New Release – Guide to Copyrights & Trademarks for CryptoCreatives

This guide is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto community. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.

Available on Amazon.

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Technology News – Token Taxonomy Act

On December 20, 2018, Representatives Warren Davidson and Darren Soto of Ohio and Florida, respectively, introduced a bill H.R. 7356, entitled the “Token Taxonomy Act.” For those following the legal issues related to digital assets and tokens, this bill attempts to adequately distinguish digital assets commonly called “security tokens” from non-security tokens as well as provide a safe harbor for digital asset holders who find that the SEC has determined that their tokens qualify as securities.

The bill defines a digital token as follows:

(20) DIGITAL TOKEN.—The term ‘digital token’ means a digital unit that—

(A) is created—

(i) in response to the verification or collection of proposed transactions;

(ii) pursuant to rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control; or

(iii) as an initial allocation of digital units that will otherwise be created in accordance with clause (i) or (ii);

(B) has a transaction history that—

(i) is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process; and

(ii) after consensus is reached, cannot be materially altered by a single person or group of persons under common control;

(C) is capable of being traded or transferred between persons without an intermediate custodian; and

(D) is not a representation of a financial interest in a company, including an ownership or debt interest or revenue share.

A digital unit is defined as follows:

(21) DIGITAL UNIT.—The term ‘digital unit’ means a representation of economic, proprietary, or access rights that is stored in a computer-readable format.

The proposed bill recommends gross income exemptions with regard to virtual currency transactions if the exchange is an exchange of virtual currency for something other than cash or cash equivalents so long as the exchange is valued at less than $600.

The bill recommends amendments to the Securities Act of 1933, the Securities Exchange Act of 1934 as well as the IRS Code of 1986, among others.

Nothing in this article is purported to be legal advice. You can contact me via email at cynthia.gayton@gayton-law.com.

Tokens, Branding and Digital Assets

“Art loves Chance, Chance loves Art”
Agathon

This article is about how content access cryptocurrency tokens may help diversify an artist’s branding portfolio and also raises some legal issues to consider before an artist takes the leap.

What is a token?

For purposes of this discussion, I am not going to address how people are raising money selling tokens as a crowdfunding venture (like an initial coin offering or ICO). Rather, I am going to address how artists can use tokens to sell and market existing art and music. In addition, I am going to limit my points to using a token as a “key” which permits users to access often exclusive digital content and assets.

According to Balaji S. Srinivasan, CEO of 21.co:

“[A] token is a digital asset that can be transferred (not simply copied) between two parties over the internet without requiring the consent of any other party.”

Mr. Srinivasan goes on to explain that when people purchase tokens they are purchasing the equivalent of private keys which can permit access to specified digital assets.

Private keys are part of an encryption or cryptographic strategy to ensure that information is only made available to those who have established a particular identity or permission to access that information. Private keys are intended to remain confidential to its owner. A public key is one that can be viewed on a directory or repository which lists public keys.

An application programming interface or API can be used by web developers to control an interface between an application and an operating system. As an example, mobile phone use is supported by APIs most commonly in the form of Java programming language. If you use an Android phone, you are using Java APIs. [See recent case Oracle v. Google, where a jury found that Google’s use of Java APIs was fair use under Copyright law.] Using a token can, therefore, be likened to an API when the token is designed for access to digital assets.

So what do you get when you buy a token? What your token can and cannot do is often unclear. The reason for this is because the technology and its uses are evolving minute-by-minute. How the token can be used may be defined by the platform on which it is being used. It may be defined by the artist or musician. The rights to use certain content is often fluid. The content to which the token is associated may vary from day to day.

In addition, access to particular content may not be guaranteed since it depends on the arrangements with the token issuer and the artist or musician. It could be possible, for example, that a content owner could add or remove content, block individual or blanket access to content as well as delete the content entirely.

In other words, it is an ongoing and living experiment.

I can’t emphasize enough that artists, musicians and fans understand the relationships between the art, the technology, and the token terms. There are powerful uses for this technology and it could bring significant income to artists as well as developers.

But first, it is necessary to look at the kind of assets an artist is likely to use in a token-enabled environment and how to incorporate those assets into a brand.

Branding

Brands are comprised of reputation, trademarks, copyrights, and other elements of “goodwill” that are often difficult to define. Most brands are recognizable due to their trademarks which are:

“[A]ny word, name, symbol or device or any combination of them that serves to identify and distinguish the source of one party’s goods or services from those of another party.”

Trademarks can be brand names, such as Coca-Cola® brand soft drink, a service mark, a certification mark or a collective mark. Superman® is a registered trademark of DC Comics covering several goods and services.

Several million dollars in revenue come from licensing brands in the form of trademarks. Trademarks rights are the exclusive rights to use a mark in commerce to distinguish your goods and services from another. Whether a product can be protected depends on whether the work has the qualities that would entitle it to trademark protection. However, you will not obtain trademark protection is your mark is “generic” or incapable of becoming a trademark.

Copyrights and trademarks are distinct intellectual property types, even though there are often design or illustrative elements in each. Copyrights protect original work of authorship that are:

“[F]ixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.”

So, even a work in digital or electronic form which can be communicated via a machine or device would qualify as being “fixed in any tangible medium of expression” and potentially entitled to copyright protection. A scanned image of your work or a digital rendering of any component, would be a sufficiently tangible medium if it can be communicated with the aid of a machine and otherwise capable of being protected by copyright laws.

The works which could be potentially covered by copyright include: literary, musical and dramatic works; pantomimes and choreographic works’ pictorial, graphic and sculptural works; motion pictures; computer programs and compilations of works or derivative works.

What is crucial to remember is that copyright only protects the expression of ideas – not the ideas themselves – this is called the idea-expression dichotomy. Why is this important to understand? Because perhaps the most litigated aspect of copyright law is determining whether an author is trying to protect the expression of an idea (a thing fixed) or the idea itself.

The rights received, once copyright has been asserted, include the exclusive rights to reproduce, prepare derivative works, distribute, display and perform publicly and authorize others to do these things.

Once you have created and fixed a work in a tangible medium of expression, the work you created automatically enjoys federal copyright protection. If you register (submit an application) your work with the Copyright Office, in the event of an infringement on your work, you will be able to ask for actual damages, statutory damages, treble damages, profit, attorneys’ fees, and an injunction. If the work is not registered, and your work has been infringed upon, you will only be able to seek actual damages, which are those losses you can prove were the result of an infringement.

Another element of personal branding is the “right of publicity” which may be the subject of trademark protection, but usually is a right enforced by state courts where misuse of someone’s identity is an unfair trade practice or fraud. According to International Trademark Association (INTA):

“The “right of publicity” is a form of intellectual property right that protects against the misappropriation of a person’s name, likeness and perhaps other indicia of personal identity for commercial benefit. In the United States, the right of publicity has not been recognized at the federal level by statute or case law, although a related statutory right to protection against false endorsement, association or affiliation is recognized under federal unfair competition law.”

 The combination of intellectual property types, as well as the right of publicity, form the elements of successful personal and corporate branding. Below is a discussion combining tokens and copyrights as digital asset forms.

First Sale Doctrine and Digital Assets

In a nutshell, in order to prevent copyright owners from having an interest in subsequent sales of physical objects where the copyright is manifested, and where the rights holders could control all secondary markets of these goods, the first sale doctrine was adopted. This doctrine was originally explained in the Supreme Court case Bobbs-Merrill Co. v. Straus, 210 US 339 (1908) and was later codified in the Copyright Act of 1909 which said:

“[T]he copyright is distinct from the property in the material object copyrighted, and the sale or conveyance, by gift or otherwise, of the material object shall not of itself constitute a transfer of the copyright, … but nothing in this Act shall be deemed to forbid, prevent, or restrict the transfer of any of a copyrighted work the possession of which has been lawfully obtained.”

Under the first sale doctrine, when a consumer buys a physical book, for example, the consumer cannot copy the book and sell the copies without violating U.S. copyright laws. [See the recent Supreme Court case Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ____ (2017) regarding “patent exhaustion” and compare the similarities to the “first sale doctrine” for copyrights which may be instructive:  “The Patent Act grants patentees the “right to exclude others from making, using, offering for sale, or selling [their] invention[s].” 35 U. S. C. §154(a). For over 160 years, the doctrine of patent exhaustion has imposed a limit on that right to exclude: When a patentee sells an item, that product “is no longer within the limits of the [patent] monopoly” and instead becomes the “private, individual property” of the purchaser. Bloomer v. McQuewan, 14 How. 539. If the patentee negotiates a contract restricting the purchaser’s right to use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may not do so through a patent infringement lawsuit.” [Emphasis added.] Syllabus] However, the consumer has a personal property interest in the book itself and can sell the physical copy without worrying about the copyright owner alleging that the consumer has violated the author’s rights to the book.

Once computer programs were covered under copyright law in 1980 and where those who bought physical copies of computer programs could make an archival or electronic copy of the program without violating copyright law, an unanticipated problem of digital downloads was ushered into the music industry as well as the software industry.

The most recent version of the Copyright Act under 17 USC 109 (b)(1)(A) says:

“[U]nless authorized by the owners of copyright in the sound recording or the owner of copyright in a computer program (including any tape, disk, or other medium embodying such program), and in the case of a sound recording in the musical works embodied therein, neither the owner of a particular phonorecord nor any person in possession of a particular copy of a computer program (including any tape, disk, or other medium embodying such program), may, for the purposes of direct or indirect commercial advantage, dispose of, or authorize the disposal of, the possession of that phonorecord or computer program (including any tape, disk, or other medium embodying such program) by rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending. Nothing in the preceding sentence shall apply to the rental, lease, or lending of a phonorecord for nonprofit purposes by a nonprofit library or nonprofit educational institution… .”

As a result, rights owners have updated the terms and conditions related to digital downloads and sales (whether music or software) and called such sales “licenses to use” which circumvents the first sale doctrine permitted for physical personal property. In this way, most rights to downloaded digital assets are retained by the copyright owner, since consumers are buying licenses.

Licenses are personal property under U.S. law, but the license terms are usually unknown or unread by consumers. As compared to the Napster days when peer-to-peer distribution was frowned upon, successful and legitimate business models have been built around licensing instead of sales, which is reflected in the proliferation of music streaming services. Unknown to most users is the multi-layered licensing terms services such as Spotify and iTunes have to navigate before music or podcasts reach consumer eyes and ears.  According to Anthony C. Eichler:

“Most people probably assume that when they “purchase” a song on iTunes, they “own” it. Of the roughly 800 Million iTunes accounts, it is likely that very few consumers actually took the time to sit down and read the daunting and lengthy Terms & Conditions that they agree to with the click of a button. [Footnote omitted.] This agreement, however, states that they do not actually own anything they pay for via iTunes. [Footnote omitted.]  To the contrary, they have been granted a limited license to access the digital asset only on their account, and only on a limited number of devices linked to the account. [Footnote omitted.] Further, the limited license granted by the User Agreement is non-transferrable in nature.”

Any consumer transparency in this industry is an astounding marketing and sales feat. For a typical song advertised, sold and performed on a music website, there are publicity rights (if you use a photo of an artist, for example, you have to have permission from the photographer as well as the artist to post the artist’s image); music rights (both performing and mechanical licensing rights have to be negotiated); cross-platform playing permissions if the player is using proprietary technology; the list goes on.

Although there is no nationwide definition of a digital asset, for purposes of comparison, here is the Delaware Code’s definition:

(7) “Digital asset” means data, text, emails, documents, audio, video, images, sounds, social media content, social networking content, codes, health care records, health insurance records, computer source codes, computer programs, software, software licenses, databases, or the like, including the usernames and passwords, created, generated, sent, communicated, shared, received, or stored by electronic means on a digital device. “Digital asset” does not include an underlying asset or liability that is governed under other provisions of this title.

Unfortunately, the Delaware Code’s definition appears under Title 12, Decedents’ Estates and Fiduciary Relations, Chapter 50. Fiduciary Access to Digital Assets and Digital Accounts. In other words, the definition only applies if the digital asset owner is dead.

In the case Capitol Records v. ReDigi, the court made it clear that the first sale doctrine does not include digital assets when a company is attempting to purchase and resell them on a digital domain. In its conclusion, the United States District Court for the Southern District of New York said:

“At base, ReDigi seeks judicial amendment of the Copyright Act to reach its desired policy outcome. However, ‘[s]ound policy, as well as history, supports [the Court’s] consistent deference to Congress when major technological innovations alter the market for copyrighted materials. Congress has the constitutional authority and the institutional ability to accommodate fully the varied permutations of competing interests that are inevitably implicated by such new technology.’ Sony, 464 U.S. at 431, 104 S.Ct. 774. Such defense often counsels for a limited interpretation of copyright protection. However, here, the Court cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step.”

It may be worth considering a few things regarding artists using tokens for branding and work distribution. Specifically, whether:

1. The token itself, if used to access existing content, may be considered a digital asset;
2. If token access is to copyright protected material, whether that copyright protected material may be sold depends on how and what rights the artist chooses to sell, e.g., whether the artist is granting rights to use in the form of a license; and
3. Whether the token or key can be sold or made available separately from the copyright or other intellectual property protected work.

To be a successful artist, whether a visual artist or a musician, requires an increasingly complex array of knowledge that was just not the case when you had a friend design your mixtape sleeve to sell at shows.

My prediction:  Token use as described above may become a threshold test case for establishing digital assets as a federally permitted statutory exception to the “first sale” doctrine under copyright law.

Thank you for reading.

[This article is derived in substantial part from a booklet prepared for an “Art on the Blockchain” MeetUp event I co-hosted with Jeff Clarkin held on June 13, 2017 at The Black Cat in Washington, DC. It is intended for educational and informational purposes only and is not intended to substitute for legal advice.]

Art on the Blockchain (AOTB™)

It has been quite some time since a post appeared on this blog. Over the course of a year, I have been following with some enthusiasm the developments of blockchain and its related technology as well as cryptocurrency. In April of this year, I co-founded an Art on the Blockchain Meetup group with Jeff “DJ J Scrilla” Clarkin a local producer, illustrator, mixtape DJ, writer and even a podcast host. Hopefully, we will be able to help navigate the spaces between the law and art using this potentially new business and music distribution model. If you are the DC area, please come by one of our events.

Marriage in Ethereum – A Cautionary Tale

In May 2016, a couple who intend to get married in December 2016 created a prenuptial smart contract agreement on Ethereum in blockchain. Ethereum is not a honeymoon resort, but provides a unique way to create, enter into, execute, pay for, secure, and enforce, contracts. The preparation of a prenuptial agreement in this manner heralds an evolution of contracts and contract management. What follows is my take on the legal intersection of autonomous contracting software and human relationships – specifically, a self-executing prenuptial agreement.

Prenuptial agreements are nothing new. Neither are virtual contracts. What is new is how this contracting process runs without human intervention based on a sequence of coded events monitored and executed by a virtual distributed transaction-based and encrypted system. What began as a transparent and public peer-to-peer financial ledger using bitcoin cryptocurrency, is now on the verge of managing personal lives as well.

I have watched bitcoin cryptocurrency and the underlying transaction software which supports the blockchain infrastructure for some time. Cryptocurrency evolved from the current fiat monetary system and has been compared to the gold standard. These monetary forms rely on a belief that the currency (in whatever form) has an agreed upon, or market created, value. Similarly, consideration, a necessary legal contract element, relies upon the parties agreeing that the value exchanged (the consideration – whether money or promises) is sufficient for an enforceable contract.

Blockchain is often described as an online decentralized ledger of financial transactions, the nature of which is transparent to others on the blockchain.  Ethereum is a blockchain platform over which cryptocurrency can be exchanged as well as smart contracts formed.

Co-founder, Vitalik Buterin, described Ethereum as “a “world computer”: a place where anyone can upload and run programs that are guaranteed to be executed exactly as written on a highly robust and decentralized consensus network consisting of thousands of computers around the world.” The Ethereum platform uses “ether” cryptocurrency, a competitor to the more familiar bitcoin. The smart contract manages a series of mini transactions (with the colloquial meaning, not the Ethereum definition), each of which build the agreement whole. Along the way, “fees” are paid for each interaction along the blockchain process. The fees pay the “miners” who process each transaction.

Now back to the marriage!

When I learned about this prenuptial agreement, I was intrigued. Initially, I wondered why anyone would want to do such a thing. Then I thought this experiment was a disaster waiting to happen. Finally, I realized that this could be awesome!

A prenuptial agreement is a promise in consideration of marriage which has to be in writing in most, if not all, 50 U.S. states and the District of Columbia. This writing requirement comes to the U.S. via the British “Act for the prevention of Frauds and Perjuryes,” which required some transactions to be in writing, whereas many oral agreements remained as enforceable as written ones. A promise in consideration of marriage is one example among many.

A case that I used in my Engineering Law class for several years was Curtis v. Anderson, where Curtis wanted Anderson to return an engagement ring when he broke off the engagement.  Anderson refused. Curtis brought a lawsuit which claimed that he gave her the ring in consideration of marriage and that she agreed to return the ring if they did not get married. In the alternative, the ring was a conditional gift.

If the ring was a promise in consideration of marriage, the promise would have to be writing under the statute of frauds.

If a ring is presented upon acceptance of a marriage proposal (the promises have already been exchanged in advance of the ring giving), it may be viewed as a conditional gift under Texas law. As a conditional gift, the gift’s terms don’t have to be in writing. The conditional gift rule only works, however, if the person who accepted the ring/gift broke the engagement.

Did Curtis get back the ring?

The court determined that the statutes related to prenuptial agreements and the statute of frauds applied. There was no writing, so whatever the parties said either before or after the engagement, did not create an enforceable prenuptial agreement. In addition, since Curtis broke off the engagement, the ring did not qualify as a conditional gift. Therefore, Anderson didn’t have to return the ring.

For my students, this was a much discussed result. Happily for me, the case was an opportunity to talk about the difference between ethics and law, as well as the difference between an engagement (which does not have to be in writing) and a promise in consideration of marriage (which does).

Which leads to the Ethereum prenuptial agreement and whether its terms would be enforceable. Generally, a contract in the U.S. is enforceable if: 1) the parties can legally enter into the contract; 2) there is an offer and acceptance; 3) there is consideration; and 4) the subject matter/form is legal.

Let’s look at each contract element in the Ethereum prenuptial agreement.

Parties and legality.  I don’t know how old the parties are or whether they may legally agree to marry. But, there is a clue – the prenuptial agreement is related to an anticipated marriage in India. If the parties entered into this agreement in India, it may not stand. Nonetheless, a dispute involving the prenuptial agreement may be resolved based on British common law which may apply in India via the Indian Contract Act of 1872.

Offer and acceptance. The parties’ acceptance may be indicated by their seemingly independent interactions with the smart contract.

Consideration.  The consideration in the prenuptial agreement is the exchange of promises to do or not do an enumerated list of things. In addition, there is consideration in the form of ether, which pays for the transactions in blockchain and which, in turn, creates the prenuptial agreement. The fees appear to have been paid and the parties appear to have agreed to its value and therefore have agreed to the prenuptial agreement’s terms.

Subject matter/form.  Let’s assume there are no statutory impediments to prenuptial agreements – could this version be enforceable if the parties live and marry in the U.S.? Prenuptial agreements are legal in the U.S. In the agreement, the magic words required for an enforceable prenuptial agreement are in writing: “in consideration of the marriage about to be solemnized between the parties.” The agreement also makes references to date nights, television viewing rules, insult restraint, etc. But to qualify as enforceable agreement, there would have to be acts that the parties have the legal rights to do, and in exchange for not exercising those rights, agree to be bound by the contract.

An example is the “dollar bill” clause of the prenuptial agreement, where the parties agree that “shopping sprees” are only permitted every fortnight, with the exception of food purchases, which have no monetary limit. If the parties do marry and one of the parties violates the $$ clause with daily shopping sprees using a joint bank account from which the shopping sprees are financed, could this violation be used as a reason to file for divorce? Maybe. Would it matter that the contract was entered into on the Ethereum platform? I do not believe so. The final written document can presumably be understood by both parties, even if they did not write the underlying code responsible for its formation. In addition, each phase of the transaction may be considered a separate agreement and further evidence of the parties’ consent to its terms. Absent fraud or duress, the agreement may be enforceable in the U.S.

There have been posts that say that smart contracts may not be legally enforceable. I was unable to discern the single element that would render them illegal. There are contracts that are illegal because of its purpose, e.g., a smart contract to commit fraud is illegal, and therefore unenforceable. Ultimately, the legal problems may be based on the blockchain code itself. If that is the case, I would suggest that each step be analyzed as a separate contract (because consideration is exchanged at every stage in Ethereum) to determine whether each transaction is legally enforceable, e.g., is there offer and acceptance? consideration? legal parties? proper form/legal? All would have to exist for a legally enforceable contract in the U.S.

This troubling issue was explained further in an article by an attorney, Stephen D. Palley. In summary, he suggests that since the nodes through which transactions pass are decentralized, there is no one entity responsible when the transaction fails due to a problem with the software. Once launched, a smart contract does not require or rely on human intervention and is managed by a decentralized autonomous organization or “DAO.” The inevitable legal problem a DAO faces, however, is who to sue if something goes wrong.

This issue is precisely what arose recently when unknown (as of June 23, 2016) Ethereum developers siphoned money from one decentralized autonomous organization’s (called The DAO) account. That smart contract was created using the Solidity programming language which operates in the Ethereum environment. The DAO was recently formed as a business entity similar to an LLC in Switzerland, perhaps in response to Mr. Palley’s articles and other calls to create a formal business entity. Within a year, liability risk went from non-existent to reality for The DAO investors.

Thus, there are two legal landscapes over which a potential user must navigate – the umbrella contract itself as well as the individual transactions over the blockchain.

Where do I see additional problems? The Ethereum platform uses language that is defined differently from legal terms of art. There are centuries of legal precedent that will not be overturned by code. That fact, however, does not mean that such a lexicon cannot be developed. Indeed, PAX has come up with a legal scripting language for Ethereum.

Upon my cursory review of this subject and applying it to a prenuptial agreement, Ethereum or something similar may make legal contractual transactions streamlined, transparent, and verifiable, especially with regard to simple purchases and template driven services.

Also, promoting something similar to a prenuptial agreement that is available for anyone to use without a disclaimer – e.g., this agreement may not be valid in your jurisdiction, or please consult local laws or we are not providing legal advice – should not be encouraged, even if intended to be humorous.

It is with both enthusiasm and caution that I look forward to what smart contracting, DAO, and cryptocurrency will become. I hope that the programmers recognize that the people with whom these systems interact are rarely streamlined, transparent or verifiable. I also hope that ethical, fiduciary, and social concerns are not abandoned as developers design automated contracts for some of the most intimate of human relationships.

Nothing in this article is purported to be legal advice. You can contact me via email at cynthia.gayton@gayton-law.com.

Photo Log #1

Working on the next edition of “Legal Aspects of Engineering, Design and Innovation” had a break and took some photos of the Martinsburg Roundhouse ruins in Martinsburg, WV.

Learn more here.

The Enduring Legacy of Henry Manne: A Review of the 2016 Law & Economics Center Conference by Theodore A. Gebhard

Post by friend and colleague about the Fifth Annual Henry G. Manne Law & Economics Conference at GMU.

Vienna Woods Law & Economics

On Friday, January 22, I attended the Fifth Annual Henry G. Manne Law & Economics Conference, which was sponsored by the Law & Economics Center at George Mason University.  The Conference was held in conjunction with the Twelfth Annual Symposium of the Journal of Law, Economics, & Policy, a publication of the GMU School of Law.  This year’s Conference was entitled, “The Enduring Legacy of Henry G. Manne,” and featured three panels of academic experts, all of whose research draws substantially on the work of the late Henry Manne.  Manne was the long time Dean of the Law School, and a trailblazing scholar of corporate governance and corporate finance.

Regrettably, owing to inclement weather, the day’s program had to be truncated, including dropping the scheduled Key Note luncheon speech by former Securities and Exchange Commission commissioner, Kathleen Casey.  Even under the shortened time frame, however, the panel…

View original post 2,083 more words

Legal Developments for the Independent Label

Sometimes, having old school printed documents is pretty useful. Back in 1999, I wrote an article about independent music publishing for a newsletter called “Portfolio” managed by the Washington Area Lawyers for the Arts. I remembered that I had written something about David Bowie – and lo and behold I had. He was very influential to me as I was learning about online music and related legal issues. Here is the newsletter article in its imperfect glory referencing his incredible 375,000 downloads from his website in 1996. Needless to say – things have changed considerably since then. For example, I have closed my CompuServe account …

1999 Winter – Portfolio – WALA – Legal Developments

What’s Happening Now in Technology, Arts, Small Business & Contracts – November 2015

Arts News

Copyrights and Fair Use: Lenz v. Universal Music Group, et. al.

In this appeal from the U.S. District Court for the Northern District of California, the U.S. Court of Appeals for Ninth Circuit’s panel held that the Digital Millennium Copyright Act (“DMCA”) requires copyright holders to consider “fair use” before sending a takedown notification. If a copyright holder fails to do this, it introduces a triable issue regarding whether the alleged infringing use was not in accordance with the law. The copyright owner’s determination whether the use is fair use or not is subjective. This subjective “good faith belief” test required under the DMCA can be determined under two analysis methods: 1) the actual knowledge theory and 2) the willful blindness doctrine, both of which the 9^th Circuit held could be used under the DMCA.

Actual knowledge theory says that the there must be some actual knowledge of the misrepresentation on the part of the copyright holder. Generally, in order to be held liable for any damages due to misrepresentation, the court will look to whether the person making the statement was negligent in making false statements. The distinction between this and fraud is that to be held liable for fraud, the speaker must have intended that there be reliance on the false statement made.

The “willful blindness doctrine” means that the speaker materially misrepresented that it had a good faith belief that the offending activity was not a fair use. The plaintiff would have to show that the defendants subjectively believed that the use of the copyright protected work constituted fair use. The lower court in this case determined that Lenz could proceed under the actual knowledge theory, but not the blindness doctrine because “because she did not show that the defendants subjectively believed there was a high probability that the video constituted fair use.”

Background: On July 24, 2007, Stephanie Lenz filed a lawsuit under 17 U.S.C. § 512(f)—part of the DMCA against Universal Music Corp. (“UMG”) and its subsidiaries. She claimed that UMG misrepresented in its takedown notification that her 29 second video containing Prince’s song “Let’s Go Crazy” and to which her children danced, was not lawful. The court determined that “the statute requires copyright holders to consider fair use before sending a takedown notification, and that failure to do so raises a triable issue as to whether the copyright holder formed a subjective good faith belief that the use was not authorized by law.

Lenz uploaded her video named “Let’s Go Crazy #1” to YouTube in 2007. UMG monitors YouTube videos and one of its employees found Lenz’s video. The employee checked to see if the video “embodied a Prince composition” and made “significant use of . . . the composition, specifically if the song was recognizable, was in a significant portion of the video or was the focus of the video.” If the song is the focus of the video, UMG’s procedure required that they notify YouTube to take it down. The procedures did not explicitly say that UMG considered application of the fair use doctrine. The notice included a good faith statement which: “We have a good faith belief that the above-described activity is not authorized by the copyright owner, its agent, or the law.”

YouTube took down the video, and Lenz protested. YouTube brought the protest to UMG’s attention and UMG responded that Lenz did not acknowledge that her statement was made under penalty of perjury and that there was no record that YouTube or Lenz had licenses to use the song. Lenz protested again, and YouTube reinstated the video. Lenz brought a lawsuit regarding UMG’s alleged misrepresentation under 512(f), among other reasons, including tortuous interference. Only the misrepresentation claim was before the Ninth Circuit for this decision.

Under the Digital Millennium Copyright Act, service providers, such as YouTube, can avoid copyright infringement claims under certain conditions. Infringement liability can be avoided if the service provider disables or removes the alleged infringing content “expeditiously.” DMCA sets forth the copyright holder’s requirements to support removal: 1) identification of the copyrighted work, 2) identification of the allegedly infringing material, and, 3) a “good faith” statement regarding the copyright holder’s belief that the infringing use was not authorized by the copyright owner, an agent, or the law. If a copyright owner misuses the takedown notice requirements, the owner is subject to liability under 512(f) misrepresentation.

Fair use analysis was codified in the Copyright Act in 1976, under 17 U.S.C. § 107. Fair use considerations are:

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

Universal argued that fair use is a “defense” to otherwise infringing activity, e.g., unless proven otherwise, any use of copyright protected works without permission is an infringement. This court stated that fair use is a right, and not an excuse for otherwise infringing content. However, the court quoted Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1542 n.22 (11^th Cir. 1996) which said: “Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.”

The court provided some guidance as to how a copyright holder could use computer programs to identify content which could be subject to a takedown notice and determine fair use: “For example, consideration of fair use may be sufficient if copyright holders utilize computer programs that automatically identify for takedown notifications content where: “(1) the video track matches the video track of a copyrighted work submitted by a content owner; (2) the audio track matches the audio track of that same copyrighted work; and (3) nearly the entirety . . . is comprised of a single copyrighted work.” Brief for The Org. for Transformative Works, Public Knowledge & Int’l Documentary Ass’n as Amici Curiae Supporting Appellee at 29–30 n.8 (citing the Electronic Frontier Foundation website (link unavailable)).” [CMG link here.]

The court concluded, however, that copyright holders must consider fair use before submitting takedown notices under the DMCA and that the plaintiff, Lenz, could move forward at trial under the actual knowledge theory regarding plaintiff’s misrepresentation allegation. In addition, the plaintiff could seek nominal damages for injuries due to the misrepresentation, if proved.

In my opinion, there are two things worth noting regarding this decision. First, Lenz had filed a tortuous interference claim which was dismissed. In her second amended complaint, only misrepresentation under § 512(f) was the only claim. The tortuous interference with her contract with YouTube claim suggested that the plaintiff’s insistence in reposting the video had a purpose other than making available an innocent video about her children. Indeed, how many children [49,659,075 YouTube views as of October 22, 2015] have been launched to fame after videos were posted on YouTube and subsequently interviewed by television personalities [100,795,145 YouTube views as of October 22, 2015] or had the opportunity to meet the musicians or vocalists the children were imitating? Second, M. Smith, Circuit Judge, concurring in part, dissenting in part, and concurring in the judgment, had the better analytical approach to this case: “In sum, I would hold that parties must individually consider whether a work is a fair use before representing that the work is infringing in a takedown notice. If they do not, and the work is a non-infringing fair use, they are subject to liability for knowingly misrepresenting that the work is infringing.”

If you have copyright protected work which you want to monitor online, Gayton Law can help you with developing policies and procedures for your businesses’ infringement monitoring activities.

Contracts

Terms of Use and Arbitration Clauses. Berkson,et. al. v.Gogo LLC and Gogo, Inc. This consumer fraud case came before the U.S. District Court for the Eastern District of New York. The class action plaintiffs alleged that the defendants, Gogo LLC and Gogo, Inc., fraudulently charged Wi-Fi services on air flights, specifically, that the defendants “improperly increased their sales and profits by misleading customers into purchasing a service that charged a customer’s credit card, on an automatically-renewing continuing monthly basis, without adequate notice or consent.” According to the complaint filed for this case, between 2008 and 2012, the defendants fraudulently advertised that purchasers were only buying single one month subscription to the Wi-Fi service, but the defendants were making recurring charges on the plaintiffs’ credit cards. The defendants said that the plaintiffs agreed to the recurring charges and they also agreed to a mandatory arbitration clause. The named plaintiffs, representing a nationwide class, claimed that the defendants committed “common law breach of the implied covenant of good faith and fair dealing, common law unjust enrichment, and violation of various consumer protection statutes.” On April 8, 2015, the court made decisions on defendants’ procedural motions, specifically, motions to (1) transfer venue; (2) compel arbitration; and (3) dismiss for lack of standing.

The motions to transfer venue and compel arbitration was based on Gogo’s terms of use. Plaintiffs’ claim that Gogo’s terms and conditions were hidden, and, therefore, unenforceable. Gogo is a dominant player in the in-flight Wi-Fi market, where more than 80% of North American flights use Gogo’s services. Gogo’s website advertised a daily rate of $10 and a monthly rate of about $40. Plaintiffs used Gogo’s services during air plane flights. The plaintiffs’ claimed that there was nothing to indicate that if they registered for the monthly service that they would be billed on a recurring basis. The service was only canceled once the subscribers noticed the fee and contacted Gogo.

The court determined that because the terms and conditions were hidden and users were not given sufficient notice to inquire about the terms (which included language regarding the recurring fee and the arbitration clause) the court denied the defendants’ motions to transfer venue and compel arbitration. The defendant’s motion regarding standing stated that the plaintiffs had not shown the particularized and concrete injuries required to meet the requirements to bring a lawsuit. The court found that just because one plaintiff was reimbursed by a credit card company for the charges when Gogo refused to do so and that another was reimbursed when that plaintiff informed Gogo of the class action lawsuit. The standing motion was also denied.

Although this case was before a New York federal district court, the issues it addresses are nationwide. More and more transactions are being conducted online. This case is instructive with regard to providing transparency about your business’s online contract terms and conditions. Contact Gayton Law to ensure that your online agreements are in compliance with your jurisdiction’s click-wrap, sign-in-wrap and browse-wrap laws.

What’s New at Gayton Law

Posts

The FTC’s Supreme Court Victory: A Rare Win for Both Libertarians and Regulators. Guest post by Theodore A. Gebhard, J.D., Ph.D.

The Federal Trade Commission’s (FTC) recent Supreme Court victory in the North Carolina State Board of Dental Examiners (NCSB or Board) case brought together in common cause both economic libertarians and federal antitrust regulators — groups often at odds with each other respecting important philosophical and policy principles. The FTC’s win, however, gave both groups much reason to celebrate.

See the rest of the post here.

Even in a Knowledge-Driven Economy – Things are Still Kings by Cynthia M. Gayton, Esq. posted on Vienna Woods Law & Economics blog.

From September 30 – October 1 of this year, I attended a conference entitled “The IP Platform: Supporting Inspiration and Innovation” that was sponsored by George Mason University School of Law’s Center for the Protection of Intellectual Property.  The extensive and impressive speaker’s list included a keynote speech by David Kappos, law professors from around the country, and innovators of all stripes.

See the rest of the post here.

Programs and Publications

Cynthia Gayton co-created a 3-part workshop, the third of which was held on Saturday, October 24, entitled “Theseus’ Paradox” at The George Washington University’s Alexandria campus. This workshop focused on strategies to manage innovation.

Learn more about the program here.

Caroline Norbury was a featured guest speaker at the second National Creative Economy Summit. Cynthia Gayton had the distinct honor and privilege of interviewing her at DC’s own WLVS Studios on October 6, 2015. Watch the interview here.

The “Guide to Creating and Protecting Fictional Characters” Second Edition by Cynthia Gayton was released in May 2014 and is now available for the Kindle.

Legal Aspects of Engineering. 9^th edition by Cynthia Gayton is available through the publisher, Kendall-Hunt publishers and on Amazon.com. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues.

The information contained in this newsletter is for general guidance on matters of general interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this newsletter connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.

© 2015 Gayton Law

“The FTC’s Supreme Court Victory: A Rare Win for Both Libertarians and Regulators” Guest Post by Theodore A. Gebhard

The Federal Trade Commission’s (FTC) recent Supreme Court victory in the North Carolina State Board of Dental Examiners (NCSB or Board) case brought together in common cause both economic libertarians and federal antitrust regulators — groups often at odds with each other respecting important philosophical and policy principles. The FTC’s win, however, gave both groups much reason to celebrate.

The question before the Court was whether unilateral anticompetitive actions of the NCSB, a state-created body, were immune from antitrust law under the “state action” doctrine. The state action doctrine arises from Parker v. Brown, a 1943 Supreme Court decision that sought to reconcile the Sherman Antitrust Act with the constitutional principle of federalism. Federalism is the idea that the U.S. Constitution recognizes both national and state government sovereignty by giving certain limited powers to the national government but reserving other powers to the individual states.

Because the Constitution is the highest law and therefore always trumps statutes, the Court carved out immunity from the Sherman Act for anticompetitive actions of states acting in their sovereign capacity, which includes regulating private actors in a way that restricts competition. In 1980 the Court extended this carve out to include the anticompetitive actions of non-sovereign bodies upon a showing that the actions were the result of clearly articulated state policy and were actively supervised by the state. (See, Cal. Liquor Dealers v. Midcal Aluminum, Inc.) The active supervision requirement ensures that the anticompetitive consequences are only those that the state has deliberately chosen to tolerate in exchange for other public policy goals.

The NCSB was established by the North Carolina Dental Act to be “the agency of the State for the regulation of the practice of dentistry.” In that capacity, the NCSB has authority to administer the licensing of dentists and to file suit to enjoin the unlawful practice of dentistry. Starting in 2006, the NCSB began to send strongly worded cease and desist letters to non-dentist providers of teeth whitening services. People in this occupation grew in numbers in North Carolina – as well as other states — as the popularity of these services increased over a period of years. Often the non-dentist providers are simply individual entrepreneurs operating out of kiosks in shopping malls and similar venues. Licensed dentists also provide teeth whitening services, but typically at substantially higher fees.

Significantly, the N.C. Dental Act is silent with respect to whether teeth whitening constitutes the practice of dentistry. Nonetheless, the NCSB determined that it was, though without hearing or comment and without any independent confirmation by any other state official. In so doing, the Board found that the non-dentists were unlawfully practicing dentistry. Instead of obtaining a judicial order to enjoin the non-dentists as prescribed by statute, however, the NCSB sent out cease and desist letters, which contained strong language including a warning that the non-dentist teeth whiteners were engaging in a criminal act. The letters effectively stopped the provision of teeth whitening services by non-dentists.

In 2010 the FTC sued the Board on antitrust grounds. In response, the NCSB asserted that it was entitled to immunity under the state action doctrine. The FTC rejected that claim and in an administrative hearing ruled that the cease and desist letters constituted unlawful concerted action to exclude non-dentist teeth whiteners from the North Carolina market for such services. The FTC further found that that this exclusion resulted in actual anticompetitive effects in the form of less consumer choice and higher prices. The Commission then ordered the NCSB to stop issuing cease and desist letters to non-dentist providers of teeth whitening services without first obtaining a judicial order.

Key to the FTC’s antitrust finding was that, under the N.C. Dental Act, the majority of NCSB members must be practicing dentists elected to the Board by the community of N.C. licensed dentists. Moreover, throughout the relevant period, most, if not all, of the dentist members of the NCSB performed teeth whitening in their respective practices. In addition, the Board’s actions came after it received several complaints from licensed dentists about the competition from non-dentists teeth whiteners and the lower fees that these providers charged. Only a few dentists suggested that teeth whitening by non-dentists might be harmful to customers. The FTC found the validity of such public health claims tenuous.

The NCSB appealed the FTC’s rejection of its state action defense. The appeal reached the Supreme Court in 2014, and in an opinion handed down last February, the Court held that, under the record facts, the NCSB does not have antitrust immunity. In reaching this conclusion, the Court found that, although the NCSB is a creature of the state and could properly be labeled a state agency, it is nonetheless a non-sovereign body and thus subject to the active supervision requirement for antitrust immunity to obtain. This requirement was not satisfied. (Not at issue was whether the state had a clearly articulated policy to regulate the practice of dentistry. All parties stipulated to this factor.)

The Court’s finding that the NCSB is a non-sovereign body is the key to the decision, and rightly focuses on substance over form. In particular, the Court focused on the fact that the NCSB is majority-controlled by active market participants and that its decisions in this case were unsupervised by any state government officials. Given these circumstances, the Court found there to be a high risk that Board decisions were and are influenced by self-interest instead of public welfare. When this risk is present, it trumps any formal label given by a state to a regulatory body. The Court specifically held that a “state board on which a controlling number of decision makers are active market participants in the occupation the board regulates must satisfy [the] active supervision requirement in order to invoke state action antitrust immunity.”

The practical result of this holding is that the FTC’s finding of illegal anticompetitive conduct stands. This outcome will no doubt yield important benefits to North Carolina citizens. Teeth whitening entrepreneurs can seek to re-enter the market, and consumers of those services will enjoy lower fees resulting from the increased competition. These will be tangible, observable benefits.

Critically, however, the Court’s holding also has important legal and policy implications beyond North Carolina. States will have to re-evaluate their regulatory boards and account for the fact that giving unsupervised control over who is qualified to compete to boards comprised of members whose incomes depend on those decisions may not produce good outcomes. Going forward, states must give greater care not only to establishing such boards, but also to overseeing their decisions. Decisions made behind merely the facade of a state-created agency will be insufficient for a board to obtain state action immunity.

Additionally, the Court’s holding recognizes that license requirements that do not rest on firm evidence of a risk to public health absent licensure serve not only to protect incumbents from healthy competition, but unnecessarily infringe on basic economic liberty and the right to earn a living. As such, the holding implicitly elevates economic liberty to a position as prominent as the antitrust concern. In so doing, the holding is an important victory for economic libertarians, just as it is for antitrust enforcers. It is a rare example of an instance when groups with economic philosophies that often diverge can come together in common celebration. A great win for both.

Theodore A. Gebhard is a law & economics consultant. He advises attorneys on the effective use and rebuttal of economic and econometric evidence in advocacy proceedings. Mr. Gebhard holds a Ph.D. in economics as well as a J.D. During his career, he spent seven years as an antitrust economist with the Justice Department and ten years as a senior antitrust attorney with the Federal Trade Commission. Nothing in this article is purported to be legal advice. You can contact the author at theodore.gebhard@aol.com.