Human Property

Are copyright damages limited in some instances?  One federal judge certainly thinks so.  On January 22, 2010, Judge Michael Davis for the District of Minnesota slashed a $1.9 million jury verdict against file-sharer Jammie Thomas-Rasset to $54,000. This amounted to an award of $2,250 per song.

Thomas-Rasset had originally been fined the $1.9 million on account of sharing 24 songs on the Kazaa network.

The RIAA had chosen to seek “statutory damages” against Thomas-Rasset.  Under the Copyright Act, a plaintiff can seek “statutory damages” instead of “actual damages.”  The minimum statutory award is $750, and the maximum is $30,000.

Since actual damages in this case would have been incredibly small (songs can be downloaded for about a buck from iTunes), the RIAA sought statutory damages, presumably to scare other file-sharers.

In explaining his decision, Judge Davis wrote that the price tag of $2,250 per song was a “reasonable limit” against a noncommercial individual and did not “veer into the realm of gross injustice.”  This represented three times the minimum statutory award of $750.

The Court further noted that Thomas-Rasset “was not a business acting for profit.  Instead she was an individual consumer illegally seeking free access to music for her own use.”  Any need for deterrence “cannot justify a $2 million verdict for stealing and illegally distributing 24 songs for the sole purpose of obtaining free music.”

Surprisingly, lawyers for Thomas-Rasset are seeking to overturn the verdict entirely.  They want a court to rule on whether or not the verdict is constitutional in the first place — a much more difficult task.  Judge Davis did not rule on this issue since he opted instead to reduce damages.

It might be better to leave well enough alone.  Challenging the constitutionality of the damage award seems like a noble task, but Judge Davis’s decision is also the first written opinion lowering a damage award for copyright infringement (and may have involved some questionable legal analysis as this blog points out).

It seems highly unlikely that the damage provisions of the Copyright Act would be thrown out by any federal judge.  Congress has express authority in the Constitution to regulate copyrights (the “Useful Arts” Clause).  And legitimate acts of Congress — including the setting of statutory damage awards — would likely be entitled to deference by a court.

An appeal seems rash and might set the way for very bad precedent the other way.  But who knows?  It seemed unlikely that Thomas-Rasset would get this far in the first place.  Maybe her legal team will be able to convince an appellate court that copyright infringement requires an actual showing of damages instead of an arbitrary Congressional estimate.

Are hundreds of thousands of dollars in damages or even permanent restriction of internet access appropriate responses to illegal online file-sharing?  What’s fair in these circumstances?

As we all start to do more things on the internet — and have access to much more creative content via the internet — these questions start to become very interesting.

To date, only two file-sharing cases have gone to trial and resulted in verdicts.  In both cases, the defendants were found liable for copyright infringement and were subject to up to millions of dollars in damages.

In the first file-sharing case, a Minnesota jury decided last summer that Jammie Thomas-Rasset was liable for $1.92 million for the infringement of 24 songs.  This amounts to $80,000 a song.

The nation’s second file sharing defendant, Joel Tannenbaum, is now asking his court for a retrial, or to reduce the $675,000 award related to the infringement of 30 songs.  This amounts to $22,500 a song.

It’s totally up to the jury to decide how much to award in damages.  The Copyright Act permits damage awards anywhere from $750 to $150,000 per infringement.  In instances of “innocent infringement,” damages can be reduced to $200, but even then, something has to be paid.  Copyright infringement is a strict liability offense.

In light of the fact that songs today can be downloaded for $1 off of iTunes, is an award of $80,000 per song for infringement reasonable?  The damage awards, on their face, would strike the casual observer as punitive, perhaps made for their deterrent effect as opposed to restitution for the infringement.

Unfortunately for these defendants, they face an uphill battle in getting a judge to reduce the verdicts.  The Copyright Act expressly permits damage awards to go into the hundreds of thousands of dollars, so it would be difficult to argue a deprivation of due process based on any lack of notice.  We’ve all seen those FBI warnings every time we rent a movie.

Then again, the Supreme Court has placed limits on punitive damage awards based on similar principles.  Even in cases where a company knew it was polluting a town’s water supply or knowingly manufacturing shoddy products, punitive damage awards are limited because due process demands some restriction on damages.   The Supreme Court has held that “few awards exceeding a single-digit ratio between punitive and compensatory damages…will satisfy due process.”  State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003).

Ultimately, the best recourse would be for Congress to modify the Copyright Act and reduce damages in cases of file-sharing so that the punishment can better fit the crime, so to speak.  But here, too, there are forces seeking even more draconian punishments, including the restriction of internet access for repeat offenders.  Such a law has just come into effect in France, and it may be only a matter of time before industry groups lobby for a similar measure in the United States.

Would Americans be okay with a law depriving people of internet access in instances where someone was repeatedly found liable for copyright infringement?  How comfortable are Americans with the idea that profit derived from creative works should trump the value associated with access to the internet?

Patents protect inventions, while copyrights protect creative works.   As India rushes onto the world stage, it seems clear that we are only a few years away from a real explosion in activity in India related to both.

The success of a movie like Slumdog Millionaire and its musical impresario A.R. Rahman hints at a growing interest in Indian music and culture in the West, that Indian companies will no doubt want to monetize.

In fact, they will probably care more about copyright protections in Western markets than in India itself — the Slumdog Millionaire soundtrack retails for a lot more in New York than in the Mumbai slum itself.

I would expect Indian cultural companies to start to really invest in copyright protections in the next five years as a way of capitalizing on growing interest in Indian music and movies in the US and Europe.

The same is true with patents.  With Indian companies like the Tata Group purchasing once powerful Western brands like Land Rover, it seems clear that Indian companies are now finally finding the confidence and capital to generate wealth alongside Western and Chinese competitors.  And to stay competitive, Indian companies will want robust patent portfolios.  A big patent book is a peacock feather —  a way of showing your intelligence and know-how in a globalized world.

India’s prospective growth rate for 2010 hovers at around 8 percent.  With Western markets continuing to look tepid, it’s just a matter of time before Indian companies make the leap and being monetizing their intellectual property in Western markets.  Expect for this to happen sooner rather than later.

California’s distaste for non-compete clauses is well known.  With very limited exceptions, an employee can stop working for a company on Friday, and begin working for a direct competitor the following Monday.

The rule is codified in Section 16600 of California’s Business and Professional Code:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Use of non-compete clauses can violate California’s Unfair Competition Law (Section 17200 of the Business and Professional Code).

The rationale for these rules is the belief that Californians should be allowed to practice their trade:

The interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.

(Diodes, Inc. v. Franzen (1968) 260 Cal.App.2d 244, 255; D’Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933.)

As a practical matter, the restriction on non-compete clauses has permitted a robust labor market for value-adding employees.  And it is perhaps no coincidence that some of the most innovative technological work in the country takes place in California:  a highly sought after engineer or other technical expert can easily jump to another company without worrying about filling up months of “dead time” on account of a limiting non-compete clause.

While these employment laws have nurtured innovation, there is also a tension with intellectual property laws and the protection of a company’s trade secrets.  Suppose an engineer develops a unique (and highly proprietary) technological method or practice, which the company wishes to keep as a trade secret.  The employee gets tired of the company, and leaves the next day for a competitor.  Then, a few months later, the competitor develops a product that looks suspiciously like it relies on the trade secrets the engineer had developed for the former company.

Sounds like there might be a problem?  Maybe — but the answer is highly fact dependent.  Where do you draw the line between an employee’s technical abilities versus the actual trade secret that was developed by that same employee for the former employer?  This is a very common question in trade secret litigation, with no easy answer.

It’s no wonder that companies seek ways to limit the ability of their employees to take proprietary information with them to competitors — the so called “trade secret” exception to non-compete clauses.

Yet faced with this issue last week, the California Court of Appeals refused to recognize this exception, punting the issue for another day.

In Dowell v. Bisosense Webster, Inc., Second District, Div. Two (2009 S0S 636) (certified for partial publication on 11/19/09) (full case here), the California Court of Appeals found two non-compete clauses void and unenforceable under California law.  The defendant Biosense Webster argued that the clauses were valid because they were tailored to protect trade secrets or confidential information.  The court rejected this argument finding the clauses too broad to be limited to trade secrets.

Interestingly, the court punted on the issue of whether or not there exists a trade secret exception that permits the use of non-compete clauses.  However, it expressed doubts about its existence:

Although we doubt the continued viability of the common law trade secret exception to covenants not to compete, we need not resolve the issue here. Even assuming the exception exists, we agree with the trial court that it has no application here. This is so because the noncompete and nonsolicitation clauses in the agreements are not narrowly tailored or carefully limited to the protection of trade secrets, but are so broadly worded as to restrain competition.

Companies with employees in California should be wary of depending on non-compete clauses if they wish to protect their confidential information or other trade secrets — they may simply be held as void by the courts if they are too broad.  Good legal counsel should be able to provide advice on the applicability of a non-compete clause to a California employee.

Copyright law, both in the United States and around the world, may be set to change drastically in the next few years — at least if there is any truth to the rumors related to a new international treaty known as the Anti-Counterfeiting Trade Agreement (or “ACTA”).

The treaty is being negotiated between the United States, Canada and the European Union (among other countries).  It aims to put in place a single set of copyright rules and regulations binding on all signatories.

Little is known about the actual contents of ACTA, as all negotiations and documents have been veiled behind unusual levels of secrecy.

In fact, the negotiations are so secret, they have been declared “properly classified national security secrets” by the Obama Administration.   The Administration has used this classification to deny any requests for information or documents under the Freedom of Information Act.

The high levels of secrecy have led to rampant speculation about the contents of the treaty and how it would change current copyright laws.  In September 2008, leaked documents led to speculation that ACTA would:

Require Internet Service Providers to monitor all consumers’ Internet communications, terminate their customers’ Internet connections based on rights holders’ repeat allegation of copyright infringement, and divulge the identity of alleged copyright infringers possibly without judicial process, threatening Internet users’ due process and privacy rights; and potentially make ISPs liable for their end users’ alleged infringing activity.

Interfere with fair use of copyrighted materials.

Criminalize peer-to-peer file sharing.

Interfere with legitimate parallel trade in goods, including the resale of brand-name pharmaceutical products.

Impose liability on manufacturers of active pharmaceutical ingredients (APIs), if those APIs are used to make counterfeits — a liability system that may make API manufacturers reluctant to sell to legal generic drug makers, and thereby significantly damage the functioning of the legal generic pharmaceutical industry.

Improperly criminalize acts not done for commercial purpose and with no public health consequences; and Improperly divert public resources into enforcement of private rights.

A clearer picture of ACTA’s provisions came a few weeks back, when a second document (a European Commission summary paper) was again leaked.  Here are some key quotes and analysis:

Safe-harbours for liability regarding ISPs, based on Section 512 of the Digital Millennium Copyright Act (DMCA)2, including a preamble about the balance between the interests of internet service providers (ISPs) and right-holders. See also KORUS Chapter 18.10.30. According to US, the language proposed is somewhere in the “middle” between the WIPO internet treaties, KORUS and the DMCA, which probably means that it is more detailed than the first but not as specific as the latter

This confirms that ACTA is probably looking to impose a “notice-and-takedown” regime (similar to one contained in the Digital Millennium Copyright Act) on other countries that currently do not have one in place.  Under this type of system, an internet content provider is required to “take down” any allegedly infringing material after receiving “notice” from the copyright holder.

On the limitations from 3rd party liability: to benefit from safe-harbours, ISPs need to put in place policies to deter unauthorised storage and transmission of IP infringing content (ex: clauses in customers’ contracts allowing, inter alia, a graduated response). From what we understood, the US will not propose that authorities need to create such systems. Instead they require some self-regulation by ISPs.

Under current American law, ISPs are only required to put in place a sufficient notice-and-takedown system and in “appropriate circumstances,” terminate users who repeatedly or blatantly infringe copyright.  Perfect 10, Inc. v. CCBill LLC, 488 F.3d 1102, 1109-1110 (9th Cir. 2007).

The important change appears to be the need for a “graduated response” to copyright infringement, as well as “self-regulation” by ISPs.  Will this require ISPs to monitor their networks?  Can your internet access be revoked based on mere allegations (but no proof) of copyright infringement?  These are key questions.

Here’s a section that relates to DVD copying (Blueray copying?) software:

Section 4: Will focus on technical protection measures (TPMs). Language inspired by US-Jordan Free-Trade Agreement (article 4.13)4, as well as by the WIPO Internet Treaties (articles 11 WCT and 18 WPPT):
- Parties to provide adequate civil and criminal remedies that are specific to
TPM infringements, i.e. treat these as separate offenses form “general”
copyright infringements.
- TPM infringements would be: (i) prohibition of circumvention of access
controls and; (ii) prohibition of manufacture and trafficking of circumventing
DRM devices.
- There will be exceptions to these prohibitions available to ACTA members.
- “Fair use” will not be circumscribed.
- There will be no obligation for hardware manufacturers to ensure
interoperability of TPMs.

The gist of all that legal-ese is that countries will be required to enact laws preventing the cracking of any technical measures designed to prevent infringement.  In the US, the Digital Millennium Copyright Act makes it illegal for anyone to crack anti-copy restrictions on DVDs, for example.  This has provided a schizophrenic legal regime where it remains technically legal to copy a DVD for some purposes (a personal copy of a DVD you already own) but illegal to crack any technical measures which prevent that DVD from being copied in the first place.  It looks like ACTA seeks to expand these restrictions to other countries.

In sum, what can be expected from ACTA?  At a high level, it appears that the proposed changes will have greater impacts in countries overseas, especially in countries that may not have the strict copyright laws of the United States.  In the United States itself, ACTA may impose greater surveillance obligations on ISPs to monitor their networks — the “graduated response” language.

At the end of the day, however, the devil will be in the details.  We should know more as more items get released…or leaked.