United States: Managing Litigation In The Ever-Changing Landscape Of Copyright And Trademark Law

Last Updated: November 27 2015
Article by Lisa T. Simpson

Introduction

It is an exciting time to be a copyright and trademark litigator. Important issues are finding their way to the steps of the United States Supreme Court at a rate that was unprecedented just a few years ago. The issues at stake have become more important and more contentious, often causing industry-leading companies to weigh in in record numbers, usually on both sides of the issues.

The developments in copyright law are particularly fascinating. Copyright law is being relentlessly challenged to keep up with ever-evolving technology. That is no easy feat. The Copyright Act was codified nearly forty years ago, in 1976, and drafted, in some cases, decades before that— well before anyone even dreamed of streaming movies, music, or television to devices held in one's hand. Computers were not even mainstream then, and everybody watched what was on TV at its scheduled time and listened to music on albums or on the radio.

Attempting to apply that 1976 copyright code to the technologies and the ways that we can now deliver content is understandably quite difficult. Often, the law is unsettled, and equally often, it is amenable to more than one reasonable interpretation or application to the issue at hand.

Trademark law is evolving in a different way. Again, the Supreme Court is hearing more substantive trademark cases than ever before, but rather than struggling to apply old law to new technology, on the trademark side, it seems the Court is weighing in on issues that those in the field viewed as settled years ago, often reaching conclusions opposite to those that have been generally accepted. Those developments, just like on the copyright side, have the potential to shake up the way trademark rights are litigated.

This chapter will discuss some of the recent developments—first in copyright and then in trademark—that are redefining the law and shaping industries. It will then offer some strategies for managing copyright and trademark litigations in this complex legal setting where the law is constantly evolving.

Copyright Developments Worth Watching

When technology and copyright law collide, interesting issues arise. There are three exciting areas to watch where such collisions are readily at work:

  1. The application of the first sale doctrine to digital content: Can a secondary market exist?
  2. The evolution of television and radio: How will we watch and listen in the future?
  3. Oracle v. Google1 and the dispute over Java: How much protection is there for computer software?

Each of these areas not only presents questions of copyright law and policy and tricky questions of statutory construction—so much so that each has found its way to the US Supreme Court—but these issues also have the potential to impact our everyday lives.

Application of the First Sale Doctrine to Digital Content: Can There Be a Secondary Market for Digital Files?

The first sale doctrine is codified in the Copyright Act,2 but everyone is generally familiar with it. You buy a book, and then it is yours; you are free to do with it what you wish. You may lend it to a friend, give it away, or sell it at a flea market. That is the first sale doctrine in action. While the copyright owner still owns the copyright in the book, the copyright owner's right to control that particular copy ended once you bought it.

The official statute reads, "the owner of a particular copy or phonorecord lawfully made under this title ... is entitled ... to sell or otherwise dispose of the possession of that copy or phonorecord."3 The first sale doctrine allows you to give your book away without infringing the copyright owner's right of distribution (one of the §106 bundle of copyrights). This doctrine first arose in the common law context in 1908 and was first codified into the Copyright Act4 in 1909. Clearly, that statute addressed traditional copyrighted goods—books and movies in hard copy. The digital and transient copies prevalent today were not part of the discussion, or even the imagination, at that time.

The Supreme Court took on the first sale doctrine in the landmark case of Kirtsaeng v. John Wiley & Sons, Inc.5 The facts of the case were relatively simple: Supap Kirtsaeng, a graduate student at University of Southern California, subsidized his university expenses by reselling textbooks. He had his family back home in Thailand buy books there, where they were less expensive, and ship them to him in the United States, where he would sell them on eBay. Some of the books he resold were published by Wiley.

The law was much less straightforward. When Wiley sued Kirtsaeng for infringement of its distribution right, Kirtsaeng asserted the first sale defense. Before trial, though, the district court rejected Kirtsaeng's first sale defense as a matter of law, holding that the defense is "unavailable to the goods manufactured in a foreign country."6 The Second Circuit affirmed, holding that "the phrase 'lawfully made under this Title' in §109(a) refers specifically and exclusively to works that are made in territories in which the Copyright Act is law, and not to foreign-manufactured works."7

The Supreme Court granted certiorari to consider the issue of whether the first sale doctrine applies to copies made abroad—i.e., whether a copy made abroad can be "lawfully made under this title" within the meaning of Section 109(a). That question had split the circuit courts, with the Second Circuit holding that the goods had to be manufactured on US soil, the Third Circuit saying that the goods merely had to be made consistent with the Copyright Act, and the Ninth Circuit creating a hybrid, saying that the goods had to be manufactured on US soil or, if manufactured abroad, had to be sold at least once in the United States for the first sale doctrine to apply. The issue had also previously split the Supreme Court.8

The stakes were very high on both sides. If the first sale doctrine were held to apply only to domestically made goods, then copyright owners would have eternal control over all further sales, rental, or gifts of foreign-made copies. The possibility of eternal downstream control would give copyright owners strong incentive to ship manufacturing abroad. On the other hand, a ruling for Kirtsaeng would frustrate the widely used and relied upon practice of market segmentation, which allows manufacturers to charge different prices in different markets depending on what each market will bear. With such significant interests at stake, amici came out in force to support each side and turned out to be critical to the decision issued by the Supreme Court.

In a 6-3 decision, the Supreme Court concluded that the first sale doctrine does indeed apply to goods manufactured abroad. It held that "lawfully made under this title" lacks a geographical limitation and means only "in accordance with" or "in compliance with" the Copyright Act.9 The Court relied heavily on the policy implications and the practical effects of the eternal downstream control that would result from Wiley's position as amplified and articulated by the amici. Of course, in addressing textbooks, Kirtsaeng provided no insight on what should happen when digital goods are at issue.

Two weeks later, in March 2013, when the issue of digital rights came up, the Southern District of New York reached the opposite conclusion. In Capitol Records v. ReDigi, the issue of digital rights and whether the first sale doctrine should apply was squarely presented.10 ReDigi is a technology startup that provided an online marketplace for used digital music. To use the service, a user downloaded ReDigi's "Media Manager" software, which would analyze the user's computer for eligible files for sale. The user then could choose to upload the eligible files from the user's computer to ReDigi's Cloud Locker. Once the file was uploaded to the Cloud Locker, Media Manager would delete the file from the user's computer and any connected devices. The theory was that the user would then retain no digital copies of the file, and the file would be available for sale to another ReDigi user from the Cloud Locker. A buyer of that file would then have the choice of storing, streaming, or offering that file for resale. The original seller's access would be permanently terminated. ReDigi earned a commission on each sale (reserving a portion of the commission for the artists).

Capitol Records, finding a number of its recordings on the site, sued for direct and indirect infringement of Capitol's reproduction and distribution rights. The district court granted summary judgment to Capitol Records, finding ReDigi liable for direct and secondary infringement for violation of both the reproduction and distribution rights.11 The court rejected ReDigi's first sale defense.12

As the court framed it: "[t]he novel question presented in this action is whether a digital music file, lawfully made and purchased, may be resold by its owner through ReDigi under the first sale doctrine." The court concluded, "it cannot."13

Starting its analysis with the reproduction right, the court noted while it was well settled that unauthorized duplication of digital music files over the Internet can infringe the reproduction right, "courts have not previously addressed whether the unauthorized transfer of a digital music file over the Internet—where only one file exists before and after the transfer— constitutes reproduction."14 The court concluded that it does.

After considering the Copyright Act's definitions of "phonorecords" and "sound recordings," the court concluded that "reproduction occurs when a copyrighted work is fixed in a new material object."15 The court went on to find, "[i]t is simply impossible that the same 'material object' can be transferred over the Internet."16 Rather, the Internet transfer of a file results in a material object being created elsewhere at the finish. "[B]ecause digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction."17 The court specifically found that when the file moves from the user's computer to ReDigi's server and when the user downloads a purchase from ReDigi's server to the user's computer, files are reproduced in violation of the copyright law. The court further found that "[i]t is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created."18

Turning to the distribution right, the court noted that an "electronic file transfer is plainly within the sort of transaction that § 106(3) was intended to reach [and] ... fit[s] within the definition of 'distribution' of a phonorecord."19

The court then considered ReDigi's affirmative defenses of fair use and first sale. ReDigi's reproduction and distribution of digital music files were found to fall "well outside the fair use defense." The court found that ReDigi's (and the user's) use was commercial and not transformative, that the works were creative works used in their entirety, and that ReDigi's sales were likely to undercut the market for the copyrighted work by diverting consumers.

Finally, considering first sale (which applied by its statutory terms only to Capitol's distribution claim), the court rejected it on two grounds. First, the court noted that since it had determined that the copy that is being sold is, in fact, "an unlawful reproduction," it is not "lawfully made under this title."20 The court also found that the doctrine protects only distribution of the "particular copy" owned by the user:

Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her "particular" phonorecord on ReDigi, the first sale statute cannot provide a defense.21

The ReDigi court, in reaching its decision, relied on a 2001 DMCA Report, a report called for by the Digital Millennium Copyright Act22 seeking input from the US Copyright Office on existing and emergent technology and operation of the first sale doctrine.23 The report recommended that the first sale right not be extended to digital works. In doing so, it noted that digital resales have a greater potential to compete with original copies, since they do not degrade and can be easily reproduced. The report further noted that foreign jurisdictions do not extend the first sale doctrine to digital copies. It concluded that it would be preferable to allow the market to move to a licensing model (where the first sale does not apply).

Examination of the issue did not stop there, however. Congressional hearings were held in 2013 and 2014, during which testimony was given suggesting that Congress consider extending the first sale doctrine to digital copies.24 In 2013, the Department of Commerce also issued a Green Paper expressing concerns that with the increasing digital distribution, the secondary resale market may become obsolete.25 It asked whether there is a way to preserve that market, eliciting robust arguments both for and against extending the first sale doctrine to digital copies.

In addition, in May 2014, the Copyright Office launched a study on the concept of "making available," asking whether US law sufficiently covers this right as it is implemented with respect to digital works in our treaty countries.26 Three camps of commenters emerged: one arguing that US law must be revised to recognize this right formally; a second arguing that the current law is sufficient, but that the Copyright Office should issue clarifications on certain issues; and a third taking the position that US law is just fine, and no revisions are needed. Results from the Copyright Office's study have yet to be published. Clearly, there is much discussion and disagreement on this issue.

But what does all this mean for clients (and litigators) in this area? Right now, although Kirtsaeng limited content-owners' rights in favor of consumers, ReDigi took them back. Following ReDigi, content owners can assert eternal downstream control over digital copies; consumers simply are not free to transfer or sell digital files (outside of a fair use defense). Given this, there is no question that there is a strong incentive to move all works into the digital realm (a trend that probably did not even need added incentives).27 And a fair concern exists that the secondary market is disappearing.

We know, though, that technology does not stand still. There are—no doubt—developers out there right now looking for ways to capitalize on the secondary market for digital content without triggering the copyright laws. ReDigi, in fact, had a different version of its service that has not been adjudicated. In ReDigi 2.0, it seems that only music files purchased directly from iTunes and put directly into the Cloud Locker are available for resale. This version therefore seems to eliminate the transfer of the file (and thus the resulting reproduction) that occurred when the seller moved the file from his computer to the Cloud Locker in the original version. This version, it seems, simply changes who is allowed to stream the file from the Cloud Locker. This very well may help on the infringement-by-reproduction front.

With respect to distribution, version 2.0 does address the concerns raised by the district court in ReDigi. The court's primary issue was that the copy being distributed was not lawful. In this new version, it seems there is no unlawful copy anymore. Additionally, if in the new version the service is merely changing the individual with access to the specific file based on who owns it, there may be an argument that any distribution is a fair use or that there is no public performance at all. In other words, these are individual copies that are not being distributed to the public, but merely being stored on the cloud at the owner's direction for private streaming at the owner's request—and sometimes the owner simply changes to another individual.28 However, one must beware of applicable terms of use in a case such as this (iTunes limits use of its files to noncommercial uses) and the Supreme Court's recent decision in Aereo.29

In Aereo, as discussed more fully in the next section of this chapter, the Supreme Court suggested that, at least in certain circumstances, individual transmissions could more or less be aggregated and therefore constitute an impermissible public performance. In the case of ReDigi 2.0, however, the music file has indeed been purchased by the user, and thus the user is receiving the file as an "owner," a key distinction noted by the Court in Aereo. The bottom line is that there are numerous moving pieces in this area: the multiple interacting sections of the Copyright Act,30 Congress, the Copyright Office, and divergent views in industry. Litigating in this arena demands an understanding of all these moving pieces.

To read this Chapter in full, please click here.

Originally published by Inside The Minds: Litigation Strategies for Intellectual Property Cases, 2015 Edition, Aspatore.

Footnotes

1 Oracle America Inc. v. Google Inc., 750 F.3d 1339, 1352 (Fed. Cir. 2014).

2 17 U.S.C.A. § 109.

3 17 U.S.C.A. § 109(a).

4 Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 28 S.Ct. 722 (1908).

5 Kirtsaeng v. John Wiley & Sons Inc., 133 S. Ct. 1351, 1358, 185 L. Ed. 2d 392, 75 A.L.R. Fed. 2d 767 (2013).

6 John Wiley & Sons Inc. v. Kirtsaeng, 32 Int'l Trade Rep. (BNA) 1500, 93 U.S.P.Q.2d 1432, 2009 WL 3364037, *5 (S.D. N.Y. 2009), aff'd, 654 F.3d 210 (2d Cir. 2011), rev'd and remanded, 133 S. Ct. 1351, 185 L. Ed. 2d 392, 75 A.L.R. Fed. 2d 767 (2013).

7 John Wiley & Sons Inc. v. Kirtsaeng, 654 F.3d 210, 222 (2d Cir. 2011), rev'd and remanded, 133 S. Ct. 1351, 185 L. Ed. 2d 392, 75 A.L.R. Fed. 2d 767 (2013).

8 Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), aff'd by an equally divided court, 562 U.S. 40, 131 S. Ct. 565, 178 L. Ed. 2d 470 (2010) and (abrogated by, Kirtsaeng v. John Wiley & Sons Inc., 133 S. Ct. 1351, 185 L. Ed. 2d 392, 75 A.L.R. Fed. 2d 767 (2013)) (considering the application of Section 109(a) to foreign made goods, Justice Kagen recused, and the court split 4-4 on the issue).

9 Kirtsaeng, 133 S. Ct. at 1358.

10 Capitol Records LLC v. ReDigi Inc., 934 F. Supp. 2d 640 (S.D. N.Y. 2013).

11 Although the court found ReDigi both directly and indirectly liable, its analysis on direct infringement is flawed and has been criticized as inconsistent with the Second Circuit's decision in Cartoon Network LP LLLP v. CSC Holdings Inc., 536 F.3d 121 (2d Cir. 2008) ("Cablevision"). The Second Circuit in Cablevision carefully considered the demarcation between direct and indirect infringement, finding that only the volitional actor, the one who causes the copying, can be liable for direct infringement. The facts recited by the court in ReDigi in support of its finding of direct infringement actually support only secondary liability. Cablevision is discussed in more detail later in this chapter.

12 ReDigi, 934 F. Supp. 2d 640.

13 ReDigi, 934 F. Supp. 2d at 648.

14 ReDigi, 934 F. Supp. 2d at 648.

15 ReDigi, 934 F. Supp. 2d at 648.

16 ReDigi, 934 F. Supp. 2d at 649.

17 ReDigi, 934 F. Supp. 2d at 649-50.

18 ReDigi, 934 F. Supp. 2d at 650.

19 ReDigi, 934 F. Supp. 2d at 651 (citing London-Sire Records Inc. v. Doe 1, 542 F. Supp. 2d 153, 173-74, 231 Ed. Law Rep. 750 (D. Mass. 2008)).

20 ReDigi, 934 F. Supp. 2d at 655.

21 ReDigi, 934 F. Supp. 2d at 655.

22 17 U.S.C.A. § 512.

23 ReDigi, 934 F. Supp. 2d at 656.

24 Hearing: First Sale Under Title 17, US House Of Representatives Judiciary Committee (June 2, 2014), http://judiciary.house.gov/index.cfm/hearings?ID=A3494657-04C2-4B9E-8027-B72783516C61

25 Copyright Policy, Creativity, & Innovation In The Digital Economy, The Department Of Commerce Internet Policy Task Force, available at http://www.uspto.gov/sites/default/files/news/publications/copyrightgreenpaper.pdf.

26 Making Available Study, US Copyright Office, http://copyright.gov/docs/making_available/.

27 According to a report issued by the Recording Industry Association of America (RIAA) on digital music sales in the United States in 2014, music downloads and audio streaming services combined now already account for 64 percent of the total market by value (with physical format accounting for only 32 percent). See Joshua P. Friedlander, News and Notes on 2014 RIAA Music Industry Shipment and Revenue Statistics, Recording Ind. Ass'n of Am. (March 18, 2015), http://riaa.com/media/D1F4E3E8-D3E0-FCEE-BB55-FD8B35BC8785.pdf.

28 See Cartoon Network LP LLLP v. CSC Holdings Inc., 536 F.3d 121 (2d Cir. 2008).

29 American Broadcasting Companies Inc. v. Aereo Inc., 134 S. Ct. 2498, 2501, 189 L. Ed. 2d 476 (2014).

30 17 U.S.C.A § 101 et seq.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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