What’s Happening – Freezing NFTs – the Osbourne Boss Ladies case

The case Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea, decided under the laws of England and Wales, is significant for several reasons. One reason is that barrister Racheal Muldoon was able to secure an injunction against specific Boss Beauties NFTs alleged to have been wrongfully appropriated from claimant Lanvinia Osbourne’s wallet. In order for an injunction to be successfully issued, it would have to be shown that the NFTs were property against which an injunction could be applied. For purposes of this injunction, the court determined that the NFTs would qualify as property under the laws of England and Wales. The injunction was successful to initially prevent future sales of the misappropriated NFTs on Opensea. However, the injunction was just the first step in legal action against the defendants including “persons unknown” and Ozone Networks, trading as Opensea. Judge Pelling, QC before the High Court of Justice, Business and Property Courts of England and Wales found, among other things, that it would be difficult to assert jurisdiction over one of the defendants, Ozone Networks, in order to enforce any judgment made against it. The Judge Pelling concluded:

I have hesitated long and hard about this but consistent with the approach which had been adopted in earlier cases, and on the assumption that Ozone would wish to cooperate with the English Courts for the purposes of supplying information which enables the proceeds of fraud to be traced, I am satisfied it is appropriate to make the order sought, subject to the qualifications I identified earlier in this judgment.

Judge Pelling’s findings are well described here. A copy of the decision is below:

reporting-restrictions-lifted-by-order-of-pelling-j-on-31-march-2022Download

The case raises the following issues which may be of interest to artists and legal practitioners:

1. How are courts going to successfully, with reasonable expense and limited burden, establish jurisdiction over wrongful NFT acquisition or possession when there is no direct connection/contact with where a harmed person or entity resides or does business?
2. Where are NFTs legally recognized as property in order to purse injunctions in the event of misappropriation?
3. Will the Pelling decision be instructive to other jurisdictions in relation to the idea of a “constructive trust”? In other words, will other jurisdictions recognize that those who misappropriated or otherwise in wrongful possession of NFTs, only hold them for the benefit of the rightful owner?
4. For purposes of bringing this kind of case, would it be better to bring it in the jurisdiction where the NFTs were misappropriated (in this case, England) or the jurisdiction where the NFTs were moved or stored? This would impact how process will be made on the appropriate party or parties.
5. How can privacy rights be assured across jurisdictions? The first consideration Pelling asks in relation to privacy rights and those not parties to the dispute “is whether or not the rights to privacy or confidentiality of those controlling the accounts are violated. As to that, a balance must be struck between the rights of the claimant and the rights of those who control the accounts.”
6. Should there be a mechanism to encourage international cooperation in relation to NFTs and be supplemented to the Trade-Related Aspects of Intellectual Property Rights (TRIPs)?
7. Does the United Nations Convention on Contracts for the International Sale of Goods (CISG) also known as the Vienna Convention on international commerce, apply?

Those trading, selling or gifting NFTs should take into account that there may be several jurisdictions interested in those transactions in the event of fraud, misappropriation or theft, as with any other trade, sale or gift transaction.

The information contained in this post 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 post should not be construed as a substitute for consultation with professional advisors. Certain links in this post 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.

© 2022 Gayton Law

What’s Happening – DAO related class action filing

For several months, I have been working on the next edition (11th!) of “Legal Aspects of Engineering, Design and Innovation” and today was re-reviewing a section on parties’ contractual duties including joint and several liability when I had a opportunity to read this new class action filing in the Southern District of California – Sarcuni et al. v. bZx DAO et al. Case 3:22-cv-00618-BEN-DEB, filed on May 2, 2022, regarding an alleged hack and stolen funds on November 5, 2021. It may be instructive for those participating in decentralized autonomous organizations (DAOs) to take a look at the preliminary statement as well as asserted jurisdiction and venue. This case will likely be followed very closely.

What’s Happening – New Article in KM World

It seems like years in crypto time since this article, “DAOs, NFTs, Web 3.0, and the metaverse: What does it all mean?” was drafted, but here it is! This article, co-written with colleague, Art Murray, D.Sc., was finally published. We’ve been talking about the subjects presented off and on for at least three years and over that time the topics and issues kept morphing. We concluded that crypto and KM were not going to keep still for us.

Enjoy!

What’s Happening – White House Executive Order on Ensuring Responsible Development of Digital Assets

There is a lot of chatter in the cryptoverse about this Executive Order which addresses a policy interest in digital assets. Specifically:

“The United States has an interest in responsible financial innovation, expanding access to safe and affordable financial services, and reducing the cost of domestic and cross-border funds transfers and payments, including through the continued modernization of public payment systems.  We must take strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution.”

You can read the entirety of the Executive Order and judge for yourself its implications for you and your business. Along with the new Corporate Transparency Act’s (CTA) Beneficial Ownership reporting requirements, it is clear that small businesses based in the United States should prepare themselves for increased regulation in relation to business activity reporting.

What’s Happening – FTC Influencer Rules

The Federal Trade Commission (FTC) is looking carefully at how those who are called “influencers” communicate their relationships with products and brands including endorsements, whether by individuals, experts or organizations.

The FTC Guides Concerning the Use of Endorsements and Testimonials in Advertising is among several documents that may be helpful to anyone who is concerned about staying within appropriate legal guidelines with regard to promoting products and services by those with a significant social media following or impact. This guide specifically addresses advertisements and endorsements. The Guide defines endorsements as:

“any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness or other identifying personal characteristics of an individual or the name or seal of an organization) that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser.”

The FTC has the equivalent of Frequently Asked Questions about endorsements here.

Over the past several years, there has been increasing scrutiny by the FTC of what it considers NFT influencers, especially if it is not clear what the financial relationship is with the influencer and the product, service or brand which includes those considered “a personal, family, or employment relationship or a financial relationship – such as the brand paying you or giving you free or discounted products or services.”

Whether you are a consumer or just a fan, you may want to take a look at the FTC guides if you have questions about what the FTC’s obligations are. If you have any additional legal questions, please contact Gayton Law.

What’s Happening – FTC v. Facebook

On January 11, 2022, the U.S. District Court for the District of Columbia denied Facebook’s motion in relation to the FTC’s antitrust case against it. The court’s decision allows the FTC to continue its Sherman Act violations claim against the social media company, saying, in part:

https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2020cv3590-90

What’s Happening in 2022 – Publications

2022 promises to be a very productive year. Cynthia Gayton will be revising her textbook, “Legal Aspects of Engineering, Design and Innovation” for its 11th edition. There will also be a second edition of “Guide to Copyrights and Trademarks for CryptoCreatives” which will address unique NFT legal questions and expand potential remedies for cryptoart related contract breaches and interference.

INTRODUCTION TO NFTS FOR ARTISTS AND ARTIST ADVOCATES

Due to several requests for a repeat course, there will be an August repeat through WALA about NFTs for artists and advocates and will cover:

August 10, 2021 @ 6pm – Day 1

• Introduction to traditional contracts
• Understanding “smart contracts”
• Introduction to art licensing – brief intro to copyrights
• Differences/similarities between “traditional art” and “crypto art” including NFTs

August 11, 2021 @ 6pm – Day 2

• Benefits and risks for artists interested in entering into crypto art
• Understanding terms of service in relation to buying and selling NFTs
• Understanding the risks related to buying and selling NFTs
• Branding issues for artists

The cryptoart space is very fast moving, so there will be updates since the earlier course offered in May. Registration required.

What’s Happening in Technology, Intellectual Property & Contracts – November 2020

Intellectual Property – Trade Secrets

InteliClear, LLC v. ETC Global Holdings, Inc., United States District Court of Appeals for the Ninth Circuit, Docket No.19-480, decided October 15, 2020

Topics: Trade Secrets, Securities Trading Software, Sufficient Particularity

This is an appeal from a district court decision to grant summary judgment against plaintiff InteliClear which claimed that ETC Global Holdings misused its securities transaction software. This case considered whether the plaintiff InteliClear identified its trade secrets with “sufficient particularity.”

Background

In the mid-2000s, InteliClear developed a electronic system to manage “stock brokerage firm accounting, securities clearance, and securities settlement services.” It used a structured query language (SQL) database which could handle millions of daily trades.

In early 2008, ETC’s predecessor company executed a Software License Agreement (SLA) for the InteliClear system. The license asserted InteliClear’s confidential, proprietary and copyright interest in the software. It also provided that ETC would have a duty to maintain confidentiality after the agreement’s expiration. In 2012, all rights, duties and obligations were delegated to ETC. Five years later, ETC notified InteliClear that it intended to terminate the license in February 2018 and confirmed, per the SLA that it would remove the database from its systems. It certified removal of the software and database from all computers and servers in March 2018. However, before the SLA termination, it started developing a competing product and deployed it. InteliClear’s General Manager and software developer, Martin Barretto noticed similarities between ETC’s new product and InteliClear’s, including a unique name table. InteliClear made its suspicions known to ETC and after negotiations, ETC agreed to allow a forensics expert to compare the two systems. The forensics expert found the similarities “striking” and submitted a report finding abundant evidence of identical elements.

InteliClear filed a lawsuit against ETC based on the forensics report in federal court on the claims of 1) misappropriation under the Defend Trade Secrets Act (DTSA); 2) misappropriation under the California Uniform Trade Secrets Act (CUTSA); and 3) unfair competition.

The district court dismissed unfair competition by saying that the CUTSA covered the same claims but denied ETC’s motion to dismiss the misappropriation claims. The ETC had claimed that InteliClear did not identify its trade secrets with “sufficient particularity.” A sealed response to ETC’s argument was given to the district court. The district court granted ETC’s motion to for summary judgment because InteliClear did not sufficiently identify which elements of its system qualified as a trade secret. It also denied InteliClear’s discovery request which InteliClear claimed would assist them in proving their case. InteliClear appealed.

Analysis

Because the CUTSA and DTSA are substantially similar, the court used the DTSA as the basis for analysis.

The DTSA’s definition of a trade secret is “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing” from which the owner of that trade secret derives economic value and is not generally known or ascertainable. There are three elements: 1) information, 2) that is valuable because it is unknown to others and 3) the owner has attempted to keep it a secret. To succeed on that claim, the owner must be able to prove that it had a trade secret, that the other party misappropriated the trade secret, and that there are or could be harm as a result. The seminal case Mai Sys. Corp. v. Peak Computer says that the plaintiff must describe the trade secret with sufficient particularity to separate it from matters of general knowledge.

Despite InteliClear’s disclosures regarding the alleged trade secrets, this court determined that there was a genuine issue of material fact as to whether Inteliclear did meet the sufficient particularity standard. However, the court did decide in Inteliclear’s favor that it took reasonable measures to keep the trade secret confidential and that the licensing agreement with confidentiality language was indicative of that.

Because there remained genuine issues of material fact, the district court abused its discretion in denying InteliClear’s request for discovery. The district court’s decision was reversed.

Comments: Trade secret protection has many advantages. Among them, trade secrets do not have to be disclosed to the public in order to protect the secret. As this case shows, if there has been misappropriation of a trade secret, it is difficult to reveal sufficient information proving that the claim is true without revealing the trade secret itself. Coca-Cola®’s trade secret protected formula is one of the best known and protected trade secret and is an example of how valuable trade secrets can be. Maintaining the confidential nature of a trade secret is a moving target as it becomes more difficult to meet a sufficient trade secret protection standard. If you are concerned about whether your employment agreements or licensing terms sufficiently protect your trade secrets or other business proprietary information, please contact Gayton Law.

Copyright and VARA

Castillo v. G&M Realty L.P., cert. denied, October 5, 2020 (5Pointz) – Gayton Law Opinion

Topics: Copyrights, Moral Rights, Visual Artists Rights Act of 1990

That the Supreme Court decided not to take this appeal shouldn’t indicate much – whether in favor of the lower court decision or in favor of the artists or even against G&M Realty. Indeed it may have thought that Congress was in the best position to make less vague how to determine whether a work is of “recognized stature”.

The question presented to the Supreme Court was:

Designed to create for visual artists a “moral right” of “integrity,” the Visual Artists Rights Act of 1990 (“VARA”) authorizes courts to impose statutory damages of up to $150,000 against the owner of a work of visual art if the owner intentionally destroys a work of “recognized stature”—a novel term, undefined in VARA, which fails to provide a person of ordinary intelligence fair notice of what is prohibited.

Did the Due Process Clause of the Fifth Amendment permit the district court to impose liability against a property owner under the “recognized stature” provision of VARA, and award enhanced statutory damages of $6.75 million, for destroying works of graffiti art affixed to his warehouses being demolished in connection with development of his property?

Legal History

In 2018, an Eastern District of New York judge found that developers G&M Realty destroyed 45 graffiti works of “recognized stature” as defined by The Visual Artists Rights Act of 1990, by “willfully” whitewashing the works in 2013. The judge ordered the payment of $6.75 million – the maximum amount representing $150k for each artist, plus attorneys’ fees. The developers appealed the decision to the Second Circuit which affirmed the Eastern District’s decision stating that although the graffiti works were temporary, they were entitled to the same protection as permanent visual works under the Act.

In response, the developers appealed to the Supreme Court under the Constitution’s due process clause. Because the Supreme Court denied certification and declined to hear the appeal, the Eastern District can hear the artists’ application for attorneys’ fees.

Copyright and Visual Artists Rights

The United States Copyright Act does not directly protect what are called “moral rights” to a work. The closest law visual artists have to moral rights in physical visual art is the Visual Artists Rights Act of 1990, an amendment to the Copyright Act of 1976, which grants art considered works of “recognized stature” certain protections, including the right to prevent the work from being destroyed. Its protection extends beyond the original creator and subsequent owner, but only applies for the life of the artist. It is a unique provision because it is contrary to the first-sale doctrine where if, for example, a non-VARA qualifying visual work was sold, the copyright owner would have no remaining interest in the physical object, even though the artist would retain copyright in the work – rights related to the art’s physical manifestation (tangible rights) are distinct from the copyright (intangible rights). Unless the copyright to the work is assigned in writing to the physical object holder, the creator still holds a copyright interest.

Background

Starting in 1993, graffiti artists were given permission by the owner, Gerald Wolkoff, to paint on the walls of an abandoned building. By 2013, the area became known as 5Pointz and was a tourist attraction. That year, Wolkoff decided he wanted to use the property for luxury condominiums, which would require the painted buildings to be demolished. The artists sought an injunction against the demolition under VARA. The U.S. District Court denied the injunction. Judge Block said that the artists knew that the buildings were going to come down and the works destroyed. He also said that Wolkoff gave permission to the artists to paint the buildings: “After all, Wolkoff gave his blessings to Cohen and the aerosol artists to decorate the buildings, and he did not choose to protect himself from liability by requiring VARA waivers. Moreover, while he was supportive of the artists and appreciated their work, he also stood to benefit economically from all the attention that had been drawn to the site as he planned to market the new buildings’ residences. … VARA protects even temporary works from destruction, defendants are exposed to potentially significant monetary damages if it is ultimately determined after trial that the plaintiffs’ works were of ‘recognized stature.’ “

Between the time of the injunction’s denial and the judge’s written opinion, Wolkoff painted over the art. Because there was no longer any object on which to assert an injunction, the only remaining claim was damages under VARA. Since there was testimony regarding the works’ importance as well as substantial photo evidence, the judge made the determination to grant full statutory damages amount for each artist.

Due Process

Wolkoff’s question to the Supreme Court regarding due process would have likely been responded to in the negative. Wolkoff claimed that the term “recognized stature” was vague and that no one of ordinary intelligence would have known what was prohibited, therefore the individual statutory damages amount of $150,000 and attorneys’ fees each denied him due process because of the phrase’s vagueness.

There are other avenues than the Supreme Court to challenge legislative vagueness. However, Wolkoff’s attorneys likely knew that he would fail on the question of whether the damages were punitive.

Historically, the Supreme Court does not take up cases regarding punitive damages which may be considered a violation of the 8^th Amendment’s prohibition against excessive fines and cruel and unusual punishment. Judges are given discretion whether or not to allow a party to recover more damages than reasonable compensation for the injury if a right was violated for reasons such as fraud, malice or other despicable conduct. A damage award in the form of exemplary or punitive damages is analyzed by looking at the degree of reprehensibility on the part of the defendant, the difference between the actual or potential harm suffered and the punitive damages award, and the difference between civil penalties awarded in comparable cases and punitive damage award in instant case. Here, the statutory damage amount in full was awarded. It was contemplated by the statute to cap the award at this amount, as well as attorneys’ fees.

The facts indicated that the previously abandoned property increased in value several times over from 1993 to 2013 – so much so that he planned to build luxury condominiums. The attractiveness of the neighborhood was linked to the artists’ endeavors, and because of this met the “recognized stature” requirement. It became a well-known destination because of the art.

Comments: The Supreme Court correctly avoided taking up this case. There may be a better dispute in the future that sufficiently challenges the VARA, which may be considered too subjective and discriminatory with regard to what qualifies for “recognized stature” and is limited to visual art and no other creative form. This case may be referred to in other cases, but the facts here are unique enough that the likely result will be what Judge Block suggested – real property owners will require VARA waivers. The IP trend for the past several decades has been to coordinate protection with similar international IP rights. For example, the America Invents Act now applies the “first to file” patent standard instead of the uniquely United States’ standard of “first to invent,”and has extended patent rights to 20 years. For copyright protection, © is no longer required and is now in alignment with international norms. If you are contemplating a public or private public visual art project, and need some assistance, please contact Gayton Law.

Bulletins

Ransomware
The Department of Treasury – Office of Foreign Assets Control (OFAC) has issued an advisory regarding businesses that engage with victims of ransomware attacks. The October 1, 2020 announcement says that there are federal sanctions for businesses assisting with the facilitation of ransomware payments on behalf of cyber-crime victims. If you are the target of a ransomware attack, report it to OFAC. The alert and related guidance can be found here.

Social Media Scams on the Rise

According to the Federal Trade Commission (FTC) social media scams cost people almost $117 million in losses over the first 6 months of 2020. The most frequently reported social media scam spreaders are Facebook and Instagram. The largest scam categories are romance, free money and pyramid schemes. The FTC offers tips such as:

• Before you buy, type the company name in a search engine followed by the word “scam,”
• Don’t send money to a love interest you have not met irl.
• Before sending money for an opportunity, go to ftc.gov/mlm.

Report the scams you find. See here for more information.

Unlawful Debt Collection Business Shut-Down

In September 2020, an Atlanta-based company was shut down for threatening consumers with arrest and imprisonment for non-existent debt. Critical Resolution Mediation posed as attorneys, law enforcement or process servers. It was shut down for being in violation of the Fair Debt Collection Practices Act. See here for more information.

Publications and Education

Publications

Legal Aspects of Engineering, Design and Innovation 10^th edition by Cynthia Gayton, February 2017.

This edition is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. 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. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.

Guide to Copyrights & Trademarks for CryptoCreatives by Cynthia Gayton, January 2019

This guide is available as an e-book on Amazon.com and is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto and digital art communities. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.

Education

Cynthia Gayton will participate in the 2020 Vancouver Bienniale, which begins on November 11, as a keynote speaker and moderator. Her Keynote is entitled “Voxel Bridge to Smart Cities and Public Art.” Learn more about it here: http://artproject.io/

Ms. Gayton taught a Business Entities Formation class for the Washington Area Lawyers for the Arts Creative Entrepreneurship Series on September 21, 2020. In addition, she made two digital, blockchain, art and copyright presentations since January 2020.The first was at the Rare Art Festival in May and the CADAF event in June.

Thank you for reading!

The information contained in this post 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 post should not be construed as a substitute for consultation with professional advisors. Certain links in this post 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.

© 2020 Gayton Law

What’s Happening in Technology, Intellectual Property & Contracts – September 2020

Intellectual Property – Copyright

Jackson v. Roberts, United States District Court of Appeals for the Second Circuit, Docket No.19-480, decided August 19, 2020

Topics: Copyright, Right of Publicity, Preemption

This is an appeal from the United States Court for the District of Connecticut that granted summary judgment to William Leonard Roberts II’s (aka Rick Ross) on Jackson’s (aka 50 Cent) claim of violation of Connecticut’s common law right of publicity on grounds that claim is preempted by Copyright Act. This case between two well-known Hip-Hop artists, considered whether an artist can make state rights claims, such as the right of publicity, to copyright protected works subject to a label agreement.

Background

Roberts used a sample from Jackson’s song “In Da Club” in a 2-15 mixtape called Renzel Remixes released for free, before he released a commercial album, Black Market. The song was subject to a recording agreement with Jackson’s record label, Shady Records/Aftermath Records. The agreement transferred Jackson’s copyright interest in the song to the label. In addition, Jackson granted the “perpetual and exclusive rights” to his name and likeness connected to label marketing efforts during the term of the agreement and a non-exclusive right to use after the agreement’s termination. The recording agreement included language limiting the right to grant commercial sample licensing without Jackson’s consent.

In November 2015, Roberts released his mixtape for free. Both parties agreed that mixtapes, which include remixes of others’ songs are common amongst hip-hop performers often without permission from either recording artists or the copyright holder.

Robert’s mixtape was a compilation of 26 remixes where Roberts put his own lyrics over poplar audio samples by well-known artists. For this mixtape, Roberts identified the recording artists associated with the samples. Roberts did not get permission to use the samples or Jackson’s stage name.

Jackson brought his lawsuit on 12/23/2015 claiming that Robert’s use of his voice from In Da Club a cut from his debut album Get Rich or Die Tryin’ as well as his name in the title track and the use of his stage name was a violation of the right of publicity under Connecticut common law. Roberts responded that his use was protected by the First amendment, that Jackson’s claim was preempted by the Copyright Act and Jackson had no publicity rights because they were transferred to the label.

In the original complaint, Jackson claimed that Robert’s use of his voice from “In Da Club” a cut from his debut album “Get Rich or Die Tryin’” as well as his name in the title track and the use of his stage name was a violation of the right of publicity under Connecticut common law.

The lower court found that Jackson surrendered his rights to use his name, performance or likeness to the label. In addition, the right of publicity claim was preempted by copyright law and he cannot make a claim based on rights given up to the label under the contract.

Analysis

Under Section 301, the Copyright Act preempts state laws “to the extent that those laws interfere or frustrate the functioning of the regime created by the Copyright Act.”

To determine whether a claim is preempted by Section 301, the court: 1) reviews the work against which the plaintiff wants to exert a state right to see if it comes within the subject matter of copyright, in this instance claims related to Connecticut rights of publicity laws and 2) looks at the equivalence or general scope of Section 301 as it relates to the work and whether it comes within copyright subject matter representing an equivalent to a right within the scope of copyright. This court considered common practices within the hip-hop community as the relevant audience to see whether that audience thought the mixtape represented a false implication of Jackson’s endorsement or sponsorship of Roberts’ project. The court found that common practices within the hip-hop community would not find that such endorsement or sponsorship was connected to the mixtape’s use of Jackson’s voice or stage name.

The court continued that it was concerned particularly about situations when another right conflicted with the rights of a copyright holder or licensee. If it did, that right “may be” preempted. This could be overcome if the state right involved consumer deception, privacy or reputational harms like defamation.

This court found that Jackson attempted to use Connecticut’s right of publicity laws to control a work subject to copyright law over which he had no control under his label agreement. The entity with the right to claim copyright infringement and violation of rights of publicity laws was the label. The alleged infringement should have been brought by the label and the rights related to commercial sample misuse were also with the label subject to Jackson’s approval. The court said that Jackson’s direct suit interferes with the actual rights holder. Specifically:

“Roberts’s mere reproduction of a sound that can be recognized as Jackson’s voice, and his small discreet notation that correctly identifies Jackson as the artist of the sample played, do not violate any substantial state law publicity interest that Jackson possesses. To the contrary, the predominant focus of Jackson’s claim is Roberts’s unauthorized use of a copyrighted sound recording that Jackson has no legal right to control.”

And

“Jackson’s attempt though this suit to control the reproduction of “In Da Club” conflicts with and acts in derogation of the exclusive right of the rights holder to exercise such control.”

This court granted Robert’s motion for summary judgment stating that Jackson’s claim was preempted under either: 1) the doctrine of implied preemption or 2) under express terms of Section 301 of the Copyright Act.

Comments: Offering copyright protected music in a mixtape for free does not automatically protect against a copyright infringement claim, as this case confirms. Rather, if there is a common industry practice, as in the case of the Hip-Hop industry, which allows for artists using others’ works without a license or other permission, what would have been considered an infringement may not be enforced. In the absence of a common industry practice, whether the work was offered for “free” is only helpful in the damages phase of copyright infringement as it relates to actual damages (if not registered with the Copyright Office) and disgorgement of profits and other statutory damages (if the work was registered with the Copyright Office For those who are concerned about music licensing and copyright, please contact Gayton Law.

Privacy and GDPR

Data Protection Commissioner v. Facebook Ireland and Maximillian Schrems (Schrems II), Ireland High Court, July 16, 2020

Topics: GDPR, Privacy Shield, Personal Data, Privacy

This is a significant privacy case decided in Ireland on July 16, 2020 which found that the United States’ offered equivalent to the European Union’s 2016 General Data Protection Regulation (GDPR), the Privacy Shield created by the United States’ Department of Commerce, was insufficient to protect the privacy of EU citizens. Fundamentally, there is no equivalent privacy-related US law which is the equivalent of the GDPR. As a result, many organizations have entered into their own agreements in order to meet GDPR requirements. It is lengthy and complicated, so what appears below is an attempt to summarize a more than 50 page decision.

Background

This Preliminary Ruling was decided under Article 267 TFEU from Ireland’s High Court in relation to proceedings between the Data Protection Commissioner of Ireland and Facebook Ireland and Maximilian Schrems regarding a complaint brought by Schrems “concerning the transfer of his personal data by Facebook Ireland to Facebook Inc. in the United States.”

Preliminary Ruling Subject Scope

The High Court’s ruling’s scope covered:

1. The Interpretation of several articles under the EC Directive 95/46/EC regarding the “protection of individuals with regard to the processing of personal data and on the free movement of such data.”

2. The Interpretation and validity of Commission Decision 1010/87/CU dated February 5, 2010 regarding “standard contractual clauses for the transfer of personal data to processors established in third countries under Directive 95/46 and

3. The Interpretation and validity of Commission Implementing Decision 2016/1250 dated July 12, 2016 regarding the “adequacy of the protection provided by the EU-US Privacy Shield.

Key Ruling Provisions

Pre-GDPR Directive 95/46 Article 25 said that: “The Member States shall provide that the transfer to a third country of personal data … may take place only if … the third country in question ensures an adequate level of protection.” Whether the adequate level of protection exists is assessed “in light of all the circumstances surrounding a data transfer operation or set of data transfer operations.” However, the Commission may find “that a third country ensures an adequate level of protection … by reason of its domestic law or of the international commitments it has entered into … for the protection of the private lives and basic freedoms and rights of individuals.”  In addition, a Member State may authorize transfer to a third country which does not ensure adequate protection where “the controller adduces adequate safeguards with respect to the protection of the privacy and fundamental rights and freedoms of individuals and as regards the exercise of the corresponding rights; such safeguards may in particular result from appropriate contractual clauses.”

Pre-GDPR Directive 95/46 was replaced by GDPR Regulation 2016/679 on April 27, 2016. The new regulation stated in part that the protection levels, rights and freedoms of natural persons with regard to data processing should be equivalent in all Member States. However, Member States should be allowed to maintain or introduce national provisions and specify its own rules, including rules that set out circumstances for specific processing situations determining more precisely the conditions under which the processing of personal data is lawful. It recognizes that personal data flows to and from countries outside the Union are necessary to expand international trade and cooperation, but the data protection of natural persons should be ensured and not undermined.

Under the GDPR, the Commission can decide for the entire Union whether a third country, international organization or territory offers “an adequate level of data protection, thus providing legal certainty and uniformity throughout the Union as regards the third country or international organization which is considered to provide such level of protection.” The Commission can take into consideration “how a particular third country respects the rule of law, access to justice as well as international human rights norms and standards and its general and sectoral law, including legislation concerning public security, defense and national security as well as public order and criminal law.” To this end, the third country “should offer guarantees ensuring an adequate level of protection essentially equivalent to that ensured within the Union, in particular where personal data is processed in one or several specific sectors.” The Commission recognizes that some third countries, territories or organizations provide or ensure an adequate level of data protection which would result in the prohibition against the transfer of personal data to that entity. The Commission’s concern is that when personal data moves beyond the Union’s borders, that there is risk that the natural person will not be able to exercise data protection rights “to protect themselves from the unlawful use or disclosure of that information.”

When the Commission is charged with assessing data protection adequacy, it takes into account three features: 1) rule of law, respect for human rights and fundamental freedoms, relevant legislation, both general and sectoral including concerning public security, defense, national security and criminal law; 2) existence and effective functioning of one or more independent supervisory authorities in the third country with responsibility for ensuring and enforcing compliance with data protection rules; and 3) international commitments into which the third country has entered into including legally binding conventions or instruments. After this assessment takes place, they may decide, using an implementing act, that a third country ensures an adequate level of protection.

If there is no implementing act, the Member States may include standard contractual clauses (SCC) in data transfer agreements, approved of by the Commission are considered to be offering adequate safeguards.

Precedent

On October 6, 2015, the Ireland High Court found the Commission’s 2000 decision under 95/46/EC supporting the adequacy of US safe harbor privacy principles, invalid. However, upon accession the limitations and safeguards promulgated by the US Department of Commerce in the form of the Privacy Shield, were found adequate.

In the current case, where Schrems requested that the Commissioner prohibit or suspend personal data transfer from Facebook Ireland to Facebook Inc., it reviewed the protection adequacy in light of Schrems’ doubts regarding the adequacy of Privacy Shield protections.

Ruling

Generally, the Commission found that because the Privacy Shield enables interference “based on national security and public interest requirements or on domestic legislation of the United States, with the fundamental rights being unprotected, and that interference arising from access to or use of personal data transferred from the EU to the US by US public authorities through US law” cannot ensure adequate protection levels related to fundamental rights. For example, “It is thus apparent that Section 702 of FISA [Foreign Intelligence Surveillance Act of 1978] does not indicate any limitations on the power it confers to implement surveillance programs for the purposes of foreign intelligence or the existence of guarantees for non-US persons potentially targeted by those programs.

Comments: Since this decision, Switzerland, which was subject to a separate Privacy Shield agreement with the United States, also concluded under its own legal regime in light of the Schrems II decision that “[b]ecause there is no guarantee of rights that would afford persons concerned in Switzerland protection comparable to that afforded by [Swiss law], the FDPIC [Federal Data Protection and Information Commissioner] considers that data protection within the meaning of Art. 6 Para. 1 FADP is insufficient in the US, even for the processing of personal data by US companies that are certified under the [Swiss-US Privacy Shield] regime.”

This decision impacts data transfer and sharing between the US and the EU, now including Switzerland. If your business relies on data transfer and sharing, you may have to rely on individual contracts containing approved SCC clauses.

See article “Beyond Terrorism: data collection and responsibility for privacy, 2006, Journal of Information and knowledge management systems, volume 36, number 4. or request a copy from Gayton Law.

Bulletins

Security and Ransomware
For those of you who are Securities and Exchange Commission (SEC) registrants or registrants’ representatives, the SEC reported in July that there was an increase in ransomware attacks against broker-dealers, investment advisers, and investment companies. The SEC’s Cybersecurity: Ransomware Alert and related guidance can be found here.

Grant Scams
Several Small Business Administration- related grant and Payment Protection Program scams are making the rounds. They are in at least two flavors: 1) a telephone call or 2) a text message – both  are connected to Facebook account contacts. The scam relies on established personal relationships to socially engineer information about the target in the form of completing a loan application and returning it to the apparent requester. Please verify the purported SBA employee before sending any personally identifiable information that may be used for purposes of identity theft. See here for more information.

Publications and Education

Publications

Legal Aspects of Engineering, Design and Innovation 10^th edition by Cynthia Gayton, February 2017.

This edition is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. 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. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.

Guide to Copyrights & Trademarks for CryptoCreatives by Cynthia Gayton, January 2019.

This guide is available as an e-book on Amazon.com and is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto and digital art communities. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.

Education

Cynthia Gayton taught a Business Entities Formation class for the Washington Area Lawyers for the Arts Creative Entrepreneurship Series on September 21, 2020.

Cynthia Gayton made two digital, blockchain, art and copyright presentations since January 2020.The first was at the Rare Art Festival in May and the CADAF event in June.

Thank you for reading and for your business!

The information contained in this post 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 post should not be construed as a substitute for consultation with professional advisors. Certain links in this post 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.

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