- In This Issue -
April 2014

Message from the Executive Editor
Bob Muller
Legislative Developments to Enhance Enforcement Against Trade Secret Theft
By Christian J. Scali
What's Fair About Copyright Law?
By Gary J. Gorham
Interference With Contract Claims Concerning Copyrightable Subject Matter Are Likely Preempted In The Ninth Circuit
By Lee Brenner, Hajir Ardebili, and Eric May

In re Petition of Pandora Media, Inc. and the Future of Musical Works Collective Licensing
By Kyle Funn

 


 

EDITORIAL STAFF

Bob Muller, Executive Editor

Laura Burson, Editor

Lee Brenner, Editor

Gary Gorham, Editor

Christian Scali, Editor


 

BOARD OF ADVISORS

Jonathan Anschell,
Executive Vice President and General Counsel, CBS Television and CBS Corporation

Fred Goldstein,
Vice President and General Counsel, Los Angeles County Museum of Art

Douglas Lichtman,
Professor of Law, UCLA School of Law

Hon. Enrique Romero (Ret.),
ADR Services, Inc.

Gail Migdal Title, Esq.,
ADR Services, Inc.

Seth Weisberg,
Chief Legal Officer, Stamps.com

 


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Message from the Executive Editor


Bob Muller

In 2012, ELIPS launched an online journal dedicated to the advancement of ideas in entertainment and intellectual property law. After a brief hiatus, we are pleased to announce that the journal is back. We have dubbed it the “ELIPS Law Lab” in the hope that the journal will spawn and incubate ideas for the advancement of laws as well as report on developments. To that end, over time, we will be introducing features to make the journal more interactive and organic – more on that later!

A new feature of ELIPS Law Lab is the introduction of a Board of Advisors to inform us about the areas of law that they would like to see us discuss, and to tell us what we are doing well, and what we can do better, to make this journal truly unique and helpful to our readers. We are grateful to our Board of Advisors for dedicating one of their more precious resources, namely, time.

ELIPS Law Lab also features an Editorial Board. I am grateful for their hard work, insight, and dedication to the relaunch of the journal.

Lastly, we encourage all of the ELIPS members to take advantage of ELIPS Law Lab and to submit ideas for publication. The submission guidelines are posted below. The journal is meant foremost for ELIPS members, although from time to time we will feature submissions from outside our group. So don’t wait any longer, send your ideas for an article to bob@cypressllp.com.

Thanks,

Bob Muller
Cypress, LLP

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Legislative Developments to Enhance Enforcement Against Trade Secret Theft


Christian J. Scali

By Christian J. Scali

Christian J. Scali is the principal of The Scali Law Firm, where he practices in the areas of advertising, consumer finance, employment law, trade secret protection, entertainment litigation, and intellectual property litigation. He can be reached at Cscali@scalilaw.com.


I. Introduction

“We are going to aggressively protect our intellectual property. Our single greatest asset is the innovation and the ingenuity and creativity of the American people. It is essential to our prosperity and it will only become more so in this century.”

President Barack Obama, February 20, 2013, Administrative Strategy on Mitigating the Theft of U.S. Trade Secrets.1

Trade secrets are the most commonly stolen intellectual property.  Even with a robust trade secret protection plan and secure means of keeping those trade secrets confidential, companies can find themselves victims of trade secret misappropriation by competitors, including foreign competitors with ties to foreign governments.  In fact, emerging trends indicate the pace of economic espionage and trade secret theft against U.S. corporations is accelerating.2  In its White Paper entitled, Strategy on Mitigating the Theft of U.S. Trade Secrets, the Obama Administration has noted that there are multiple vectors of attack for trade secret thefts, from hackers, to seemingly loyal employees to foreign governments and militaries buying secrets.  The Administration has expressed alarm that American interests—from U.S. Companies, law firms and academia, to financial institutions—are increasingly experiencing cyber intrusion activity against electronic repositories containing trade secret information.3

Over time, the U.S. government has demonstrated vigilance in addressing threats of trade secret misappropriation. In less than two years, the public has witnessed several legislative developments to enhance enforcement against trade secret theft and economic espionage.  Most recently, on November 22, 2013, Congress introduced the Future of American Innovation and Research Act (FAIR Act), a new trade secrets bill that would allow American trade secrets owners to sue entities who misappropriate trade secrets outside the U.S.4

Creating a federal cause of action for theft of trade secrets is not a novel subject. Historically, trade secret and economic espionage-related bills have never gained enough traction to become law. This article summarizes Congressional efforts and legislative developments related to trade secrets leading up to the FAIR Act.  Passage of the FAIR Act would end years of debate regarding the need for a single federal cause of action for misappropriation of trade secrets.  Further, the FAIR Act would provide protection and recourse to U.S. entities whose trade secrets are stolen by a foreign entity.  But, is a federal law aimed at the threat of foreign trade-secret theft necessary?  It is not clear that it is; but even if it is not, the federal statute would provide a valuable new means to protect companies’ trade secrets from misappropriation.

II. Legislative Development One: Protecting American Trade Secrets and Innovation Act

On July 17, 2012, Democrats in the Senate introduced the Protecting American Trade Secrets and Innovation Act of 2012 (PATSIA) into the United States Senate as Senate Bill 3389 (S. 3389).5  According to one of the bill’s sponsors, Herb Kohl (WI), the bill’s purpose is to “help American Companies protect their valuable trade secrets . . . when they are the victims of economic espionage …[and give them] efficient ways to combat trade secret theft and recoup their losses, helping them to maintain their global competitive edge.”6  PATSIA would allow domestic trade-secret claims to be brought under federal law, in federal courts.  While the bill does not expressly address conduct outside the US, the law’s main purpose appears to be protecting domestic companies from economic espionage conducted by foreign entities.7 

As of the date of this writing, PATSIA has not passed since it was referred to the House Judiciary Committee on June 20, 2013.  While the Obama Administration’s Strategy on Mitigating the Theft of U.S. Trade Secrets did not directly recommend the passage of PATSIA, it does promote improved domestic legislation and indicates that the Office of U.S. Intellectual Property Enforcement will initiate and coordinate a process to determine if legislative changes are needed to enhance enforcement against trade secret theft.8  This might include a recommendation in favor of a civil trade secrets law, which in this era of stretched government resources may lead to a real increase in the protection of trade secrets.

However, it is unclear whether PATSIA would confer significantly more protection than state Uniform Trade Secrets Act (UTSA) statutes. One perceived disadvantage of PATSIA is the "Definitions" section appears almost identical to UTSA. The two statutes define “misappropriation” in exactly the same way, both define “trade secrets” broadly, and they provide mostly the same remedies: injunctive relief, actual damages, damages due to unjust enrichment, exemplary damages in the event of a willful misappropriation, and attorney’s fees for claims brought or resisted in bad faith. 9

But PATSIA differs from UTSA in two important ways that would, in spite of these similarities, make it a valuable arrow in the quiver of any company hoping to redress a theft of its  trade secrets.  First, unlike UTSA, PATSIA would authorize federal courts, on ex parte application, to order the seizure for up to 72 hours of property related to misappropriated trade secrets, and would provide for an expedited hearing to determine the property’s disposition. 10 Second, PATSIA would provide protections against misappropriation by a foreign entity, which the federal government is better suited than the states to provide. 11 The statute would confer federal-court jurisdiction for claimants who allege a substantial need for nationwide service of process for foreign misappropriation.

III. Legislative Development Two: Amendment of the Espionage Act

Next, on December 28, 2012, President Obama signed Senate Bill 3642 (S. 3642), amending the Economic Espionage Act (EEA) of 1996 to cover trade secret violations for products or services used or "intended for use" in interstate commerce. 12  

The legislation was a response to the decision in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), which overturned a jury verdict finding the defendant violated 18 U.S.C. § 1832(a) by stealing a computer code from his employer. 13 That statute imposed fines and imprisonment for a defendant who intentionally steals a trade secret “that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof.” 14

In 2011, a jury trial resulted in the conviction of Sergey Aleynikov for stealing and transferring proprietary computer source code of his employer’s high frequency trading system in violation of the National Stolen Property Act, 18 U.S.C. § 2314 (the “NSPA”), and the Economic Espionage Act of 18 U.S.C. § 1832 (the “EEA”). 15   Shortly thereafter, Aleynikov filed a notice of appeal of his conviction to the Second Circuit. 

In February 2012, the Second Circuit reversed Aleynikov's conviction of trade secret theft. 16 The court refused to apply the EEA because the trade secret failed to satisfy the interstate or foreign commerce requirement. The court held that Aleynikov was wrongly charged with theft of property because computer code is intangible and cannot be categorized as a physical good under a federal theft statute. 17 The court explained that “because Aleynikov did not ‘assume physical control’ over anything when he took the source code, and because he did not thereby ‘deprive [Goldman] of its use,’ Aleynikov did not violate the NSPA.” 18   As a result, the Court of Appeal overturned Aleynikov’s conviction.    

In the wake of this shocking decision, Congress moved quickly and before the year’s end, and President Obama signed S. 3642.  This Bill revised the EEA by striking the underlined phrase above and inserting in its place “a product or service used in or intended for use in.” 19 Thus, the amended Section 1832(a) will apply to a trade secret “that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof.” 20

While the expansion of the EEA is a victory for victims of trade secret misappropriation, there are limitations to its application.  Under the EEA, civil remedies are limited to injunctive relief, preventing further disclosure of the trade secret.  The power to seek this injunctive relief is vested in the Attorney General, with the injunction working alongside a federal criminal prosecution. 21   Victims are left with no power to seek redress at the federal level and are thus limited to seeking remedies under the appropriate state law.  Federal civil remedies, however, have not matured beyond the proposition stage, rendering victims of trade secret theft with inadequate means by which they can recover their damages. 

On a bright note, S. 3642, expanding the EEA to criminalize theft of products and services “intended for use” in interstate commerce, in conjunction with the passage of PATSIA or the FAIR Act, creating a federalized trade secret protection right of action, may provide victims of trade secret misappropriation with greatly enhanced remedies, allowing them more avenues for successful and productive resolutions to such claims.

IV. Legislative Development Three: The Future of American Innovation and Research Act

Most noteworthy, the theft of trade secrets abroad is accelerating at a high rate. As a result of conducting international business, U.S. companies often share trade secret information with foreign entities or persons, including foreign employees, suppliers, and customers.  Unfortunately, foreign entities are currently not subject to the same trade secret statutes and regulations as U.S. entities.   
On November 22, 2013, Senator Jeff Flake (R-AZ) introduced S. 1770, the Future of American Innovation and Research Act of 2013 (FAIR Act). 22    “It’s no secret that innovation is one of the key drivers of economic growth in the U.S. today, and that the protection of intellectual property is critical to innovation. We cannot abide gaps in current law that allow foreign entities to misappropriate U.S. trade secrets,” said Senator Flake. 23
The FAIR Act seeks to create a federal civil cause of action for trade secret misappropriation against foreign actors.  Specifically, the Fair Act provides for federal civil liability against a person who misappropriates a trade secret (a) while located outside the U.S. or, (b) on behalf of, or for the benefit of, a person located outside the U.S.  The FAIR Act also provides that actions outside the U.S. can support a cause of action if that conduct “causes or is reasonably anticipated to cause an injury” within the U.S. or to a U.S. individual. 24   
This bill represents the most recent attempt to federalize trade secret protection.  Like PATSIA, the bill uses similar language to the UTSA’s definitions of "trade secret" and "misappropriation," and includes typical remedies for damages and injunctive relief.  However, while PATSIA also creates a federal cause of action for trade secret misappropriation, it does not necessarily reflect the realities of a global marketplace because PATSIA does not expressly address conduct outside the U.S.  In contrast, the FAIR Act explicitly provides for protection against international misconduct.  Furthermore, it enables courts to seize property involved in the theft of trade secrets. 25  

For the first time, victims of trade secret theft are experiencing momentum for pro-trade secret legislation at the federal level, addressing threats from home and abroad..   

V. Conclusion

Once a trade secret is misappropriated, its value is forever eliminated because it cannot be recovered.  American corporations lose millions each year by these acts of misappropriation.  While companies may take extreme measures to secure and keep their trade secrets confidential, companies can find themselves victims of trade secret misappropriation by bad actors, including overseas perpetrators.  Only time will tell if 2014 will see PATSIA and the FAIR act move forward in a form that allows for a meaningful federal private right of action for the protection of trade secrets.  And while significant protections exist to protect trade secrets at the state level, the national service of process and seizure remedies in either of these acts can help companies combat trade secret misappropriation better than they can under existing law.

1 Executive Office of the President of the United States, “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets,” February 2013, at 1.

2 Id.

3 Id.

4 Senate Bill 1770.

5 Senate Bill 3389.

6 Resolution Committee No. 410.

7 Id.

8 Executive Office of the President of the United States, “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets,” February 2013, at 11-12.

9 Senate Bill 3389.

10 Id. at §1836(a)(3).

11 Id. at §1836(a)(1)(B).

12 Senate Bill 3642.

13 United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012).

14 Id. at 73.

15 Id.

16 Id. at 82.  

17 Id. at 77-78.

18 Id. at 78-79.

19 Senate Bill 3642 § 2 Amendment.

20 18 U.S.C. § 1832.

21 Id.

22 Senate Bill 1770.

23 “Sen. Flake Introduces Bill to Help Protect U.S. Innovations from Theft” (November 22, 2013) http://www.flake.senate.gov/

24 Senate Bill 1770.

25 Id.


 


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What's Fair About Copyright Law?


Gary J. Gorham


By Gary J. Gorham

Gary J. Gorham is a partner at Richardson & Patel, LLP in Los Angeles.  He is a litigator, with an emphasis on business and intellectual property law.  He can be reached at GGorham@RichardsonPatel.com

 

Two unique copyrighted images are appropriated by third parties.  Each image is slightly transformed by the alleged infringer, who incorporates the original artwork into an altered work.  The transformed images are used in commerce.  The copyright owners sue in the same judicial district.  The defendants each raise a defense of fair use, based on transformative use.  One prevails on summary judgment, and the other loses on summary judgment and is ordered to pay hundreds of thousands of dollars in attorneys’ fees.  Copyright cases are unpredictable.

The deliberately amorphous and continually evolving concepts of “fair use” and “transformative use” in the context of copyright are notorious for leading to unexpected and perhaps results-driven decisions by courts.  This was highlighted recently by the opposite results in these two lawsuits, both in the Central District of California.  One case was against Green Day, and another against “appropriation artist” Thierry Guetta.

Green Day
Artist Derek Seltzer sued Green Day, its touring company and its set designer for copyright infringement and unfair competition over the use of his visual work “Scream Icon” as part of a video montage playing behind the band during the live performance of its song East Jesus Nowhere.

Seltzer created Scream Icon, a black-and-white drawing of a screaming face with fangs, in 2003 while he was in high school.  He displayed it in the form of stickers and posters, as street art in public places.1 Here is Seltzer’s work: 2

    

After being hired to design the video backdrop to Green Day’s 2009 tour, Roger Staub photographed a tattered, graffiti-covered Scream Icon poster on a wall at the corner of Sunset Boulevard and Gardner Avenue in Los Angeles.  He cropped the photo, changed the contrast and color, added a brick background, and superimposed a large, red spray-painted Latin cross over the image of the grimacing face.  The resulting image appeared, without license or attribution, as part of a four-minute video playing on a giant screen at seventy arena and stadium concerts while Green Day performed East Jesus Nowhere. 3

  This is what Green Day’s set looked like: 4



Seltzer sued for copyright infringement and other claims in the Central District of California.  Defendants asserted a defense of fair use, based on their new and transformative use of Scream Icon.

In support of a motion for summary judgment, Staub testified about his creative process, emphasizing that the “transformed” artwork appearing in the video had an entirely different purpose than the original Scream Icon, because the new work reflected the lyrics of East Jesus Nowhere, about the hypocrisy and violence of organized religion. 5  

That was different, he asserted, than Seltzer’s artistic objective, which was to address “themes of youth culture, skateboard culture, [and] insider/outsider culture.” 6
In August 2011, District Court Judge Philip S. Gutierrez granted summary judgment in favor of defendants on Seltzer’s claim for copyright infringement, ruling that the defendants’ incorporation of Seltzer’s work into the video display was “highly transformative” as a matter of law, and therefore was fair use:  “The different visual elements Staub added, including graffiti, a brick backdrop, and (especially) the large red cross over the image, considered in connection with the music and lyrics of East Jesus Nowhere, ‘add[] something new, with a further purpose or different character” than Plaintiffs’ original work.’”7

Judge Gutierrez later granted defendants’ motion for attorneys’ fees, ruling that “while Seltzer’s claims were not frivolous, neither were they objectively reasonable,” particularly since the allegedly infringing work was “highly transformative.” 8   He ordered Seltzer to pay over $190,000 in legal fees.9

Guetta

At around the same time, a similar case was playing out in a different courtroom in the same building.  The plaintiff, Dennis Morris, took a photograph of the Sex Pistols bassist Sid Vicious. The original black and white photograph shows Vicious in a distinctive pose, tilting his head and winking. The photograph gained some notoriety.  It was published on the Internet and was included in a book published by Morris about the Sex Pistols.10 This is Morris’s photograph: 11



Thierry Guetta is in the business of "appropriation art," which includes altering and selling modified pictures of celebrities. Guetta admitted that he created seven artworks, all featuring Sid Vicious tilting his head and winking.  Some, but not all of Guetta's Sid Vicious works have a higher black and white contrast than Morris’s photograph, with the images less sharply defined.  Some of Guetta’s works also added elements such as splashes of brightly colored paint. One work added sunglasses to Vicious and was printed on a backdrop with the Peanuts’ character, Snoopy, and palm trees.  Another work was a mural.  Yet another was made from broken vinyl records.  Two works add a mole on the image of Sid Vicious’s face and an overlay of blonde hair in a different style. Some, but not all of Guetta's seven works were sold. 12   Here is one of Guetta’s pieces: 13

    

Morris sued for copyright infringement in the Central District of California, and Guetta asserted fair use based on his transformative use of Morris’ photo. In briefing for summary judgment, Guetta declared that his works were transformative, were created as a commentary on Sid Vicious’ persona and the nature of celebrity, and that he "created the mural (with color) in particular because it was larger than life, like Sid Vicious, and I wanted to give him the respect it seemed like he did not get in life." 14

In February 2013, Judge John A. Kronstadt granted Morris’s motion for summary judgment, rejecting Guetta’s fair use defense because, although Guetta’s works were transformative, they were not sufficiently so.  Judge Kronstadt particularly noted that he found Guetta’s explanation of his artistic purpose “unconvincing” and merely a “post-hoc rationalization of the justification for copying.”15   The Court declined to credit Guetta’s testimony, emphasizing that he “need not accept a defendant's explanation for use of and extent of copying of a plaintiff's work and can make an independent assessment of its persuasiveness.” 16

The Green Day and Guetta cases neatly demonstrate the subjectivity of the fair use analysis, with judges assessing artistic purpose in addition to the parties’ credibility.

Fair Use
Section 106 of the Copyright Act grants copyright holders a bundle of exclusive rights, including the right to “reproduce the copyrighted work in copies,” and the right “to prepare derivative works based upon the copyrighted work.” 17

The fair use doctrine is a statutory exception and a complete defense to copyright infringement. Section 107 of the Copyright Act permits the unauthorized use or reproduction of copyrighted work if it is “for purposes such as criticism, comment, news reporting, teaching . . ., scholarship, or research.” 18

There is no question that courts have wide latitude to resolve a defense of fair use.  Congress deliberately created a vague definition of fair use, recognizing that “the endless variety of situations and combinations of circumstances that can arise in particular cases precludes the formulation of exact rules in the statute.” 19

Instead of a bright line standard, the Copyright Act describes a rule-of-reason analysis, under which courts should “include” as part of their examination the following four factors:   (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. 20

Using these factors as guideposts, “each case . . . must be decided on its own facts”21 “in light of purposes of copyright.” 22

The fair use doctrine “‘permits [and requires] courts to avoid rigid application of the copyright statute when, on occasion, it would stifle the very creativity which that law is designed to foster.’” 23  This reflects the “inherent tension in the need simultaneously to protect copyrighted material and to allow others to build upon it...” and is “necessary to fulfill copyright’s very purpose, ‘[t]o promote the Progress of Science and useful Arts...’” 24

Fair use is a mixed question of law and fact. 25 However, such issues are rarely resolved by a jury because courts almost always resolve fair use issues at the summary judgment stage where there are no genuine issues of material fact. 26   "Because fair use is an affirmative defense, defendants bear the burden of proof on all of its factors." 27

Transformative Use
In 1994 the Supreme Court decided Campbell v. Acuff-Rose Music, Inc., ruling that 2 Live Crew’s mocking, comedic parody of the Roy Orbison hit Pretty Woman was fair use.  In his landmark opinion, Justice Souter emphasized the first factor enumerated by Congress – the “purpose and character of use” – that has come to dominate the fair use analysis. The Court proclaimed that “[a]lthough [a finding of] transformative use is not absolutely necessary for a finding of fair use, the goal of copyright, to promote science and the arts, is generally furthered by the creation of transformative works. 

Such works thus lie at the heart of the fair use doctrine’s guarantee of breathing space within the confines of copyright and the more transformative the new work, the less will be the significance of other factors, like commercialism, that may weigh against a finding of fair use.” 28  

The central purpose of this in vestigation is to see, in Justice Souter's words, whether the new work merely "supersede[s] the objects" of the original creation . . . or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning, or message; it asks, in other words, whether and to what extent the new work is "transformative." 29

So what is a transformative use?  "A use is considered transformative only where a defendant changes a plaintiff's copyrighted work or uses the plaintiff's copyrighted work in a different context such that the plaintiff's work is transformed into a new creation." 30 "Although 'transformative use is not absolutely necessary for a finding of fair use,' where the 'use is for the same intrinsic purpose as [the copyright holder's] . . . such use seriously weakens a claimed fair use.'" 31"As Justice Souter put it: 'There must be real, substantial condensation of the materials, and intellectual labor and judgment bestowed thereon; and not merely the facile use of the scissors; or extracts of the essential parts, constituting the chief value of the original work.'" 32   However, "[i]t would be a dangerous undertaking for persons trained only to the law to constitute themselves final judges of the worth of [a work], outside of the narrowest and most obvious limits." 33
But that “dangerous undertaking” is exactly what the Courts must undertake to resolve the issues framed by Campbell.  Courts compare the purpose of the original author against that of the alleged infringer, to see whether and to what extent the use of the copyrighted work is “transformative.”

This factor often sways the determination of fair use, because “[t]he more transformative the new work, the less important the other factors, including commercialism, become.” 34   If a work is transformative, for example, it should not impact the market for the original work. 

A defense of transformative use shifts the paradigm away from “what was copied” and toward “why was it copied”?  Because artistic purpose is subjective and an author’s testimony about creative expression often is not easily refuted, resolution of many copyright cases depends on the self-serving testimony of artists and the clever explanations of their lawyers.  If the testimony is detailed, sensible and credible, a defendant has a good chance of prevailing on a fair use defense.  Where the testimony is viewed as “pure shtick” and a “post-hoc characterization of the work,” the defense is not going to work. 35

Not surprisingly, this can lead to unpredictable, seemingly contradictory (see Green Day and Guetta) and often counterintuitive results.

Direct Copying Can Be Transformative

In several cases, courts have found transformative use, even where no alterations or additions are made to the original work.  For example, in Caulkins v. Playboy, the district court found transformative use when Playboy magazine precisely reproduced a high school year book photo of a model appearing in the centerfold. 

The district court ruled that the original photographer’s purpose was to create a gift for family and friends, while Playboy’s expressive purpose was to “inform and entertain.” 36  The Caulkins court easily could have found that that both uses were designed to inform and entertain. 

Similarly, in Perfect 10, Inc. v. Amazon, Inc., the Ninth Circuit found transformative use where Google Image Search reproduced thumbnail images of infringing, third party copies of plaintiff’s original works.  The court reasoned that even exact replicas of the original expression is fair use, if they serve a different purpose or function.  Whereas the purpose of the original images was “art and entertainment,” the purpose of the thumbnail images was to act as a pointer to another source of information. 37  

Virtual reproduction in a commercial context also was condoned in a case involving the direct reproduction of several Grateful Dead posters and concert tickets.  Defendants published reduced-size images of these items in a biography of the Grateful Dead, and incorporated the pictures in a timeline of events. 38  The Second Circuit found the use of the posters to be "transformatively different." 39 While the original purpose of the posters was to advertise "the band's forthcoming concerts," the transformative purpose of the posters in the biography was "to document and represent the actual occurrence of [the] concert events featured on [the biography's] timeline." 40

Transformed Works Can Infringe

Conversely, as in Guetta, some courts have found no fair use even where the original work is transformed. 

For instance, the Second Circuit upheld a finding of copyright infringement for a Seinfeld trivia book, ruling that any transformative purpose possessed in the derivative work was “slight to non-existent.” 41   The book, titled SAT: The Seinfeld Aptitude Test, contained trivia questions and answers about the plots and characters of Seinfeld.  Some of the questions contained dialogue lifted directly from the show.

The defendants argued that the trivia book was transformative, because its purpose was not reproducing the program, but “decoding the obsession with and mystique that surrounds Seinfeld by critically restructuring Seinfeld’s mystique into a system complete with varying levels of ‘mastery’ that relate the reader's control of the show's trivia to knowledge of and identification with their hero, Jerry Seinfeld.” 42  District Court Judge Sonia Sotomayor granted summary judgment for the plaintiff, dismissing the defense’s perhaps overly clever explanation of purpose, and concluding that the purpose of the trivia book was to use Seinfeld to entertain Seinfeld fans.

Practical Lessons

Congress invited a degree of uncertainty in its definition of fair use, and courts have accepted the invitation.  There is a strong correlation between findings of transformative use and findings of fair use.  This may demonstrate the primacy of the “transformative purpose or use” factor in the fair use analysis.  Or it may be that the courts simply declare a use transformative where the court believes the use should be declared fair because the overall equities lie in favor of the defense.  What is certain is that the outcome of any particular case is largely uncertain, and that the courts’ evaluation of the witnesses and their artistic purpose largely dictates the result.

1  Seltzer v. Green Day, Inc., 2011 U.S. Dist. LEXIS 92393 (C.D. Cal. Aug. 18, 2011) at * 1.

3  Id. at *3-4.

4  From http://www.google.com/url?sa=i&rct=j&q=&esrc
=s&source=images&cd=&cad=rja&
docid=pzEgAiTEnZw_aM&tbnid=SZyvPH9UCViRrM:&ved=
0CAUQjRw&url=http%3A%2F%2Fmnnqn.tumblr.com%2F&ei=
rfkUU9rgCYbcoAT2koHICQ&bvm=bv.62286460,d.cGU&psig=
AFQjCNFj0AEVAz0QXBiZjTJefwOEbhO2yg&ust=
1393969964123796

5  Id.

6  Id. at *12.

7  Id. at *11.

8 Seltzer v. Green Day, Inc., 2011 U.S. Dist. LEXIS 134388 (C.D. Cal. Nov. 17, 2011) at *23.

Id. at *16-17.  On appeal, the Ninth Circuit affirmed the order of summary judgment, but reversed and vacated the award of attorneys’ fees on the ground that Seltzer’s claims were not objectively unreasonable.  Seltzer v. Green Day, et al., 725 F.3d 1170, 1179, 1180-81 (2013).

10  Morris v. Guetta, 2013 U.S. Dist. LEXIS 15556 (C.D. Cal. Feb. 4, 2013) at *2-3.

12  Id. at *3-4.

14  Id. at *29-30.

15 Id. at *27-30. 

16  Id. at *29.  Judge Kronstadt also rejected Guetta’s declaration on evidentiary grounds.

17 17 U.S.C. §106.

18 17 U.S.C. §107.

19  H. Rep. No. 94-1476 at 65-66 (1976), quoted in Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 448 n.31 (1984).

20  17 U.S.C. §107.

21  Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 588 (1985), quoting H. Rep. No. 94-1476 at 65 (§107 leaves the courts
“free to adapt the doctrine to particular situations on a case-by-case basis”).

22  Perfect 10 v. Amazon, 508 F.3d 1146, 1168 (9th Cir. 2007), quoting Campbell, 510 U.S. at 578.

23  Sony Computer Entm’t Am., Inc. v. Bleems, LLC, 214 F.3d 1022, 1026 (9th Cir. 2000) (quoting Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577 (1994).

24  Campbell, 510 U.S. at 575, quoting U.S. Const., Art. I, §8, cl. 8; See also Mattel, Inc. v. Walking Mountain Prods., 353 F.3d 792, 799 (9th Cir. 2003)
(“the Act limits the rights of a copyright owner regarding works that build upon, reinterpret, and reconceive original works”).

25  Harper & Row, 471 U.S. at 560.

26  See, e.g., Castle Rock Entertainment, Inc. v. Carol Publishing Group, Inc., 150 F.3d 132, 136 (2d Cir. 1998);
Hustler Magazine, Inc. v. Moral Majority, Inc.
, 796 F.2d 1148, 1150-51 (9th Cir. 1986); See also Mattel, 353 F.3d at 800
("Where material facts are not in dispute, fair use is appropriately decided on summary judgment.")
 

27 Columbia Pictures Indus., Inc. v. Miramax Films Corp., 11 F. Supp. 2d 1179, 1187 (C.D. Cal. 1998) (citing Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., 109 F.3d 1394, 1403 (9th Cir. 1997)).

28  Campbell, 510 U.S. at 579.

29  Id.

30  Wall Data Inc. v. Los Angeles County Sheriff's Dept., 447 F.3d 769, 778 (9th Cir. 2006).

31 Worldwide Church of God v. Philadelphia Church of God, Inc., 227 F.3d 1110, 1117 (9th Cir. 2000) (quoting Campbell, 510 U.S. at 579).

32 Id.

33 Campbell, 510 U.S. at 582 (alterations in original).

34 Kelly v. Arriba Soft Corp., 336 F.3d 811, 818 (9th Cir. 2003).

35 Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., 109 F.3d 1394, 1403 (9th Cir. 1997) ("We completely agree with the district court that Penguin and Dove's fair use defense is 'pure shtick' and that their post-hoc characterization of the work is 'completely unconvincing.'").

36 Caulkins v. Playboy Enters. Int’l, Inc., 561 F. Supp. 2d 1136, 1141 (E.D. Cal. 2009).

37 Perfect 10, 508 F.3d at 1168.

38 Bill Graham Archives v. Dorling Kindersley Ltd., 448 F.3d 605 (2d Cir. 2006).

39 Id. at 609.

40Id.

41 Castle Rock Entertainment Inc., 150 F.3d at 136.

42 Id. at 142.

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Interference With Contract Claims Concerning Copyrightable Subject Matter Are Likely Preempted In The Ninth Circuit


Lee Brenner

Hajir Ardebili

Eric May

 

By Lee Brenner, Hajir Ardebili, and Eric May

Lee Brenner, Hajir Ardebili and Eric May are intellectual property and business litigators in the Los Angeles office of Kelley Drye & Warren LLP.  They can be reached at lbrenner@kelleydrye.com, hardebili@kelleydrye.com and emay@kelleydrye.com.

I.          Introduction
In lawsuits involving claims for interference with contract that are substantively equivalent to copyright infringement claims (i.e., alleging unauthorized reproduction, distribution, performance or display of a work), there is a nationwide trend holding such claims to be preempted by the Copyright Act. 

Notwithstanding the clear trend in favor of preemption, at first blush there appears to be a dearth of authority at the appellate level in the Ninth Circuit squarely addressing the question of whether claims for intentional interference with contract are preempted by the Copyright Act.  The Ninth Circuit has decided against preemption in a few limited cases, in which the contractual rights at issue were not equivalent to those protected by copyright – i.e., where the plaintiff did not allege the violation of any right granted under copyright.  Nevertheless, upon closer inspection of reported Ninth Circuit case law, it is likely that the Ninth Circuit will find that the Copyright Act preempts claims for interference with contract in those instances where the plaintiff asserts that he or she was contractually entitled to benefits from the exploitation of his or her protected work, yet lost those benefits as a result of the defendant’s unauthorized exploitation of the work.  Put differently, claims for interference with contract will likely be found to be preempted in the Ninth Circuit – so long as the subject matter at issue is copyrightable, and the “wrong” alleged is equivalent to violations that the Copyright Act is designed to remedy. 

II.        Copyright Preemption: General Principles
The Copyright Act extends copyright protection to original works of authorship fixed in any tangible medium of expression.1  The Copyright Act gives the owners of a copyright the exclusive right to reproduce, distribute, and prepare derivative works of the copyrighted material, among other things.2  

With respect to the Copyright Act, Congress intended to create a broad statutory preemption scheme in order to create national uniformity regarding authors’ rights. 3  Accordingly, Congress enacted Section 301 of the Copyright Act, which expressly provides for statutory preemption of any rights under state or common law equivalent to and within the scope of federal copyright law.4  

Under Section 301, claims involving rights, remedies, and conduct not qualitatively different from copyright claims, or “merely copyright by another name,” are preempted. 5   In determining whether Section 301 preempts a state law claim, courts decide whether (1) the work falls under the subject matter of copyright and (2) the right or remedy asserted is equivalent to a right protected or remedy set forth in the Copyright Act. 6  

III.       Other Jurisdictions Generally Have Found Claims for Interference With Contract To Be Preempted
A plaintiff must plead five elements to state a claim for intentional interference with contract:  (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of that contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage. 7  

Although the elements of an interference claim facially differ from those of copyright infringement, e.g., requiring the plaintiff to establish the defendant’s knowledge and intentional conduct, many courts have found that those additional elements do not “establish qualitatively different conduct on the part of the infringing party, nor a fundamental non-equivalence between the state and federal rights implicated.” 8  

Leading copyright commentators have noted that the majority of claims for intentional interference with contract are preempted by the Copyright Act, where the subject matter of the contract is copyrighted material.  Nimmer states that preemption of a claim for intentional interference with contract is appropriate when unauthorized reproduction, distribution, performance, or display causes the plaintiff to lose benefits that would flow from a contract. 9   Patry similarly states that the “vast majority of tortious interference claims are nothing more than copyright infringement claims in state clothes and thus are preempted.” 10  

The majority of courts that have addressed whether claims for intentional interference with contract are preempted by the Copyright Act have concluded that such claims are preempted to the extent that the interference claim stems from actions equivalent in substance to a copyright infringement claim. 11  By way of example, in Harper & Row Publishers, Inc. v. Nation Enters., 723 F.2d 195 (2d Cir. 1983), rev’d on other grounds, 471 U.S. 539 (1985), plaintiffs owned the exclusive rights to publish President Ford’s memoirs, but defendants published excerpts and a summary of the memoirs based on a draft copy that they received.  Plaintiffs’ allegation that defendants “destroy[ed] the exclusive right of an author and his licensed publishers to exercise and enjoy the benefit of the pre-book publication serialization rights” was held to be akin to the exclusive right to prepare derivative works under the Copyright Act. 12   The court reasoned that “in both [copyright infringement and interference claims], it is the act of unauthorized publication which causes the violation.  The enjoyment of benefits from derivative use is so intimately bound up with the right itself that it could not possibly be deemed a separate element.”13  

Numerous district courts, using similar reasoning, have found that intentional interference claims are preempted.14  

 

IV.       Courts In The Ninth Circuit Have Begun To Step In Line With Other Jurisdictions In Finding Preemption Of Interference With Contract Claims
The Ninth Circuit’s Prior Rulings Focus On The Nature Of The Contractual Right At Issue
The Ninth Circuit Court of Appeals has addressed whether a claim for interference with contract is preempted by the Copyright Act on only a few occasions, each time holding that it is not preempted.  In each of those prior rulings, however, the Ninth Circuit found that the plaintiff sought to enforce contractual rights that were not within the scope of the Copyright Act.  For example, in MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 957 (9th Cir. 2011), the court found that the contractual provisions at issue (which prohibited players of a computer game play from using “bots” to automate game play) did not seek to enforce rights equivalent to the exclusive rights of copyright, and thus the plaintiff’s claim for tortious interference was not preempted. 15   The appellate court applied the same reasoning in another case where the contractual right at issue was
the scope of permitted use of software under the product license agreement. 16  

The foregoing holdings are consistent with those of at least one California district court, which has also made clear that intentional interference claims seeking enforcement of contractual rights that are not within the rights protected by the Copyright Act are not preempted. 17   However, the Ninth Circuit Court of Appeals has noted that preemption of interference with contract claims is “surely” possible. 18  

A Qualitative Difference Is Required To Avoid Preemption
A recent case from the United States District Court for the Central District of California closely examined the preemption issue and signaled a focus on a qualitative analysis of the wrong alleged by the plaintiff, rather than a simple process of counting and comparing the elements required to establish a claim.  In Wilder v. CBS Corp., No. 2:12-cv-8961, plaintiff Angela Wilder brought suit against CBS, Sony, and other defendants, alleging numerous state law causes of action (including tortious interference with contract, among others).19   Wilder’s complaint alleged that the defendants misappropriated Wilder’s treatment of “The Mothers’ Hood” by creating “The Talk,” a show dedicated to motherhood and issues faced by mothers in their everyday lives. 20  The defendants moved to dismiss Wilder’s cause of action for interference with contract on the grounds that it was preempted by the Copyright Act. 21  

On February 13, 2013, the district court granted the defendants’ motion. 22   The court’s ruling was based on its determination that claims of intentional interference with contract and intentional interference with prospective economic advantage are preempted by the Copyright Act when they are “based on an allegation that a defendant used a plaintiff’s idea without her authorization.” 23   The court then reasoned that Wilder’s intentional interference claim amounted to nothing more than a claim that the defendants had encroached upon her exclusive right to profit from sale or reproduction of her treatment, and therefore – like similar claims for interference with prospective economic advantage in Wild v. NBC Universal, Inc., 788 F. Supp. 2d 1083, (C.D. Cal. 2011) and Idema v. Dreamworks, Inc.,162 F. Supp. 2d 1129 (C.D. Cal. 2001) – her claim was not qualitatively different from the rights guaranteed by the Copyright Act. 
The district court expressly rejected Wilder’s argument that a tortious interference claim is not automatically preempted by the Copyright Act because it involves “contractual rights.” 24  The court drew a distinction between seeking to enforce a contract that restricts the use of a work, which is arguably not preempted, as opposed to the reproduction of a work, which is preempted. 25 

Similarly, the court also rejected Wilder’s argument that a tortious interference claim is not automatically preempted because it contains “extra elements” that are not part of a copyright claim. 26   The court reasoned that the additional elements of a tortious interference claim “merely mean[] that the state-created right is narrower than its copyright counterpart, not that it is qualitatively different so as to preclude preemption.” 27  

V.        Conclusion
The mere fact that a claim for interference with contract includes elements not necessarily at issue under copyright law – e.g., the existence of a contract and intentional conduct – does not mean that a the claim will avoid preemption.  To the contrary, the presence of additional prerequisites to maintain a claim “merely means that the state-created right is narrower than its copyright counterpart, not that it is qualitatively different so as to preclude preemption.” 28  

Likewise, as set forth above, the reported cases in the Ninth Circuit reveal that where the alleged violation concerns reproduction or one of the other exclusive rights granted under copyright, then the interference with contract claim is likely to be preempted.

1 17 U.S.C. § 102. 

2 17 U.S.C. § 106. 

3 H. R. Rep. No. 94-1476, at 129 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5746; Peckarsky v. Am. Broad. Co., 603 F. Supp. 688, 695 (D. D.C. 1984); see also Daboub v. Gibbons, 42 F.3d 285, 288 (5th Cir. 1995). 

4 17 U.S.C. § 301.

5 Omnibus Copyright Revision Legislative History, 89th Cong., 1st Sess., Supplementary Report of the Register of Copyrights on the General Revision of the U.S. Copyright Law: 1965 Revision Bill, at p. 85 (1975). 

6 17 U.S.C. § 301 (a), (b); Downing v. Abercrombie & Fitch, 265 F.3d 994, 1003 (9th Cir. 2001).

7 See Quelimane Co. v. Stewart Title Guar. Co., 19 Cal. 4th 26, 55 (1998). 

8 Harper & Row Publishers, Inc. v. Nation Enters., 723 F.2d 195, 201 (2d Cir. 1983), rev’d on other grounds, 471 U.S. 539 (1985); see also Huckshold v. HSSL, L.L.C., 344 F. Supp. 2d 1203, 1209 (E.D. Mo. 2004); Titan Sports, Inc. v. Turner Broad. Sys. Inc., 981 F. Supp. 65, 73 (D. Conn. 1997); Gemcraft Homes, Inc. v. Sumurdy, 688 F. Supp. 289, 295 (E.D. Tex. 1988).

9 1 Melville B, Nimmer & David Nimmer, Nimmer on Copyright § 1.01[B][1][1][ii] (Matthew Bender, Rev. Ed.) (“Nimmer”). 

10 5 William F. Patry, Patry on Copyright § 18:30 (2010).

11 See, e.g., Tingley Sys., Inc. v. CSC Consulting, Inc., 152 F. Supp. 2d 95, 110-111 (D. Mass. 2001) (collecting cases). 

12 Harper, 723 F.2d at 201. 

13 Id. 

14 See, e.g.,  Tegg Corp. v. Beckstrom Elec. Co., 650 F. Supp. 2d 413, 430-31 (W.D. Pa. 2008) (interference with contract claim stemming from allegations that defendant induced franchisees to deliver copies of plaintiff’s copyrighted software databases so defendants could produce, market and sell the software was preempted because it was akin to the right to distribute, reproduce, and produce derivative works based on copyrighted material); Fharmacy Records v. Simmons, No 05-72126, 2006 U.S. Dist. LEXIS 2789, at *16-17 (E.D. Jan. 20, Mich. 2006) (in a dispute regarding alleged unauthorized use and reproduction by defendants of musical composition, plaintiffs’ intentional interference claim failed to plead facts beyond his exclusive right to use and reproduce a musical composition); Logicom Inclusive, Inc. v. W.P. Stewart & Co., 04 Civ. 0604, 2004 U.S. Dist. LEXIS 15668, at *55 (S.D. N.Y. Aug. 10, 2004) (claim based on allegations that defendants induced the independent contractor to disclose plaintiff’s proprietary information in breach of their agreement was preempted because it merely sought to protect exclusive rights to make derivative use of plaintiff’s programs); Higher Gear Group, Inc. v. Rockenbach Chevrolet Sales, Inc., 223 F. Supp. 2d 953, 956, 959 (N.D. Ill. 2002) (interference with contractual relations claim preempted because defendant’s violation of agreement to use plaintiff’s software “only for internal business operations” was not qualitatively different from restricting defendants’ use by prohibiting copying or creating derivative works of the software); Am. Movie Classics Co. v. Turner Entm’t Co., 922 F. Supp. 926, 932 (S.D. N.Y. 1996) (tortious interference claim stemming from exhibition of movies to which plaintiff had the exclusive exhibition rights were found to be equivalent to plaintiff’s exclusive right of public performance under the Copyright Act); Aqua Bay Concepts, Inc. v. Grosse Point Bd. Of Realtors, No 91-CV-74819, 1992 U.S. Dist. LEXIS 16038, at *12-14 (E.D. Mich. May 7, 1992) (claim that defendants intentionally used, copied, and/or sold editions of a city map were preempted because it failed to state extra element other than the underlying claim for infringement); Gemcraft Homes, Inc. v. Sumurdy, 688 F. Supp. 289, 295 (E.D. Tex. 1988) (“[T]o the extent plaintiff’s claims for tortious interference with contract complain that plaintiff has lost benefits flowing from its exclusive rights to the architectural plans, the cause of action would be preempted.  In this type of claim for tortious interference with contract . . . it is the act of unauthorized copying which causes the violation.”); Pac. & S., Inc. v. Satellite Broad. Networks, Inc., 694 F. Supp. 1565, 1572 (N.D. Ga. 1988), rev’d on other grounds, 940 F.2d 1467 (11th Cir. 1991) (tortious interference claim stemming from defendant’s retransmission of television signals was preempted because it was bound up with the right to prepare derivative works under the Copyright Act); Kamakazi Music Corp. v. Robbins Music Corp., 522 F. Supp. 125 (S.D. N.Y. 1981) (tortious interference with contract claim preempted because it was based on same allegations as plaintiff’s copyright infringement claim).

15 MDY Indus., LLC v. Blizzard Entm’t, Inc., 629 F.3d 928, 957 (9th Cir. 2011).

16 Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079, 1089-90 (9th Cir. 2005).

17 See Craigslist, Inc. v. Autoposterpro, Inc., No. 08 05069, 2009 U.S. Dist. LEXIS 31587, at *5-6 (N.D. Cal. Mar. 31, 2009) (no preemption of claim alleging breach of terms of use agreement which imposes extra obligations beyond those imposed by the Copyright Act). 

18 See G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 904 (9th Cir. 1992) (noting that a plaintiff’s complaint about an improper use of a document was not preempted by the Copyright Act, but that were he claiming “an exclusive right to copy the [documents], his claim would surely be preempted by the Copyright Act.”).

19 Civil Minutes – General at 1, Wilder v. CBS Corp., No. 2:12-cv-8961 (C.D. Cal. Feb. 13, 2013). 

20 Id. at 2-3. 

21 Id. at 7.

22 Id. at 2.

23 Id. at 10 (citing Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137 1151 (9th Cir. 2008); Wild v. NBC Universal, Inc., 788 F. Supp. 2d 1083, 1110-11 (C.D. Cal. 2011); Idema v. Dreamworks, Inc., 162 F. Supp. 2d 1129, 1193 (C.D. Cal. 2001); Stromback v. New Line Cinema, 384 F.3d 283 306 (6th Cir. 2004); Harper & Row Publishers, Inc. v. Nation Enters., 723 F.2d 195, 201 (2d Cir. 1983), rev’d on other grounds, 471 U.S. 539 (1985). 

24 Id. at 10-11. 

25 Id. at 11. 

26 Id. at 12. 

27 Id. (citing 1 Nimmer § 1.01[B][1][a][ii]).

28 1 Nimmer § 1.01[B][1][a][ii]; see also Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1164-65 (1st Cir. 1994) abrogated on other grounds by Reed Elsevier Inc. v. Muchnick, 559 U.S. 154 (2010) (noting that “a state claim of tortious interference with contractual relations … is equivalent in substance to a copyright infringement claim where the additional elements merely concern the extent to which authors and their licensees can prohibit unauthorized copying by third parties.”); Harper & Row, 723 F.2d at 201 (“[T]he fact that cross-appellants pleaded additional elements of awareness and intentional interference, not part of a copyright infringement claim, goes merely to the scope of the right; it does not establish a qualitatively different conduct on the part of the infringing party, nor a fundamental nonequivalence between the state and federal rights implicated.”); Tingley Sys., Inc. v. CSC Consulting, Inc., 152 F. Supp. 2d 95, 111 (D. Mass 2001) (holding that a claim of intentional interference with contract was preempted and noting that the elements of awareness and intentional interference did not establish a “fundamentally or qualitatively different element.”).





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In re Petition of Pandora Media, Inc. and the Future of Musical Works Collective Licensing


Kyle Funn

By Kyle Funn

Kyle Funn is an associate with Cypress, LLP, practicing primarily in the areas of corporate and intellectual property transactions.

I. Introduction

The U.S. District Court for the Southern District of New York (the “Rate Court”) recently issued an eagerly anticipated decision in the proceeding to set rates for the public performance of ASCAP members’ repertoire by Pandora Media, Inc. (“Pandora”) and similar services. 1 At a time of already growing concern for the state of musical works collective licensing, this decision comes just months after the Rate Court handed down a ruling prohibiting ASCAP from withholding its members’ digital rights from ASCAP licensing. 2 In light of this ruling and the more recent decision on the rates, ASCAP could be facing a critical point in its existence that could have an unprecedented impact on the state of the music publishing industry and collective licensing as a whole.

II. Background

A. ASCAP Consent Decree

ASCAP is a performing rights society that, among other things, facilitates non-exclusive licenses for the public performance of its songwriter, composer, and music publisher members’ musical works.

In 1941, in light of Department of Justice (“DOJ”) concerns with potential anti-competitive practices as a result of ASCAP’s collective licensing scheme, ASCAP and the DOJ entered into a consent decree (the “Consent Decree”), 3 which among other things, limits ASCAP’s ability to freely grant licenses on its members’ behalf. 4 More specifically, the Consent Decree requires ASCAP to grant compulsory licenses and vests the Rate Court with jurisdiction to set reasonable rates for the public performance of ASCAP members’ works, in the absence of a voluntary agreement reached between ASCAP and the applicant. 5

B. ASCAP-Pandora Voluntary Agreement

Pandora, one of the most popular Internet and mobile digital audio music services, 6 initially entered into a voluntary license agreement with ASCAP on June 11, 2005. 7 Pursuant to this agreement, Pandora was required to pay a public performance royalty equal to the greater of 1.85% of its revenue or $0.0006 per “session.” 8

However, believing that the rates were no longer reasonable, Pandora terminated the voluntary license with ASCAP in 2010 and applied for a license pursuant to the Consent Decree. 9 Thereafter, Pandora invoked its right under the Consent Decree to initiate a proceeding to have the Rate Court set the public performance royalty rate for Pandora and other similarly situated services for the 2011 – 2015 license period. 10

C. ASCAP Member Withdrawals

After Pandora filed its petition to set the performance rate under the Consent Decree, and pursuant to a change in ASCAP’s membership rules, 11 many of ASCAP’s largest music publishing company members began announcing their intent to withdraw from ASCAP their right to license performances in certain “new media,” including those made by Pandora. 12 Upon learning of these withdrawals and purportedly in an effort to avoid potential copyright infringement liability, Pandora began engaging the withdrawing music publishers, seeking direct licenses for performances of those publishers’ works on the Pandora service. 13

Ultimately, Pandora reached an agreement to license first, the EMI catalog at a rate of 1.85% of revenue, then the Sony catalog at a rate of 5% of revenue, and finally the Universal Music Publishing (“UMPG”) catalog at a rate of 7.5% of revenue. 14

III. The Pandora/ASCAP Rate Court Proceeding

A. Proposed Benchmarks

Pursuant to the Consent Decree, the Rate Court determines a reasonable fee for the use of ASCAP repertoire by Pandora and other similarly situated services. 15 In determining reasonableness, the Rate Court generally looks to what a willing buyer and willing seller would agree to in a competitive market. 16 However, in part because of ASCAP’s collective compulsory licensing scheme, there arguably is no competitive market for the use of ASCAP repertoire. 17 As a result, the Rate Court generally relies on other marketplace “benchmarks” to set a fair market value for the repertoire. 18  

In the litigation, Pandora sought to establish as a benchmark, the rate that terrestrial radio stations pay ASCAP pursuant to a settlement agreement reached between ASCAP and the Radio Music Licensing Committee (“RMLC”) for the 2010 – 2016 license period. 19 Pursuant to this agreement, terrestrial radio pays a blanket rate of 1.7% of gross revenue for both its terrestrial broadcasts and digital performances via the Internet and mobile devices ("webcasting"). 20

In support of its benchmark, Pandora pointed to Clear Channel’s iHeartRadio service – a service paying under the ASCAP-RMLC agreement – as a service comparable to Pandora’s offering. 21 Additionally, Pandora argued that terrestrial radio and its non-interactive webcasting component directly competes with Pandora for listeners and advertising revenue, and any refusal to accept the ASCAP-RMLC agreement as a benchmark would constitute impermissible discrimination among licensees under the Consent Decree. 22

ASCAP appeared 23 to refute Pandora’s argument by seeking to distinguish Pandora’s service from terrestrial radio. 24 In fact, ASCAP argued in separate briefing that, while Pandora may offer a similar listener experience to Clear Channel’s iHeartRadio service, terrestrial radio’s webcasting component as a whole is merely ancillary to the terrestrial broadcasts in terms of music use, revenue generated, and overall business model.25 Moreover, ASCAP contended that terrestrial radio includes non-music programming, while Pandora generates nearly all of its revenue from its music-only service and has no other content costs. 26

Instead, ASCAP proposed as its primary benchmarks, the agreements reached between Pandora and those large music publishers that withdrew their new media rights from ASCAP membership. 27 In doing so, ASCAP sought a rate that started at 1.85% of revenue for 2011-2012, and increased to 2.5% for 2013, and 3% for 2014-2015. ASCAP argued that the music publisher agreements constituted a more appropriate benchmark because the agreements were between comparably situated parties and, unlike the ASCAP-RMLC agreement, were not settlements of a rate court proceeding. 28

B. Summary Judgment Order Regarding Withdrawal of New Media Rights

After the large music publishers attempted their withdrawal of new media rights from ASCAP membership, Pandora filed a summary judgment motion in the Rate Court seeking a determination that the withdrawals would not limit the scope of the ASCAP repertoire subject to the rate decided by the Rate Court. 29  

In its ruling on the motion, the Rate Court held that the ASCAP members’ withdrawal of such new media licensing rights from ASCAP membership was impermissible under the Consent Decree. 30 In doing so, the Rate Court held that the plain meaning of the Consent Decree’s terms requires ASCAP to grant licenses for “any or all of the works in its repertory.” 31 The Rate Court reasoned that, because “ASCAP repertory” is defined in terms of “works” and not “rights in works,” ASCAP cannot withhold separate rights from the works that it licenses. 32

As a result, ASCAP members must withdraw from ASCAP entirely if they wish to directly license their new media rights. Moreover, because ASCAP’s members attempted to withdraw after Pandora’s request to be licensed under the Consent Decree, the Rate Court held that ASCAP’s members would be bound to the rates set by the Rate Court in this proceeding through 2015. 33

C. Rate Court’s Order Setting Rates

On March 14, 2014, the Rate Court issued its ruling setting the performance rates to be paid by Pandora and similar services for ASCAP member repertoire. 34 In its decision, the Rate Court determined that a reasonable rate for such services is 1.85% of the services’ revenue for the entire 2011-2015 license period.

In adopting this rate, the Rate Court noted that the parties agreed that the ASCAP-Pandora voluntary license and the EMI-Pandora license, both of which contained a 1.85% of revenue headline rate, reflected a reasonable benchmark for 2011 and 2012. 35 There, the Rate Court reasoned that the EMI-Pandora license covered the same period, and the ASCAP-Pandora license, while covering an earlier period, covered the same parties. 36

However, the Rate Court declined to adopt ASCAP’s proposed incremental escalations in the rate through 2015. In doing so, the Rate Court first reasoned that historical practice and prior rate court precedent suggests a presumption of a single rate throughout the license term. 37 Additionally, the Rate Court rejected the Pandora-Sony and Pandora-UMPG license benchmarks as not reflecting fair market rates. 38 In doing so, the Rate Court devoted a substantial portion of its decision to discussing the circumstances of the negotiations of these licenses. 39 Ultimately, the Rate Court found that the large music publishers “exercised their considerable market power to extract supra-competitive prices” through their negotiations with Pandora. 40 Moreover, the Rate Court found that the trial evidence “revealed troubling coordination between Sony, UMPG, and ASCAP, which implicates a core antitrust concern.” 41

However, the Rate Court also refused to adopt Pandora’s proposed RMLC agreement benchmark, although the Rate Court characterized its decision as “close.” 42 While the Rate Court found that Pandora is essentially radio and competes directly with terrestrial radio, the Rate Court also found that the RMLC licensees are distinguishable because they consist of both terrestrial and internet radio offerings. Moreover, the Rate Court reasoned that the Consent Decree prohibits discrimination among similarly situated “licensees” and, although Pandora may be similar to one of many of an RMLC licensee’s services, it is not similarly situated to the terrestrial radio entities that is deemed the “licensees.” Additionally, the Rate Court found that Pandora is just as similarly situated to radio as other internet radio services previously subject to the 1.85% benchmark that the parties agreed was reasonable. For these reasons, the Rate Court concluded that there was no reason to further adjust the 1.85% rate.

IV. Implications

At this point, it is unclear how the Rate Court’s decision on the ASCAP rates will affect the musical works collective licensing landscape. However, the decision is already being characterized as a defeat for songwriters and music publishers. 43 Given the Rate Court’s earlier ruling on the issue of ASCAP member withdrawals, an extreme result of its recent decision on the rate would be a mass exodus of musical works owners from ASCAP membership entirely. Such a mass exodus could reduce ASCAP revenue significantly if, for example, the largest music publisher members withdraw. 44

Moreover, a mass withdrawal could change the licensing landscape for all parties involved because Pandora and other services would be required to enter into direct licenses with each individual withdrawn musical works owner. This could result in significant administrative costs for both the services and the publishers, although the withdrawn members could engage third parties to administer these licenses on the withdrawn members’ behalf. 45

While a mass exodus could change the musical works licensing landscape significantly, this is not the songwriters’ and publishers’ only option. In fact, ASCAP and its members have already engaged the DOJ to review the Consent Decree. 46 In doing so, it is likely that ASCAP and its members are seeking a revision that would allow ASCAP to withhold new media rights from its licenses pursuant to an individual member’s voluntary withdrawal of those rights. 47 However, any such proposition would likely be subject to close DOJ scrutiny, particularly given the Rate Court’s admonishing of ASCAP and the large publishers’ “cooperation” during the Pandora negotiations.

Additionally, ASCAP and its members could seek relief in the form of a legislative fix. While the Rate Court’s decision has been pending in this proceeding, Congress has already introduced a bill that would, among other things, permit the introduction of sound recording rate proceeding evidence in future ASCAP and BMI Rate Court proceedings. 48 Such a bill arguably reflects Congress’s acknowledgment of the concerns of songwriters, composers, and publishers, which could lead to a more wholesale revision of the collective licensing scheme through this bill. However, even if songwriters, composers, and publishers were to work such a wholesale revision into the proposed bill, it would likely be years before any legislative fix on such a scale is implemented, if at all.

In any event, as noted above, in the absence of an ultimate reversal on appeal, current ASCAP members may be stuck with the Rate Court’s decision through 2015. However, it will be interesting to see when and to what extent the decision will impact the overall future of the music publishing industry, if at all. In the meantime, we wait in anxious anticipation.

1 See United States v. Am. Soc’y of Composers, Authors & Publishers (In re Petition of Pandora Media, Inc.), 12 Civ. 8035 (DLC), slip op. (S.D.N.Y. Mar. 14, 2014) (hereinafter In re Pandora Final Order).

2 United States v. Am. Soc’y of Composers, Authors & Publishers (In re Petition of Pandora Media, Inc.), 12 Civ. 8035 (DLC), 2013 WL 5211927 (S.D.N.Y. Sept. 17, 2013) (hereinafter In re Pandora Summary Judgment Order).

3 The 1941 consent decree has been modified several times, the most recent of which was in 2001 to, among other things, provide for a so-called “through-to-the-audience” license that exempts from separate licensing, a user of ASCAP repertoire making public performances via an authorized simultaneous or delayed transmission from an ASCAP licensee. See United States v. Am. Soc’y of Composers, Authors & Publishers, No. 41-CV-1395, 2001 WL 1589999 (S.D.N.Y. Jun. 11, 2001) (hereinafter Consent Decree).

4 See In re Pandora Summary Judgment Order, at *1.

5 Id.

6 See, e.g., December 2013 Top 20 Ranker, Webcast Metrics by Triton Digital (Feb. 4, 2014), http://www.tritondigital.com/Media/Default/rankers/december-ranker-2013.pdf (ranking Pandora first among digital audio radio services in December 2013, based on total listener hours).

7 See In re Pandora Summary Judgment Order, at *1.

8 Memorandum in Support of Motion for Summary Judgment That ASCAP Publisher “Withdrawals” During the Term of Pandora’s Consent Decree License Do Not Affect The Scope of the ASCAP Repertory Subject to That License at 6-7, United States v. Am. Soc’y of Composers, Authors & Publishers (In re Petition of Pandora Media, Inc.), No. 12-8035 (DLC) (MHD) (S.D.N.Y. Aug. 1, 2013) (hereinafter Pandora Summary Judgment Motion).

9 See Petition of Pandora Media, Inc. for the Determination of Reasonable License Fees at 3, United States v. Am. Soc’y of Composers, Authors & Publishers (In re Petition of Pandora Media, Inc.), No. 12-8035 (DLC) (MHD) (S.D.N.Y. Nov. 5, 2012) (hereinafter Pandora Petition).

10 See id.

11 The ASCAP rule change was adopted by the ASCAP Board of Directors to allow ASCAP members to withdraw from ASCAP membership solely their rights to license to “new media” services. At the time, this was a source of considerable controversy among the songwriter and publisher members of the organization. See In Re Pandora Final Order at 39-49.

12 In re Pandora Summary Judgment Order, at *3.

13 Id., at *3.

14 Id. The EMI agreement was entered into prior to Sony’s purchase of the EMI catalog, while the Sony agreement was executed after the purchase. As noted further below, the disparity between the rates in the EMI and Sony agreements and the circumstances surrounding those negotiations were key factors in the Rate Court’s decision on the applicable rates Pandora would be required to pay. In re Pandora Final Order at 92-105.

15 Consent Decree, at *6 (Consent Decree Section IX(A)).

16 See United States v. Am. Soc’y of Composers, Authors & Publishers (In re Application of THP Capstar Acquisition Corp.), 756 F. Supp. 2d 516, 538 (S.D.N.Y. 2010).

17 Id.

18 Id.; see also United States v. Broadcast Music, Inc. (In re Application of Music Choice), 426 F.3d 91, 95 (2d Cir. 2005) (setting forth certain factors that the Rate Court considers in adjusting benchmarks from other marketplaces).

19 Pandora Petition at 4-6.

20 Id. at 4.

21 Id. at 4-5.

22 Id. at 5-6.

23 At the time of publication, the author did not have access to the trial transcript of the Rate Court proceedings. As such, at times, the author infers the arguments likely made at trial based upon statements made by the parties in separate briefing throughout the litigation.

24 See ASCAP’s Memorandum of Law in Opposition to Pandora’s Motion for Summary Judgment at 22-24, United States v. Am. Soc’y of Composers, Authors & Publishers (In re Petition of Pandora Media, Inc.), No. 12-8035 (DLC) (MHD) (S.D.N.Y. Jul. 31, 2013) (hereinafter ASCAP Summary Judgment Motion).

25 Id. at 22-24 (arguing why separate rates for Pandora and terrestrial radio would not constitute discrimination).

26 Id. at 24.

27 Id. at 23. At trial, ASCAP proposed as secondary benchmarks (i) the SESAC-Pandora license and (ii) the ASCAP-Apple license for the iTunes Radio service. However, the Rate Court essentially rejected these benchmarks outright due to a lack of data about the SESAC repertoire and the Apple iTunes Radio business model. See In re Pandora Final Order at 107-111.

28 Id.

29 Pandora Summary Judgment Motion.

30 In re Pandora Summary Judgment Order, at *1.

31 Id. at *4.

32 Id. at *5-7.

33 Id. at *7.

34 In re Pandora Final Order.

35 In re Pandora Final Order at 92-93.

36 Id.

37 Id. at 95-96.

38 Id. at 97-107.

39 See, e.g., id. at 53-80, 97-107.

40 In re Pandora Final Order at 97.

41 Id.

42 Id. at 129-134.

43 See, e.g., Hannah Karp, Ruling on Pandora: ASCAP Royalty Fight is a Draw, WSJ.com (Mar. 14, 2014, 9:19 PM), http://blogs.wsj.com/digits/2014/03/14/ruling-on-pandora-ascap-royalty-fight-is-a-draw/ (noting the frustration with the decision expressed by ASCAP’s Chief Executive).

44 See Ed Christman, Universal Music Publishing Plots Exit From ASCAP, BMI, Billboard.com (Feb. 1, 2013), http://www.billboard.com/biz/articles/news/publishing/1537554/universal-music-publishing-plots-exit-from-ascap-bmi (noting that the largest music publishers account for approximately 60% of global publishing revenue to the PROs).

45 While the withdrawn members could also attempt to have ASCAP administer direct licenses on the ex-members’ behalf, any ASCAP involvement would likely be required to be very narrowly drawn to avoid running afoul of the Consent Decree and antitrust laws, generally (see, e.g., Consent Decree, at *3 (prohibiting ASCAP from enforcing any public performance licenses which discriminates between similarly situated licensees)).

46 See Ben Sisario, Pandora Suit May Upend Century-Old Royalty Plan, N.Y. Times, Feb. 13, 2014, http://www.nytimes.com/2014/02/14/business/media/pandora-suit-may-upend-century-old-royalty-plan.html?_r=0; Ed Christman, Rate Court Judge Rules Pandora Will Pay ASCAP 1.85% Annual Revenue, BillboardBiz, http://www.billboard.com/biz/articles/news/publishing/5937528/rate-court-judge-rules-pandora-will-pay-ascap-185-annual .

47 Id.

48 The Songwriter Equity Act, H.R. 4079, 113th Cong. (2014).

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