required for judgment as a matter of law (“JMOL” in lawyer parlance) can constitute a forfeiture, and preclude the right to raise the omitted issue on appeal.
To make matters worse, these potential waivers come when the fog of war is at its worst: after days or weeks of sleep-deprived trial stress the lawyers have to file a written motion for JMOL just before the jury is handed the case. A lawyer may know that the failure to do this will forfeit the right to raise the missed issue on appeal, but at that point the lawyer is frantically preparing for closing argument and dealing with the countless issues that come up at the end of trial, and the motion may be forgotten or not thoroughly prepared. However, filing the correct pre-verdict motion is not the end of the matter. FRCP 50 requires that the motion be renewed within 28 days after the court enters judgment. However, a post-judgment JMOL motion cannot raise an issue that was not presented in the prejudgment motion.
Belk v. Meyer Corp., decided by the 4th Circuit in May, is a classic example of JMOL forfeiture. The case involved a claim of trade dress infringement of high end cookware. Following a jury trial the plaintiff obtained a judgment for over $1.2 million. On appeal to the 4th Circuit the defendant attempted to raise a potpourri of errors committed by the trial judge, but the 4th Circuit held that most of them had been forfeited based on the defendant’s failure to file a timely post-judgment JMOL motion. In its lengthy opinion the 4th Circuit provides a detailed tutorial on what lawyers must do under FRCP 50 to avoid forfeiting rights on appeal. However, it’s too late for the losing party in this case.
Belk v. Meyer Corp
by Lee Gesmer | Jul 10, 2012 | Noncompete Agreements
Can an employer prevent a former employee from working for a competitor in the absence of a non-compete agreement and with no evidence the employee has violated the former employer’s trade secret or confidentiality rights? You would think not, but a couple of cases — infamous in the annals of non-compete law — have imposed a non-compete in these circumstances. The case cited most frequently on this issue is PepsiCo v. Redmond, a 1995 case in which the 7th Circuit affirmed a preliminary injunction ordering the former employee of PepsiCo to cease working for a competitor for six months, despite the fact that the employee did not have a non-compete agreement. Another high profile case prohibiting an employee from working for a competitor, even in the absence of a non-compete agreement, is Bimbo Bakeries USA, Inc. v. Botticella, decided by the 3rd Circuit in 2010. In these cases the employee does have non-disclosure/trade secret agreements. The employer’s argument, based on these, is that the employee will “inevitably” disclose the former employer’s trade secrets or confidential information in the course of working for a competitor.
However, cases where the courts have accepted this theory without evidence of actual misappropriation are almost as rare as hens teeth, and Massachusetts U.S. District Court Judge Denise Casper recognized this when she denied the former employer a preliminary injunction in U.S. Electrical Services v. Schmidt in June of this year.
Inevitably, plaintiffs in these cases argue that a preliminary injunction is essential to prevent the former employee from disclosing trade secrets. After all, the employee, who presumably knows the former employer’s inner-most secrets, is now working for a competitor. How can the employee be expected to resist? And, if the secrets were disclosed, how would the former employer prove that? Too risky, the former employer argues.
However, that argument usually fails, as it should when a non-compete agreement is absent.
Judge Casper said as much: “none of the authorities cited by [plaintiff] stand for the proposition that allegedly inevitable future misuse of trade secrets is by itself sufficient to establish a violation of either common law or statutory obligations regarding trade secrets.” The law does “not show that a party may rely solely on inevitable future conduct, rather than conduct that has actually occurred, to establish a likelihood of success on the merits of a trade secrets appropriation claim or a breach of confidentiality claim, as [plaintiff] seeks to do here.”
In other words, a plaintiff must have proof that trade secrets have been disclosed, not that they might be disclosed in the future.
Despite the strong policy against imposing an injunction based on an “implied covenant not to compete,” and the poor track record held by plaintiffs in these cases, employers keep on trying. It appears that intermittent reinforcement — the rare but occasional win by a plaintiff based on this theory — is enough to keep the hope of such judicial relief alive in the face of bad odds. After all, a plaintiff may think, why not try, I may get lucky!
By the way, it’s my opinion that the plaintiff made a mistake filing this case in federal court, where the judges have less experience with this area of law and generally are more protective of employee job security. It’s not always the case that a non-compete case (or, in this case a quasi non-compete case) will have a better chance of success in Massachusetts state court, but I believe the odds favor it.
U.S. Electrical Services v. Schmidt
by Lee Gesmer | Jul 6, 2012 | Patents
“It’s not clear that we really need patents in most industries . . .. You just have this proliferation of patents. “It’s a problem.”
Judge Richard Posner, Silicon Valley MercuryNews.com, July 5, 2012
Do you recall the final scene in Monty Python and the Holy Grail? After 90 minutes of farcical medieval/King Arthur-inspired humor the film concludes with a big attack scene (cliché visuals of swords, spears and knights in armor, opposing armies lined up in a field, battle music ….). King Arthur makes a Crusades-inspired speech and yells charge. Just as the armies are about to engage a police car pulls up with siren blaring. 20th century British bobbies jump out and arrest some of the knights, who put up no resistance. Others are simply told to go home. The war is cancelled. (video).
This is not very different from what just happened in the patent war between Apple and Motorola Mobility (owned by Google) over smartphone patents. In that case, initially filed in federal court in Wisconsin in late 2010, a year before Steve Jobs’ death, each side accused the other of multiple patent infringements. To put things in context, this case was part of the war against Google’s Android OS that Jobs initiated before his death. According to the Isaacson biography of Steve Jobs, Jobs stated that Android’s use of Apple’s ideas equated to “grand theft,” and that Jobs was “willing to go thermonuclear war on this.” He is also reported as saying that “I will spend every penny of Apple’s $40 billion in the bank to right this wrong.” (both quotes referenced here).
When it was first filed in 2010, the case was assigned to a Wisconsin federal trial judge. In mid-2011, Google purchased Motorola Mobility (owner of the patents) for $12.5 billion, to strengthen its patent position with Android. In October 2011 Jobs passed away. Then, in December 2011, the case was hit by an earthquake: the case was re-assigned to Judge Richard Posner, an appellate judge on the 7th Circuit and possibly the most highly respected federal appellate judge in the country. According to reports Posner requested that the case be assigned to him. Hmmm, why did he do that? And why this case?
(more…)
by Lee Gesmer | Jun 22, 2012 | Noncompete Agreements
What is the first thing a lawyer looks for when a client wants to enforce a non-compete agreement? What is the first thing a lawyer hopes not to find when a client is the subject of a non-competition demand letter or lawsuit? Bad facts. Did the employee take confidential information belonging to the former employer? Did the employee contact customers of the former employer and solicit them for the prospective employer before leaving the former employer? If the employee was an executive or owed a fiduciary duty to the former employer, did the employee solicit other employees to leave with her? If the employee did any of these things, did the employee try to cover it up? Bad facts! The plaintiff’s lawyer will say. Give me those bad facts!
OK, I exaggerate a bit – of course a lawyer first wants to see if there is a written agreement that contains a non-compete provision. But believe me, any experienced lawyer is itching to find those bad facts. Lawyers know that judges are ambivalent about non-compete agreements, and putting someone out of work by issuing an preliminary injunction to enforce a non-compete provision is something few judges do with an easy conscience. It’s no secret that there are some judges who will bend over backwards to find a way not to enforce a non-compete.
So, lawyers trying to enforce these agreements know that the one thing likely to motivate a judge to enforce a non-compete agreement is bad facts. And, if there’s anything better than bad facts its bad facts and a cover-up. After all, often the cover-up is worse than the crime.
Life Image’s lawsuit against Michael Brown, a former executive of Life Image, shows how bad facts and a cover-up can play out in a lawsuit where the former employer is seeking a preliminary injunction to enforce a non-compete agreement. Mr. Brown violated almost every rule an employee with a non-compete agreement should follow when leaving an employer.
First, Mr. Brown (V.P. of Business Development at Life Image, a cloud-based medical imaging service) met with his prospective employer and made a suggestion to enhance its forthcoming product, while still employed by Life Image. (Lesson to employees: do not meet with your prospective employer before leaving your current employer, other than to negotiate employment terms).
Second, Brown left Life Image with a demo copy of Life Image’s software program on his computer. And, it appears that he copied the program to his personal computer just before leaving Life Image. (Lesson: take nothing from your former employer except your personal belongings. Nothing).
Third, Brown had communicated with his new employer using Life Image’s email system, and he deleted copies these emails from of his “sent” email folder before leaving Life Image. (Lesson: don’t use your current employer’s email system to communicate with your prospective employer. if you do, don’t try to cover it up. Brown worked for a software company – he should have known that he couldn’t get away this this. Computers never forget.).
Fourth, according to the court Brown transferred a “large volume of information” from his Life Image computer to an external hard drive after giving notice. Brown could not justify doing this as part of his job at Life Image. (Lesson: see the second lesson, above).
Fifth, after suit was filed, and after the court had ordered Brown to return Life Image data to Life Data, Brown deleted some Life Image data from his computer. (Lesson: don’t violate court orders. And again, computers never forget.).
Admittedly, Brown would have had a tough case to start with – he was a high level employee at Life Image. The terms of his non-compete were reasonable, and he was made aware of the agreement as a pre-condition of his employment (as opposed to being asked to sign it after he had already started at the job). There was no question he had gone to a competitor (in fact, he had admitted this in an email while still employed by Life Image). According to the judge he had other job prospects, so presumably enforcement of the non-compete wouldn’t leave him unemployed.
However, Brown also had one important, sympathetic fact in his favor: Brown, a citizen of Australia, was in the U.S. on a work visa. The judge was told that an injunction causing him to become unemployed could result in the loss of his ability to remain in the United States. However, the judge rejected this factor, noting, “it is most unfortunate that Mr. Brown put his visa status in jeopardy when he took the risk of moving to [a competitor of Life Image] with apparent knowledge of possible outcomes.”
Brown also offered the judge a compromise that would have allowed him to continue to work for the new employer, but in areas that do not compete with Life Image. This can often work, giving the judge a way to reach a compromise decision. However, the judge rejected this, commenting on Brown’s “lack of judgment” in deleting files after receiving the court’s preservation order, as well as the other conduct discussed above. Based on these bad facts the judge expressed “doubt that [Brown] is possessed of the ability to wall off in his mind secret strategic marketing information about Life Image” while working for the new employer.
This case is a case study on what not to do when leaving an employer that might sue to enforce a non-compete agreement. The tragedy (if that’s not too strong a word) is that Mr. Brown might have been able to avoid an outcome that put him out of work had he only acted legally before and after leaving Life Image. The bad facts, not his contract, are what got him in the end.
Life Image v. Brown
