Holland & Knight - Digital Technology & E-Commerce Blog

Digital Technology & E-Commerce Blog

Content Owners Seek Recovery From Online Service Providers

Posted on December 19, 2011, by Marc S. Reisler

The growth of e-commerce offers businesses the opportunity to connect with consumers throughout the world in ways they never could before. Unfortunately, along with the success of legitimate commerce, the distribution and sale of counterfeit and pirated products through professional-looking websites has also increased dramatically. While estimates of the harm differ greatly among analysts, the sale of counterfeit, replica and pirated goods has been reported to cost American creators and producers billions of dollars per year. Given that a counterfeiter or unauthorized seller may be elusive, difficult to locate and judgment proof, aggrieved content owners have sought recovery from specified third parties, including Internet service providers, payment processors, online ad network providers, and web design specialists, all of whom may play some role in enabling consumers to access an infringing website, purchase content and products, and view advertisements.

Recent Litigation

In the past year, there have been several examples of content owners that have successfully brought actions against providers that knowingly provided services to counterfeiters. For example, in Roger Cleveland Golf Co., Inc. v. Prince, No. 09-02119 (D. S.C. Judgment entered Mar. 14, 2011), a golf equipment company brought suit against, among others, the web hosting company that participated in the design and support of the websites selling counterfeit golf gear that infringed the plaintiff's trademarks. At trial, a jury found the counterfeit site operator liable for direct infringement and awarded over $28,000 in damages, and found the web host liable for willful secondary trademark infringement and awarded the plaintiff over $770,000 in damages.

Subsequently, in Louis Vuitton Malletier SA v. Akanoc Solutions, Inc., 658 F.3d 936 (9th Cir. 2011), the Ninth Circuit affirmed a jury verdict of contributory trademark infringement against a web host that ignored multiple takedown notices and knowingly enabled infringing conduct by leasing packages of server space, bandwidth and IP addresses to foreign-based websites that sold the plaintiff's knockoff goods. The appeals court found that even though they exist in cyberspace, "websites are not ethereal" and would not exist without physical roots in servers and internet services and that defendants had direct control over the “master switch” that kept the websites online and available. Regarding damages, the appeals court reduced the jury's duplicative Lanham Act statutory damage awards against two defendants, holding that both defendants would be jointly and severally liable for a single award of statutory damages for contributory infringement in the amount of $10.5 million.

Beyond payment processors and website design and management providers, at least one court has considered the secondary liability of a service provider in the copyright infringement context. The dispute involved an online advertising network company that placed third-party advertisements on an allegedly infringing website and shared the proceeds with the website owner. However, unlike the previous examples, the content owner in this case, a publishing company, was not successful and the court granted the defendant's motion to dismiss the action. In Elsevier Ltd. v. Chitika, Inc., 2011 WL 6008975 (D. Mass. Dec. 2, 2011), the court found that an online advertising provider that was not familiar with the content of an allegedly infringing free download site and had not received any notice of infringing activity from the plaintiff was not liable for contributory copyright infringement. The court also noted, in dicta, that the defendant did not "materially contribute to the infringement" merely because the shared advertising revenue made it easier for the website owner's infringement to be profitable.

Marketing Association Releases Self-Regulatory Principles Concerning Online Data Collection

Posted on November 10, 2011, by Marc S. Reisler

In December 2010, the FTC issued a report regarding data privacy that stated that the online marketing industry's efforts to address privacy through self-regulation “have been too slow, and up to now have failed to provide adequate and meaningful protection.” Moreover, the current Congress has waded into the online privacy arena, with members of both chambers introducing bills that address online advertising and data tracking. This past week, in a continuing effort to implement transparency and accountability controls, the online marketing industry released a new set of principles covering the collection of user data across non-affiliated websites.

The Digital Advertising Alliance, which represents the leading marketing associations, released its “Self-Regulatory Principles for Multi-Site Data” that establish self-regulatory standards governing the use of so-called "multi-site data." According to the Digital Advertising Alliance, the new principles extend beyond collection of data for online behavioral advertising purposes and "apply to all data collected from a particular computer or device regarding Web viewing over time and across non-Affiliate Web sites." The principles prohibit service providers from collecting multi-site data for any adverse determination regarding eligibility for employment, credit, health treatment or insurance, but providers would not run afoul of these prohibitions if the provider transfers such data "with a reasonable basis for believing that it will not be used for a [prohibited purpose], and the recipient then misuses the data for a purpose that is prohibited…." Certain practices are exempted from the requirements, however, including the collection of data for system management, market research or product development, or where the data has or will go through a "de-identification process," which is defined as when an entity "has taken reasonable steps to ensure that the data cannot reasonably be re-associated or connected to an individual or connected to or be associated with a particular computer or device."

Prior to the release of the latest principles, leading online advertising industry associations had already released a set of consumer protection principles for online behavioral advertising. See Am. Ass’n of Advertising Agencies et al., "Self Regulatory Principles for Online Behavioral Advertising" (2009). Generally speaking, behavioral advertising is the tracking of a consumer's Web browsing activities through the use of browser cookies to deliver advertising targeted to that individual consumer's interests. The industry program was broken down into multiple principles, which proposed that participating organizations and sites, among other things:

Clearly disclose data collection and use practices with links and disclosures on the Web page where the advertisement appears;
Permit consumers to choose whether or not their data will be collected, used, or transferred to another entity for behavioral advertising purposes;
Make special considerations for sensitive data, including not collecting financial account numbers, Social Security numbers, pharmaceutical prescriptions, or medical records for behavioral advertising purposes without consumer consent.

Subsequently, industry associations released technical specifications for an ‘Advertising Option Icon’ that would offer a uniform method to provide website users with notice regarding behavioral advertising, including the placement of a metadata tag within or beside an online advertisement that users could click on to obtain basic information on the organization that served the ad, the location of its advertising policy and how to opt-out of such targeted advertisements in the future. See Press Release, Interactive Advertising Bureau, "IAB and NAI Release Technical Specifications for Enhanced Notice to Consumers for Online Behavioral Advertising," (Apr. 14, 2010).

With the release of the online marketing's industry's latest consumer privacy initiatives, it remains to be seen whether such self-regulatory efforts -- the behavioral advertising principles, the ‘Advertising Option Icon’, the multi-site principles -- will satisfy the FTC and members of Congress currently considering limits on the practice of behavioral advertising and data tracking.

'Friend Finder' Lawsuit Dismissed

Posted on November 3, 2011, by Richard Raysman

The basic purpose of social network websites is to allow users to exchange information and experiences with friends, groups and various degrees of other acquaintances. During Facebook’s growth, it has periodically introduced new features designed to facilitate its users’ abilities to interact. Certain updates have been welcomed, but others have provoked objections that the network is distributing too much information automatically to the detriment of personal privacy. In some cases, litigation has resulted, such as Cohen v. Facebook, Inc., No. 10-5282 (N.D. Cal. Oct. 27, 2011), which involved a recent putative class action over Facebook’s “Friend Finder” feature

Friend Finder is a service that allows Facebook access to a user's email account address book. Once connected, the service compares the contact information in those accounts with the Facebook user database, and presents the user with a list of other Facebook users he or she already knows, but who are not currently his or her Facebook “friends.” The system also generates emails to the user’s contacts who are not Facebook members, inviting them to join. Beyond the basic functionality, Facebook promotes the availability of Friend Finder by placing notifications on the home pages of users stating that certain of their Facebook friends have utilized the service to locate persons they know, and encouraging the users to try the new service. The notices included the names and profile pictures of the “friends” who have purportedly used the service. This promotion was the crux of the plaintiffs' complaint in Cohen. In the dispute, the plaintiffs raised California right of publicity claims contending that Facebook used their names and profile pictures to promote Friend Finder without their consent and misappropriated their names and likenesses for its own commercial purposes.

The court granted Facebook's motion to dismiss the amended complaint, concluding that the plaintiffs failed to plead a cognizable injury. The central issue presented was whether the use of the names and likenesses of non-celebrity private individuals without compensation or consent caused injury sufficient to support standing, where plaintiffs could not allege that their names and likenesses had any general commercial value. The plaintiffs contended that their names and likenesses had an economic value because Facebook chose to use them to promote its “Friend Finder” service and purportedly achieve monetary gain.

The court found the plaintiffs' arguments lacking and noted that even though the legislature provided for statutory damages for individuals who were unable to quantify the amount of damages suffered, this fact did not eliminate the requirement that a plaintiff plead a cognizable injury in the first instance. Interestingly, the court bolstered its holding by characterizing the defendant's use in its social network context:

"It is also worth noting that this is not a situation where the defendant is alleged to have publicized the plaintiffs’ names or likenesses to any audience or in any context where they did not already appear—rather, the names and likenesses were merely displayed on the pages of other users who were already plaintiffs’ Facebook “friends” and who would regularly see, or at least have access to, those names and likenesses in the ordinary course of using their Facebook accounts."

Cybersecurity and the Growing Role of Chief Compliance Officer

Posted on September 22, 2011, by Richard Raysman

Cyberattacks and data security breaches are a constant threat for businesses and part of what experts see as a rapidly expanding international threat that costs companies and taxpayers collectively billions of dollars per year in lost information and response costs. Indeed, a recent paper by the Intelligence and National Security Alliance underscored the growing danger of cyberattacks for both the public and private sector and the "rapidly increasing need to fully leverage cyber intelligence assets and capabilities on a national and global scale" to address this evolving cyber threat.

There are a host of ways companies can defend against and proactively respond to cyberattacks if and when they occur. Beyond robust computer security procedures and employee computer usage policies, the Chief Compliance Officer ("CCO") plays a critical role in preventing and containing cyberattacks. Formerly, the role of CCO consisted of complying with SEC laws and regulations, making sure that confidential information remained as such, and ensuring that public filings were accurate. However, in the digital era, the role of the CCO has dramatically expanded. New technologies such as mobile devices, social media and cloud computing have increased risks posed by cyber criminals. With the epidemic of cyberattacks and hacking, a new responsibility has been added to the CCO's job function -- that of deterring cyber attacks, and if they occur, acting to quickly contain them and the financial and reputational harm they can cause.

To be sure, some companies may delegate computer systems' security responsibility to the Chief Information Officer ("CIO"). Clearly, it is the CIO who is charged with protecting privacy and access to the Information Technology system. Nevertheless, it is CCO's job to coordinate with the CIO and other company departments to prevent cyberattacks and set up policies and procedures for employees to follow.

One important policy initiative includes implementing procedures to properly secure and preserve electronic evidence following a cyberattack. When trained employees or experts are not brought in pursuant to a coherent post-response policy, a data breach investigation may be hindered or vital evidence tainted. One recent case proves this point. In United States v. Koo, 770 F.Supp.2d 1115 (D. Or. 2011), the court held that an image of the hard drive from an employee's company-issued laptop was inadmissible to prove the contents of the computer at the time it was confiscated because of evidence that a supervisor booted the machine, accessed files and allegedly altered content prior to the laptop being handed over to the FBI for processing. The defendants, former employees of the complainant, were charged with wire fraud, trade secret theft and computer fraud, among other things, arising out of their alleged copying of confidential company data to start a competing enterprise. The court granted the defendants' motion to exclude two hard drive images the FBI took of the defendant's laptop due to a lack of authentication under Fed. R. Evid. 901.

App Developer Settles COPPA Charges

Posted on September 9, 2011, by Marc S. Reisler

This past month, an iPhone app developer settled FTC charges that it violated the Children’s Online Privacy Protection Act (COPPA) by improperly collecting and disclosing personal information from tens of thousands of children under age 13 without their parents’ prior consent. What makes this settlement notable is that this was the agency's first case involving smartphone applications, or apps.

The FTC complaint charged that the developer's children-oriented apps allowed children to post personal information on message boards without first obtaining parental consent. Generally speaking, under the FTC’s COPPA Rule, website operators must notify parents and obtain their consent before they collect, use, or disclose children’s personal information and post a clear, understandable privacy policy. The FTC alleged that the developer failed to follow these regulations. Under the terms of the consent decree, the developer was obligated to pay a $50,000 penalty, follow the COPPA Rule in the future and delete all personal information from users collected in violation of the Rule. See United States v. W3 Innovations, LLC, No. 11-03958 (N.D. Cal. Consent Decree Aug. 12, 2011).

The FTC’s Children’s Online Privacy Protection Act (COPPA) Rule became effective in April 2000. In 2005, the FTC initiated a review of the Rule, and after considering extensive public comment, decided to retain it without amendment. However, given the changes to the online environment, including the increasing use of mobile technology to access the Internet, last year, the FTC decided to reexamine the Rule.

In March 2010, the FTC opened a 90-day comment period and thereafter hosted a public roundtable to elicit comments concerning a number of issues such as the implications for COPPA enforcement raised by mobile communications (including, using technology to improve the process of obtaining parental consent) and whether the Rule's definition of "personal information" should be expanded to include mobile geolocation data or information collected from behavioral advertising. This recent enforcement action reaffirms that the agency is concerned about the new uses of mobile technologies by children and will take action even as it weighs whether to update the COPPA Rule. Going forward, it is likely that app developers will undertake their best efforts to comply with the COPPA Rule, despite the inherent limitations of the mobile platform in communicating disclosures and other privacy-related information to minors and their parents.

NLRB Takes Action on Behalf of Employees Fired Due to Facebook Postings

Posted on July 27, 2011, by Marc S. Reisler

Obscene videos, derogatory status updates, inappropriate party photos, racist comments, feigned "sick" days uncovered, bitter rants against customers, divulged company secrets, and complaints about working conditions or supervisors. These are some of the more common reasons why employees are terminated due to postings on social media websites such as Facebook. Though, the latter reason -- off-site, off-hours critical comments about one's workplace -- has caused a backlash from employees who believe that they shouldn't be disciplined or fired for posting criticism about their jobs from their home computers during their leisure time. Recently, some employee complaints have caught the eye of the National Labor Relations Board (NLRB), which has alleged in some enforcement actions that employees discussing the terms and conditions of their employment with co-workers and others are engaged in protected activity.

In one recent complaint filed in May, the NLRB alleged that a Chicago car dealership wrongfully discharged an employee for posting photos and comments on Facebook that were critical of the dealership's recent promotional event. Despite complying with his employer's request to remove the postings, the salesman was terminated. The NLRB contended that the postings were protected activity because they involved a discussion among employees about the terms and conditions of their employment. In another similar complaint filed in June, the NLRB alleged that a New York nonprofit social service company wrongly discharged five employees that posted Facebook comments defending their job performance and criticizing working conditions at the company.

It remains to be seen what the outcome will be in the above agency actions, but a settlement earlier this year may be instructive. This past February, the NLRB reached a settlement in a dispute involving the firing of a Connecticut ambulance service employee for posting negative comments about a supervisor on Facebook. In that case, the NLRB complaint alleged that the company maintained overly-broad rules in its employee handbook regarding blogging, internet posting, and communications between employees. Under the terms of the settlement, the company agreed to revise its social media rules to ensure that it does not improperly restrict employees from discussing their working conditions with co-workers and others while not at work. The company also agreed that they would not discipline employees for engaging in such discussions.

Looking Ahead

Ultimately, a company must decide whether it wants to block employees from accessing social media sites during work hours and to what extent it wishes to regulate off-hours discussions of work-related topics or the workplace itself. Broad clauses such as "Employees are prohibited from making critical, disparaging, discriminatory or defamatory comments when discussing the Company or the employee’s superiors, co-workers and/or competitors" should be reexamined in light of the recent actions by the NLRB. Indeed, restrictions on workers' social media postings done during off-hours should be moderated in certain circumstances because some federal whistleblower and employment laws and regulations protect discussion of work terms and union organizing activities, and some states, including New York, have more extensive laws that, with certain exceptions, bar employers from discriminating against employees that engage in lawful off-hours activities. See e.g., N.Y. Labor Law §§ 201-d(2)(c), (3)(a) (protects “an individual's legal recreational activities outside work hours, off of the employer's premises and without use of the employer's equipment or other property,” subject to certain exceptions, including, among others, behaviors that are “a material conflict of interest” to the employer's trade secrets and proprietary business interests).

For a more detailed discussion about corporate social media policies, please see "A Practical Look at Social Media Policies."

Second Circuit Rules Banks' 'Hot News' Claims Preempted by Copyright

Posted on June 30, 2011, by Richard Raysman

Two years ago, the Southern District of New York reignited the 90-year-old hot news doctrine and applied it in the Internet context, when it ruled that a newswire’s hot news misappropriation claim against a news aggregation website that collected news stories on the Internet and repackaged them under its own banner was valid under New York law. Since that decision, a number of businesses have attempted to use the hot news doctrine to prevent competitors from "free riding" off their time-sensitive informational content.

Most recently, several financial firms brought suit to prevent an online site from collecting and re-publishing summaries of their well-researched stock recommendations that are released to clients before the markets open. Last year, a district court found that the online site was liable for hot news misappropriation and issued a permanent injunction barring the defendant from publishing the banks' stock recommendations for a specific amount of time after the reports were released to top investors. See Barclays Capital Inc. v. TheFlyOnTheWall.com, 2010 WL 1005160 (S.D.N.Y. Mar. 18, 2010).

However, this past week, the Second Circuit reversed the lower court's decision on the hot news claim. Barclays Capital Inc. v. TheFlyOnTheWall.com, 2011 WL 2437554 (2d Cir. June 20, 2011). While the appeals court reaffirmed the viability of the hot news doctrine, it arguably narrowed its scope or at least repositioned it to its more traditional focus of protecting the rights of original news gatherers. The ruling's ultimate effect on the hot news doctrine will not be known until future courts parse the decision, perhaps in a future dispute between a traditional news outlet and an online news aggregator that republishes timely news headlines and stories without permission.

In Barclays, the Second Circuit held that a financial newsfeed website that posted, before the market opened, key information from proprietary, time-sensitive equity research reports distributed by several Wall Street investment firms to subscribing investors was liable for certain instances of copyright infringement but not hot news misappropriation. The court concluded that the plaintiffs' hot news claim failed and was preempted by the Copyright Act because it did not satisfy the necessary factors as outlined by Second Circuit precedent.

The court centered its analysis on whether the defendant was "free riding" off of the banks' research efforts and noted that the use of the term in recent "hot news" misappropriation jurisprudence has somewhat confused the issue.

The [Supreme Court] defined the "hot news" tort in part as "taking material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and . . . appropriating it and selling it as [the defendant's] own . . . ." [citation omitted]. That definition fits the facts of [that Supreme Court decision]: The defendant was taking news gathered [by the plaintiff newswire] and selling that news as though the defendant itself had gathered it. But it does not describe the practices of [TheFlyOnTheWall.com]." [emphasis added]

Interestingly, the court commented that "unfairness alone is immaterial to a determination whether a cause of action for misappropriation has been preempted by the Copyright Act," and that "the adoption of new technology that injures or destroys present business models is commonplace." In the end, the court rejected the banks' contentions that the defendant was "free riding" because, as the court outlined, the defendant retained a staff to summarize, disseminate, and report on the news of the banks' securities recommendations and attributed the news to its source. In short, the court stated that: "The Firms are making the news; [the defendant], despite the Firms' understandable desire to protect their business model, is breaking it" and the defendant, having obtained news of a securities Recommendation, "is hardly selling the Recommendation as its own."

Patent Filing of Confidential Method Destroys Trade Secret Status

Posted on May 11, 2011, by Richard Raysman

Generally speaking, the most important consideration in determining whether something constitutes a trade secret is whether the information is kept secret. To qualify as a trade secret, the information need not be kept absolutely secret, but a court will look to the extent of measures taken by the trade secret owner to guard the secrecy of the information. However, trade secret status can disappear if the information becomes well-known, such as being widely posted on the Internet or readily ascertainable in the marketplace. In addition, trade secret status can be lost when secret methods are disclosed in a patent application, as the Fifth Circuit reiterated in a recent opinion.

In Tewari De-Ox Systems, Inc. v. Mountain States/Rosen, L.L.C., 2011 WL 1238008 (5th Cir. Apr. 5, 2011), the plaintiff had created a “zero oxygen” method for packing fresh meat for shipment and display in retail stores and the defendant, a distributor, was interested in examining a system that prolonged shelf life and reduced spoilage. After the plaintiff and defendant signed a nondisclosure agreement, the plaintiff revealed the trade secrets relating to the meatpacking method. Afterward, the defendant allegedly misappropriated the trade secrets, and the plaintiff filed suit, advancing misappropriation and fraud claims, among others. The defendant argued that the plaintiff's meatpacking method was not a trade secret because the plaintiff had previously disclosed it in a prior patent application, that had been rejected by the USPTO.

The Fifth Circuit, in affirming the lower court, found that the alleged trade secrets were not protectable because they were disclosed in patent applications filed before the parties signed the nondisclosure agreement regarding the meatpacking technology. The court noted that the decision to seek a patent is an either/or choice: "either secure the material rewards for his invention for a limited time on condition that he make full disclosure for the benefit of the public of the manner of making and using the invention or make no public disclosure of his invention and thereby protect his trade secret.”

The appeals court also noted that the outcome might have been different if the defendant had gained knowledge of the plaintiff's methods while they were still trade secrets and those methods subsequently lost trade secret protection due to publication with the USPTO. Ultimately, the court remanded the case and refused to dismiss all of the plaintiff's misappropriation claims because five other trade secrets were arguably not disclosed in the prior patent applications and may have retained their protected status.

Yet, not all disclosures of trade secret information to government agencies necessarily abrogate legal protections. For example, in JustMed, Inc. v. Byce, 600 F.3d 1118 (9th Cir. 2010), the Ninth Circuit held that a disclosure of portions of secret software code to the Copyright Office in the course of a copyright registration is not, in itself, inconsistent with maintaining the requisite secrecy and value of a trade secret, particularly since the Office only releases reproductions of works under limited circumstances. Specifically, in the case of software, the Copyright Office has established procedures for submitting source code containing trade secrets.

New York's Highest Court Issues Important Jurisdictional Ruling for Copyright Holders

Posted on April 1, 2011, by Richard Raysman

In 2010, the Second Circuit certified a question to the New York Court of Appeals regarding a novel question of jurisdictional law concerning whether a New York copyright holder can sue an out-of-state defendant accused of digital piracy in New York federal court or whether the copyright holder must pursue an action in the defendant's home state or in the location where the allegedly unlawful downloading of copyrighted works occurred. See Penguin Group (USA) Inc. v. American Buddha, 609 F.3d 30 (2d Cir. 2010).

The plaintiff, a New York publisher, alleged that the defendant unlawfully uploaded to its servers unauthorized copies of four copyrighted works for free downloading. The sole issue before the lower court was whether there was a basis for personal jurisdiction over the defendant in New York. The plaintiff asserted that the court had jurisdiction under a provision of New York's long-arm statute, C.P.L.R. § 302(a)(3)(ii), that allows for jurisdiction over an out-of-state defendant with no contacts with New York, if the plaintiff demonstrates that: (1) the defendant's tortious act was committed outside New York, (2) the cause of action arose from that act, (3) the tortious act caused an injury to a person or property in New York, (4) the defendant expected or should reasonably have expected that his or her action would have consequences in New York, and (5) the defendant derives substantial revenue from interstate or international commerce. Only the third requirement of section 302(a)(3)(ii) was in dispute, namely, whether the defendant's allegedly copyright-infringing conduct involving computer servers located in Oregon or Arizona caused the requisite injury in New York.

The lower court recognized two competing lines of authority interpreting section 302(a)(3)(ii), one that views the situs of injury as the location of the infringing conduct and one that views the situs of injury as the location of the plaintiff and, in some cases, the location of its intellectual property. Relying on the first line of authority, the lower court concluded that the situs of the injury would be where the book was electronically copied — presumably in Arizona or Oregon, where the defendant and its computer servers were located — and not New York, where the plaintiff was headquartered. Accordingly, the court dismissed the case for failure adequately to plead injury in New York. See Penguin Group (USA) Inc. v. American Buddha, 2009 WL 1069158 (S.D.N.Y. Apr. 21, 2009).

However, in Penguin Group (USA) Inc. v. American Buddha, 2011 NY Slip Op 02079 (N.Y. Mar. 24, 2011), the New York Court of Appeals came to a different interpretation of the state's long-arm statute. The court held that in copyright infringement cases involving the uploading of a copyrighted printed literary work onto the Internet, the situs of injury for purposes of determining long-arm jurisdiction under C.P.L.R. § 302(a)(3)(ii) is the location of the principal place of business of the copyright holder. In answering a certified question from the Second Circuit, the New York Court of Appeals rejected the defendant's argument that a derivative economic injury felt in New York based solely on the domicile of the plaintiff was insufficient to establish an in-state injury within the meaning of the long-arm statute. The court commented that in the case of online infringement and digital piracy, where the harm is dispersed throughout the country, the place of uploading is inconsequential and it is difficult, if not impossible, to correlate lost sales to a particular geographic area, such that the out-of-state location of the infringing conduct carries less weight in the jurisdictional inquiry. Indeed, the court noted: "the absence of any evidence of the actual downloading of Penguin's four works by users in New York is not fatal to a finding that the alleged injury occurred in New York."

Interestingly, the court responded to some of the cautionary assertions from the defendant's brief about the possible expansive nature of this ruling.

[C]ontrary to American Buddha's assertion, our decision today does not open a Pandora's box allowing any nondomiciliary accused of digital copyright infringement to be haled into a New York court when the plaintiff is a New York copyright owner of a printed literary work. Rather, CPLR 302 (a)(3)(ii) incorporates built-in safeguards against such exposure by requiring a plaintiff to show that the nondomiciliary both "expects or should reasonably expect the act to have consequences in the state" and, importantly, "derives substantial revenue from interstate or international commerce." There must also be proof that the out-of-state defendant has the requisite "minimum contacts" with the forum state and that the prospect of defending a suit here comports with "traditional notions of fair play and substantial justice," as required by the Federal Due Process Clause…."

Open-Source Software Use and Compliance

Posted on February 28, 2011, by Richard Raysman

Richard Raysman recently authored a Practical Law Company article titled "Open-Source Software Use and Compliance."

The article outlines key issues and sets out practical tips for companies to consider in order to effectively govern the use of open-source software, both internally and when developing products. Open-source software (OSS) is an important tool for helping businesses develop software rapidly and effectively, whether to run internal systems or to integrate into customer-facing products. While OSS can provide valuable benefits to a company, how a company uses OSS, together with the obligations contained in the software license granting the right to use that OSS, can have significant consequences. Indeed, although OSS is an important tool for assisting businesses to develop software rapidly and effectively, the improper integration of OSS into a company's IT can impact the value of the intellectual property and the company itself.

In the article, Mr. Raysman examines the following:

What Is OSS? OSS is computer software in source code form that is licensed to the general public at no charge under a copyright license that conforms to a set of standard criteria (known as the Open Source Definition). Some of the best known examples of OSS include the operating system Linux, the web browser Mozilla Firefox, and the Apache HTTP web server software. Generally, OSS licenses permit licensees to use, copy, modify and redistribute the OSS, subject to complying with the disclosure, use, distribution and other relevant obligations and restrictions set out in the license.
Why Companies Use OSS? Companies originally used OSS as stand-alone software primarily to support their internal operations. Today many companies combine OSS with their proprietary internal management or operations software, include OSS in their customer-facing proprietary software, or integrate OSS into products, either as stand-alone software or with proprietary software, to be sold to customers. OSS provides several commercial advantages for businesses, including no license fees, lower development time, the availability of reliable code, and access to third-party improvements.
The Risks in Using OSS. Although OSS licenses vary widely in scope, application and legal effect, most include certain underlying obligations and restrictions, which bring certain risks to companies that use OSS. For example, the integration of OSS into a company’s software could dilute the commercial value of the product and compromise the company’s ability to fully exploit its commercial potential. Moreover, depending on the terms of the relevant OSS license, incorporating OSS into a company’s proprietary software and redistributing it to employees, suppliers, contractors or customers could result in that software being considered part of the public domain.
Developing an OSS Compliance Policy. OSS policies can be structured in many different ways depending on how a company intends to use OSS in consideration of its overall business objectives. Some types of policies are designed solely to manage a company’s use of OSS in its internal business, while others are structured to also accommodate the incorporation of OSS in customer-facing products. Counsel should first communicate with the key business stakeholders to develop a common understanding of how the company uses or intends to use OSS, and determine how the intended use of OSS best aligns with company’s overall business, intellectual property and risk management goals. In addition, counsel should coordinate with personnel responsible for managing software development, use and maintenance (typically the chief information officer or equivalent) to identify and review any current OSS risk management processes.
OSS Development and Operational Guidelines. An OSS policy must identify the relevant personnel responsible for managing OSS use within the company and specify what employees are covered by the policy. This policy usually deals with, among other things, the parties who should receive OSS-related questions and information requests, the appropriate legal language to be inserted in applicable customer contracts for the sale of products or services that use OSS, and the steps relevant employees should take to ensure that all third-party contractors are aware of the guidelines for OSS use.

To view the full article, please visit Practical Law Company article.

The UCC and Software Contracts: Recent Developments

Posted on February 18, 2011, by Richard Raysman

Article 2 of the Uniform Commercial Code (UCC) applies to the sale of goods and offers parties a wide array of contractual rights, protections and limitations. However, Article 2 does not explicitly mention software. Most courts have held that computer software qualifies as a “good,” but legal uncertainty continues with regard to certain software transactions. Indeed, many corporate software transactions are complex, a mixed goods and services arrangement involving both the sale of goods (i.e., software programs) and services (i.e., support and implementation) often under a license agreement as opposed to a sales agreement.

Several decisions in the past year evince that courts are continuing to wrestle with interpreting mixed software licensing transactions.

In Surplus.com, Inc. v. Oracle Corp., 2010 WL 5419075 (N.D. Ill. Dec. 23, 2010), the court held that a software development agreement that was governed by the UCC. The court granted the defendant's motion to dismiss, finding that the four-year statute of limitations for breach of contract under the UCC applied to the plaintiff's claims. The court found that although the custom software development entailed the provision of services--even software development services that were performed by an outside entity--those services were ancillary to the software that was the heart of the relevant agreement. The court concluded that the agreement's provision for maintenance and technical support did not render the software a "service" rather than a "good" under the UCC.

Another recent federal district court decision reached a contrary outcome. In Digital Ally, Inc. v. Z3 Technology, LLC, 2010 WL 3974674 (D. Kan. Sept. 30, 2010), the defendant, a computer engineering firm, designed and manufactured hardware modules for use in videographic products and licensed the modules, including related software, to its customers. When the relationship with the plaintiff broke down over production of custom modules, the parties filed claims and counterclaims alleging breach of the underlying agreement. In construing the defendant's counterclaims for lost profits, the court was obliged to determine if the parties' licensing agreement was governed by the UCC. Lacking any precedent under Nebraska law, the court relied on an Illinois decision that held that a pure license agreement does not involve transfer of title and so was not a sale of goods for Article 2 purposes. In the end, the court found that because title to the “licensed materials” described in the agreement was not transferred, the license agreement was not governed by UCC Article 2.

FCC Set to Impose New Accessibility Requirements under the Twenty-First Century Communications and Video Accessibility Act

Posted on January 11, 2011, by Bill LeBeau

At the end of this week, in two advisory committee meetings on January 13 and 14, 2011, the Federal Communications Commission (the "FCC") will begin its public discussion of the new accessibility requirements of the Twenty-First Century Communications and Video Accessibility Act (the "Act"). The Act imposes -- or authorizes the FCC to impose -- substantial new obligations on manufacturers or providers of video programming and advanced communications ("AdvCom") equipment and services. These meetings, and accompanying FCC regulatory notice-and-comment proceedings, will inform a number of new regulatory mandates, including safe-harbor provisions, exemptions, and other guidelines intended to assist equipment manufacturers, service providers, and video programmers.

Twenty-First Century Communications and Video Accessibility Act

The Act, which became law late last year, broadens a number of existing mandates to newer technologies and also creates additional requirements. See Twenty-First Century Communications and Video Accessibility Act of 2010, Pub. L. No. 111-260, 124 Stat. 2751 (2010) (as codified in various sections of 47 U.S.C.). Subject to some exceptions, the Act defines AdvCom to include interconnected and non-interconnected VoIP, much text messaging, and video conferencing. Consistent with past regulation, the Act defines video programming to include programming generally considered comparable to programming provided by a television broadcast station and generally does not include user-generated content such as a user might find on YouTube or other online video-sharing sites.

In addition to other requirements, including new hearing-aid compatibility mandates, emergency information requirements, and new rules for certain deaf-blind services (with the caveat that any prospective safe-harbor guideline cannot require use of any proprietary technology), the Act generally calls on the FCC to issue regulations sufficient to implement the following mandates and exceptions:

AdvCom. AdvCom equipment and services must be accessible to persons with disabilities UNLESS:

it is not "achievable," which is defined to consider costs, the nature of the manufacturer's operations, other available options from the manufacturer, and technical or economic impact;
the FCC waives, on its own or a petitioner's motion, requirements for equipment "designed for multiple purposes" and used "primarily for purposes other than" AdvCom services;
the mandate is satisfied through "peripheral devices" or other equipment that affords access to those with disabilities at "nominal cost;
the AdvCom equipment or services are "customized" and not "offered directly" or "effectively available directly" to the public;
the provider is an FCC-exempted small entity; or
the equipment or service already is subject to Interconnected VoIP rules (see 47 U.S.C. § 255), which will continue to apply.

Online Video. Online video – specifically, video programming delivered using Internet protocol that was once published or exhibited on television with captions after the effective date of FCC regulations – must include captions UNLESS:

the FCC has concluded that captioning would be "economically burdensome," either on its own or per an entity's petition; or
the programming or entity complies with FCC-established "alternate means of compliance."

Video Devices. Video playback or receiving equipment must be able to decode or pass through captioning, video description and emergency information BUT:

such capabilities must be "technically feasible;"
the FCC may establish "alternate means of compliance;"
if the apparatus uses a screen smaller than 13", then such a capability also must be "achievable;" or
if the equipment is designed for multiple purposes, then mandates do not apply if the "essential utility" of the device is not video playback.

Video recording devices must be able to activate or pass through captioning, video description and emergency information if chosen by user BUT:

only if "technically feasible;" and
the FCC may establish "alternate means of compliance."

For devices designed to play back, record or receive video programming, via Internet protocol or otherwise, their on-screen text menus and guides must be usable by individuals who are blind or visually impaired, including audio output or other accessibility for video menus, and accessible using a button, key or icon similar to that used to activate closed captioning BUT:

only if "achievable;"
the FCC may establish "alternate means of compliance;"
NavGuides may comply through availability of free peripheral device to those who request it; and
small MVPDs may be exempted from NavGuide mandates.

Note: Under the Act, UIs are any on-screen menu or indicator, other than NavGuides, through which user may access video-related functions. NavGuides include any interactive equipment used by consumers to access MVPD programming.

Video Description. Video programming by certain TV broadcast stations (i.e., "Big Four" network affiliates in the top-25 U.S. TV markets) and the top-five nonbroadcast networks with enough video programming subject to the rules must include audio description of key visual elements in pauses in dialogue during the programming ("video description") for at least 50 hours per calendar quarter of video programming during primetime or children's programming BUT:

this does not include "consumer-generated programming";
this does not include programming exempted by FCC because description would be "economically burdensome;" and
this does not include "live or near-live" programming.

Upcoming FCC Actions

The FCC has to conduct several rulemaking proceedings on a relatively short deadline, including: (i) by October 2011, a rulemaking to implement new AdvCom mandates, potential safe harbor guidelines, and the scope of multiple exemptions; (ii) also by October 2011, a rulemaking to update and implement video description rules; and (iii) by April 2012, a rulemaking on online captioning obligations and exemptions. These proceedings will involve public comment. Already, a preliminary public notice on some of these matters has issued, although it attracted relatively little comment.

The FCC, either directly or through one of the two advisory committees that will hold their meetings this week, also must prepare and publish reports on multiple aspects of the Act. The reports from these committees, which are composed of multiple industry and advocacy-group representatives, are also likely to ultimately lead to additional regulations.

Fed. Circuit Rejects “25 Percent Rule of Thumb” in Calculating Patent Case Damages in Patent Cases

Posted on January 7, 2011, by R David "Dave" Donoghue; Benjamin M. "Ben" Stern

On January 4, 2011, the U.S. Court of Appeals for the Federal Circuit found that the so-called “25 percent rule of thumb” analysis long used by damages experts in patent cases to calculate a “reasonable royalty” is “fundamentally flawed.” Uniloc v. Microsoft (Fed. Cir. 2011). The Federal Circuit held that because the 25 percent rule merely applies a general theory that is untethered to the facts of a case, “[e]vidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence.” Slip op. at 41. The full decision can be found online.

Striking down the 25 percent rule has important implications for patent damages in both existing and future patent litigation. As a result, the Uniloc decision is critical for every company that faces any current or potential risk of patent litigation.

Background

The 25 percent rule of thumb has long been a “starting point” of a reasonable royalty analysis. The rule – which the Federal Circuit observed has “met its share of criticism” – is based on the idea that, in a hypothetical negotiation, a licensee generally agrees to pay the patentee a royalty rate equivalent to 25 percent of the licensees’ expected profits on products that incorporate the intellectual property at issue in the case.

In this case, the plaintiff, Uniloc, sued Microsoft, alleging that a certain feature of Microsoft’s Word XP, Word 2003 and Windows XP infringed Uniloc’s patent. The jury agreed and awarded Uniloc $388 million in damages (which was less than the approximately $564 million that Uniloc’s expert opined it was due, based upon the 25 percent rule). These damages represented a “reasonable royalty” that Uniloc and Microsoft would have hypothetically agreed upon at the time the infringement began. Following the jury verdict, the district court granted Microsoft’s motion for a judgment as a matter of law of noninfringement, thereby effectively nullifying the jury’s damage award.

The Appeal

On appeal, the Federal Circuit first observed that the “admissibility of the 25 percent rule has never been squarely presented to this court” but acknowledged that it has “passively tolerated” the rule’s use over the years. After first reviewing the standards for the admissibility of expert opinions, the Federal Circuit concluded that U.S. Supreme Court precedent requires experts to “justify the application of a general theory to the facts of the case.” Slip op. at 43. If an expert cannot do so, then the proffered theory is inadmissible. Id. Given that the 25 percent rule, according to the Federal Circuit, is based on generalized empirical evidence about licenses, the Court concluded that the rule is nothing more than “an abstract and theoretical construct that … does not say anything about a particular hypothetical negotiation or reasonable royalty involving any particular technology, industry or party.” Slip op. at 45. Furthermore, it “is of no moment” that the 25 percent rule is merely a “starting point” for a reasonable royalty analysis; damages experts used the rule as a baseline and then applied other case-specific factors to adjust the rate up or down. According to the Court, “[b]eginning from a fundamentally flawed premise and adjusting it based on legitimate considerations specific to the case nevertheless results in a fundamentally flawed conclusion.” Slip op. at 46. Because Uniloc’s expert’s damages opinion (which was based on the 25 percent rule) was unrelated to the facts of the case, it was “arbitrary, unreliable, and irrelevant.” Slip op. at 47.

Thus, the Federal Circuit held that Microsoft is entitled to a new trial on damages. Because the Federal Circuit also reversed the district court’s post-trial finding of noninfringement, ordering a new trial on damages means that Uniloc may yet obtain a damage award in the case.

Implications of the Decision

The implications of the Uniloc decision on damages analysis for patent cases are tremendous. Because most patentees seek “reasonable royalties” (rather than lost profits, the other general mode of analysis), damages opinions, up until now, often began with the 25 percent rule of thumb and then “adjusted” the royalty rate up or down in light of the facts of the case.

Now that the 25 percent rule has been repudiated, the future promises to bring new and creative modes of analysis to arrive at a “reasonable royalty” in patent cases, which will likely result in new disputes about the admissibility of damages opinions.

State and City Bar Issue Notable Ethical Opinions on Social Network Data

Posted on November 16, 2010, by Richard Raysman

Facebook passed the 500 million registered user mark; mobile phone users now spend approximately 3.1 hours per week on social network sites; and American users currently spend almost 25 percent of their online time on social networking sites and blogs. Recognizing this trend, litigation lawyers quickly realized that social network sites were an untapped repository of potentially discoverable information that could be used for impeachment purposes against parties and witnesses. Such data might include profile information, photos and videos, and comments and status updates concerning a user's thoughts, activities, and feelings. However, ethical questions arise as to how far attorneys may go to obtain such information, some of which is only available to social network "friends" or specific individuals whom the online user has allowed access.

Accordingly, bar associations in the state of New York have recently issued ethical opinions to guide their members in these potentially sticky situations.

The Association of the Bar of the City of New York, Committee on Professional Ethics recently issued an opinion entitled "Obtaining Evidence From Social Networking Websites." In Formal Opinion 2010-2, the Committee stated that a lawyer may not attempt to gain access to a social network website under false pretenses, either directly or through an agent. Rather, a lawyer should rely on discovery procedures sanctioned by the ethical rules and case law to obtain relevant evidence, such as the truthful “friending” of unrepresented parties or by using formal discovery devices such as subpoenas directed to non-parties in possession of information maintained on an individual’s social networking page. The City Bar Committee recognized that, generally speaking, users are easier to deceive in the online world than if approached in person: "Despite the common sense admonition not to 'open the door' to strangers, social networking users often do just that with a click of the mouse." For example, an attorney or hired investigator might pose as an old classmate and send a friend request to a potential witness or unrepresented party in order to gather personal information. The Committee stated that such deceptive behavior was barred under the New York Rules of Professional Conduct (the "Rules"), namely Rules 4.1 and 8.4(c), which prohibit attorneys from making false statements and engaging in dishonest conduct, respectively.

Moreover, in September 2010, the New York State Bar Association, Committee on Professional Ethics released Op. 843, discussing a lawyer's ethical obligations in gathering public social network information that is not restricted by a user's privacy settings. In that opinion, the Committee stated that a lawyer representing a client in pending litigation may access the public pages of another party's social networking website for the purpose of obtaining possible impeachment material for use in the litigation. The State Bar Committee differentiated between those social network pages that are only accessible to a user's "friends" and those pages that are accessible to all members of a social network or the online community. The Committee stated that New York's Rule 8.4 prohibiting deceptive practices would not be implicated by an attorney searching a party's (whether represented by counsel or not) public social media information for potential impeachment material. The Committee noted that searching for such public data is no different than typing a person's name into an Internet search engine, printing media articles, or conducting research on paid subscription services like Nexis or Bloomberg.

Ninth Circuit Clarifies Software "Ownership" Issue in Noteworthy Opinion

Posted on October 11, 2010, by Marc S. Reisler

A panel of the Ninth Circuit ruled that an off-the-shelf software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions. Vernor v. Autodesk, Inc., 2010 WL 3516435 (9^th Cir. Sept. 10, 2010). The appeals court reversed the district's court grant of summary judgment in favor of the plaintiff- reseller on the copyright claim, concluding that an individual that resold used copies of software that the original customer acquired pursuant to a sale that contained use restrictions committed infringement and was not entitled to invoke the first sale doctrine or the essential step defense. This principal issue before the court was whether the software maker sold its software to its customers or licensed the copies to its customers. If the original customer that resold the software to the plaintiff "owned" its copies of the software, then both its sales to the plaintiff and the plaintiff's subsequent sales to third parties were noninfringing under the first sale doctrine; however, if the software maker only "licensed" the original customer to use copies of the software, then the original customer and the plaintiff's sales of those copies would not be protected by the first sale doctrine and would therefore infringe the software maker's exclusive distribution right under the Copyright Act.

The lower court recognized that a mere licensee in possession of a copy of software could rely on the first sale doctrine, but deemed the software maker's transfer of the software to the original owner under the software license agreement at issue to be "a sale with restrictions on use" because it allowed the owner "to retain possession of the software in exchange for a single up-front payment." Vernor v. Autodesk, Inc., 555 F. Supp. 2d 1164, 1170-71, 1175 (W.D. Wash. 2008). The lower court interpreted early Ninth Circuit precedent [United States v. Wise, 550 F.2d 1180, 1187 (9th Cir. 1977)] to hold that a "first sale" occurs whenever the transferee is entitled to keep the copy of the work and declined to follow the MAI trio of cases. See Mai Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995); Wall Data, Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006).

The Ninth Circuit, however, reconciled the MAI trio of cases with earlier precedent to fashion a consolidated three-factor test in determining whether the plaintiff-reseller in this case took the software via a sale or a restrictive license.

"We read Wise and the MAI trio to prescribe three considerations that we may use to determine whether a software user is a licensee, rather than an owner of a copy. First, we consider whether the copyright owner specifies that a user is granted a license. Second, we consider whether the copyright owner significantly restricts the user’s ability to transfer the software. Finally, we consider whether the copyright owner imposes notable use restrictions.₁₁ Our holding reconciles the MAI trio and Wise, even though the MAI trio did not cite Wise."

In analyzing the software license agreement at issue, the appeals court stated that the software maker retained title to the software and imposed significant restrictions, including, among other things, prohibitions on transfer, modification, translation, reverse engineering and usage outside of the Western Hemisphere. The software license agreement also provided for termination for unauthorized copying or usage. The court held that the software maker's customers were "licensees" of their copies of the software rather than "owners." Consequently, the court concluded that since the original customer of the software was not entitled to resell its copy to the plaintiff under the first sale doctrine and the plaintiff could not have passed ownership title to others, and as such, both the original customer and the plaintiff's sales infringed the software maker's copyright.

Looking ahead, it remains to be seen whether the plaintiff-reseller will request an en banc review of the panel's decision.

'Jailbreaking' Smartphones One of Six DMCA Anticircumvention Exemptions Announced by Librarian of Congress

Posted on August 17, 2010, by Edward A. Pisacreta

Every three years the Librarian of Congress is charged with determining whether there are any classes of works that will be subject to exemptions from the DMCA's prohibition against circumvention of technology that effectively controls access to a copyrighted work.

Under the final rule announced this past July, six classes of works will not be subject to the prohibition against circumventing access controls (17 U.S.C. § 1201(a)(1)), including: circumvention of copy-protected DVDs to incorporate snippets of motion pictures into educational or non-commercial videos; programs that enable used wireless telephone handsets to connect to a wireless telecommunications network; certain security testing of copyright-protected video games; programs protected by dongles that prevent access due to malfunction or damage and which are obsolete; literary works distributed in ebook format that prevent the use of a read-aloud function or specialized screen reader.

Beyond the aforementioned exemptions, the Librarian of Congress, in consultation with the Register of Copyright, most notably exempted computer programs that enable wireless telephone handsets to execute software applications, where circumvention is accomplished for the sole purpose of enabling interoperability of such applications (when they have been lawfully obtained) with computer programs on the telephone handset. This exemption permits the so-called practice of "jailbreaking," which is done primarily by users of the iPhone to download smartphone applications (or "apps") that had not been authorized for distribution by Apple's iPhone App Store. Any software or app to be used on the iPhone must be validated with the firmware that controls the iPhone’s operation.

Both the Electronic Frontier Foundation (EFF), a digital rights advocacy group, and Apple Inc. submitted comments during the Librarian's evaluation of the proposed jailbreaking exemption. In its comments, the EFF argued, among other things, that jailbreaking was a noninfringing, noncommercial activity protected by fair use, and to the extent jailbreaking requires copying the phone's existing firmware beyond the scope of the user license, it would fall under the exceptions of 17 U.S.C. § 1l7(a), which permit the "owner" of a copy of software certain rights. Regarding the latter argument, the EFF contended that iPhone owners are also owners of the copy of the iPhone's firmware and that jailbreaking qualifies as an "adaptation" authorized by § 117(a). In its responsive comments, Apple countered that its prohibitions against jailbreaking were necessary to protect consumers and Apple from harm and that iPhone customers were mere licensees, not owners of the computer programs contained on the iPhone such that § 117(a) of the Copyright Act was inapplicable. Apple further argued jailbreaking would not be a fair use under the Copyright Act.

Regarding the § 117(a) arguments, the Register of Copyright stated that while Apple "unquestionably retained ownership of the intangible works," the Register could not determine whether the various versions of the iPhone consumer contracts constituted a sale or license of a copy of the computer programs contained on the iPhone, particularly since "the state of the law with respect to the determination of ownership is in a state of flux in the courts."

However, the Register of Copyright concluded that when one jailbreaks a smartphone in order to make the operating system on that phone interoperable with an independently created application that has not been approved by the smartphone maker, such a modification is fair use under the Copyright Act. Reviewing the first fair use factor (the purpose and character of use), the Register of Copyright found that jailbreaking was "innocuous at worst and beneficial at best" and that Apple’s objections appeared to "have nothing to do with its interests as the owner of copyrights in the computer programs embodied in the iPhone…[but] relate to its interests as a manufacturer and distributor of…the iPhone." Addressing the fourth fair use factor (the effect of the use upon the potential market of the copyrighted work), the Register found that permitting jailbreaking will not adversely affect the market of the phone's firmware: "The harm that Apple fears is harm to its reputation…, [that] jailbreaking will breach the integrity of the iPhone’s 'ecosystem.' [S]uch alleged adverse effects are not in the nature of the harm that the fourth fair use factor is intended to address."

It should be noted, however, that the Librarian of Congress's final rule concerns the legality of jailbreaking under the DMCA, but has no effect on contractual provisions that might void a user's warranty if his or her smartphone has been jailbroken. Indeed, as one commentator stated, jailbreaking can be a practice with many benefits—and many downsides.

Statutory Damage Award under Copyright Act Reduced on Constitutional Grounds

Posted on July 15, 2010, by Charles D. Tobin

A Massachusetts district court has sharply reduced the damages recovered in a peer-to-peer music file sharing case, finding that the Constitution would not permit the jury's six-figure award against an individual infringer.

In Sony BMG Music Entertainment v. Tenenbaum, 2010 WL 2705499 (D. Mass. July 9, 2010), the defendant was accused of using file-sharing software to download and distribute thirty copyrighted songs belonging to the plaintiffs-recording companies. The defendant's liability for infringement was not seriously in question, and his defense of fair use was rejected by the court in a prior ruling. The only questions for the jury were whether the defendant's infringement was willful and what amount of damages was appropriate.

The plaintiffs opted for statutory damages over actual damages as the remedy. Under the relevant statute, 17 U.S.C §504(c), the jury's award could be no less than $750 for each infringed work and no more than $30,000 or $150,000, depending on whether the jury concluded that the defendant's conduct was willful. The jury found that the defendant willfully infringed the plaintiffs' copyrights and imposed damages of $22,500 per song, yielding a total award of $675,000. The defendant filed a motion for remittitur, raising both common law and constitutional grounds. The defendant raised the question whether the Constitution's Due Process Clause was violated by a jury's award of statutory damages against an individual who committed infringement for no financial gain.

After applying the principles from the Supreme Court's punitive damages jurisprudence, analyzing a sampling of statutory damage awards from copyright cases over the past two years, discussing the asymmetry between the relatively small harm suffered by plaintiffs and benefit reaped by the defendant, and reaffirming the defendant's willful, unlawful conduct, the court ruled:

"[I] conclude that the jury's award of $675,000 in statutory damages for Tenenbaum's infringement of thirty copyrighted works is unconstitutionally excessive. This award is far greater than necessary to serve the government's legitimate interests in compensating copyright owners and deterring infringement. In fact, it bears no meaningful relationship to these objectives. To borrow Chief Judge Michael J. Davis' characterization of a smaller statutory damages award in an analogous file-sharing case, the award here is simply “unprecedented and oppressive.” Capitol Records Inc. v. Thomas, 579 F.Supp.2d 1210, 1228 (D.Minn.2008). It cannot withstand scrutiny under the Due Process Clause.

[I] reduce the jury's award to $2,250 per infringed work, three times the statutory minimum, for a total award of $67,500. Significantly, this amount is more than I might have awarded in my independent judgment. But the task of determining the appropriate damages award in this case fell to the jury, not the Court. I have merely reduced the award to the greatest amount that the Constitution will permit given the facts of this case."

The court looked to another recent peer-to-peer filing sharing decision where another court ordered remittitur of a large jury verdict against a file-sharer. In Capitol Records Inc. v. Thomas-Rasset, 680 F.Supp.2d 1045 (D. Minn. 2010), the jury originally awarded $80,000 per song, for a total award of $1,920,000. The court subsequently ordered a remitted award of $2,250 per song, stating that although the plaintiffs "were not required to prove their actual damages, statutory damages must still bear some relation to actual damages.” The plaintiffs in the Thomas-Rasset case rejected the reduced award, opting instead for a new trial. Much like Thomas-Rasset, the Tenenbaum court reasoned that an award of $2,250 per song, three times the statutory minimum, "was the outer limit of what a jury could reasonably (and constitutionally) impose in this case."

It remains to be seen whether the Tenenbaum opinion will be upheld on appeal, particularly given the court's reasoning that equated constitutional limits on Copyright Act statutory damages with punitive damages, and its selection of the $2,250-per-song damage calculation based upon three times the statutory damage minimum. Until an appeals court weighs in, it is likely that copyright infringers may seek to reduce statutory damage awards that appear to be out of proportion with the actual damages suffered by the content owner, particularly in cases where the infringer lacked a commercial motive. It is not clear, however, how much of the rationale behind the Tenenbaum decision is adaptable to other areas of copyright law. Over the past few years, the handful of major peer-to-peer music file sharing opinions have been described by some commentators as almost a separate sect of copyright law, with decisions based upon unique fact patterns and technology, and culminating in rulings that do not necessarily translate into mainstream copyright and content licensing disputes.

The Bilski Decision

Posted on June 30, 2010, by Joshua Krumholz; Benjamin D. Enerson

In the Supreme Court’s decision in Bilski v. Kappos decided on June 28, 2010, the Supreme Court rejected the Federal Circuit’s “machine-or-transformation” test as the sole test for determining whether a given “process” constitutes patentable subject matter. The Court held that, while the “machine-or-transformation test” is a “useful and important clue, an investigative tool,” it “is not the sole test for deciding whether an invention is a patent-eligible ‘process.’” (Slip Op. at 8.) In this respect, the Supreme Court’s opinion in Bilski echoes its decision in KSR, in which it held that the “motivation to combine” test was too rigid, and instead, “motivation to combine” should be one of many factors to be considered when assessing obviousness under section 103. The Court did, however, repeatedly emphasize the usefulness of the "machine-or-transformation" test.

In reaching its conclusion, the Supreme Court also rejected the argument that a business method patent could not constitute a "process" under Section 101 (although note that the 4-justice concurring opinion disagreed with this conclusion). In reaching this conclusion, the Court looked to the plain language of the statute, in particular section 100(b), and its use of the term “method” to help define what constitutes a patentable process. The Court noted that it “is unaware of any argument that the ‘ordinary, contemporary, common meaning . . . of ‘method’ excludes business methods.” (See id. at 10.) The Court found further support in section 273(b)(1) and 273(a)(3), which concern prior inventorship. Section 273(a)(3) in particular describes a “method” as being “a method of doing or conducting business.” (See id. at 11.)

Business method patent owners, however, should not draw much comfort. The Supreme Court expressed a healthy skepticism for business method patents, and suggested that many, if not most or all, could be found unpatentable as "abstract ideas." In particular, the Supreme Court affirmed that the specific claims at issue, which covered a method for hedging against the risk of price changes in the energy market, were unpatentable under section 101 of the patent laws. In doing so, the Supreme Court relied on its prior decisions in Flook, Benson, and Diehr, holding that the claims at issue covered “abstract ideas.” (See id. at 13–16.) To the extent certain claims limited the idea to a particular field of use, the Supreme Court found, relying on its decision in Flook, that such post-solution activity or field of use restrictions did not render the claims patentable. (See id. at 15.)

Like in some recent Supreme Court cases, this decision brings some uncertainty back into the process. However, because the Court essentially endorsed the utility of the "machine-or-transformation" test and offered no alternatives, that test likely will still be the main determiner under Section 101. In addition, while the Court did not explicitly say so, it appears that any risk to software patents as a class has now passed.

Lower Court Rules in Favor of Google in Landmark Copyright Dispute

Posted on June 24, 2010, by Marc S. Reisler

After more than three years of litigation, the court in the closely-watched Viacom-YouTube copyright dispute issued a decision granting summary judgment to YouTube (Google), ruling that the service provider was protected under the Digital Millennium Copyright Act (DMCA) safe harbor against all of the plaintiff's direct and secondary infringement claims.

In Viacom International, Inc. v. YouTube, Inc., No. 07-02103 (S.D.N.Y. June 23, 2010), the district court held that general knowledge that copyright infringement is "ubiquitous" on a video sharing website does not impose a duty on the service provider under the DMCA safe harbor to monitor or search its service for infringements. Relying primarily on Ninth Circuit precedent and the DMCA's legislative history, the court granted summary judgment in favor of the video sharing website, ruling that it qualified for protection under the DMCA safe harbor, 17 U.S.C. §512(c) and was not liable for direct or contributory copyright infringement. The plaintiff had alleged that the video sharing website was responsible for copyright infringement "on a massive scale" for hosting thousands of videos containing the plaintiff's content. The defendant had countered that after it received a takedown notice from the plaintiff concerning the presence of 100,000 infringing videos on its site, it removed virtually all of them by the next business day in compliance with its obligations under the DMCA. The court ruled that if a service provider knows from a takedown notice from the owner or a "red flag" of specific instances of infringement, the provider must promptly remove the infringing material (which occurred in this case). If not, the court stated that the burden is on the content owner to identify the infringement. The court further stated that the DMCA safe harbors do not condition protection on a service provider monitoring its service or affirmatively seeking facts indicating infringing activity, particularly when, as was the case here, the infringing works are a "small fraction of millions of works posted by others on the service's platform, whose provider cannot by inspection determine whether the use has been licensed by the owner, or whether its posting is a "fair use" of the material, or even whether its copyright owner or licensee objects to its posting." Notably, the court rejected the plaintiff's reliance on the recent P2P music file-sharing decisions, stating that "the Grokster model does not comport with that of a service provider who furnishes a platform…and…identifies an agent to receive complaints of infringement, and removes identified material when he learns it infringes."

Can a Website's "Look and Feel" be Protected via a Trade Dress Claim under the Lanham Act?

Posted on May 28, 2010, by Edward A. Pisacreta

What is the "look and feel" of a website and how can it be protected? Two possible intellectual property regimes exist in the context of protecting a web site's "look and feel" - the Copyright Act and the Lanham Act.

Copyright Law

Copyright law will protect an "original work of authorship fixed in any tangible medium of expression." To be "original" the work must not be copied from another's work and must possess a modicum of creativity. Those works without this modicum of creativity do not qualify for copyright protection, i.e., are not "copyrightable subject matter." Copyright infringement claims and trade dress claims are mutually exclusive and, if an adequate remedy lies under the Copyright Act, any remedy under the Lanham Act is preempted. When no copyright protection is available, a Lanham Act claim is not preempted.

While some courts and the Copyright Office have stated that copyright law will generally not protect the overall format and layout of a Web page or website (though text, software code and certain creative graphic elements may be protectable), a number of courts in recent years have indicated a willingness to extend trademark law protections to distinctive website design and features. In fact, this spring, two district courts waded into the debate and ruled that a website's look and feel could be protectable trade dress that would not interfere with copyright law interests, albeit with varying results for the plaintiffs.

Trade Dress Generally

Trade dress includes the arrangement of identifying characteristics or decoration connected to a product, whether by packaging or otherwise, intended to make the source of the product distinguishable from another and to promote it for sale. It refers to the "total image and overall appearance" of a product, and like trademark, is meant to protect consumers from confusion between a product from an expected source and one from another, unexpected source. Protectable trade dress can include a wide range of features, including the color and shape of pill capsules, the look of a greeting card line, the design and format of magazine covers, the distinctive décor of a restaurant, and the color and tropical depictions on liquor bottles.

However, a website is a multi-layered, non-static, changing "product" with both original and functional elements, thereby making a trade dress determination more difficult. The “look and feel” of a website is a concept which is difficult to define. In general, the “look” comprises aspects of a website's visual design including the colors, shapes, layouts, fonts, and shapes, items not so dissimilar from traditional trade dress. The "feel" describes what lies beneath the “visual design”, that is, the “interface design.” These are the recognizable, familiar elements that help the user navigate the site, such as through the use of tabs, boxes, menus, and hyperlinks. The "look" and the "feel" of a website also include an "overall mood, style and impression." All of these produce an intuitive association with a company's or brand's reputation. In summary, for trade dress infringement, the question is, as with a trademark, does the public associate the "look and feel" of the plaintiff's website with the plaintiff or its products to the point that the defendant's website causes confusion as to the source of the site?

Recent Decisions

In Conference Archives, Inc. v. Sound Images, Inc., 2010 WL 1626072 (W.D. Pa. Mar. 31, 2010), the parties' partnership broke down and the defendant copied a portion of the plaintiff's HTML/Javascript code to develop a new product that would mimic the "look and feel" of the plaintiffs' product. Among other intellectual property-related claims, the plaintiff brought trade dress claims under the Lanham Act. The court denied the defendant's motion for summary judgment on the plaintiff's Lanham Act claim and found that the plaintiff stated a cognizable trade dress claim.

The court applied the two-part test for trade dress infringement:

The claimed trade dress infringement must survive copyright preemption. While certain elements of a website would clearly fall within the subject matter of copyright, including the text of the page, software code, and certain creative graphical elements, the court found that the look and feel of the plaintiff's website fell outside the subject matter of the Copyright Act and thus escaped preemption.

Beyond the preemption analysis, the next step involves a three-factor test, requiring that the plaintiff prove that: (1) the trade dress at issue is distinctive and indicates the source; (2) the trade dress is primarily nonfunctional; and (3) the trade dress of competing goods is confusingly similar. After comparing several elements of the plaintiff's and defendant's websites such as the spacing between table cells, font and background colors, cell height (in pixels), none of which would be protectable under copyright, and noting the defendant's admittedly willful copying of some of the elements of the trade dress of plaintiff's website, the court concluded that the plaintiff had adequately pleaded its trade dress claim.

Interestingly, this month, a California district court also recognized the viability of a trade dress claim based upon the copying of a website's look and feel, though the end result for the litigants was different. In Sleep Science Partners v. Lieberman, 2010 WL 1881770 (N.D. Cal. May 10, 2010), the plaintiff alleged that the defendant, its former business associate, started a competing medical enterprise and used the same format, design and feel as the plaintiff's website and other media. The court found the plaintiff's claims were underdeveloped and vague: "Although it has cataloged several components of its website, Plaintiff has not clearly articulated which of them constitute its purported trade dress. […] Without an adequate definition of the elements comprising the website's 'look and feel,' [the defendant] is not given adequate notice." As a result, the court dismissed, among other claims, the plaintiff's trade dress infringement claim, with leave to amend to articulate its alleged trade dress with greater detail.

Some Lessons from the Recent Rulings

While certain website elements may receive copyright protection, generally a website's interface elements are beyond the scope of the subject matter of the Copyright Act. As the Conference Archives court stated, in order to withstand copyright preemption, the elements of a trade dress elements should be "specifically identified and painstakingly selected." The above shortcoming was the principal reason that the plaintiff's claim in Sleep Science Partners did not survive the defendant's dismissal motion. Thus copyrightable elements such as text and creative graphic designs that have been infringed should be pleaded in a copyright infringement claim.

In order to prove its cause of action, a plaintiff should offer a comprehensive comparison of the websites in question and delineate what trade dress elements have been copied, going beyond a mere conclusory statement that the defendant's website is "visually similar." For example, in Conference Archives, the plaintiff produced a report that broke down the visual similarities arising from use of the same colors (noting identical hexadecimal color notations), screen orientations, arrangement of codes and tags in HTML language, and pixel heights for shaded areas.

A trade dress infringement case can be bolstered by evidence that the defendant committed willful copying or copied the material for the express purpose of emulating the plaintiff's website.

Free Speech in the Blogosphere: Do Bloggers Enjoy The Offline Journalist's Coveted Privilege To Refuse To Disclose Sources?

Posted on May 10, 2010, by Ieuan Mahony

Internet speech is broad and robust, and bloggers fight to preserve this wide-open "exchange of news and views" by relying on, among other legal protection, First Amendment guaranties of "freedom of the press." The journalist's privilege is designed to preserve this freedom by allowing a journalist to refuse to disclose his or her sources -- or to use a derogatory term, "informants" – for a news report. From the lonely pamphleteer to the major metropolitan newspaper publisher, a large range of individuals can be considered "journalists." In a broad range of "brick and mortar" circumstances, these individuals have obtained protection under the journalist's privilege, and courts have permitted them to refuse to disclose their confidential news sources. Proponents of the privilege applaud these court decisions, and argue that if a journalist's information sources could not remain confidential, the required free flow of information to the public would effectively dry up.

Yet with the explosion of news, information, opinion, and invective on the Internet, courts have found it difficult to define who is entitled, under the journalist's privilege, to refuse to disclose information sources. Thankfully, near "hot off the press" court decisions now provide key guidance on the scope and effect of the journalist's privilege: (i) to the participant in online reporting and in other less formal information-sharing; and (ii) to the "target" of an online exchange, who believes he or she has been wronged by the exchange, either through disclosure of confidential information, or through untrue and reputation-disparaging statements.

One notable example of these decisions is O'Grady v. Superior Court, 44 Cal. Rptr. 3d 72 (Cal. App. 2006). In O'Grady, the defendants allegedly posted information from Apple insiders disclosing trade secrets about unreleased Apple products. When Apple demanded the identity of these anonymous insiders, the California Court of Appeals refused, ruling that the defendants' Internet publications were sufficiently similar to traditional news publications to qualify them for the journalists' privilege. The Court then "quashed" Apple's subpoenas and protected the identity of the defendants' sources. As the Ninth Circuit reasoned in a similar case, the journalist's privilege is not limited to traditional news media; instead the privilege "is designed to protect investigative reporting, regardless of the medium used to report the news to the public .... [W]hat makes journalism journalism is not its format but its content." Shoen v. Shoen, 5 F.3d 1289, 1293 (9th Cir. 1993).

The second of these decisions is the recent New Jersey appellate case of Too Much Media LLC v. Hale, 2010 WL 1609274 (N.J. Super. Ct. App. Div. Apr. 22, 2010). There, a claimed news reporter had conducted an investigation of – and posted on Internet sites her "findings" concerning – claimed participants and wrongdoing in the online adult entertainment industry. The target of her claimed investigative reporting disagreed with her facts and conclusions, sued the reporter for defamation and other claimed wrongs, and demanded the identity of her sources, likely to show (among other points) that these sources were untruthful or ill-informed. The defendant responded by claiming she was an "investigative reporter" enjoying protection under the New Jersey Shield Law, and entitled to withhold the identity of her sources. On appeal, the Court rejected these arguments. While recognizing that the journalist's privilege provides broad protection, and includes protections to Internet publications beyond traditional news media, the court stressed that "new media should not be confused with news media." The court then examined what it means to be involved in "news media," and ruled that the claimed reporter in fact had not engaged in any activities traditionally associated with news reporting or news media. For example, she had not undertaken fact-checking, had not retained notes of conversations, meetings, or interviews with her claimed sources; admittedly did not identify herself to her sources as a reporter; and admittedly did not promise anonymity to her sources. The court, therefore, ruled she enjoyed no protection under the journalist's privilege, and was required to disclose her sources, and in fact support the alleged veracity of her Internet postings through these sources.

Although these two cases do not provide "binary rules" for predicting whether the journalist's privilege will protect specific online activity that you may contemplate, the cases provide important factors to consider in your online endeavors:

Given the broad range of topics that might be considered newsworthy, courts will generally avoid inquiry into whether the content of your post qualifies as "news."
You may qualify for protection under a particular state's journalist's privilege even if you are not a member of the institutionalized press. The privilege protects the activity of investigative reporting, and not simply "official" newspaper or television reporters.
To qualify for the privilege, you must to do more than simply assert "I am a reporter" and "I have a hard-hitting journalistic website." Instead, you must show that you are actively engaged in a substantive, real news process.
To determine whether your activities meet this requirement, a court would likely examine: (i) the process you employed in preparing your post; (ii) the nature of your connection (if any) to recognized traditional or online news services, and (iii) the nature of the website and where your work is posted.
For example, courts draw a distinction between (a) an open and deliberate blog, on a news-oriented website, that concerns news you've gathered specifically for the purpose of making that contribution; and (b) the casual "deposit" of information, opinion (or fabrication) to an open and "all-welcoming" newsgroup or other online forum. If your posting is akin to item (a), above, it is more likely your conduct will qualify for the journalist's privilege.
Courts also draw a distinction between (i) personal diaries, opinions, impressions and expressive writing; and (ii) news reporting. Information you post that tends toward the forms outlined in item (i), above, is more likely to disqualify you from the privilege.
The privilege is more likely to attach where you have an understanding with your information source that you will not disclose his or her identity. This understanding can be express (you have said so to your source, in words or in writing), or even implied (you did not actually say this to your source but, given the circumstances, your source would have believed you were giving assurances of anonymity).
You will increase your chances of enjoying the privilege where you follow general professional journalism standards, such as editing, fact-checking, and disclosure of conflicts of interest.
You should identify yourself to interviewees and other information sources as a reporter or journalist.
You should take and retain notes of conversations, meetings, and interviews with contacts or sources that underlie – whether favorably or unfavorably – the information you post.
You should seek to create independent work product, and should not simply assemble posts and writings by others. If you wish to include postings and quotes from others, you should work to make an interesting, substantive contribution to the dialogue, and not simply parrot the opinions and writings of others.

Congress may clarify this area further. There is a federal bill pending, U.S. Senate (S.448) entitled the "Free Flow of Information Act," designed to codify the journalist's privilege at the federal level.

While waiting for this potential development, understand in your blogging and other online work that you may qualify for the highly coveted privilege enjoyed by "brick and mortar" journalists. Only remember: if you want protection like a journalist, you've got to act like a journalist.

Discussion Draft of Internet Privacy Bill Released by House Subcommittee

Posted on May 4, 2010, by Marc S. Reisler

On May 4, 2010, Rep. Rick Boucher, Chairman of the House Subcommittee on Communications, Technology, and the Internet, and Cliff Stearns, Ranking Member of the Subcommittee, released a discussion draft of privacy legislation that would cover the personal and sensitive information of consumers both on the Internet and offline. There are currently several fronts in the push for online privacy controls: privacy watchdog groups that are advocating for stronger regulation, most recently in the form of a complaint with the FTC over certain companies' behavioral advertising practices; the online advertising industry that favors self-regulation, most recently releasing technical specifications that would offer a method to provide website users with notice regarding behavioral advertising; and the FTC, which last year released its own online and behavioral advertising self-regulatory principles and has hosted several public roundtable discussions this year to explore the privacy challenges posed by the vast array of 21st century technology and business practices that collect and use consumer data.

Representative Boucher's discussion draft bill would, among other things, cover a number of online privacy concerns:

Privacy Policy Disclosures: Companies that collects individuals' "covered information" (which included traditional "personally identifiable information" as well as persistent identifiers such as a user's IP Address) would have to conspicuously display a clearly-written, understandable privacy policy that explains how information about individuals is collected, stored, used, disclosed, comingled with other collected personal information, and if applicable, disposed or rendered anonymous.

Opt-Out Consent: Under the bill, websites with adequate privacy policies would be able to collect information about individuals unless an individual affirmatively opts out of that collection. If an individual declines consent at any time subsequent to the initial collection of the covered information, the website could not collect covered information from the individual or use covered information previously collected. While a covered entity would be prohibited from selling, sharing, or otherwise disclosing covered information to an unaffiliated party without first obtaining a user's express affirmative consent, opt-out consent would still apply when a website relies upon another service provider to effectuate a first party transaction, such as the serving of ads on that website, and the service provider agrees to use the information solely for the purpose of providing the contracted service.

No Consent: No consent would be required to collect and use operational or transactional data—the routine web logs or session cookies that are necessary for the functioning of the website—or to use aggregate data or data that has been rendered anonymous.

Opt-In Consent: Websites would need an individual’s express opt-in consent to knowingly collect sensitive information (SSN, financial, medical, geolocation data) about an individual.

Behavioral Advertising: Many websites work with third-party advertising networks to create a profile and target ads based on a user's Web activity. The bill would apply opt-out consent to the sharing of an individual’s information with a third-party ad network if there is a clear, easy-to-find link to a webpage for the ad network that allows a user to edit his or her profile, and if he chooses, to opt out of having a profile, provided that the ad network does not share the individual’s information with anyone else.

Data Security: Under the bill, a covered entity or service provider that collects covered information about an individual would be required to implement and maintain appropriate administrative, technical, and physical data security safeguards that the FTC determines are necessary to ensure the security, integrity, and confidentiality of collected information and protect against anticipated threats and unauthorized access.

Enforcement: The FTC would adopt rules to implement and enforce the measures. While there is no private right of action under the bill, state attorneys general or state consumer protection agencies could enforce the FTC’s rules.

'Hot News' Doctrine Back in the News

Posted on April 19, 2010, by Richard Raysman

Ever since (and likely long before) the famous Paul Revere's "Midnight Ride" of 1775, breaking news has been a hot commodity. And given the ease of distribution of information in the digital age, news organizations and content providers have found it increasingly difficult to prevent its wide release over the Internet, particularly uses that do not necessarily constitute copyright infringement. It seems, however, that the old "hot news" misappropriation doctrine—first outlined by the Supreme Court in its almost century-old International News Service v. Associated Press, 248 U.S. 215 (1918) decision—may offer a limited remedy against websites that "free-ride" on content providers' costly efforts to collect and generate time-sensitive news and materials.

As I wrote about last year, the Southern District of New York reignited the 90-year old “hot news” doctrine and applied it in the Internet context. In The Associated Press v. All Headline News Corp., 2009 U.S. Dist. LEXIS 11816 (S.D.N.Y. Feb. 17, 2009), the district court found that a newswire’s “hot news” misappropriation claim against a news aggregation website that collected news stories on the Internet and repackaged them under its own banner was valid under New York law.

Most recently, this past month, the Southern District issued another opinion upholding the hot news doctrine in Barclays Capital Inc. v. TheFlyOnTheWall.com, 2010 WL 1005160 (S.D.N.Y. Mar. 18, 2010). In Barclays, a financial newsfeed website that posted key information from proprietary, time-sensitive equity research reports distributed by several Wall Street investment firms to subscribing investors prior to the opening bell was liable for hot news misappropriation. Following a bench trial, the court, among other things, issued a permanent injunction barring the defendant from publishing information culled from research reports for a specific amount of time after the investment firms release their reports to top investors (i.e., the defendant must wait until one-half hour after the market's opening bell (10:00am) for equity research reports released while the market is closed, and two hours for reports released while the market is open for trading). The court found that the plaintiffs satisfied the five-part test for hot news misappropriation, namely that: (1) the plaintiffs produced the equity research at great expense; (2) the value of the information was highly time-sensitive; (3) the defendant’s use of the information constituted "free-riding"; (4) the defendant was in direct competition with the plaintiff in disseminating equity research to investors; and (5) the defendant's continued conduct would reduce the plaintiffs' incentive to produce equity research reports and would threaten the continued viability of plaintiffs’ research business.

The Barclays decision was certainly a notable victory for the investment banks, though, not all commentators agree on the beneficial result in limiting the disclosure of such reports. While this decision involved financial reports, the AP announced this month that it would pursue legal action against news aggregators that reprinted its materials without permission. Going forward, it remains to be seen whether other news outlets will seek to use the hot news doctrine to prevent online certain news aggregators and other similar websites from collecting headlines and displaying snippets of article text underneath, particularly in light of the recent financial woes of news publishers that are struggling to find the right balance of free and paid content on the Internet.

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