Changes Ahead in U.S. Copyright Statutory Damages Law

February 18, 2016 · by ·

The U.S. Department of Commerce’s Internet Policy Task Force  (the Task Force), which is led by both the U.S. Patent and Trademark Office (USPTO) and the National Telecommunications and Information Administration (NTIA), published on January 28 a  White Paper on Remixes, First Sale, and Statutory Damages which addresses three issues:

  • 1) the legal framework for the creation of remixes;
  • 2) the relevance and scope of the first sale doctrine in the digital environment; and
  • 3) the application of statutory damages in the context of individual file-sharers and secondary liability for large-scale online infringement.

The Task Force had published a Green Paper, “Copyright Policy, Creativity, and Innovation in the Digital Economy” on July 31, 2013, which had identified these three issues warranting further review by the Task Force.

The Task Force then published a Notice in the Federal Register seeking comment on these issues. It conducted a public meeting in December 2013 and also held roundtables around the U.S., before reviewing comments from stakeholders as diverse as rights holder organizations, Internet-based companies, public interest groups, libraries, academics, and individual authors and artists.

Remixes

Remixes use existing works, some of them still protected by copyright, to create new works, which may be compilations or derivative works under the Copyright Act, or collective works.  As noted by the Task Force, user generated content (“UGC”) “has become a hallmark of the Internet” (p.6).

Some of the remixes, such as fan fiction and fan videos, are created by non-professionals, while others, such as music mashups, are created by professionals and may even be sold. Several stakeholders noted that “the lines between amateur and professional, and between noncommercial and commercial, are often blurred” (p. 7). Others noted that “noncommercial activities can cause harm to the market for the original work or for licensed derivative works” (p.8).

Some remixes are fair use, some are not, and determining what is fair use or not is not easily determinable, even by attorneys or by courts, as noted by some stakeholders (p.10). The Copyright Office maintains an online fair use index to help determine whether a particular use may be fair or not, but this tool alone does not provide an absolute determination of whether a particular use is fair or not.piano rolls

The Task Force did not believe that a compulsory license, such as the one provided by section 115 of the Copyright Act for phono records, would be advisable. At the time this compulsory license was enacted, one company had the monopoly on the piano roll market, and the Task Force has not seen evidence that a similar monopoly exists today for remixes or their licensing.

Also, such compulsory licenses would allow the creation of derivative works, whereas statutory licenses now only permit reproducing, distributing, and public performance of the licensed work, without alteration (p. 26). While the Task Force acknowledged that remixes are “valuable contributions to society… the record has not established a need to amend existing law to create a specific exception or a compulsory license for remix uses” (p. 4).

Instead, the Task Force recommends three goals to be pursued so that remixers would understand when a use is fair or not, and to understand how to obtain licenses.

These three goals are:

  1. developing negotiated guidelines which would provide greater clarity as to the application of fair use to remixes;
  2. expanding the availability of a wider variety of voluntary licensing options; and
  3. increasing educational efforts aimed at broadening an understanding of fair use.

The guidelines could be developed independently or with the collaboration of the government (p. 28) and should be written in language easily understandable by the general public (p.29). The White Paper notes that such guidelines already exist, such as the Principles for User Generated Content Services which aims at “foster[ing] an online environment that promotes the promises and benefits of UGC Services and protects the rights of Copyright Owners.”

As licensing would remain voluntary, authors and rights holders would have the option to refuse granting a license, “especially when the prospective licensee is seeking permission for a use that the author or rights holder considers offensive” (p. 30).

A stakeholder gave the example of the Beatles Hey Jude song used to create an Anti-Semitic work (see note 44 of the White Paper). But such hateful use would probably be fair use, and protected by the First Amendment. Only granting authors a moral right would allow them to bar every use they find offensive. By the way, what is “offensive”?  The Beatles example would be considered offensive by many, if not all, but what about use of a protected work to comment on issues where opinions diverge more, such as political opinions?

First Sale Doctrine

The Task Force noted that works distributed online are often licensed, not sold, and “this could make the resale market obsolete” (p. 35). Some stakeholders noted that the contractual terms of such licenses are often “opaque” (p.39).

Libraries expressed concerns that their use of digital works may be limited, including eBook library loans (p. 47). Indeed, libraries may only lend books thanks to the first sale doctrine, but the Task Force believes that “early government intervention into the eBook market could skew the development of innovative and mutually beneficial arrangements” between eBook publishers and libraries. However, this may change if libraries are not able to “appropriately serve their patrons due to overly restrictive terms imposed by publishers” (p.4).

In order to preserve the first sale doctrine in the online environment, the Task Force believes it is not advisable to extend the first sale doctrine to digital transmissions of copyrighted works, because of the risks that would cause to copyright owners’ primary markets.

The Task Force noted that digital works are offered at lower prices than the hard copies of the works and thus deliver the benefit offered by the first sale doctrine to consumers who may purchase used books and used copies of protected works at a lower price (p.58).

While consumers are not allowed to resell their digital copies, “[i]t is difficult… to determined the value of this lost benefit” as the Task Force does not have “sufficient data to conduct an authoritative  cost-benefit analysis of the trade-offs between the consumer benefits from the first sale doctrine and from licensed online services”(p. 59).

So U.S. law is not (yet) ready to authorize the resale of digital goods.

Statutory Damages

Statutory damages have been applied against individuals sharing files online and against online services found to be secondarily liable for such infringements. Remix artists often refrain from using a protected work, even they believe their use is fair, as fair use can not be accurately predicted and “the threat of high statutory damages can stifle lawful activity” (p.33). Some stakeholders also argued that statutory damages have a chilling effect on innovation and investment (p.80), an assessment disputed by some right holder groups (p. 81).troll

Statutory damages have also allowed the development of a noxious “business model” of massive copyright infringement suits (aka copyright trolls), which abuse the litigation process by filing hundreds of boilerplate copyright infringement suits, using the subpoena power of the courts to find the identity of Internet users. These suits are, however, rarely litigated, but instead are settled after intimidating correspondence (p. 74).

The Task Force recommends three amendments to the Copyright Act so that the needs of copyright owners, users, and intermediaries may be better balanced:

First, the Task Force recommended that Congress add a new paragraph in Section 504 of the Copyright Act to provide a list of factors for courts and juries to consider when determining the amount of a statutory damages award. It proposed the insertion of this new clause in subsection Section 504(c): (p.87)

FACTORS TO CONSIDER — In making any award under this subsection, a court shall consider the following nonexclusive factors in determining the appropriate amount of the award:

(1) The plaintiff’s revenues lost and the difficulty of proving damages.

(2) The defendant’s expenses saved, profits reaped, and other benefits from the infringement.

(3) The need to deter future infringements.

(4) The defendant’s financial situation.

(5) The value or nature of the work infringed.

(6) The circumstances, duration, and scope of the infringement, including whether it was commercial in nature.

(7) In cases involving infringement of multiple works, whether the total sum of damages, taking into account the number of works infringed and number of awards made, is commensurate with the overall harm caused by the infringement.

(8) The defendant’s state of mind, including whether the defendant was a willful or innocent infringer.

(9) In the case of willful infringement, whether it is appropriate to punish the defendant and if so, the amount of damages that would result in an appropriate punishment.

The Task Force explained that these factors “should be weighted holistically” (p. 88).

Secondly, the Task Force recommended amending Section 401(d) and 402 (d) of the Copyright Act to expand eligibility for the lower “innocent infringement” statutory damages awards (p. 97).

Thirdly, the Task Force recommended giving courts discretion to assess statutory damages other than on a strict per-work basis in cases of non-willful secondary liability for large scale online services (p. 97).

Small Claims Tribunal

The Task Force is also in favor of establishing a small claims tribunal, as it believes this “could help diminish the risk of disproportionate levels of damages against individual file-sharers” (p.5). This has been proposed by the Copyright Office itself.

The tribunal would be centralized, in a single location, and would provide for a cap on awards of both statutory and actual damages. There would be limited discovery and counterclaims, and all relevant defenses could be asserted, including fair use. Also, it would not be mandatory to be represented by an attorney, and the tribunal could award costs and fees against frivolous litigants (p. 99). This is a very interesting proposal and I hope it will be implemented soon.

This post was first published on The 1709 Blog.

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First Sale Doctrine Allows Retailer to Sell in U.S. Gray Market Watches Bought Abroad

January 29, 2015 · by ·

This blog post was originally published on The IPKat blog. 

On January 20, 2015, a three-judge panel from the 9th Circuit affirmed a Central District of California’s decision which had granted summary judgment to defendant U.S. discount retailer Costco. The discounter had been sued for copyright infringement by Swiss luxury watch manufacturer Omega. The case is Omega S.A. v. Costco Wholesale Corp., No. 11-57137 (9th Circ.).costco1

A Gray-Market of Genuine Luxury Goods

Costco sold Omega “Seamaster” watches in its stores. It had purchased them abroad in 2004 in the “gray market,”after Omega had sold the watches to authorized foreign distributors. Indeed, instead of buying goods directly from an official supplier, some companies buy genuine goods in the secondary market, after they have been first sold by an authorized distributor.

Choosing where your products will be sold, or “placement,” is an important part of the marketing mix. The watches were sold by Costco for 35% less than Omega’s suggested retail price (p.19) and “Price” is also a component of the marketing mix. It is therefore not surprising that many luxury companies are less than happy to see their products sold by discount retailers, for fear of losing the aura of prestige which is one of the reasons customers may buy a luxury product.

Omega did not want its watches to be sold by Costco, and sued the discount retailer for copyright infringement, arguing that it had breached §602 of the Copyright Act, which forbids importing protected works into the United States “without the authority of the owner of copyright.” As watches cannot usually be protected by copyright in the U.S., because they are useful articles, Omega had each of the Seamaster watches engraved on its underside with a tiny copyrighted Omega design, the “Globe De
sign,” in order to be able to assert a copyright in them. Costco did not have permission to use this design.

Costco asserted a first sale doctrine defense. The Central District of California granted summary judgment to Costco, noting that Omega had engraved the Globe Design on its watches at least in part to control importation of the watches, and thus had misused its copyright. But the 9th Circuit reversed the decision in 2008 and remanded, holding that the first sale doctrine does not apply to copies of works produced abroad. The Supreme Court affirmed per curiam in 2010. On remand, the district court granted again summary judgment to Costco. Omega appealed and the 9th Circuit affirmed this time, because the Supreme Court held in 2013 in Kirtsaeng v. John Wiley & Sons that the first sale doctrine applies to goods manufactured abroad.

First Sale Doctrine

109(a) of the Copyright Act authorizes the owner of a lawfully made copy of a protected work to sell or dispose of that copy without having to ask permission of the copyright owner. Therefore, once a copy of a protected work has been lawfully sold, the owner of that copy, and the subsequent owners as well, may dispose of it as they wish, because the first sale of the work has “exhausted” the copyright owner’s exclusive distribution right under § 106(3).

In Quality King Distributors, Inc. v. L’anza Research Int’l, Inc., the Supreme Court held in 1998 that §602(a)(1), which refers to §106(3)’s exclusive distribution right, incorporates the “first sale” doctrine limitation. That means that §602(a)(1) allows the importation into the United States of a copy of a protected work purchased abroad. In the Quality King case, however, the copy, while purchased abroad, had been manufactured in the U.S.A., and thus the case could be distinguished from the Costco case.

But while the Costco suit was under way, the Supreme Court held in 2013, in Kirtsaeng v. John Wiley & Sons, that the first sale doctrine also applies to copies of protected works lawfully manufactured abroad. The Kirtsaeng judgment retroactively applied in the Costco case, and therefore, the Ninth Circuit found that Omega had no copyright infringement cause of action against Costco:

“Omega’right to control importation and distribution of its copyrighted Omega Globe expired after that authorized first sale, and Costco’s subsequent sale of the watches did not constitute copyright infringement” (p.7).

This decision is a big victory for Costco and similar retailers alike. As noted by Judge Wardlaw in her concurring opinion, Costco sells “a wide range of luxury goods, including Dom Pérignon Champagne, Waterford crystal, Dolce & Gabbana handbags”(p. 9). We may soon see more luxury goods in discounter’s aisles, alongside gallons of laundry detergent and giant cans of tomato soup.

 

Image  is courtesy of Flickr user Bas Lammers under a CC BY-SA 2.0 license. 

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No Sales of ‘Used’ Digital Music Files

April 4, 2013 · by ·

2606063781_cdfde8a420One of my favorite things to do is to browse a used book store. I almost always find out-of-print books that I never knew could be so interesting. Same goes with buying used LPs. Yes I have some Luddite left in me…

Such browsing can also be done online. However, one is not likely to be able soon to browse a used digital music store. Here is why…

A federal court, the Southern District of New York, held on March 30 in Capitol Records v. ReDigi that the first sale doctrine does not authorize the lawful owner of a digital music file to resell it, even if only one file exists before or after the transfer.

Plaintiff in this case was Capital Records, which owns the copyright in many recordings. The defendant was ReDigi, which, according to its site, is the “World’s First Pre Owned Digital Marketplace.” It describes itself as being a “free cloud service that allows you to sell your legally purchased digital music.”

This is how it works, or worked. A ReDigi user is able to upload his legally purchased digital music files to a remote server, ReDigi’s “Cloud Locker.” The files are stored, and are available to the user for streaming, but he may also elect to sell one or more files. In that case, he can no longer access the digital file which was sold, and exclusive access to this file is transferred to the user who purchased it ‘used.’

The main issue in this case was whether a ReDigi user “migrates” a digital music file when uploading it to the ReDigi server, or if he makes a copy of it. This was important because, under the Copyright Act, the owner of a copyright has the exclusive right to reproduce, distribute or perform the copyrighted work. Also, Section 106(1) of the Copyright Act gives the owner of the copyright the exclusive right “to reproduce the copyrighted work in copies or phonorecords.”

Is transferring a digital file from a hard drive to a server copying that file?

Under Section 101 of the Copyright Act,  a ‘phonorecord’ is the material object in which the sounds are fixed by any method.

“Phonorecords” are material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The term “phonorecords” includes the material object in which the sounds are first fixed.

In this case, the copyrighted work is the digital music file, and the “phonorecord” is the segment of the hard disk where the file is embodied.

ReDigi’s system aims at preventing illegal copying. First, it does not allow music files illegally downloaded or copied from a CD to be sold on its site. It acknowledged, however, that the program it uses to detect illegal copying cannot detect copies stored in other locations than a user’s hard drive. ReDigi’s “Media Manager” program, which users must install on their computers, can, however, detect if a copy of a digital file uploaded on ReDigi remains on a user’s hard drive. In that case, ReDigi contacts the user and asks that the file be deleted. Not doing so may lead to the account being terminated.

ReDigi argued that a user does not copy the musical file he originally had acquired legally, but merely “migrates” it, and thus it is the same file that is transferred from the hard drive of the ReDigi’s user to the ReDigi’s server, and then is eventually sold to another ReDigi user.

The Court was not convinced, finding instead that a reproduction occurs each time a user uploads a digital file into ReDigi’s server. It noted that “[i]t is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.”

The Court reasoned that the copyrighted work, fixed in a phonorecord, is copied if it is fixed in a new material object, and therefore the plaintiff’s copyright was infringed each time a digital music file of which Capital Records owns the copyright was uploaded into ReDigi’s server.

The First Sale Doctrine Defense Does Not Excuse the Infringement

ReDigi asserted a first sale defense, but the court disagreed.

Under the first sale doctrine, the owner of the copyright cannot prevent the legitimate owner of a book or a phonorecord protected by copyright to resell or to give it away. That is the federal law which authorizes us to sell or to give away our books, our CDs, and our DVDs. Once the owner of a coypyrighted work has placed it in the stream of commerce by selling it, he has exhausted his exclusive right to distribute the work.

The doctrine was originally recognized by a court in 1908, and has been codified in the 1976 Copyright Act.

Under its section 109(a):

“the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.”

But the first sale doctrine could not be used as a defense, according to the Court, because ReDigi’services infringed Plaintiff’s reproduction right. Additionally,  the first sale doctrine could not be a defense in this case, as it is only a defense if plaintiff claims a violation of his right to distribute.

Also, according to the Court, the first sale doctrine could not protect ReDigi as it only protects the legitimate owner of a copy or a phonorecord, and the digital music files sold on ReDigi’s site were not lawfully made under the Copyright Act.

Here is what the court said:

“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. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce.”

It looks like we may not be able to resell the digital music we fell out of love anytime soon…

Image is 174/366  courtesy of Flickr user irrezolut pursuant to a Creative Commons CC BY-SA 2.0 license.

 

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