Mass Law Blog

The NAR Antitrust Case: The Per Se Rule Misapplied?

The NAR Antitrust Case: The Per Se Rule Misapplied?

In October 2023 a Missouri jury awarded class-action plaintiffs $1.8 billion in a federal antitrust suit against the National Association of Realtors (NAR) and several brokerage firms. As I discuss below, the central issue in this case – and what I expect will be the central issue on appeal – is whether the case should have been tried under the “per se” rule or the “rule of reason.” Spoiler: while the NAR may ultimately be found liable for violating the antitrust laws the trial judge erred in trying the case as a “per se” violation. I expect the Eighth Circuit or the Supreme Court to reverse the judgment in this case. 

Per Se or Rule of Reason?

A key issue in any Sherman Act Section 1 case is whether the challenged conduct should be tried under the per se rule or the rule of reason. Some anticompetitive conduct is viewed as so presumptively harmful that it’s treated as a “per se” violation, meaning that no offsetting pro-competitive justification defense is allowed. Classic examples are horizontal price fixing, market division and bid rigging. In a civil case these violations can result in money damages. In a criminal case the corporate employees involved may be facing time in a federal prison. 

Per se antitrust conspiracies usually occur in secret. The classic scenario is the secret meeting where competitors agree to fix prices or divide markets. But this is not always the case. Sometimes the challenged conduct takes place in the open. That’s the situation in Burnett v. NAR (W.D. Miss.), the case that resulted in the $1.8 billion verdict against the NAR. (docket).

The NAR Mandatory Payment Rule

If you’ve ever sold a house in the U.S. it’s likely you hired a realtor to represent you. This person is referred to as the “seller-broker” or the “listing-broker.” You likely knew that a second realtor might be involved – the “buyer-broker” – and that both brokers would receive a commission on sale.

When you retained your broker you agreed to pay a brokerage commission when the house was sold. It was probably between 5% and 6% of the sale price, although you might have negotiated a lower amount. You may also have been aware that this commission would be split 50-50 between the two brokers. You, the seller, would be paying both brokers from the proceeds, a fact that probably was a consideration when you set the selling price for the house. If you expected to sell your house for $1 million, a 5% brokerage fee meant that at closing you’d pay $25,000 to each broker.

Perhaps you told your realtor that while you were OK paying him 2 ½% on sale, you didn’t want to pay the buyer-broker. After all, the buyer-broker represented the buyer – let the buyer negotiate its own brokerage fee and pay it directly. You may have pointed out that many buyer-side brokers play a minimal role in home purchasers today, when buyers can research the housing market online. A buyer-broker’s job might be not much more than providing access to a lock box and communicating an offer. Why, you ask, should the buyer’s broker be paid $25,000, an amount that may be unrelated to the service provided?

If that’s what you were thinking you may have instructed your broker to post your house for sale with “buyer-broker compensation to be determined.” 

If you tried this your broker likely responded that deferring the buyer-broker’s commission until later in the transaction was not an option. Why? Because your broker is almost certainly a member of the NAR, and must comply with the NAR membership rules. Not stating the buyer-broker’s commission up front would run afoul of a long-standing NAR rule that the seller must state the buyer-broker commission on MLS when the property is first listed. If the seller didn’t agree to this the listing-broker would lose access to the NAR-owned MLS. And, your broker adds, even in the age of Zillow and Redfin an MLS listing is essential to advertising a house and finding a buyer. 

If a realtor told you this they would be right. Since the mid-1990s the NAR’s so-called “Mandatory Payment Rule” (the “NAR Rule”) has required that any seller listing on MLS must make an offer to potential buyer brokers when the property is first listed:

In filing property with the multiple listing service, participants make blanket unilateral offers of compensation to the other MLS participants and shall therefore specify on each listing filed with the service the compensation being offered by the listing broker to the other MLS participants. (NAR Handbook, Section 5)

In plain English, this rule (along with others not quoted here) requires that a seller broker disclose an offer of compensation to the buyer broker when the house is first listed, despite not having any information about the buyer, the buyer-broker or the services the buyer-broker will perform. Any negotiation of the compensation must occur before the property is shown and cannot be negotiated after that point. As a practical matter, therefore, there rarely if ever is a negotiation over the compensation offered to buyer brokers on the MLS.

The NAR Case

The NAR Rule has been in existence since the mid-1990s, and it has long been the target of criticism and controversy. This finally came to a head when several home sellers filed an antitrust class action in Missouri against the NAR and several large brokerage firms. The NAR and some large realtors refused to settle or back down, and at trial things didn’t go well for the NAR and its broker co-defendants. A jury found that the policy violated the antitrust laws and awarded $1.8 billion in damages. Add to this the possibility of treble damages exceeding $5 billion and attorneys fees. And this is just the beginning of a litigation free-for-all – the verdict has led to similar lawsuits in other jurisdictions and increased government scrutiny of the NAR. 

The Per Se Rule – When Does It Apply?

The per se rule is a draconian rule in the context of antitrust law, and the Supreme Court has been clear that it is to be applied cautiously. In fact, in recent decades the Court has been liberal in recharacterizing per se conduct as rule of reason conduct.

The leading case on this is Leegin v. PSKS (U.S. 2007), where the Court moved resale price maintenance from the “per se” column to the “rule of reason” column. However, the Supreme Court has done this more than once. In Continental v. Sylvania (U.S. 1977), non-price vertical restrictions were moved into the rule of reason column. 

Leegin, Sylvania and similar cases have important implications for the “per se” vs “rule of reason” decision. In these decisions the Supreme Court has made clear that the per se rule should be applied only after the courts have adequate experience with the restraint at issue. See also Arizona v. Maricopa County Medical Society (U.S. 1982)(“Only if it is clear from the record that the agreement is so plainly anticompetitive that no elaborate study of its effects is needed to establish its illegality may a court properly make a per se judgment”).

The Court emphasized this in Leegin:

The accepted standard for testing whether a practice restrains trade in violation of § 1 of the Sherman Act is the rule of reason, which requires the factfinder to weigh “all of the circumstances,” including “specific information about the relevant business” and “the restraint’s history, nature, and effect.” The rule distinguishes between restraints with anticompetitive effects that are harmful to the consumer and those with procompetitive effects that are in the consumer’s best interest. However, when a restraint is deemed “unlawful per se,” the need to study an individual restraint’s reasonableness in light of real market forces is eliminated. Resort to per se rules is confined to restraints “that would always or almost always tend to restrict competition and decrease output.” Thus, a per se rule is appropriate only after courts have had considerable experience with the type of restraint at issue, and only if they can predict with confidence that the restraint would be invalidated in all or almost all instances under the rule of reason. [citations omitted; emphasis added]

In order to obtain the “considerable experience” required make a determination of this sort courts typically receive evidence in the form of lay testimony and expert opinion (from economists and industry experts), review the economic literature and reach a reasoned determination whether the practice at issue “always or almost always” restricts competition and decreases output.

Is The NAR Policy A Per Se Antitrust Case?

In the NAR case the trial judge decided the all-important “per se” vs. “rule of reason” issue at the summary judgment stage: “The Court agrees with Plaintiffs and finds that the per se rule is applicable here . . . The record creates a genuine material fact as to whether Defendants have engaged in a horizontal price-fixing scheme, exactly the situation where applying the per se rule is appropriate.” (Emphasis added). By the time of trial the judge had concluded that there was no longer an issue of material fact on this issue – in his view the case fell under the per se rule, and he instructed the jury accordingly. 

Consequently, the NAR defendants went to trial with one hand tied behind their backs – they were not allowed to argue the economic benefits of the NAR Rule. They were limited to defending against the allegations of a conspiracy and the damages claims.  

However, if you reread the NAR Rule that I quoted above you will notice something unusual about it – it does not “fix” the commissions paid to the listing and buyer’s broker. In other words, it doesn’t say that the brokers will charge (and split) a 5% or 6% commission – the listing broker can set whatever commission he agreed upon with his client, the seller. While listing brokers must make an offer of compensation, the amount of the offer is unrestricted. The commission offered could – at least in theory – be as little as $1. And, the Rule does not affect the amount of the selling broker’s commission – sellers are free to negotiate that amount with their brokers.

In other words, although the judge characterized this Rule as a “horizontal price-fixing scheme,” the NAR Rule does not “fix” prices – it only requires that a non-zero offer must be made, and when. 

The NAR has a strong argument that the courts do not have sufficient experience with a rule of this nature in the residential real estate market, and therefore placing this practice under the per se rule was legal error by the trial judge. If this argument prevails the verdict and any injunction imposed by the district court as part of the final judgment (which has yet to be entered) will be reversed by either the Eighth Circuit or the Supreme Court. The plaintiffs would then have the option of retrying the case under the rule of reason.

The Verdict is In, But the Case is Far From Over

In the meantime, it’s important to bear in mind that this case is still in early innings. The parties are only now filing post-trial briefs, and the defendants are asking the trial court to set aside or reduce the verdict. The plaintiffs will ask the judge to issue an injunction prohibiting the parties from following the NAR Rule, and if he doesn’t reverse the jury verdict he likely will do so, although the precise terms of an injunction are uncertain.  

If the verdict does hold up on appeal what impact will this case have on the U.S. residential real estate market? Will the NAR lose its ownership and control over the MLS? Will home buyers have the option of paying their brokers directly, and if so will this lower the overall cost of home purchases? Or is the “seller pays both brokers” business model so deeply entrenched in the real estate industry that it will continue on its own momentum, without an NAR Rule to compel it? 

It’s also worth noting that the NAR faces significant legal challenges in addition to this suit, not the least of which is a wide ranging Department of Justice antitrust investigation that was pending settlement under the Trump administration, but which has been reopened under the Biden Department of Justice.

The future is always uncertain, but all of these legal issues and uncertainties add up to a challenging future for the real estate brokerage industry.  

Is It Legal To Use Copyrighted Works to Train Artificial Intelligence Systems?

Is It Legal To Use Copyrighted Works to Train Artificial Intelligence Systems?

If you follow developments in artificial intelligence, two recent items may have caught your attention. The first is a Copyright Office submission by the VC firm Andreessen Horowitz warning that billions of dollars in AI investments could be worth less if companies developing this technology are forced to pay for their use of copyrighted data. “The bottom line is this . . . imposing the cost of actual or potential copyright liability on the creators of AI models will either kill or significantly hamper their development.”

The second item is OpenAI’s announcement that it would roll out a “Copyright Shield,” a program that will provide legal defense and cost-reimbursement for its business customers who face copyright infringement claims. OpenAI is following the trend set by other AI providers, like Microsoft and Adobe, who are promising to indemnify their customers who may fear copyright lawsuits from their use of generative AI.

Underlying these two news stories is the fact that the explosion of generative AI has the copyright community transfixed and the AI industry apprehensive. The issue is this: Does copyright fair use allow AI providers to ingest copyright-protected works, without authorization or compensation, to develop large language models, the data sets that are at the heart of generative artificial intelligence? Multiple lawsuits have been filed by content owners raising exactly this issue.

The Technology

The current breed of generative AIs is powered by large language models (LLMs), also known as Foundation Models. Examples of these systems are ChatGPT, DALL·E-3, MidJourney and Stable Diffusion.

This technology requires that developers collect enormous databases known as “training sets.” This almost always requires copying millions of images, videos, audio and text-based works, many of which are protected by copyright law. When the data is scraped from the web this is potentially a massive infringement of copyright. The risk for AI companies is that, depending on the content (text, images, music, movies), this could violate the exclusive rights of reproduction, distribution, public performance, and the right to create derivative works.

However, for purposes of copyright fair use analysis it’s important to recognize that the downloads are only an intermediate step in creating an LLM. Greatly simplified, here’s how it works:

In the process of creating an LLM model words are broken down into tokens, numerical representations of the word. Each token is a unique numerical ID. The numerical IDs are then transformed into high-dimensional vectors. These vectors are learned during the model’s training and capture semantic meanings and relationships.

Through multiple layers of transformation and abstraction the LLM identifies patterns and correlations within the data. Cutting edge systems like GPT-4 have trillions of parameters. Importantly, these are not copies or replications of the copyright-protected input data. This process of transformation minimizes the risk that any output will be infringing. A judge or jury viewing the data in an LLM would see no similarity between the original copyrighted text and the LLM.

Is Generative AI Transformative?

Because the initial downloads in this process are copies, they are technically a copyright infringement – a “reproduction.” Therefore, it’s up to the AI companies to present a legal defense that justifies the copying, and the AI development community has made it clear that this defense is based on copyright fair use. At the heart of the AI industry’s fair use argument is the assertion that AI training models are “non-expressive uses.” Copyright protects expression. Non-expressive use is the use of copyrighted material in a way that does not involve the expression of the original material. 

For the reasons discussed above, the AI industry has a strong argument that a properly constructed LLM is a non-expressive use of the copied data.

However, depending on the specific technology this may be an oversimplification. Not all AI systems are the same. They may use different data sets. Some, but not all, are designed to minimize “memorization” which makes it easier for end users to retrieve blocks of text or infringing images. Some systems use output filters to prevent end users from utilizing the LLM to create infringing content.

For any given AI system the fair use defense turns on whether the  LLM is trained and filtered in such a way that its outputs do not resemble protected inputs. If users can obtain the original content, the fair use defense is more difficult to sustain.

There is a widespread assumption in the AI industry that, assuming an AI is designed with adequate safety measures, using copyright-protected content to train LLMs is shielded by the fair use doctrine. After all, the reasoning goes, the Second Circuit allowed Google to create a searchable index of copyrighted books under fair use. (Google Books, Hathitrust). And the Supreme Court permitted Google to copy Oracle’s Java API computer code for a different use. (Oracle v. Google). AI companies also point to cases holding that search engines, intermediate copying for the purpose of reverse engineering and plagiarism-detection software are transformative and therefore allowed under fair use. (Perfect 10 v. Google; Sega Enterprises v. Accolade; A.V. et al. v. iParadigms

In each of these cases the use was found to be “transformative.” So long as the act of copying did not communicate the original protected expression to end users it did not interfere with the original expression that copyright is designed to protect. The AI industry contends that LLM-based systems that are properly designed fall squarely under this line of cases.

How Does Generative AI Impact Content Owners?

In evaluating AI’s fair use defense the commercial impact on content owners is also important. This is particularly true under the Supreme Court’s decision earlier this year in Warhol Foundation v. Goldsmith. In Warhol the Court taught that, in a case that involved commercial copying of photographs, the fact that the copies were used in competition with the originals weighed against fair use. 

AI developers will argue that, so long as users can’t use their generative AI systems to access protected works, there is no commercial impact on content owners. In other words, like in Google Books, the AI does not substitute for or compete with content owners’ original protected expression. No one can use a properly constructed AI to read a James Patterson novel or listen to a Joni Mitchell song.

The AIs should be able to distinguish Warhol by pointing out that they are not selling the actual copyrighted books or images in their data sets, and therefore – like in Google Books – they are causing the content owners no commercial harm. In other words, the AI developers will argue that the “intermediate copying” involved in creating and training an LLM is transformative where the resulting model does not substitute for any author’s original expression and the model targets a different economic market. 

Does the authority of Google Books and the other intermediate copying cases extend to the type of machine learning that underpins generative AI? While the law regulating AI is in its infancy, several recent district court cases have given plaintiffs an unfriendly reception. In Thomson Reuters v. Ross Intelligence the defendant used West’s head notes and key number system to train a specialized natural language AI for lawyers. West claimed infringement. A Delaware federal district court judge denied Ross’s motion for summary judgment based on fair use, and held that the case must be decided by a jury. However, relying on the intermediate copying cases, the judge noted that Ross would have engaged in transformative fair use if its AI merely studied language patterns in the Westlaw headnotes and did not replicate the headnotes themselves. Since this is in fact how LLMs are trained on data, Ross’s fair use defense likely will succeed.

In a second case, Kadrey v. Meta, the plaintiffs, book authors, claimed that Meta’s inclusion of their books in its AI training data violated their exclusive ownership rights in derivative works. The Northern District of California federal judge dismissed this claim. The judge noted that the LLM models could not be viewed as recasting or adapting the plaintiff’s books. And, the plaintiffs had failed to allege that the content of any output was infringing. “The plaintiffs need to allege and ultimately to prove that the AI’s outputs incorporate in some form a portion of the plaintiffs’ books.” Another N.D. Cal. case, Andersen v. Stability AI is consistent with these rulings.

While these cases are early in the evolution of the law of artificial intelligence they suggest how AI developers can take precautions to insulate themselves from copyright liability. And, as discussed below, the industry is already taking steps in this direction.

The Industry Is Adapting To The Copyright Threat

In the face of legal uncertainty, the AI industry is adapting to legal risks. The potential damages for copyright infringement are massive, and the unofficial Silicon Valley motto – “move fast and break things” – doesn’t apply with the stakes this high.

ChatGPT4: Create an image showing Jack Nicholson in The Shining

Early in the current generative AI boom (only a year ago) it was possible to use some of these systems to generate copyright- protected content. However, the dominant AI companies seem to have plugged this hole. Today, if I ask OpenAI’s ChatGPT to provide the lyrics to “All Too Well” by Taylor Swift it declines to do so. When I ask for the text of the opening paragraph of Stephen King’s “The Shining,” again it refuses and tells me that it’s protected by copyright. When I ask OpenAI’s text-to-image creator Dall·E for an image of Batman, Dall·E refuses, and warns me that what it will create will be sufficiently different from the comic book character to avoid copyright infringement.

These technical filters are illustrative of the ways that the industry can address the copyright challenge, short of years of litigation in the federal courts.

The first, and most obvious, is to train the systems not to provide infringing output. As noted, Open AI is doing exactly this. The Shining may have been downloaded and used to create and train Chat GPT, but it won’t let me retrieve the text of even a small part of that novel.

ChatGPT4: Create an image of Taylor Swift performing her song “All Too Well”

Another technical measure is minimization of duplicates of the same work. Studies have found that the more duplicates that are downloaded and processed in an LLM the easier it is for end-users to retrieve verbatim protected content. “Deduplication” is a solution to this problem.

Another option is to license copyrighted content and pay its creators. While this would be logistically challenging, a challenge of similar complexity has been met in the music industry, which has complex licensing rules that address different types of music licensing and a centralized database system to make that process accessible. If the courts prove to be hostile to AI’s fair use defense the generative AI field could evolve into a licensing regime similar to that of music.

Another solution is for the industry to create “clean” databases, where there is no risk of copyright infringement. The material in the database will have been properly licensed or will be comprised of public domain materials. An example would be an LLM trained on Project Gutenberg, Wikipedia and government websites and documents. 

Given the speed at which AI is advancing I expect a variety of yet-to-be conceived or discovered infringement mitigation strategies to evolve, perhaps even invented by artificial intelligence.

International Issues

Copyright laws vary significantly across countries. It’s worth noting that there has been more legislative activity on the topics discussed in this post in the EU than the US. That said, as of the date of this post near the close of 2023 there is no consensus on how LLMs should be treated under EU copyright law. 

Under a recent proposal made in connection with the proposed EU “AI Act,” providers of LLMs would need to “prepare and make publicly available a sufficiently detailed summary of the content used to train the model or system and information on the provider’s internal policy for managing copyright-related aspects.”

Additionally, they would need to demonstrate “that adequate measures have been taken to ensure the training of the model or system is carried out in compliance with Union law on copyright and related rights . . .”

The second of these two provisions would allow rights holders to opt out of allowing their works to be used for LLM training. 

In contrast, the recent US AI Executive Order orders the Copyright Office to conduct a study that would include “the treatment of copyrighted works in AI training,” but does not propose any changes to US copyright law or regulations. However, US AI companies will have to pay close attention to laws enacted in the EU (or elsewhere), since – as has been the case with the EU’s privacy laws (GDPR) – they have the potential to become a de facto minimal standard for legal compliance worldwide. 

Andreessen Horowitz and the Copyright Shield

What about the two news items that I mentioned at the beginning of this post? With respect to the Andreessen Horowitz warning of the cost of copyright risk on AI developers, in my view the risk is overstated. If AI developers design their systems with the proper precautions, it seems likely that the courts will find them to qualify for fair use.

As to OpenAI’s promise to indemnify end users, the risk to OpenAI is slim, since its output is rarely similar to inputs in its training data and its filters are designed to frustrate users who try to output copyrighted content. In any event end users are rarely the targets of infringement suits, as seen in the many copyright suits that have been filed to date, which all target only AI companies as defendants.

The Future

The application of US copyright law to LLM-based AI systems is a complex topic. I expect more lawsuits to be filed as what appears to be a massive revolution in artificial intelligence continues at breakneck speed. While traditional copyright law seems to favor a fair use defense, the devil is in the details of these complex systems, and the legal outcome is by no means certain.


Selected pending cases:

Andersen v. Stability AI, N.D. Cal. 

J.L. v. Alphabet Inc., N.D. Cal.

P.M. v. OpenAI, N. Dist. Cal. 

Doe v. GitHub, N.D. Cal

Thomson Reuters Enter. Ctr. GmbH v. Ross Intel. Inc., D. Del.

Kadrey v. Meta, N.D. Cal. 

Sancton v. OpenAI, S.D. N.Y.

Doe v. GitHub, N.D. Cal.

Nonprofit Copying and Publication of Laws “Incorporated By Reference” is Fair Use

Nonprofit Copying and Publication of Laws “Incorporated By Reference” is Fair Use

By Lee Gesmer and Andrew Updegrove

 Every citizen is presumed to know the law …  and it needs no argument to show… that all should have free access to its contents.

U.S. Supreme Court in Georgia v. Public.Resource.Org (2020)

Many private organizations promulgate best-practice standards. Two examples you might be familiar with are the National Fire Protection Association (NFPA) and the American Society  for Testing and Materials (ASTM). 

In the U.S., unlike most foreign countries, standards are developed “from the bottom up” by the private sector, rather than “from the top down” by government agencies or quasi-public bodies. In keeping with this division of labor, government agencies have come to rely extensively on private sector standards developers to provide standards suitable for adoption as regulations.

Federal law permits federal agencies to incorporate privately developed standards into law by referencing them in the Federal Register without reproducing them there. The Code of Federal Regulations (CFR) has more than 27,000 incorporated standards. States and municipalities do this as well, adding to that number. Once adopted the standards carry the force of law.

These private-government relationships are crucially important – they leverage specialized knowledge and industry expertise to formulate robust and reliable standards that the government could not create by itself, and save untold millions of tax dollars in avoided costs for government agencies that would otherwise have to generate them. The standards organizations that provide standards referenced into law, in turn, gain legal legitimacy and wider application for their standards.

There is also a commercial side to these relationships – many standards organizations support themselves in part by the sale of their standards.

Public.Resource.Org (Public Resource) is a nonprofit group that disseminates legal materials. Its website has posted thousands of standards, including those produced and copyrighted by ASTM. ASTM (along with two other standards organizations) sued Public Resource for copyright infringement. The case has been working its way through the courts for a decade. Absent a successful appeal to the Supreme Court, the Court of Appeals for the District of Columbia finally decided the issue on September 12, 2023. It held that the non-commercial dissemination of these standards as incorporated by reference into law constitutes copyright fair use, and therefore cannot support liability for copyright infringement.

As we have observed on many occasions, copyright fair use is an unpredictable legal doctrine. Often, the outcome seems to be in the eye of the beholder – the judge or judicial panel – rather than the result of any predictive legal test. A recent example of this is Goldsmith v. Warhol: a federal district court held that Warhol’s use of Goldsmith’s photo of Prince was fair use. The Second Circuit reversed, holding that it wasn’t. The Supreme Court upheld that ruling, but under a different rationale from the Second Circuit. Three courts, three different approaches to fair use. For another example see Final Thoughts On Google v. Oracle. The result is a confusing body of law that lacks predictability for the copyright community, both authors and the lawyers that are asked to advise them.

D.C. Circuit’s Holding in ASTM

While Warhol involved art and Oracle software, ASTM involved privately developed technical standards that had been incorporated into law “by reference.” 

There is no question that in most cases technical standards are copyrightable – that is, they reflect sufficient originality to be protected by U.S. copyright law. Hence, without an affirmative defense Public Resource’s reproduction and distribution of ASTM’s standards infringed its copyrights. Public Resource’s defense was copyright fair use.

The D.C. Circuit applied – as it must – the four-factor fair use test:

Purpose and Character of the Use. Under the first factor it found that the “purpose and character“ of Public Resource’s nonprofit status favored fair use. Further Public Resource’s use of the standards – to provide a free repository of the law – is “transformative,” a key issue in any fair use case. While in most cases the term “transformative” involves changes to the work, here the court construed it to mean a transformative “use” of the work. 

Nature of the Copyrighted Work. Factor two also favored fair use. Because the court viewed the standards as “factual” in nature – a conclusion we find questionable – it conclude that they “fall at best, at the outer edge of copyright’s protective purposes.” Factual works are often given “weak” or “thin” copyright protection, and because protection is weaker for such works, it’s easier to establish fair use.

Amount and Substantiality of the Portion Used. Under factor three, although Public Resource copied the standards in their entirety, the court found that this was necessary in light of the purpose. “If an agency has given legal effect to an entire standard, then its entire reproduction is reasonable in relation to the purpose of the copying . . ..” This is not unusual in the context of copyright fair use – many fair use cases involve comprehensive copying. Oracle is a good example of this. 

Effect of the Use Upon the Potential Market for or Value of the Copyrighted Work. Lastly, the fourth fair use factor required the court to consider the “market harm“ caused by Public Resource’s copying, including any substantially adverse impact on the “potential market“ for the original standards. While the court observed that it “seems reasonable” to suppose that economic harm might result, it found that the plaintiffs could not quantify past or future financial harms, relying instead on “conclusion, assertions and speculation.“ In any event, even if Public Resource’s free postings lowered the demand for the plaintiffs’ standards, this was outweighed by “the substantial public benefits of free and easy access to the law.“ The court concluded that the fourth fair use factor did not tip the balance one way or the other. But because the first three factors “strongly“ favored fair use, it found that Public Resource’s non-commercial posting of standards incorporated into law by reference is fair use.

Legal Precedents Favored Public Resource

The extent to which the law should be in the public domain is not a new issue for copyright law. In 2020 the Supreme Court held that annotations to Georgia’s official statutory code, as government edicts, were free from copyright. In that case the Court didn’t even reach fair use – it held that officials who “speak with the force of law” cannot claim copyright in the works they create in the course of their official duties.” Georgia v. Public Resource

The lower courts have also weighed in on this issue. In Veeck v. Southern Building Code the Fifth Circuit relied on fair use to hold that model building codes adopted by reference could be copied. In Building Officials & Code Administration. v. Code Technologies, Inc. the First Circuit suggested that once a model building code has been adopted into law it is in the public domain, and remanded for further consideration.

Public Resource relied heavily on these cases on appeal, and indeed, these precedents put ASTM and its co-plaintiffs in an uphill battle heading into the appeal to the D.C. Circuit. 

Copyright Fair Use Based On “Public Benefits” 

While not explicitly identified in the Copyright Act, the “public benefit” theory of fair use prioritizes societal and cultural benefits in the application of copyright law. A recent example of this is the Supreme Court’s holding in Oracle v. Google. In this 2021 case the issue was whether Google’s use of Oracle’s Java API (Application Programming Interface) in its Android operating system constituted fair use. While Google copied all of Oracle API and used it commercially, the Court found fair use, based in part on the benefit to the software development industry and technical innovation. As the Court said, “we must take into account the public benefits the copying will likely produce.”

Similarly, in the 2015 Google Book Search decision, Author’s Guild v. Google, the Second Circuit recognized the substantial public benefits of Google’s project in concluding that Google’s verbatim copy of books was protected by fair use.

The D.C. Circuit’s ruling in the ASTM case follows this line of reasoning. Just as there is a public benefit in allowing software developers to use the Java API, and a public benefit in allowing the public to search copyright-protected books for relevant “snippets,” so does the publication of laws incorporated by reference benefit the public by making the law more accessible. However, as we discuss below, it did this at the risk of upsetting the delicate balance between the standards organizations and the governments that benefit from their works.

Was the “Public Benefits” Theory of Fair Use Properly Applied in ASTM?

While the D.C. Circuit’s holding allowing the unauthorized reproduction of standards may fall within the “public benefits” line of fair use cases, in our view there is a risk that the court misjudged the interplay between standards organizations, government entities, and public access. Any challenge to the delicate symbiotic private-government relationship risks injury  to the public interest, which benefits from the creation of these standards. Based on our experience working with nonprofit standards organizations for decades, we fear that the D.C. Circuit underestimated this potential disruption. 

Importantly, the court found insufficient an accommodation that many standards developers (including ASTM) have already put in place in response to Public Resource’s challenge. Specifically, they have created public “reading rooms” where every standard they have developed that has been incorporated into law by reference can be read, free of charge, online in read-only mode. The American National Standards Institute (ANSI) hosts an “IBR Standards Portal” offering one stop access to the incorporated by reference (IBR) standards of a dozen major standards organizations can be accessed, as well as links to another sixteen standards organizations reading rooms with links to their own IBR’d standards.

As noted, many standards organizations charge a fee for copies of their standards. In the case of many traditional standards developers, such fees comprise a major, or even the majority, of the budgets of the organizations. Developing standards is inherently time-consuming and expensive, and in some cases (e.g., organizations that develop building codes), most or all of the production of such organizations is referenced into law. In other cases, standards were never intended for referencing into law, but have been nonetheless, without notice to, or consent by, the organization that developed them. The revenues from sales and licensing are reinvested into research, development, and enhancement of new and existing standards. Respecting copyright protects the investments of these organizations in developing standards, ensuring they can fund their continuing operations and standards development and providing incentives to continue to create these essential public goods.

The unauthorized distribution by nonprofits risks reducing those revenues and incentives by offering a free alternative to purchasing or licensing the standards. This, in turn, risks slowing down the frequency of updating existing standards and innovating new ones, potentially leaving them outdated or less applicable to evolving industry needs.

This may prove to be the case if the implications of the decision extend beyond nonprofit vendors to for-profit companies. Some for-profit companies already do sell copies of standards without first paying for the rights to do so. It is difficult to see how the court’s rationale – finding fair use when a nonprofit engages in this behavior – does not extend to for-profit sales of standards. 

Our bottom line takeaway: the implications of this decision on private standard-setting organizations and their business models may be far reaching. Hopefully, there may be a legislative solution that may provide relief.  On March 17, 2023, Darrell Issa (R CA) introduced proposed amendments to amend the Copyright Act with bipartisan support from seven representatives from each party. If enacted, the bill would void a fair use defense against a claim of infringement of an IBR’d standard if that standard “is displayed for review in a readily accessible manner on a public website,” without cost.

We support this common sense ratification of the public reading room approach and hope that the bill is adopted.

American Society for Testing and Materials v. Public.Resource.Org., Inc. (D.C. Cir. Sept. 12, 2023).

Artificial Intelligence May Result In Human Extinction, But In the Meantime There’s a Lot of Lawyering To Be Done

Artificial Intelligence May Result In Human Extinction, But In the Meantime There’s a Lot of Lawyering To Be Done

Any sufficiently advanced technology is indistinguishable from magic.   Arthur C. Clarke

Do you recall when Netscape Navigator was released in December 1994? I suspect not. You may not have been born or you might have been too young to take notice. This software marked the public’s first widespread introduction to a user-friendly web browser, and it was a big deal at the time. I remember buying a copy on disk from Egghead Software in Boston and trying (with limited success) to access the World Wide Web using a dialup modem.

Of course, few people foresaw that Navigator would set off the “dotcom boom,” which ended with the “dotcom crash” in 2000, only to be followed by the ubiquitous internet technologies we live with today

Will OpenAI’s release of ChatGPT in November 2022 be remembered as a similar event for artificial intelligence? It may prove to be as significant as the invention of the printing press, as Henry Kissinger and his co-authors suggest. (link, WSJ paywall). Or, it may signal the demise of the human race, as Stephen Hawking warned. Or, once the novelty wears off it may simply become another forgotten episode in the decades-long AI over-hype cycle

However, for now one thing is clear: there will be a lot of lawyering to be done. 

When the internet took off in the late ‘90s a vast number of legal issues emerged, keeping lawyers busy for years afterwards. However, it wasn’t immediately obvious that this would occur, and issues emerged slowly over time. By comparison, in 2023 generative AI – as represented by ChatGPT and other “large language models” (LLMs) – has landed like a bomb. Seemingly hundreds of new products are being released daily. Countless new companies are being formed to join the “AI gold rush” of 2023. 

So, what are the legal issues (so far)? Warning, this topic is already vast, so what follows is a selective summary. I hope to write about these issues in more detail in the future. 

AI and Copyright Law

At least for the moment, when it comes to generative AI, copyright law is the primary battlefield. The copyright issues can be divided into legal questions that deal with the “output” side versus the “input” or “training” side.

The Output Issue – Who Owns An AI Model’s Output?  Who owns the copyright in works created by AI image generators, whether autonomously created or a human-AI blend?

I covered this topic from the perspective of the Copyright Office in a recent post. Generative AI Images Struggle for Copyright Protection. Shortly after I published that post the Copyright Office issued a policy statement, Copyright Registration Guidance: Works Containing Material Generated by Artificial Intelligence, reaffirming its policy that works be the product of human authorship, but noting that there is a substantial grey area that will need to be decided on a case-by-case basis:

[works] containing AI-generated material [may] also contain sufficient human authorship to support a copyright claim. For example, a human may select or arrange AI-generated material in a sufficiently creative way that “the resulting work as a whole constitutes an original work of authorship.” Or an artist may modify material originally generated by AI technology to such a degree that the modifications meet the standard for copyright protection. In these cases, copyright will only protect the human-authored aspects of the work, which are “independent of ” and do “not affect” the copyright status of the AI-generated material itself.

The Copyright Office has also created a web page tracking its activities in copyright AI, including an initiative to examine the copyright law and policy issues raised by AI technology. (link)

9th Cir.: Monkey selfie not copyright-protected

However, the Copyright Office is not the last word when it comes to AI and copyrightability – the federal courts are, and the issue is pending in a lawsuit before the Federal District Court for the District of Columbia (Thaler v. Perlmutter). Suffice it to say that there are no court decisions as yet, and all monkey-business aside who (if anyone) owns AI outputs scraped from the internet is an open (and rapidly evolving) question. 

The Input Issue – Can You Use Copyrighted Content To Train An AI LLM? The training stage of AI tools requires the scraping and extraction of relevant information from underlying datasets (typically the internet), which contain copyright protected works. Can AI companies simply hoover up copyright-protected works without the consent of their owners and use that material to “train” LLMs? 

AI companies think so, but content creators think otherwise. Getty has filed suit against Stability AI in the U.S. (link) and in a parallel case in London, claiming that this company illegally copied over 12 million photographs from Getty’s website to train Stable Diffusion. Other cases have been filed on the same issue (Andersen v. Stability AI, pending N.D. Cal.). The central legal issue in these cases is whether unauthorized use of copyrighted materials for training purposes is illegal or (as the AI companies are certain to assert) “transformative” and therefore protected under the fair use doctrine? The Supreme Court’s recent decision in Warhol v. Goldsmith is likely to have some bearing on this issue. (sarcasm ….)

While the legal question under U.S. law may be whether these activities qualify as fair use, in the EU the copyright aspects of training are likely to fall under the text and data mining (TDM) exceptions in the Copyright in Digital Single Market (CDSM) Directive. (To go in depth on the TDM exceptions see Quintais, Generative AI, Copyright and the AI Act).

However, the issues surrounding output ownership and the utilization of copyrighted materials to train LLMs are merely scratching the surface. It’s easy to foresee that copyright law and AI are going to intersect in other ways. An example of this is cases involving music that copies an artist’s “artistic style” or “voice”. At present copyright law does not protect artistic style. But for the first time, music AI systems make it easy to copy a style or an artist’s voice, so there will be pressure on the law to address this form of copying. It remains to be seen whether copyright law will expand to encompass artistic style, or whether artists will have to rely on doctrines such as the right of publicity or “passing off.”

Liability Shield Under CDA/Section 230

While the copyright issues in AI are complex, the legal issues around AI are not limited to copyright. An AI could generate defamatory content.

 Even worse, it could be used to create harmful or dangerously wrong information. If a user prompts an AI for cocktail instructions and it offers a poisonous concoction, is the AI operator liable? What if the AI instructs someone on how to build a dangerous weapon, or to commit suicide? What if an AI “hallucination” (aka false information generated by an AI) causes harm or injuries?

Controversy over online companies’ liability for harmful content has led to countless litigations, and generative artificial intelligence tools are likely to be pulled into the fray. If ChatGPT and other LLMs are deemed to be “information content providers” they will not be immunized by Section 230, as it exists today. 

Supreme Court Justice Neil Gorsuch alluded to this during oral argument in Gonzalez v. Google, where he suggested that generative AI would not be covered by Section 230’s liability shield. (link, p. 49) Two of Section 230’s 1996 congressional co-authors have publicly stated that it does not – “If you are partly complicit in content creation, you don’t get the shield.” (link

Section 230 was enacted to protect websites from liability based on user inputs. However, given the unpopularity of Section 230 on both sides of the isle it seems unlikely that Congress will amend Section 230, or pass new laws, to limit the liability of AI companies whose products generate illegal content based on user inputs. The opposing view, as observed by internet law scholar Prof. Eric Goldman, is that “we need some kind of immunity for people who make [AI] tools . . . without it, we’re never going to see the full potential of A.I.” (link, behind NYT paywall).

Contracts and Open Source

Because copyright-protected works can also be the subject of contracts, there will be issues of contract law that intersect with copyright. We can already see examples of this. For example, In the Getty/Stability AI case mentioned above, Getty’s website terms prohibit the very use Stability AI made of Getty photos. A class action suit has been filed over AI scraping of code on Github without providing attribution required by the applicable OSS license agreements, raising questions about the risks of using AI in software development. That suit also relies on DMCA Section 1202 for removing copyright management information (CMI). 

These cases point to the fact that companies need to monitor and regulate their use of AI code generators to avoid tainting their code bases. Transactional lawyers (licensing, M&A) will have to be alert to these issues. Suffice it to say that there are significant questions over whether using open source code requires compliance with restrictions of the open source licenses. 

Patent Law

What if an AI creates a patentable invention? Similar to copyright, the USPTO will only consider inventions from “natural persons” and not machines. This has already been the subject of litigation (Thaler v. Vidal, CAFC 2022; yes, the same Thaler that’s the plaintiff in the copyright case cited above) and an unsuccessful Supreme Court appeal (cert. denied). The USPTO is conducting hearings concerning AI technologies and inventorship issues, however at present the law, as stated by the CAFC in Thaler, is that “only a natural person can be an inventor, so AI cannot be.” For the foreseeable future there will be significant questions about the ability to patent inventions that were conceived with the assistance of AI.

Government Regulation

Governments worldwide are waking up to the issues created by AI. The U.S. has issued policy statements and executive orders. The U.S. Senate is holding hearings into an AI regulatory framework. While there is no comprehensive U.S. federal regulatory scheme in place regarding AI technologies today, it may be just a matter or time. When AI scientists warn that the risk of extinction from AI is comparable to pandemics and nuclear war, Congress is likely to pay attention.

Pending federal umbrella legislation, individual agencies are not sitting on their hands. Every day seems to bring some new agency action. The FDA has weighed in on the regulation of machine learning-enabled medical devices. The SEC and CFTC have already weighed in, focusing on credit approval and lending decisions. The FTC is pondering how to use its authority to promote fair competition and guard against unfair or deceptive AI practices. Although not a government agency, in early January NIST, at the direction of Congress, published a voluntary AI Risk Management Framework that is likely to be one of the first of many industry standards. The CFTC, DOJ, EEOC, FTC have issued a joint statement expressing their concerns about potential bias in AI systems. (link) Homeland Security has announced formation of a task force to study the role of AI in international trade, drug smuggling, online child abuse and secure infrastructure.

Not wanting to be left behind, California, Connecticut, Illinois and Texas are starting to take action to protect the public from what they perceive to be the potential harms of AI technology. (For a deeper dive see How California and other states are tackling AI legislation)

However, it would be a mistake to focus solely on U.S. law. International law – and in particular the EU – will play a significant role in the evolution of AI. The EU’s Artificial Intelligence Act (a work in progress) is far ahead of the U.S. in creating a legal framework to regulate AI. While the AI Act would regulate the use of AI technologies only in Europe, it could set a global standard, much like the EU General Data Protection Regulation (GDPR) has done for privacy regulation. (To go in depth on this topic see Perkins Coie, The Latest on the EU’s Proposed Artificial Intelligence Act).

The Future of AI and Law

I expect that the topics I’ve touched on above will prove to be only the tip of the AI iceberg. Regulators are already looking at issues involving privacy, facial recognition, deep fakes and disinformation, substantive criminal law (criminal behavior by an AI), anti-discrimination law and racial or gender bias.

Just as it was nearly impossible to foresee the massive volume of litigation that would follow the growth of the internet following passage of the DMCA in 1998 and Section 230 of the CDA in 1996, the legal issues around AI are only beginning to be understood.

I’ve said it many times before on this blog, but I’ll say it again – stay tuned. And lawyers – Get ready! 


Update, June 26, 2023: it didn’t take long for the first defamation suit to be filed. See Australian mayor readies world’s first defamation lawsuit over ChatGPT content.

ChatGPT, Please Prepare a Software License Agreeement

ChatGPT, Please Prepare a Software License Agreeement

I asked GPT 3.5 to create a license agreement using the following prompt:

Draft an End user object code software license agreement between LICENSOR and LICENSEE using the following terms.

• Formal delivery, acceptance testing, final acceptance within 30 days assumed unless notice within that period
• A site license limited to offices in Cambridge, MA
• The licensor will provide updates annually
• License should be limited to internal use; resale/redistribution prohibited
• The software should be treated as confidential
• The terms of this license agreement must be confidential
• The agreement is subject to Massachusetts law.
• Annual license fee $100,000, increased annually by 5%.
• Price exclusive of applicable taxes
• Term: five years
• Any dispute subject to arbitration, venue in Massachusetts, three person panel with SAAS subject matter expertise
• Agreement is non-assignable
• Agreement is terminable for non-payment; licensee may cure within 30 days notice of default
• Limited warranty in accordance with specifications. Exclusive remedy is damages limited to monies paid by Licensee
• No virus warranty
• Non-infringement warranty
• No claims pending warranty
• No implied warranty or warranty for specific purpose
• Indemnification against IP claims – yes
• Source code escrow accessible in event of material breach by Licensor
• Licensee may not reverse engineer
• Notices in writing – certified mail
• Any amendment must be in writing

Here is the agreement the AI created. What do you think?



This Software License Agreement (“Agreement”) is made and entered into as of the date of acceptance by Licensee, by and between Licensor, and Licensee.


(a) “Software” means the object code form of the software products specified in the applicable order form or purchase order, and any related documentation, materials, updates, and upgrades provided by Licensor to Licensee under this Agreement.

(b) “Order Form” means the written or electronic document issued by Licensor and executed by both Licensor and Licensee, or submitted electronically by Licensee and accepted by Licensor, specifying the Software licensed by Licensee and any related services.

(c) “Documentation” means the user manuals, installation guides, and other technical documentation provided by Licensor to Licensee.

(d) “Licensee” means the individual or entity that accepts the terms and conditions of this Agreement.

(e) “Licensor” means the individual or entity that licenses the Software to Licensee under this Agreement.

(f) “Support Services” means the support and maintenance services described in Section 5 of this Agreement.

(g) “Confidential Information” means any information disclosed by either party to the other party, either directly or indirectly, in writing, orally, or by inspection of tangible objects, which is designated as “Confidential,” “Proprietary,” or some similar designation, or which should reasonably be understood to be confidential given the nature of the information and the circumstances of disclosure.


(a) Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee a non-exclusive, non-transferable license to use the Software and Documentation, solely for Licensee’s internal business purposes, and only at Licensee’s offices in Cambridge, Massachusetts.

(b) Licensee shall not use the Software or Documentation for any purpose other than as expressly permitted by this Agreement.

(c) Licensee shall not modify, copy, reproduce, distribute, or create derivative works of the Software or Documentation.

(d) Licensee shall not remove or alter any proprietary notices or labels on the Software or Documentation.

(e) Licensee shall not disclose or distribute the Software or Documentation to any third party without the prior written consent of Licensor.


(a) Licensor shall deliver the Software and Documentation to Licensee within thirty (30) days after the date of execution of the Order Form.

(b) Licensee shall have a period of thirty (30) days following delivery to conduct acceptance testing of the Software and Documentation.

(c) Licensee shall notify Licensor in writing within thirty (30) days of delivery if Licensee determines that the Software or Documentation fails to meet the specifications set forth in the Order Form.

(d) If Licensee does not provide written notice of non-acceptance to Licensor within thirty (30) days after delivery, the Software and Documentation shall be deemed accepted by Licensee.


(a) Licensor shall provide updates to the Software and Documentation annually during the term of this Agreement, at no additional charge.

(b) Licensee shall be entitled to install and use such updates during the term of this Agreement.

(c) Licensee shall not use any updates to the Software or Documentation in any manner that violates the terms of this Agreement.


(a) Licensor shall provide Support Services to Licensee during the term of this Agreement, at no additional charge.

(b) Support Services shall include:

(i) Telephone and email support for Licensee’s designated technical support personnel during Licensor’s normal business hours;

(ii) Bug fixes and updates to the Software as necessary to correct material errors or malfunctions that materially affect the Software’s operation in accordance with the Documentation;

(iii) Assistance with installation, configuration, and troubleshooting of the Software;

(iv) Access to online support resources, including user forums and knowledge bases; and

(v) Any other support services agreed to by the parties in writing.

(c) Licensor shall not be obligated to provide Support Services if:

(i) The Software or Documentation has been modified, altered, or tampered with by anyone other than Licensor;

(ii) The Software or Documentation has been used in a manner not authorized by this Agreement;

(iii) The failure of the Software to operate is due to causes outside of Licensor’s control, including but not limited to failure of Licensee’s hardware or software systems; or

(iv) Licensee has not paid any applicable fees when due.

6. FEES.

(a) Licensee shall pay Licensor an annual license fee of $100,000, exclusive of any applicable taxes.

(b) The annual license fee shall be increased by five percent (5%) at the beginning of each subsequent year of the term of this Agreement.

(c) Licensee shall pay all fees within thirty (30) days of the date of the applicable invoice.

(d) Licensor reserves the right to suspend or terminate Licensee’s access to the Software and Support Services if Licensee fails to pay any fees when due.


(a) This Agreement shall commence on the date of acceptance by Licensee and shall continue for a term of five (5) years.

(b) Either party may terminate this Agreement upon written notice if the other party materially breaches any provision of this Agreement and fails to cure such breach within thirty (30) days after receiving written notice of such breach.

(c) Licensor may terminate this Agreement immediately if Licensee fails to pay any fees when due.

(d) Upon termination of this Agreement, Licensee shall immediately cease all use of the Software and Documentation, and shall return or destroy all copies of the Software and Documentation in Licensee’s possession or control.

(e) The provisions of Sections 2(d), 2(e), 6, 7, 8, 9, 10, 11, 12, and 13 shall survive any termination or expiration of this Agreement.


(a) Licensor represents and warrants that it has the right to license the Software to Licensee, and that the Software does not infringe any third party’s intellectual property rights.

(b) Licensor warrants that the Software will materially conform to the specifications set forth in the Order Form and the Documentation.

(c) Licensee’s exclusive remedy for any breach of the warranties set forth in this Section 8 shall be for Licensor to use commercially reasonable efforts to correct or replace the non-conforming Software or Documentation, or if Licensor is unable to do so within a reasonable period of time, to refund the fees paid by Licensee for the non-conforming Software or Documentation.

(d) Licensor does not warrant that the Software or Documentation will be error-free or uninterrupted.

(e) Licensor makes no warranties, express or implied, regarding the Software or Documentation, including but not limited to any implied warranties of merchantability, fitness for a particular purpose, or non-infringement.

(f) Licensee acknowledges that it has not relied on any representations or warranties not expressly set forth in this Agreement.


(a) Licensor shall indemnify, defend, and hold harmless Licensee from and against any and all claims, damages, liabilities, costs, and expenses (including reasonable attorneys’ fees) arising out of or related to any third party claim that the Software infringes any third party’s intellectual property rights.

(b) Licensee shall promptly notify Licensor in writing of any claim covered by this Section 9, and Licensor shall have sole control over the defense and settlement of any such claim. Licensee shall provide Licensor with all necessary assistance, information, and authority to perform such defense or settlement.

(c) If any claim covered by this Section 9 arises or is likely to arise, Licensor may, at its sole option and expense:

(i) Obtain for Licensee the right to continue using the Software;

(ii) Modify the Software so that it becomes non-infringing;

(iii) Replace the Software with non-infringing software that is functionally equivalent;

(iv) Terminate this Agreement and refund the fees paid by Licensee for the infringing Software; or

(v) Defend Licensee against the claim.

(d) Licensor shall have no liability under this Section 9 to the extent that the claim is based on:

(i) Any modification of the Software or Documentation by anyone other than Licensor;

(ii) The combination of the Software with any product, service, or process not provided by Licensor, to the extent that such claim would not have arisen but for such combination; or

(iii) Licensee’s failure to use the Software or Documentation in accordance with this Agreement or the Documentation.


(a) In no event shall Licensor be liable to Licensee for any indirect, incidental, consequential, special, or punitive damages, including but not limited to lost profits, loss of business, or loss of data, arising out of or related to this Agreement, even if Licensor has been advised of the possibility of such damages.

(b) Licensor’s total liability to Licensee for all claims arising out of or related to this Agreement shall be limited to the fees paid by Licensee to Licensor under this Agreement during the twelve (12) month period preceding the claim.


(a) Licensee acknowledges that the Software and Documentation contain valuable trade secrets and confidential information of Licensor.

(b) Licensee shall use the same degree of care to protect the confidentiality of the Software and Documentation as it uses to protect its own confidential information, but in no event less than a reasonable degree of care.

(c) Licensee shall not disclose the Software or Documentation to any third party without the prior written consent of Licensor.

(d) The terms of this Agreement shall be deemed Confidential Information of both parties.

(e) This Section 11 shall survive any termination or expiration of this Agreement.


(a) Any dispute, claim, or controversy arising out of or related to this Agreement shall be resolved by binding arbitration in accordance with the rules of the American Arbitration Association.

(b) The arbitration shall take place in Massachusetts, and the arbitrators shall have experience in the software-as-a-service industry.

(c) The arbitration shall be conducted by a panel of three (3) arbitrators.

(d) The arbitration shall be conducted in the English language.

(e) The decision of the arbitrators shall be final and binding on the parties.

(f) This Section 12 shall not preclude either party from seeking injunctive relief in a court of competent jurisdiction.


(a) This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, representations, warranties, and understandings, whether oral or written.

(b) This Agreement may not be amended except in writing signed by both parties.

(c) Licensee may not assign this Agreement or any rights or obligations hereunder, whether by operation of law or otherwise, without the prior written consent of Licensor.

(d) Licensor may assign this Agreement or any rights or obligations hereunder without the consent of Licensee.

(e) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

(f) If any provision of this Agreement is held to be invalid or unenforceable, such provision shall be deemed modified to the extent necessary to make it valid and enforceable, and the remaining provisions of this Agreement shall remain in full force and effect.

(g) No failure or delay by either party in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy.

(h) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to its conflict of laws provisions.

(i) Any notices required or permitted to be given hereunder shall be in writing and shall be deemed to have been given and received (i) when delivered by hand, (ii) three (3) business days after being sent by registered or certified mail, return receipt requested, postage prepaid, or (iii) one (1) business day after being sent by nationally recognized overnight courier, to the parties at the addresses set forth below or to such other addresses as either party may specify in writing.


[Insert Licensor’s Name and Address]

Attention: [Insert Name and Title]


[Insert Licensee’s Name and Address]

Attention: [Insert Name and Title]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.


[Insert Licensor’s Name]

By: _____________________________

Name: [Insert Name and Title]

Title: [Insert Title]


[Insert Licensee’s Name]

By: _____________________________

Name: [Insert Name and Title]

Title: [Insert Title]


Lanier v. Harvard: “Do The Right Thing”

Lanier v. Harvard: “Do The Right Thing”

Louis Agassiz thought that black and white races had different origins. In 1850 Agassiz – an eminent professor at Harvard – embarked on a tour of South Carolina plantations in search of racially “pure” Africans whom he could study as evidence to support this theory, known as “polygenism.”

On the trip Agassiz commissioned a photographer to take daguerreotypes of Renty Taylor and his daughter Delia, two slaves who lived on a South Carolina plantation.

The images – believed to be the earliest photos of American slaves – disappeared into the archives of Harvard’s Peabody Museum for over a hundred years, only to be discovered by a museum employee in the 1970s and widely publicized by Harvard.

In 2011 Tamara Lanier learned she was a descendant of Renty and Delia and became aware of the daguerreotypes. She wrote to then-Harvard President Drew Faust and asked that Harvard give these family artifacts to her. To make a long story short, Harvard declined. In the words of the Massachusetts Supreme Judicial Court (SJC) Harvard was “dismissive” and “disrespectful” when it wasn’t ignoring her altogether.

Represented by celebrity civil rights lawyer Ben Crump and others Lanier sued Harvard. She didn’t want money – she wanted Harvard to give her the daguerreotypes. 

Lanier’s claim had nothing to do with the images, which are unprotected by any copyright. Lanier asserted a property right. She wanted the physical daguerreotypes – the copper plates – that were created in 1850 and which Harvard had retained for almost 175 years.

Renty Taylor

Renty Taylor

Harvard refused and Lanier sued. Lanier’s suit contained a variety of legal claims, but the central claim was for “replevin.” Replevin is a legal right that has a thousand year history in British and U.S. law. Replevin enables someone to regain possession of property that belongs to them. If you steal my bicycle and refuse to return it I could go to court and file an action for replevin to force you to hand it over. This is what Lanier wanted – to force Harvard to give her the physical media that held the images of her ancestors.

Her suit failed, although the court did throw her a bone – it held that Louis Agassiz’s actions in 1850, and Harvard behavior toward Ms. Lanier post-2011, were plausibly extreme and outrageous, and therefore might support claims of intentional and reckless infliction of emotional distress. The case could proceed to trial on these theories. 

However, these claims appear to be little more than an afterthought – they aren’t mentioned in the appellate briefs or oral argument before the SJC. While Ms. Lanier is pursuing them post-appeal they are unlikely to yield much in the way of money, and they won’t give her the relief she was seeking.

Delia Taylor

Why did the SJC deny her property claim? The SJC’s decision in this case is a remarkable deep dive into the history of slavery and racism in 19th Century America. The Harvard professor, Louis Agassiz, was not an obscure academic – he was a giant in the study of natural history, and geology. Until not long ago a neighborhood in Cambridge, Massachusetts where he had lived was known as “Agassiz.” Reading the legal filings and the SJC decision is as much a historical journey through American slavery and a moral crusade as a legal argument. The central message is that Harvard committed a terrible wrong to Renty and Delia in 1850, and that Harvard’s refusal to give his ancestors the daguerreotypes is a continuation of that wrong. In essence, Lanier asked Harvard to do the right thing and give the plates to her. When Harvard refused to do so Lanier’s lawyers asked the courts to force Harvard to compel Harvard to do the right thing. 

Lanier’s arguments failed before the SJC. The court held that Lanier was unable to satisfy the strict requirements of replevin because she had no property interest in the plates. Under well-established law the photographer (or in this case the commissioning party, Harvard) owns the negatives from a photograph. The court declined to make “new law” that would give her possession of the plates. And, in any event, her claim was barred by the statute of limitations. 

One of the seven SJC justices – Associate Justice Elspeth Cypher – wrote separately and argued for a new common-law cause of action. In a concurring opinion she argued that the common law may be used to remedy any injustice. While she cited many case decisions that support this proposition, the most powerful statement came from former SJC Chief Justice Ralph Gants:

“We are responsible [for] and the sole arbiter of the common law of Massachusetts. The common law of Massachusetts is ours. We are responsible for it. . . . probably the single most important thing … is that it is our obligation to correct miscarriages of justice.  . . . we don’t walk away from miscarriages of justice. We don’t generally say, `well, we rely upon the importance of continuity, so if it was an injustice that occurred a while ago, we’re just going to leave it be.’ Our obligation is to correct a miscarriage of justice whenever it happens, and that is part of what is bred in our bone.”

R.D. Gants, C.J., Welcome Remarks (Aug. 31, 2020).

Tragically, Justice Gants passed away suddenly in 2020, just a month after making these remarks, so he had no voice in the SJC’s Lanier decision. 

Justice Cypher proposed an extraordinarily narrow legal legal test to resolve this case – a test that might provide justice to Ms. Lanier and likely never be applied again:

“a plaintiff must show that (1) she is a direct lineal descendant of a specific individual or individuals enslaved in the United States or in a colony that later became a part of the United States; (2) the defendant has possession of an artifact, which was created or obtained as a consequence of the enslavement of the plaintiff’s ancestors; (3) the defendant participated, either directly or indirectly, in the wrongful creation or attainment of such artifact; (4) the artifact provides a meaningful connection between the plaintiff and her ancestors; and (5) the plaintiff has made a request or demand to the defendant to relinquish the artifact to the plaintiff, which the defendant has refused or ignored. On establishment of the foregoing elements, as the sole remedy for this cause of action, the plaintiff would be entitled to the specific performance of transfer of possession of the artifact from the defendant to the plaintiff.”

The majority of the Court rejected this test, arguing that – 

“we can identify no support in the common law of this Commonwealth or any other State for the new cause of action that Justice Cypher’s concurrence would create to allow descendants of persons who were enslaved to obtain possession of artifacts that resulted from the enslavement of their ancestors. . . . the new right proposed in Justice Cypher’s concurrence does not derive from common-law reasoning, which is a precedent-based, evolutionary decision-making process providing both for continuity and change. Rather, a right and remedy, without precedent, would be created anew.”

As best I can determine, Ms. Lanier has no further legal recourse. There are no federal constitutional or statutory issues in the case, so she has no right of appeal to the U.S. Supreme Court. Unless Harvard has a change of heart, Harvard will maintain possession of the daguerreotypes of Renty and Delia Taylor in perpetuity.

Lanier v. President and Fellows of Harvard College, 490 Mass. 37 (2022)

Oral Argument Video

NFTs – An Existential Crisis for Copyright Lawyers

NFTs – An Existential Crisis for Copyright Lawyers

Many people who’ve lived with the traditional rules of intellectual property during their professional lives are struggling with non-fungible tokens, or “NFTs”. I’m one, and it’s a bit of an existential crisis for us. My advice – relax and repeat after me: “this has nothing to do with copyright law.”

The existence of NFTs came to the attention of many people after Christie’s sold Beeple’s Everydays: the First 5000 Days – a collage of 5000 digital art images – for $69 million in early 2021. One of the 5000 images is at the top of this post. The purchaser was Vignesh Sundaresan, and to be precise, Sundaresan purchased this NFT in exchange for $69 million worth of Ether cryptocurrency. 

What, I asked when I first heard this, did the buyer receive in exchange? I assumed the buyer received copyright title in the artwork. Or perhaps a license to the work. This was a copyright transaction involving digital art, right? Old wine in new bottles.


Although the subject matter of the Beeple NFT appeared to fall in the realm of copyright law – digital artwork – Mr. Sundaresan received none of these things, nor anything else that one would associate with copyright law. 

Warning, blockchain jargon ahead: Mr. Sundaresan received a unique (hence “non-fungible”) crypto “token” – not to be confused with non-unique (hence “fungible”) cryptocurrencies like Bitcoin and Ethereum that can be traded on a blockchain. His purchase of this NFT was subject to a “smart contract” that you can read here (2,000+ lines of code, good luck). The token is managed (recorded, bought/sold) on a public blockchain, a decentralized, peer-to-peer network-based digital ledger system that tracks the ownership of the NFT. The token contains a link to a location on the Internet that holds a copy of the digital artwork, but there was no transfer of ownership of the artwork. Christie’s terms of sale made this clear to potential purchasers.

Beeple’s Everydays: the First 5000 Days

Let me stop now and note that, based on my reading on the subject, there’s a lot of confusion around NFTs, even among the Internet 3.0 cognoscenti. A photo or musical work created today is under copyright, and the owner (often the author, particularly in the world of NFTs) can control reproduction and public display/performance. In the world of traditional copyright transactions a buyer owns the physical copy s/he purchases. If there’s only one copy, or a limited series, the original may increase in value – this is why people invest in art.

By contrast the buyer of an NFT rarely (if ever) acquires ownership of the art work. And here we see the copyright conundrum – historically, no knowledgeable art investor would spend a large sum of money to buy a piece of digital art to which they didn’t own the copyright or a physical copy, and which could be reproduced and downloaded off the Internet with the right-click of a mouse. 

This is the “legal” aspect of NFTs that leaves intellectual property lawyers perplexed – in many instances the seller of the NFT makes no promises, other than not to resell the specific NFT purchased by the buyer. The buyer owns nothing more than a fragment of code that exists on a blockchain, and a link to a website that holds an authentic copy (one hopes) of the artwork.

The point is this: in the world of NFTs – which typically involve artwork, video and music –  purchasers of NFTs do not obtain any intellectual property ownership in the work associated with the NFT unless it is explicitly transferred. In the case of Beeple’s artwork, the buyer didn’t purchase the artwork and he didn’t purchase the copyrights – the buyer purchased the token, and the right to hold or resell it. The images in Beeple’s $69 million collage are all freely available on his website.

Now, lawyers, wake up! There’s good news for you. NFTs may be subject to “smart contracts.” What is a smart contract? It’s a computer program executed in the blockchain by algorithmic code when given certain data. You can see the Beeple contract linked above (the MakersTokenV2 standard), and another example here (the ERC721 standard). If you have the courage to click through you’ll see that these so-called “contracts” look nothing like traditional  contracts  – they are computer code.

However, with smart contracts traditional legal principles have infiltrated the world of NFTs – at least to the extent that a court can “translate” and enforce a code-based contract. The buyer and seller of the NFT can agree to copyright-like rights, either on the blockchain or even in a traditional “off-blockchain” natural language contract. They could also agree, for example, that if the token is resold a percentage of the resale price would be paid to the NFT creator, or some other third party (perhaps a charity). The smart contract would cause this to occur automatically and the designated recipient would receive payment in crypto currency without any human intervention.

So, to return to my original point – at first this is all a bit mind boggling to people steeped in traditional copyright law, but not so much if you understand that NFTs often involve works that could be the subject of traditional copyright transactions, but aren’t. 

If you’ve been paying attention and think you’ve understood everything I’ve said, you may still feel confused. Don’t feel badly, almost everyone else is too. If you’d like to read further on this topic I recommend Deconstructing that $69million NFT (explaining what an NFT is, in technical detail) and the October 26, 2020 episode of the 4PC Podcast, which explains some of the legal issues involved with smart contracts.

If you still aren’t sure what an NFT is, or why people are willing to pay huge sums of money for them, I’ll leave you with copyright lawyer Rebecca Tushnet’s explanation. When asked to explain the value of a NFT she responded – 

The value is the ability to say that you own the NFT. Like blockchain currency, it is worth whatever humanity collectively or individually decides it’s worth. It is a melding of Oscar Wilde and Andy Warhol, art for art’s sake and commerce for commerce’s sake. 

Arbitration War Stories (third) – Arbitration or Court?

In my first two posts on arbitration (here and here), I told a couple of war stories about what goes on behind the scenes in arbitration – what I called the “sausage factory.” To close this series, here are some general observations on arbitration.

Should I include an arbitration clause in a contract?

This can be a difficult question, with pros and cons on either side, and no obvious answer. And, since arbitration is typically in the “boilerplate” section of a contract it often receives little attention during a negotiation. This can be made worse if the lawyer guiding a client is a contracts or corporate lawyer that has had little or no personal experience with arbitration, which is often the case.

Pros of Arbitration

It Can Be Fast and Private. The key factor favoring arbitration is speed. It’s faster, almost always faster than a court case, which can take years to go to trial and can then be appealed by the losing party, stretching the process out even further. In Massachusetts it can take three years or more for a case to go to trial in state court. Add another year for appeal.

These delays can drive litigants crazy, and arbitration short-circuits this. It’s also private (if the agreement stipulates this), which can be appealing to a business that may be concerned about having its reputation harmed by public court proceedings.

Cons of Arbitration

However, when weighing the desire for a speedy resolution you need to take a few things into consideration.

It Can Be Expensive. Arbitrators are almost always lawyers, and you are paying for the arbitrator’s time, usually at his or her hourly rate. The parties split the cost, but it still has the potential to be more expensive than state or federal court. And where there is a panel of three arbitrators (as was the case in the two war stories I told in previous posts), the parties are paying three hourly rates. Assume $450/hour (a reasonable estimate in Massachusetts) and one hour of hearings, deliberations or phone conferences to discuss a procedural matter or discovery dispute will cost the parties $1,350.

In my experience, on three-person panels all of the arbitrators weigh in on everything that comes up in the case, no matter how minor. This includes scheduling orders, discovery disputes and any other minor issue. The parties have no control over this.

The American Arbitration Association (AAA) asks each arbitrator to estimate their fees at the beginning of each case, and arbitrators tend to overestimate their fees – better to overestimate and surprise on the downside than the opposite. However, this can result in a large upfront bill to the parties, who can’t be confident that they’ll get a refund at the end of the case.

Add to this fees of the company administering the arbitration, such as the AAA, and the expense is even higher.

I had a case last year in which an individual filed arbitration against a well-financed corporation. The case called for a three-person panel and senior, expensive (the other two, not me) arbitrators were appointed. It was obvious that the individual plaintiff would have a difficult time paying a three-person panel in a complex business dispute that would involve discovery disputes, thorny legal issues, dispositive motions and what was expected to be a five day hearing. Indeed, the case settled early on. I suspect that the anticipated arbitration costs were a factor in that settlement.

A court case, by contrast, costs nothing more than the filing fee.

Arbitrators are Not Bound to Follow the Law. How many people or companies, when negotiating an agreement that contains an arbitration clause, are told by their contract lawyers that in the event of a dispute an arbitrator can pretty much disregard the law and the facts, and that you have no right of appeal? Very few, I suspect.

Under the law of Massachusetts and under federal law, an arbitrator cannot be reversed by a court for failing to follow the law. The only possible exception to this is the so-called “manifest disregard” doctrine – an arbitrator may be reversed by a court when she decides a case in “manifest disregard” of the law.

However, this is a controversial doctrine which has been repudiated in some states and federal circuits. In any event it is difficult to establish that an arbitrator has acted with “manifest disregard” of the law. Cases reversing an arbitration award based on “manifest disregard” are exceedingly rare, and usually are accompanied by some form of overt misbehavior by the arbitrator.

The bottom line: if you elect arbitration you are pretty much at the mercy of the arbitrator with no right of appeal.

Where Does This Leave the Decision of Arbitration or Court?

In earlier posts I told a couple of war stories where, arguably, arbitrators acted improperly. But it’s my experience that the vast majority of arbitrators act properly and do everything they can to decide a case within the law and the facts. That said, you can never fully discount the risk that you’ll get an arbitrator who harbors a hidden bias or who may disregard the law.

Therefore, I would advise choosing a 3-person panel over a single arbitrator if you (or the party you’re representing or advising), can handle the additional cost — the 3-person panel reduces the power of a renegade arbitrator of the sort that I described in my second “war stories” post.

But I would never recommend a 3-person panel in which one arbitrator is neutral and the other two are retained by (and beholden to) the parties, as described in my first war story post. The attorneys for the parties can argue the case, and they don’t need “insider” arbitrators to argue the case a second time.

Good luck!

Does Your Lawyer Have Emotional Intelligence?

Does Your Lawyer Have Emotional Intelligence?

“Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser – in fees, expenses, and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man.” Abraham Lincoln.

Does your lawyer have emotional intelligence? Or if you’re a lawyer, do you?*

*Note: “Studies show that lawyers score high in intelligence but below average in emotional intelligence, and Ronda Muir, author of ‘Beyond Smart: Lawyering with Emotional Intelligence,’ says that plays a part in the public’s low opinion of them.” American Bar Association, October 2017

Listening to a couple of doctors on radio interviews talk about how important emotional intelligence is for the doctor-patient relationship got me thinking about emotional intelligence in the context of lawyering.

What is emotional intelligence (EQ)? Howard Gardener describes it this way –

Your EQ is the level of your ability to understand other people, what motivates them and how to work cooperatively with them,” says Howard Gardner, the influential Harvard theorist. Five major categories of emotional intelligence skills are recognized by researchers in this area.

He goes on to describe the five major factors, one of which is empathy:

The ability to recognize how people feel is important to success in your life and career. The more skillful you are at discerning the feelings behind others’ signals the better you can control the signals you send them. An empathetic person excels at s service orientation. Anticipating, recognizing and meeting clients’ needs.

All five factors described by Gardener are important (the others are self-awareness, self-regulation, motivation and social skills), but I’ll focus on empathy in this post, since it’s had the biggest impact in my legal practice.

To be honest, my awareness of empathy was slow to develop. When I first graduated law school my goal was to be a competent legal technician, my definition of a “good lawyer” at the time. That meant learning the law in my practice area, which was all-consuming for the first few years. But eventually my eyes began to open to the empathic needs of my clients. My experience with two clients in particular made me aware of this.

Clients 1 and 2 – What a Difference!

The first client dates back to when I was a young lawyer at a large Boston law firm. The firm took on a contingent fee personal injury case. It was a relatively small case, so they assigned it to me to handle through trial. The facts were simple enough – an employee fell on a flight of stairs that didn’t meet building code. The client, I’ll call her Client 1, fell and injured herself quite badly. We were seeking $150,000 in damages from the building owner. The defendant (represented by insurance company lawyers) offered us $35,000.

The case was scheduled to go to trial, and one of the trial practice books I was reading suggested a good practice was to expose clients to the courtroom before trial. The theory was that a courtroom is an unfamiliar environment (boy, is it ever!), and the client should be familiarized with it before trial.

I walked the client up to Suffolk Superior Court a few days before trial, on an afternoon when I knew our courtroom would be vacant. Client 1 walked into the courtroom, took one look around, and I could see the blood drain from her face. She turned to me and said, “settle the case for whatever you can get.” I settled for the $35,000 that was on the table.

Not many years later, in my own law practice, I represented a businessman who had a net worth of $20 million. This man – Client 2 – was sued in a complex breach of fiduciary duty case that threatened his entire net worth. You might think that this would be stressful for him (it was for me), but as near as I could tell, he slept like a baby and this risk didn’t phase him one bit. I gradually came to realize that this man had nerves of steel. We ended up settling that case on very favorable terms, in large part due to his emotional resilience.

These two cases showed me two client extremes, and for many years I’ve used them as mental markers to gauge where my clients fall on this continuum. Were they, like Client 1, terrified of the courtroom (and very likely the entire legal process), or were they unfazed and able to handle the risk of a major lawsuit, like Client 2?

How has this changed me? Well, in the first place I try to suss out a client’s risk tolerance as early as possible. I discuss the realities of a lawsuit and the stress it puts people under. Rather than ask clients about their fortitude head-on, I’ll tell them the stories of Client 1 and Client 2, so that they have specific examples. This often gets them thinking, and by comparing themselves to these two situations clients can examine their own feelings and, perhaps, share them with me.

Sometimes I share with them the Abraham Lincoln quote at the top of this post. If the client thinks that the other side is weak and will settle early, I dissuade them of this belief. I may share one of my favorite proverbs: “a feather that floats into a court of law on a gentle breeze may require two oxen to remove.” I’ll tell them that I have seen many lawsuits where my client thought the opposing party was financially weak and would settle early, but the case dragged on for years.

I describe a deposition and trial, and explain that they may be the target of an aggressive lawyer on the other side of the case. You’d think that, based on popular television, everyone would know this, but you’d be surprised how many people don’t. A lawsuit is a stressful experience, and a client shouldn’t have to wake up one morning halfway through the case with the sudden realization that a lawsuit is like an endless root canal.

If the client has a spouse, I try to make sure the spouse is aware of how stressful a lawsuit can be. Most clients will discuss their feelings with their spouse before they discuss them with their lawyer, and stress on a spouse can be a major factor in the client’s mental health. I recall one case in which the client refused to settle, even on the threat of divorce from his wife. In fact, the client’s wife did divorce him.

Why is all of this important? First, you may be able to save your client emotional suffering and legal fees. Client 1, in my example above, was on a contingent fee, but I certainly could have saved her emotional suffering as that lawsuit dragged on and finally headed to trial. I should have seen her fear, but as a young lawyer I was probably too focused on my own insecurities. Second, like it or not, the lawyer and her client are a team, and the lawyer needs to know how strong the other member of that team is. Are they going to fold, like Client 1? If so, it would be good to know this as early as possible, especially if the lawyer has taken the case on a contingent fee. After all, the client, not the lawyer, controls the decision to settle.

Often, I’ll find my self representing a group of individuals whose interests are aligned. For example, several partners or co-owners of a business. From the EQ perspective that multiplies the complexity of the representation, since each of the partners may have a different capacity to endure the stress and uncertainty of a lawsuit, and the partners are forced to work that out among themselves. Better that they do that sooner than later, and if I can help with that process, so much the better.

So, to clients involved in a lawsuit (or considering bringing one), ask your lawyer to explain the process to you in detail, with an eye toward your emotional reaction to the events she describes. And lawyers, developing the skill I describe here may save you both emotional and financial pain.

Will the Supreme Court Review Oracle v. Google? Please?

Will the Supreme Court Review Oracle v. Google? Please?

This extraordinary software copyright case — Oracle v. Google — has been in the courts for eight years, and I’ve blogged about it almost every step of the way. After winning twice in district court and losing two appeals before the Federal Circuit the case is on appeal to the Supreme Court for the second time. In its petition to the Court Google’s “questions presented” are:

  1. Whether copyright protection extends to a software interface.
  2. Whether, as the jury found, Google’s use of a software interface in the context of creating a new computer program constitutes fair use.

The first question was the focus of the first trial and appeal by Oracle. Google asked the Supreme Court to decide this issue after losing the first appeal, but was rebuffed. The second question was the subject of the second trial, which Google won on a jury verdict and lost on Oracle’s appeal to the Federal Circuit.

To recap, Google need a mobile operating system for its smartphones, and wanted to use Java. After negotiations to license Java from Oracle were unsuccessful Google rewrote the programming language code for Java (the implementing code) to be compatible with Java. It called this Android. It was careful to do this without copying the code for the Java language or infringing Oracle’s copyright in this work.1

However, Google did copy the Java “declaring code” or naming structure (basically function calls),2 in order to make Android more familiar and accessible to Java programmers.3

In the first appeal in this case the Federal Circuit reversed a decision by the trial judge and held that the declaring code was copyright protected, and therefore Google had engaged in copyright infringement. However, this conclusion was subject to Google’s fair use defense, which the jury had hung on at the first trial. It therefore remanded the case to the district court for a second trial on fair use.

At the second trial the jury found that Google’s copying was protected by fair use. However, Oracle appealed to the Federal Circuit again, and the Federal Circuit found that Google’s copy of the declaring code was not protected by fair use. This decision was extremely controversial – it was the first time a federal appeals court has overruled a jury verdict on fair use.

With respect to the first question presented — whether copyright protection extends to a software interface — Google’s current appeal focuses on the First Circuit’s 1995 decision in Lotus v. Borland. In that case the First Circuit held that the menu command hierarchy in the Lotus 1-2-3 spreadsheet program was a “method of operation,” and therefore excluded from copyright protection under Section 102(b) of the Copyright Act.

That decision was the subject of an appeal to the Supreme Court. In 1996 the Court deadlocked 4-4, and as a consequence the First Circuit’s decision was affirmed. However, due to the 4-4 deadlock it became law only in the First Circuit, not nationally. Lotus was an important decision at the time, but it has remained an outlier – no other court has fully adopted the holding in Lotus v. Borland.

In seeking Supreme Court review Google argues that there is a circuit split, as follows:

. . . the courts of appeals are deeply divided on the appropriate standard for determining the circumstances under which a software interface is copyrightable … . At a minimum, the Federal Circuit’s standard directly conflicts with the standard adopted by the First and Sixth Circuits. The Court should grant review to resolve the conflict among the courts of appeals on this exceptionally important issue.4

On the second question presented — whether Google’s use of a software interface in the context of creating a new computer program constitutes fair use — Google argues:

Because the jury returned a general verdict on fair use, the Federal Circuit correctly stated that it “must assume that the jury resolved all factual issues relating to the historical facts in favor of the verdict.” . . . But the Federal Circuit said one thing and did another: it reconsidered for itself a number of factual issues presented to the jury and resolved those issues in support of the conclusion that Google’s use was unfair as a matter of law. . . . To permit that approach would condone an unprecedented degree of appellate second guessing of factual determinations in fair-use cases. This Court’s intervention is urgently warranted to rectify the Federal Circuit’s profoundly flawed approach.

I’m going to predict that the Supreme Court will accept review of this case on at least one of the two issues presented by Google. This case is of real importance to the software industry, and there is a good chance the Supreme Court will recognize that, as it did when it accepted review of Lotus v. Borland  24 years ago.

However, there are two issues lurking beneath the surface that could impact the Court’s decision of whether to grant review. T’he first is the unusual procedural posture of the case. It came to the Federal Circuit because there were patent infringement claims at an earlier stage of the case. This required that any appeals — even an appeal of a non-patent issue — be directed to the Federal Circuit rather than to the Ninth Circuit Court of Appeals, where the case was tried. However, Federal Circuit decisions that come to it from other circuits and do not involve patent law do not become the law in those circuits for purposes of legal precedent. This means that courts in the Ninth Circuit are not bound by the Federal Circuit’s ruling in this case. This fact diminishes the impact of the “circuit split.” It’s a circuit split between the First Circuit (Lotus) and the Federal Circuit, which hears very few copyright cases, and a First Circuit/Federal Circuit “split” may be less significant than a First Circuit/Ninth Circuit split would have been.

The second issue is the position of the Solicitor General. When Google appealed the Federal Circuit’s first decision the Supreme Court requested the Solicitor General’s opinion on whether it should take the case. The Solicitor General advised against review at that time, noting that the case involved “substantial and important concerns” that should be addressed through the fair use doctrine. The fair use doctrine was the subject of the second trial, and it’s likely the Supreme Court will ask for the Solicitor General’s views again. The recommendation of the current Solicitor General’s office on the issues in this case will be an important factor in the Court’s decision whether to review the case.

These technicalities aside, this is a hugely important case for the U.S. software industry. We can only hope that that Supreme Court recognizes this, and decides to clarify the issues presented by the case.


First Update: In September 2019 the Solicitor General (representing the United States) filed a brief opposing a grant of certiorari by the Supreme Court. The Supreme Court has agreed with an SG recommendation to deny cert  over 90% of the time (Comparing Cert Stage OSG Efforts Under Obama and Trump (link)), so things are not looking good for Google at the moment.

Second Update: The Supreme Court granted cert (review). See my resources page here: link


Supreme Court To Decide Whether Trademark License Can Be Rejected In Bankruptcy

Supreme Court To Decide Whether Trademark License Can Be Rejected In Bankruptcy

The U.S. Supreme Court decides very few intellectual property cases. And, it accepts review of few cases from the First Circuit Court of Appeals in Boston (my circuit). So, when the Supreme Court accepts an IP case appealing a decision from the First Circuit, as it has now, I pay attention.

The case under appeal involves a narrow but important legal issue that is of interest to both the intellectual property licensing and bankruptcy communities. Here is a brief summary of what’s at issue.

The decision on appeal is Mission Product Holdings Inc. v. Tempnology LLC (1st Cir. January 12, 2018), and the issue is a mashup of trademark and bankruptcy law.

When a company files for protection under Chapter 11 of the Bankruptcy Code, the trustee or the debtor-in-possession (the “debtor”) may secure court approval to “reject” any executory contracts to which the debtor is a party.1 An example would be a distribution agreement for a specific term (say five years) that has not run its course. If the distributor goes into bankruptcy two years into the five year term it can “reject” the contract – it is no longer obligated to perform during the remaining years.

The debtor doesn’t get off completely free – it is left with a liability for a pre-petition breach of the contract. 11 U.S.C. § 365(g) (“[T]he rejection of an executory contract or unexpired lease of the debtor constitutes a breach of such contract or lease … immediately before the date of the filing of the petition….”). However, the other party to the contract has nothing more than an unsecured claim, and these are often worth little in bankruptcy proceedings.

There is an important exception to this rule, which leads to the issue in this case. When the rejected contract is one “under which the debtor is a licensor of a right to intellectual property,” the licensee may elect to “retain its rights … to such intellectual property,” in effect forcing the continuation of the license. 11 U.S.C. § 365(n)(1).

However, the exception presents a potential problem for licensees in one respect – the definition of “intellectual property” includes patents, trade secrets and copyrights, but does not mention trademarks, a form of intellectual property that is often the subject of license agreements. 11 USC § 101(35)(A)2

The First Circuit case involved an ongoing (“executory”) trademark license, and the debtor took the position that because trademarks are not included in the list of exceptions, it was entitled to reject (terminate) a trademark license. The licensee, the other party in the case, took the opposite position, asserting that the trademark license should continue.

The licensee lost before the bankruptcy court and appealed to the First Circuit. After a review of the statutory history of the law and the policy issues involved, the First Circuit held that Congress meant what it said by omitting trademarks from the list of the kinds of intellectual property that cannot be rejected by a Chapter 11 debtor –  executory trademark licenses are an exception to the exception, and they can be rejected by a debtor. Therefore, the licensee lost its ongoing trademark license.

However, this ruling set up a “circuit conflict” with the Court of Appeals for the Seventh Circuit. For reasons too detailed to go into here, in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC (7th Cir. 2012), the Seventh Circuit held that Chapter 11 bankruptcy does not entitle the debtor to terminate a trademark license.

This conflict between the First and Seventh Circuits led the Supreme Court to accept an appeal of this case.3 And, this is clearly a case worthy of Supreme Court review. Prospective licensees should know whether or not they will be able to continue to use a trademark if the licensor files for bankruptcy, not that it depends on where in the country the bankruptcy is filed and therefore which circuit’s law is controlling.4 A decision by the Court will resolve, nationwide, the status of trademark rights when a debtor rejects a license agreement in bankruptcy.

Briefing on this case has not yet begun, but the case is likely to be heard next year, and a decision issued before the Supreme Court 2018-19 term ends next June. I’ll update this post when a decision is issued. In the meantime, here is a link to the Scotusblog page for the case.

Update, May 2019: The Supreme Court ruled that a debtor may not terminate a trademark license. Link to decision.