Game Over in College Sports Rights Dispute

July 4th, 2014, by Richard R. Bergovoy

Ad for NCAA Football 2014

Ad for Electronic Arts’ NCAA Football 2014


Are makers of video games required to take licenses from celebrities depicted in their games, or does the First Amendment shield them from the need to obtain permission and pay royalties?

The NCAA student-athlete legal free-for-all has generated two remarkably aligned federal appeals opinions that have brought a rare measure of uniformity to the generally disjointed case law on balancing rights of publicity protections for individuals against First amendment protections for creative expression.

The NCAA case has been very much in the headlines recently, but began five years ago as an antitrust case in which former college athletes sought to get a piece of the $20 billion a year in licensing revenue (from both television and official merchandise) received by the NCAA and its licensing agent, Collegiate Licensing Company. At that time, we noted it might be years before the case was resolved through final appeal. In fact, the first case has just finished trial.

Since 2009, the case has morphed into a class action involving potentially thousands of athletes. The issue made further headlines recently when sports superlawyer Jeffrey Kessler filed a new suit on behalf of a class of current college athletes, not to get a slice of the licensing revenues, but to blow up the entire NCAA “amateur student-athlete” system on antitrust grounds, and allow athletes to bargain for compensation while they are still students.

What escaped attention on most sports pages, however, were opinions late last year by the Third Circuit Court of Appeals in Philadelphia in the case of former Rutgers University quarterback Ryan Hart (Hart v. Electronic Arts, Inc.) and in the Ninth Circuit Court of Appeals in San Francisco in the case of former Nebraska University and Arizona State University quarterback Sam Keller (Keller v. Electronic Arts, Inc.), both against video game publisher Electronic Arts—not on antitrust grounds, but for using their personal and athletic performance information without a license, and thereby allegedly misappropriating their rights of publicity.

The former athletes both won their appeals, resulting in a proposed $60 million settlement with them and other former athletes —$40 million from EA and CLC, $20 million added by NCAA on the eve of the antitrust trial— and EA’s decision to shut down its franchise NCAA Football videogame series for at least 2015.

Both courts agreed with each other on multiple points regarding how to properly balance an individual’s rights of publicity versus an author’s First Amendment free-speech rights, a field in which up until now there has rarely been agreement or clarity.

The one Supreme Court case on this issue, Zacchini v. Scripps-Howard Broadcasting Co., 433 U.S. 562 (1977), held that a news broadcast of Hugo Zacchini’s entire “human cannonball” act without his consent when he appeared at a county fair was a misappropriation of his rights of publicity under Ohio law. The Court held that there must be a balance between the rights of individuals to control the economic exploitation of their names and images, protected by rights of publicity laws (currently recognized in about 40 states, depending on who is doing the counting), and the right of free expression, protected by the First Amendment to the federal Constitution. However, while ruling in favor of Zacchini that the television station had exceeded the bounds of First Amendment protection for the news media and was liable for misappropriation, the Court did not offer guidelines on how to strike that balance on a general basis. Lower courts have been formulating their own tests ever since.

Three of the leading tests are:

1) The Predominant Use Test holds that if the predominant purpose of a work is to exploit the commercial value of an individual’s identity, instead of to make an expressive comment about that individual, then the right of publicity claim will prevail over the First Amendment defense.

2) The Rogers Test was originally formulated in a case brought by movie actress Ginger Rogers, who sued the producers and distributors of Ginger and Fred, an Italian movie about nightclub dancers who were nicknamed after Ginger Rogers and Fred Astaire, on the grounds that the title of the movie infringed both her trademark and her rights of publicity. The Second Circuit Court of Appeals disagreed, holding that the First Amendment trumped Ms. Rogers’ rights of publicity because: (a) the use of her name in the title bore some relationship to the contents of the movie; and (b) the use of her name in the title was not a disguised advertisement for the sale of goods or services.

3) The Transformative Use Test was first formulated by the California Supreme Court in Comedy III Productions, Inc. v. Gary Saderup, Inc., 21 P.3d 797 (2001), in which the rights owner of the Three Stooges movie comedy team sued an artist for selling t-shirts and lithographs with photorealistic sketches of the Stooges. The court held that the artist had not added enough of his own original content to the portraits to be “transformative,” that is, to make it’s the artist’s own expression rather than a mere celebrity likeness, therefore the Stooges’ rights of publicity defeated the artist’s First Amendment defense.

The Third Circuit case was brought as a class action by Hart under the New Jersey statutory rights of publicity provision, while the Ninth Circuit case was brought by Keller and eight other former NCAA Division I football and basketball players under both California’s statutory and common law rights of publicity. The main defendant was video game publisher Electronic Arts, which was the producer of the NCAA Football video game series. Although EA had licensed the rights to use the NCAA and individual university trademarks for its video games, it had not licensed the rights of publicity from the college athletes. (According to a footnote in the Ninth Circuit case, Keller claimed that EA had specifically agreed in its NCAA license not to use athlete likenesses.)

Both courts substantially agreed on the facts of the case—that EA’s NCAA Football series seeks to replicate each university’s entire team roster as accurately as possible. Every player on a team has a corresponding avatar with the same jersey number, class year, height, weight, build, skin tone, hair color, home state, equipment modifications, and playing style. Player names are not written on the jerseys of the avatars, but can be added via third-party applications.

Promotional screen shot EA's NCAA Football 2014

Promotional screen shot from EA’s NCAA Football 2014

In both cases, EA defended against claims of misappropriation of the players’ rights of publicity on the grounds that the video games were forms of expression protected by the First Amendment, under any of several legal theories, trumped the athletes’ rights of publicity, and therefore negated any need for a license from the athletes.

As a threshold issue, both courts agreed with EA that the video games are fully protected as expressive speech under the First Amendment.

The Third Circuit quickly rejected the Predominant Use Test advocated by EA on the grounds that it forced judges to become art critics who “analyze select elements of a work to determine how much they contribute to the entire work’s expressiveness.”

Both courts rejected employing the Rogers Test also advocated by EA because: 1) in prior case law, it had mainly been used in trademark infringement cases, but rarely been used in rights of publicity cases, and even then had primarily been applied when a celebrity’s name was used in a title of an expressive work, not in the body of the work itself; 2) application of the Rogers Test would almost always result in shielding the video game developer, because a video game in which a celebrity appears will almost always satisfy the Rogers Test criteria of being related in some degree to the celebrity; and 3) the test was derived from trademark law, where the primary concern is protecting the public from confusion about the source and quality of goods, not an appropriate focus for rights of publicity cases, where the focus should be on protecting a valuable intellectual property right of an individual— the commercial exploitation of his identity.

Both courts ultimately concluded that the Transformative Use Test was the appropriate balancing test. The Third Circuit felt it was more appropriate to rights of publicity cases because it was derived from the fair use defense in copyright law, which focuses on protection of individual intellectual property rights. In the context of the EA video games, both courts relied heavily on the case No Doubt vs. Activision Publishing, Inc., 192 Cal.App.4th 1018 (2011), in which the California Court of Appeals held that use of significant elements of identities of members of the pop music group No Doubt in the Band Hero video game was not a transformative use. Even though the game incorporated many creative elements in the performance environment for the members, such as performing in outer space or performing songs of rival bands, there was not a sufficient transformation of the avatars of the members, ruled the court. Likewise, concluded both the Third and Ninth Circuit panels, in the NCAA video games, EA’s use of player avatars with detailed literal biographical and appearance information was not transformed by the game’s ability to create different game environments. The athletes’ avatars were placed in the same context— playing football— as what they had become famous for, even though the game made it possible to change certain variables of that context. Further, the fact that the game allowed some degree of customization of the avatar did not change the equation—to rule otherwise would provide an easy out for game makers to capitalize on use of celebrity images, as long as they also built in an option to tweak the images.

In both cases, judges wrote dissenting opinions which argued that use of the Transformative Use Test as interpreted in No Doubt was not protective enough of First Amendment rights, and might result in imposing liability on authors of books, movies, and other creative works that incorporate historical figures, even if situated in a totally fictional environment.

Additionally, the Ninth Circuit addressed two non-First Amendment, California-specific defenses to rights of publicity claims. California law creates a defense against common law rights of publicity claims for the “publication of manners in the public interest,” and a defense against statutory rights of publicity claims “in connection with any news, public affairs, or sports broadcast or account, or any political account.” The court held that it was not necessary to weigh whether the video games were “in the public interest,” or were connected to news or sports broadcasts, because they failed the threshold requirement for both doctrines that they be in the nature of publishing or reporting. Instead, they were using the athletes’ personal information in the context of simulated games that had never occurred in the real world, so they were not “publications” or “reports.”

The court then addressed one of the toughest issues in a footnote at end of its opinion. It attempted to distinguish several cases from outside California in which courts ruled that the First Amendment trumped rights of publicity claims for fantasy sports leagues that publish player names and publicly available performance statistics, so that the leagues were not required to obtain licenses from the athletes. The NCAA case is different argued the Ninth Circuit, because EA’s creation of non-publicly available virtual avatars using player identifying information did derive from the athletes’ “identities,” and were not merely public domain statistical information. While this distinction may “feel” right, the “mere statistics” versus “statistics plus specially created avatars” distinction is a very thin dividing line, and will likely be litigated in the future.

Takeaway: once limited to California cases, the Transformative Use Test is gathering endorsements from an increasing number of appellate courts, when it is necessary to balance the rights of individuals to protect their rights of publicity from exploitation by others versus the First Amendment right protections of creative expression, and especially in the context of use of celebrity avatars in video games. But rights of publicity are grounded in diverse state laws, so that even when the applicable balancing test is settled, it is notoriously difficult to predict in advance whether a court will find a particular rendering sufficiently transformative, so caution remains in order for use of celebrity likenesses without a license.

A Star is Born: The Licensing of Blue Ivy

February 24th, 2012, by Richard R. Bergovoy

We here at The Licensing Law Blog have a saying: “It’s never too early to teach your kids about licensing.”

Apparently mega-super-celebrities Beyonce and Jay-Z agree. With licensing in mind, they recently filed a trademark application for their newborn baby daughter’s name, Blue Ivy.

Here to explain the how and why, we are honored to have as a guest blogger our friend and former Beanstalk colleague, Oliver Herzfeld:

1.    How does one trademark a child’s name?

Trademarking a child’s name is no different than doing so for any other name or mark.  In many countries, one’s right to use a mark is conditioned on being the first to register it in the relevant jurisdiction (i.e., it is a race to the filing office).  However, in the U.S., one’s right to use a mark is conditioned on being the first to actually use the mark in commerce.  Federal trademark registration is not mandatory.  In general, registering a mark in the U.S. will not help permit one to use it, nor will a failure to register a mark in the U.S., by itself, prohibit one from using it.  In most cases, all registration will do is provide certain procedural advantages.  One exception to the foregoing is a so-called “intent to use” application (ITU).  In the U.S., if one has not yet commenced using a trademark, but plan to do so in the future, one may file an ITU based on a bona fide intention to use the trademark in the future.  Doing so provides the registrant with the benefits of constructive use and priority that “relates back” to the original filing date.  This is precisely the type of registration Blue Ivy’s parents, Jay-Z and Beyonce, have pursued.  In other words, they are not yet using the name “Blue Ivy” in commerce, but they are claiming that they intend to do so in the future and, if/when they do, in terms of priority, they will be deemed to have commenced their use on January 26, 2012, the date of their ITU registration application.

2.    Is this a first or is there precedent for it?

This is certainly not a first.  For example, Ford Motor Company registered “Edsel”, the first name of Edsel B. Ford, son of the company’s founder.  The Edsel was an automobile manufactured by Ford, but the name has become synonymous with failure because the car never gained popularity and Ford lost millions of dollars on it.  Nonetheless, Ford continues to maintain five live trademark registrations for the name Edsel covering a variety of product categories.

3.    What do Jay-Z and Beyonce gain from this?

Owning a federal trademark registration provides a number of advantages.  Most importantly, it provides a legal presumption of their ownership of, and exclusive right to use, the name nationwide on or in connection with the goods/services listed in their registration.  Other benefits include:

  • Public notice of their claim of ownership (to counter any defendant’s claim of innocent infringement);
  • The ability to bring an infringement action in federal court;
  • The use of the U.S. registration as a basis to obtain registration in other countries;
  • The ability to record the U.S. registration with the U.S. Customs and Border Protection (CBP) Service to prevent importation of infringing foreign goods;
  • The right to use the federal registration symbol ®; and
  • Listing in the United States Patent and Trademark Office’s online databases.

4.    What do you think Jay-Z and Beyonce will use the trademark for?

Blue Ivy’s parents were obligated to describe their intended uses in their ITU application.  Here are the products and services they included grouped in accordance with certain international trademark classification numbers: Read the rest of this entry »

Betty Boop Trademark Case Has A Happy Ending

January 8th, 2012, by Richard R. Bergovoy

Like a hero rescuing a damsel in distress, the federal Ninth Circuit Court of Appeals granted a happy ending to the brand licensing industry in the controversial Betty Boop trademark case.

After its original opinion in Fleischer Studios, Inc. v. A.V.E.L.A., Inc. appeared to not only reverse settled case law, but also undercut the foundations of the brand licensing industry, the Ninth Circuit withdrew the opinion and replaced it with one that omits the controversial ruling.

The court’s original ruling held that under the doctrine of “aesthetic functionality,” there is no trademark infringement if a third party uses a trademark for its consumer appeal, rather than to identify the goods as “official.”

This holding unleashed a firestorm of criticism from the brand licensing industry, and prompted a petition for rehearing by the full Ninth Circuit Appeals Court, supported by briefs from such industry heavyweights as INTA, the MPAA, Major League Baseball, the NFL, and the NBA.

The Ninth Circuit did not give the petitioners what they had asked for, but something better— dispensing with rehearing by the full appeals court, the original three judge panel withdrew its  opinion, and replaced it with a new opinion omitting all mention of aesthetic functionality. In its new ruling, the court stuck to the narrow issues at hand. It upheld the trial court by ruling that Fleischer Studios had not proved that it held a valid trademark in the Betty Boop image mark, but reversed the trial court by ruling that Fleischer Studios might have a valid trademark in the Betty Boop word mark, and sent the case back to the trial court for further hearings on the issue.

Takeaway: the Ninth Circuit Court of Appeals followed both common sense and its own recent case law by withdrawing its arbitrary expansion of the doctrine of aesthetic functionality, saving the brand licensing industry from free riders who could sell branded merchandise as long as they make clear the mark was used for its consumer appeal, and not to identify the goods as made or endorsed by the mark owner.

Why IP Assignment Agreements Matter, Supreme Edition

July 14th, 2011, by Richard R. Bergovoy

The Supreme Court schooled Stanford University in legal writing in Trustees of Stanford University v. Roche Molecular Systems, ruling that sloppy drafting of an intellectual property assignment agreement required Stanford to share ownership of an important patent for HIV detection technology.

As summarized in an earlier post, the Federal Circuit Court of Appeals dismissed Stanford’s patent infringement lawsuit against Roche because a poorly drafted intellectual property assignment agreement signed by one of Stanford’s researchers in effect made Roche a co-owner of the patent and thus immune from a patent infringement lawsuit. The Stanford agreement said that the researcher “agree[d] to assign,” his rights in any inventions, i.e. at some time in the future, but that was trumped by a later assignment that the researcher signed with Roche’s predecessor, but which was phrased in the present tense (“do[es] hereby assign”), to take immediate effect.

Before the Supreme Court, Stanford’s argument focused not on the language of the assignment agreement, but on the Bayh-Dole Act, which regulates intellectual property ownership and commercial exploitation of inventions created as part of a federally funded project. Stanford argued that its HIV research project was subject to Bayh-Dole, and that the law vested ownership of the invention directly in Stanford, so that the researcher had no rights to assign to Roche.

The Supreme Court disagreed, ruling that patent law had traditionally vested initial ownership of inventions in inventors, regardless of whether they invented on their employers’ payroll. (For that reason, most employers make sure to have their researchers sign assignment agreements that transfer ownership of all inventions upon creation to the employer.) The Court admitted that the Bayh-Dole Act was not a model of clarity on the issue of initial ownership of inventions, but ruled that a statute would need to directly and unambiguously vest ownership in the research organization to change the “inventor owns” rule, but Bayh-Dole had not.

Takeaway: as we said back in January, 2010: “A lot of folks DIY basic contracts like employment agreements by cutting and pasting poorly drafted templates from the Internet. A lot of other folks sign non-disclosure and similar basic agreements without a glance at the actual contents. This case shows why neither is a good idea.” If you are a federally funded research organization subject to the Bayh-Dole Act, it would be wise to review your IP assignment agreements for compliance with the Stanford decision.

Boop Oop a Yikes! Did the 9th Circuit Just Torpedo the Brand Licensing Industry?

June 19th, 2011, by Richard R. Bergovoy

The Ninth Circuit's slip is showing

In a recent case involving the saucer-eyed, short-skirted Betty Boop cartoon character, the federal Ninth Circuit Court of Appeals in Fleischer Studios, Inc. v. A.V.E.L.A., Inc. appears to have torpedoed the legal foundations of the brand licensing industry by ruling that there is no trademark infringement if a trademark is used for its commercial appeal rather than its source-identifying value.

If read broadly, the case would give a free pass to merchandisers to sell unlicensed New York Yankee caps or Mercedes-Benz medallions, as long as buyers were purchasing the goods for their brand appeal, and not under the mistaken belief that they were “official” goods.

The court’s Betty Boop “slip” was doubly surprising, considering that it had torpedoed a similar argument just five years ago.

The case involved both copyright and trademark infringement claims of Fleischer Studios against unlicensed sellers of vintage posters and other merchandise featuring the Betty Boop character.

The main focus of the court’s opinion was whether Fleischer had in fact purchased the copyrights to the Betty Boop character. The court concluded that Fleischer had not, because the party from which Fleischer had purportedly purchased its rights did not have an unbroken chain of title. Accordingly, Fleischer’s copyright infringement claims failed.

The court then focused on Fleischer’s alternate argument, that because it (along with Hearst Publications) owned the registered trademarks in the Betty Boop name and image, even if the defendants had not infringed its copyright, their unlicensed use of Betty Boop infringed Fleischer’s trademarks.

The court did not decide whether Fleischer in fact owned the trademarks, but ruled that in any case there was no trademark infringement because the defendants’ use of Betty Boop was not for the purpose of indicating that Fleischer or any other party was the source or origin of the products, but only for Betty’s commercial appeal to consumers. In other words, since the primary function of a trademark is to identify the source or origin of goods and services, the defendants’ use was not a trademark use, and therefore such use could not infringe Fleischer’s trademark rights, if any. Furthermore, added the court, Fleischer had not submitted evidence that the defendants’ use of Betty Boop had mislead consumers that Fleischer was the source of the goods. (But that was not surprising, given that the court raised the issue for the first time on appeal (below)).

As precedent, the court cited its 1980 opinion in International Order of Job’s Daughters v. Lindeburg & Co., which held that a maker of jewelry incorporating the trademarked insignia of the Job’s Daughters young women’s organization did not infringe because, “Trademark law does not prevent a person from copying so-called ‘functional’ features that constitute the actual benefit that the consumer wishes to purchase, as distinguished from an assurance that a particular entity made, sponsored or endorsed a product.” In a nutshell, this is the doctrine of “aesthetic functionality,” which starts from the long-accepted premise that a functional feature of a product cannot qualify as a trademark, because to do so usurps the domain of patent law, but then extends that an extra layer by holding that features that contribute to consumer appeal, including trademarks themselves, are automatically “functional” in the same way as an attention-grabbing mechanical feature of a product.

There was just one problem. Neither the parties in their briefs nor the trial court in its opinion had cited Job’s Daughters, probably because the Ninth Circuit itself had put the case in a very narrow box in its 2006 opinion in Au-Tomotive Gold Inc. v. Volkswagen of America, Inc. In Auto Gold, a dealer in automobile accessories tried to sell keychains and other paraphernalia featuring Volkswagen and Audi logos, arguing that under Job’s Daughters, it was using the marks for their consumer appeal, not their source-identifying function, and had attached disclaimers stating that the goods were not produced or endorsed by Volkswagen or Audi.

The Auto Gold court flatly rejected that argument on the grounds that in Job’s Daughters and similar cases, the “aesthetic functionality” doctrine had only exempted aesthetic or ornamental features, like product color or shape, and only when they had some function “wholly independent of any source-identifying function.” The court contrasted those cases with the Volkswagen and Audi branded goods sold by Auto Gold, for which the “alleged aesthetic function is indistinguishable from and identical to the marks’ source identifying nature… The demand for Auto Gold’s products is inextricably tied to the trademarks themselves,” and not to independent economic or performance benefits of the designs. In other words, it is nonsensical to say that because a source-identifying symbol that is designed to have consumer appeal in fact has such appeal, that makes it per se “functional,” and therefore ineligible to receive trademark protection.

And in a footnote, the Auto Gold court marginalized Job’s Daughters directly by saying that the case only applied to “collective marks,” that is, a category of trademarks used by members of a collective group or organization, which typically have less of a source-identifying function than commercial trademarks, according to the court.

But the Fleischer opinion did not even mention Auto Gold, much less attempt to distinguish it from the Betty Boop facts. Making it extremely likely that another merchandiser will try to free-ride another famous brand, and the Ninth Circuit will have to hide its Betty Boop slip all over again.

Takeaway: brand owners selling products in the federal Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam) should be vigilant to stop companies from selling unlicensed merchandise featuring their trademarks which claim that the marks are not used for their source identifying purposes, but rather for their consumer appeal. It will be especially helpful to gather evidence that consumers believe the unlicensed goods are “official” goods manufactured, sponsored, or endorsed by the brand owner.

Handling Trademark Licensees in Bankruptcy

May 31st, 2011, by Richard R. Bergovoy

Don’t panic, trademark licensors with financially shaky licensees. In case it has already sold out at your local newsstand, here is a copy of Handling Trademark Licensees in Bankruptcy, Part 1, from the June issue of Royaltie$ magazine, written with our friend and former Beanstalk colleague, Oliver Herzfeld.

Part 2 will be out in August.

Conditions, Covenants, Copyrights, and Contracts

May 26th, 2011, by Richard R. Bergovoy

More weapons for licensors, my pet!

Whether you are doing battle in a virtual world with mythical beasts or in a real courtroom with rebellious licensees, it’s all about the weapons.

In MDY Industries LLC vs. Blizzard Entertainment, Inc., the federal Ninth Circuit Court of Appeals explained under what circumstances a licensee’s violation of a non-exclusive software license agreement would not only be a breach of contract, but also an infringement of copyright, giving the licensor many more powerful legal weapons with which to do battle.

World of Warcraft (“WoW”) is a popular multiplayer fantasy computer game in which weapons feature prominently. Players must advance through 70 different levels by fighting battles, slaying beasts, and buying or trading for weapons and armor. WoW has an end user desktop software component subject to an end user license agreement, and an Internet server component subject to terms of use. Michael Donnelly invented a software bot called Glider that automatically plays the game and advances players through the lower levels of WoW without their participation. Glider quickly became popular, eventually earning Donnelly $3.5 million.

When Blizzard became aware of Glider, it changed the end-user license agreements and the terms of use to prohibit use of game-playing bots, and implemented an anti-bot component called Warden to intercept Glider. Donnelly added an anti-detection module to Glider, and bragged in the press that Blizzard would never be able to completely shut down Glider.

After Donnelly received a threatening visit from Blizzard’s legal counsel, his company, MDY, filed suit. Blizzard countersued, claiming: 1) end-users’ use of Glider in violation of the license agreement and terms of use was an infringement of Blizzard’s copyright in the WoW software; and 2) although MDY did not directly infringe Blizzard’s copyrights, it either encouraged or permitted Glider users to do so, which made MDY liable under theories of either contributory or vicarious copyright infringement. (Blizzard also raised claims under the Digital Millennium Copyright Act and tortious interference with contract.)

Blizzard claimed copyright infringement in part out of necessity – MDY was not a licensee of WoW, so Blizzard could not sue MDY for breach of contract – and in part out of preference. As we saw in Jacobsen vs. Katzer, copyright infringement actions give the plaintiff powerful legal remedies. Not only the right to seek the licensor’s actual damages as in a breach of contract action, but also to seek the infringer’s profits, statutory damages of up to $150,000 per work, injunctive relief, attorney’s fees, as well as enforcement against downstream infringers.

The trial court found in favor of Blizzard on the copyright claims, assessed a judgment of $6.5 million against MDY, and permanently prohibited MDY from distributing Glider.

The Ninth Circuit started from the premise that a copyright licensor normally waives the right to claim copyright infringement against a non-exclusive licensee, and is therefore limited to its contractual remedies for breach of the license agreement.

The exception to this rule occurs when the licensee breaches a condition of the license, that is, a contractual term on which the licensor conditioned his permission for the licensee to access the copyrighted material. And not just any condition, but one that has a close nexus to the licensor’s exclusive copyright rights.

This was in accord with the Federal Circuit in Jacobsen vs. Katzer and other courts that have ruled that breach of garden variety contractual promises (covenants) in a license agreement condition would not constitute copyright infringement, but that breach of conditions might. According to the WoW court, state law will normally define these terms, but generally speaking, a covenant is a promise to act or not act in a particular way (“Licensee agrees that it will not X”), while a condition is a precondition that must be fulfilled before a party delivers a benefit (“Provided that Licensee does not A, then Licensor will allow Licensee to B”).

Furthermore, the breached condition must have a nexus to the licensor’s exclusive copyright rights such as copying, selling, and creation of derivative works. If not, wrote the court, all licensors would draft every license provision to say that it is an essential condition of the license, to access more powerful copyright remedies against breaches. In a footnote, the court ruled that a licensee’s failure to pay the license fee would always be deemed to have the required nexus to permit the licensor to bring a copyright infringement action.

Turning to the facts of the Glider bot, the court found MDY was not liable for either contributory or vicarious copyright infringement, because: 1) the Blizzard license prohibitions against using bots were phrased as covenants (“You agree that you will not…create or use cheats, bots, ‘mods,’ and/or hacks….”), not as conditions to using WoW; and (2) Glider users’ violations of the license terms did not implicate any exclusive copyright rights, for example copying WoW or creating altered versions of it.

Takeaway: Although Blizzard lost its copyright claim, in a larger sense licenses and licensors won in yet another Ninth Circuit case. Expect licensors to draft software and other copyright licenses in which many of the licensee’s obligations are styled not as covenants, but as conditions to the licensor’s provision of the license, by inserting language such as, “Provided that Licensee…” or “Subject to and conditioned on Licensee’s…” With the increased legal weapons that a copyright infringement action makes available to licensors, there could be an increase in litigation not only against licensees, but also against third parties who may have encouraged or permitted infringement by licensees.

Cloud Services and SAAS Agreements: Clickwrap vs. Custom

March 28th, 2011, by Richard R. Bergovoy

Photo Courtesy NASA

Many businesses are attracted by the economic advantages of cloud computing, yet at the same time wary of the risks of putting their data and business in the hands of a stranger.

The advantages of cloud computing include: eliminating the need for a major upfront investment in equipment that is then utilized only part-time; ability to ramp up quickly (scalability); ability to add functions quickly (modularity); paying only for what you use on a “utility model.” On other hand, the worst case scenario is that a cloud vendor could lose all of the customer’s data, as happened to many users of Sidekick mobile phones, who were notified in late 2009 that their e-mails, photographs, contacts, and other data stored in the cloud had been lost due to an equipment failure.

A well-drafted contract, that defines and allocates the risks between the parties, is therefore essential.

But most newcomers go the clickwrap route. Let’s take a look at a representative clickwrap cloud services agreement– the Amazon Elastic Cloud Compute (EC2) agreement, which is actually somewhat more customer-friendly than most– and how it could be improved from a customer’s point of view.

Uptime: Amazon’s goes further than most clickwrap agreements, offering concrete service levels that guarantee 99.95% uptime. Sounds good, right? But what happens if Amazon flunks its SLAs? The customer gets a service credit of 10% per month against future invoices, but note that Section 11 says that Amazon has no responsibility to pay for violation of SLAs, and in any event, total damages from all causes are limited to fees paid, not much comfort if your e-commerce site is down Christmas season. As a customer, you would want contractual provisions allowing you to receive more than token damages, and to require the vendor to insure you against loss. If the vendor is providing applications or services in addition to raw computing power, then service levels should be crafted that define and quantify the vendor’s success—uptime alone is not a sufficient metric.

Data Protection and Data Loss: major concerns for a cloud customer are loss of data security or integrity due to equipment failure or malicious third party actions such as hacking. Section 3.1 of the agreement says only that Amazon will implement reasonable measures to prevent loss, and puts the burden on the customer to back up data and to secure it against hacking. As a customer, you would want: contractual provisions guaranteeing that the vendor will implement certain safeguards and comply with certain security protocols; provide backup against data loss; allow customer audits; require vendor reporting, especially in case of security breaches, in which case you would also want a defined incident response, including requiring the vendor to provide any third party notifications required by law. And if all else fails, you would want the ability to recoup damages against the vendor, especially if a third party is making claims against you arising from actions of the vendor.

Regulatory Issues: location of the vendor’s equipment could impact what regulations a customer is subject to. In Section 3.2, Amazon allows customers to choose the physical location where their data is stored and used, and offers safe harbor programs to ensure compliance with the regulations of the relevant jurisdictions. That’s a good start, but Amazon puts the burden on customers to determine whether data will ever be stored or transmitted outside the requested location. Customers should review the provisions of the myriad state, federal, and foreign data privacy and security laws, to assess which might apply and how to the customer’s business model, then negotiate appropriate provisions with the vendor to ensure compliance. For example, the EU has a strict regulatory scheme to protect personally identifiable information of its residents, and has determined that US standards generally are non-compliant. So if there is any chance that such data will flow through the US, the agreement should require the vendor to comply with the EU-US Safe Harbor program of the US Department of Commerce.

Data Portability: clickwrap cloud services agreements are often silent about what happens to the customer’s data and content at the end of the contract. In the Amazon agreement, for 30 days after voluntary termination, Amazon promises not to erase data, and to offer reasonable assistance to transfer data back to the customer. That’s pretty good by clickwrap standards, but the agreement should also address other common scenarios where data access is a concern: if the vendor becomes insolvent, or is acquired by another vendor, or in a disaster recovery scenario.

Update, 4/25/11: This just in from our I Don’t Want To Say I Told You So Dept.: Amazon’s EC2 service went down last Thursday, and did not return to normal until Sunday, knocking out or seriously impairing thousands of websites, including Reddit and Foursquare, and resulting in permanent data loss for a small number of EC2 customers. But surely the 10% credit against next month’s bill will make up for the downtime…

There Are 8 Million Lawsuits in the Naked Cowboy

February 23rd, 2011, by Richard R. Bergovoy

This blog post is not authored by, endorsed by, or affiliated with the Naked Cowboy(R), and other stuff our lawyer made us say.

Photo Courtesy Ryan McGinnis

A New York New Year’s tradition is the dropping of the ball in Times Square.

Another is fast becoming the serving of the New Year’s lawsuit by Times Square’s scantily clad troubadour, the Naked Cowboy.

Robert John Burck, aka the Naked Cowboy, recently sued CBS and the producers of the soap opera “The Bold and The Beautiful” for an episode showcasing a character in “Naked Cowboy signature garb” of cowboy hat, cowboy boots, tighty whitey briefs, and strategically placed guitar. The suit seeks $15 million damages for a casebook worth of intellectual property-related legal injuries, including trademark infringement, trademark dilution, false advertising, misappropriation of right of publicity, and unfair business practices.

But guys, you missed the most obvious claim of all– infringement of trade dress.

The complaint claims that the suit was filed only after the defendants ignored multiple requests to take a $150,000 license, in order that the “integrity and propriety of the brand be kept in tact [sic].”

Would that have been a naked license?

In 2008, Burck sued candy maker Mars, Inc. on the grounds that Times Square billboards and a mural featuring a guitar-strumming, underwear-clad blue M&M infringed his Naked Cowboy trademark and rights of publicity. The judge dismissed the right of publicity claim on the grounds that Burck could not claim it for a fictional character; the parties later reached a confidential settlement regarding the trademark infringement claims.

In 2009, Los Angeles videogame maker Gameloft filed a preemptive lawsuit against Burck seeking a ruling that the appearance of a scantily clad, guitar strumming character in its videogame, New York Nights, was not an infringement of the Naked Cowboy trademark.

Also in 2009, Burck sued Clear Channel Communications, claiming that its Tampa radio station created and promoted a Naked Cowboy imposter.

In 2010, Burck sued Sandra Brodsky, a bikini-clad, guitar strumming ex-stripper who strolled Times Square as the Naked Cowgirl, after she refused to sign a Naked Cowboy franchise agreement (going price: $5,000 per year or $500 per month) and ignored a cease-and-desist letter to halt all Times Square performances. Burck’s complaint alleged that the Naked Cowgirl would cause confusion among potential consumers of Naked Cowboy services, and tarnish his wholesome image, by her frequent use of obscene language and gestures towards uncooperative tourists.

What Is A Reasonable Royalty?

January 27th, 2011, by Richard R. Bergovoy

Did somebody say royalty?

What is a reasonable royalty rate for licensed intellectual property?

According to the Court of Appeals for the Federal Circuit, it is not 25%–at least not as a rule of thumb.

The U.S. Patent Act requires that damages in a successful patent infringement lawsuit equal the reasonable royalty that a licensee would pay a licensor in a hypothetical license negotiation at the time the infringement began.

In Uniloc USA, Inc. v. Microsoft Corp., Uniloc prevailed at trial in its patent infringement claim and was awarded damages of $388 million, based in part on its expert witness’s testimony that 25% of Microsoft’s expected profits on its Office software suite was a reasonable baseline from which to calculate patent royalties. The infringed invention was a product activation key designed to deter illegal software copying.

The 25% rule of thumb starts with the infringer’s gross profit margin (profits divided by nets sales), multiplies that by 25%, then multiplies the resulting royalty rate by the infringer’s net sales from the infringing products, to calculate the patent owner’s damages. For example, if the present value of net sales of an invention is $6, and the present value of manufacturing expenses is $4, the gross profit margin is 33.3% (6 – 4/ 6), and the 25% rule royalty rate would be one-quarter of that, or 8.3% of net sales. The initial royalty rate is often adjusted upwards or downwards, according to the 15 factors detailed in the 1970 case, Georgia-Pacific Corp. v. U.S. Plywood Corp.

On appeal, Uniloc argued that academic studies had proven that the 25% rule of thumb was supported by evidence that patent royalties negotiated in the real world averaged around 25% of profits.

The CAFC conceded that it had tolerated the 25% rule of thumb in cases where the parties had not contested it, but ultimately overturned Uniloc’s damages award on the grounds that to be admissible, a general theory must be sufficiently tied to the facts of the case, however Uniloc’s expert had not laid the necessary groundwork to introduce the 25% rule of thumb in that case.

More broadly, the CAFC said the 25% rule failed because: 1) it did not account for the importance of the patent to the product in which it was incorporated; 2) it did not account for the difference in market power and risk assumed by the parties; and 3) it is essentially arbitrary, and does not fit within the model of a hypothetical negotiation assumed to occur prior to a finding of infringement.

So what then is a “reasonable royalty” for licensed IP?

The CAFC endorsed three of the 15 Georgia-Pacific factors for calculating a reasonable patent royalty: looking at royalties paid or received in licenses for the patent or in comparable licenses, and looking at the portion of profit that is customarily allowed in the particular business for use of the invention or similar inventions. But even these must be tied to the facts of the particular case.

By way of reference, a frequently cited rule of thumb for calculating a fair trademark royalty rate is 10% to 25% of the licensee’s expected gross profit margin, depending on the type of goods, the size of the market, and the strength of the mark. In the same ballpark as patent law’s deposed 25% rule of thumb, but with more flexibility to allow calibration of the licensed IP’s actual contribution to the profitability of the product that incorporates it.