Archive for the ‘Copyright’ Category

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

Sunday, June 19th, 2011

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.

Conditions, Covenants, Copyrights, and Contracts

Thursday, May 26th, 2011

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.

Costco v. Omega: Supreme Court Punts On Another Big IP Case

Monday, December 27th, 2010

Photo Courtesy University of Wisconsin Digital Archive under the cc 2.0 license

The United States Supreme Court deadlocked 4-4 on the question of whether the “first sale doctrine” permits copyrighted goods manufactured overseas but not authorized for sale in the United States to be sold here on the “gray market,” upholding a Ninth Circuit opinion which ruled in favor of the copyright owner that the doctrine does not apply.

The unsigned opinion in Costco Wholesale Corp. v. Omega S.A. was one of the shortest in the Court’s history: “The judgment is affirmed by an equally divided Court.”

Recently appointed Justice Elena Kagan recused herself from the decision, because she participated on the case while serving as US Solicitor General.

The case involved Omega Seamaster watches manufactured in Switzerland that were engraved on the underside with a US copyrighted “Omega Globe Design.” Omega sold the watches only for distribution in South America, but they found their way to the United States, where they were resold by Costco stores in California at a price of $1,299, compared to the $1,999 suggested retail price for authorized US resellers.

Omega sued Costco for copyright infringement on the grounds that Costco’s unauthorized sales of the Seamaster watches infringed Omega’s exclusive right under Section 106(3) of the Copyright Act of 1976 to distribute its work by sale, rental, lease, or lending.

Costco countered that Omega’s exclusive distribution right was preempted by the so-called first sale doctrine of Section 109(a) of the Copyright Act, which states that, “the owner of a particular copy…lawfully made” within the meaning of the Copyright Act is not subject to Section 106(3), so that once a copyright owner consents to the sale of its work, it loses its distribution right with respect to those copies, and the purchaser is free to transfer ownership in any way it wishes. The federal district court ruled in Costco’s favor, on the grounds that Omega’s sale to the South American distributors had triggered the first sale doctrine. (The existence of the first sale doctrine is one reason that copyright owners are increasingly trying to recast their transactions as licenses not subject to the doctrine, rather than sales.)

The Ninth Circuit Court of Appeals reversed, ruling in Omega’s favor on the grounds that prior cases in the circuit had held that the first sale doctrine does not apply to copies manufactured overseas and not authorized for sale in the United States. Key to that opinion was the Ninth Circuit’s holding that copies manufactured outside the United States were not “lawfully made” for purposes of Section 109, and therefore did not trigger the first sale doctrine, so that they continued to be subject to the copyright owner’s exclusive distribution right even after the first sale.

Before the Supreme Court, Costco urged reversal on the grounds that the appellate opinion: was based on precedents not supported by the Copyright Act; was at odds with the Supreme Court’s 1998 opinion in Quality King Distributors, Inc. v. Lanza Research International, Inc.; and was bad policy, because it would encourage manufacturers of copyrighted goods to relocate their factories overseas to maintain resale prices.

Although the case was widely anticipated by both copyright owners (movie studios, record companies) and luxury goods manufacturers on the one hand, and retailers on the other hand, to bring clarity to the often tangled law of gray market goods, the Court’s split left in place the Ninth Circuit’s opinion for that circuit only, but set forth no single national standard and created no Supreme Court precedent. It is likely the Court will need to revisit the issue.

Similarly, in another widely anticipated IP case, delivered in June, the Court in Bilski v. Kappos fractured into three separate but overlapping opinions without setting forth a clarifying standard for what is patentable subject matter in the digital age.

Takeaway: For cases arising in the jurisdiction of the Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam), copyright owners will be able to pursue copyright infringement lawsuits against gray market sellers of their copyrighted goods that they manufactured overseas, and did not authorize for resale in the United States. Although not addressed in the Costco case, note that manufacturers may also have rights to sue gray market sellers under trademark law (the Lanham Act) to prevent US sales of their trademarked goods, if there is any material difference between the foreign version and the authorized US version, such as different product features or warranty coverage.

Licensor Recovery of Attorneys’ Fees in Bankruptcy

Thursday, November 18th, 2010

Photo Courtesy tristam sparks under the cc 2.0 license

The only thing worse for a licensor than losing money when its licensee files for bankruptcy is paying attorneys’ fees on top of that to stop the bleeding.

Two of the most common bankruptcy proceedings that licensor creditors get involved in are: 1) hearings related to the licensee’s attempt to assume an executory license agreement; and 2) lawsuits against the licensor to recover so-called preferential transfer payments from the licensee.

But can a clever licensor recover attorneys’ fees incurred in post-petition bankruptcy proceedings, if it had the foresight to include a well-drafted attorneys’ fee provision in its boilerplate license agreement?

Since a 2007 Supreme Court decision, the answer has been “maybe,” which was a big improvement over the previous answer of “almost never.”

Until 2007, there were two hurdles against a licensor creditor recovering its attorneys’ fees in a bankruptcy proceeding. The first was that many courts invalidated attorneys’ fee provisions to the extent that they applied to bankruptcy proceedings, arguing that the Bankruptcy Code had a general policy to invalidate contractual clauses that were triggered by bankruptcy. The second was that some courts interpreted the Bankruptcy Code to prohibit recovery of attorneys’ fees by unsecured creditors under any circumstances.

In 2007, the US Supreme Court removed the first hurdle in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., which held that the Bankruptcy Code did not contain a blanket prohibition on recovery of attorneys’ fees for bankruptcy related proceedings, as long as the attorneys’ fees provision is valid under state law.

But the Travelers case did not address the second hurdle, and there is currently a split among various courts whether unsecured creditors can recover attorneys’ fees even pursuant to a contractual provision valid under state law. So far, the Second Circuit, Ninth Circuit, and Sixth Circuit federal appeals courts have permitted such recovery, while the First Circuit and Eighth Circuit (in pre-Travelers opinions) have not.

Sigh, so confusing. What is a licensor to do? Well of course, put attorneys’ fee recovery language in your boilerplate license agreement. The worst that can happen is the court says no.

A starter attorneys’ fee provision might read as follows:

“If any legal action, arbitration, or other proceeding is brought under or in relation to this Agreement, including but not limited to any legal action, arbitration, or proceeding under the U.S. Bankruptcy Code, then in addition to any other relief to which the Licensor is entitled, if the Licensor is the successful or prevailing party, then the Licensor is also entitled to recover, and the Licensee shall pay, all: (a) reasonable attorneys’ fees of the Licensor; (b) court costs; and (c) expenses, even if not recoverable by law as court costs (including, without limitation, all fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings); incurred in that action, arbitration, or proceeding and all appellate proceedings. For purposes of this Section, the term ‘attorneys’ fees’ includes, without limitation, paralegal fees, investigative fees, expert witness fees, administrative costs, disbursements, and all other charges billed by the attorney to the Licensor.”

Adjust the above to be valid under the state law that governs the license agreement. Check whether that state law makes the provision reciprocal, by deeming that if an agreement grants one party the right to recover attorneys’ fees, then the other party is automatically entitled to recover its attorneys’ fees under like circumstances. Then cross your fingers.

Oh Man: Dora the Explorer Discovers She’s Been Swiped

Tuesday, November 2nd, 2010

David vs. Goliath, Dora the Explorer vs. Swiper the Fox, Caitlin Sanchez vs. Nickelodeon.

Since our passion is the drafting and negotiation of intellectual property-related contracts, when 14-year-old Caitlin Sanchez, the voice of the popular Dora the Explorer cartoon character, filed a lawsuit against the Nickelodeon cable network claiming that Nickelodeon and its affiliates have duped her out of millions of dollars in royalties and residuals by pressuring her to sign a “bizarre, impenetrable, unconscionable contract,” it tweaked our curiosity.

But was it really a bad contract, or rather bad negotiation that resulted in Caitlin getting a lot less money than she and her family expected?

To answer that question, we tracked down a copy of the agreement (“Agreement”) between Caitlin and Uptown Productions, Inc. (“Uptown”), the production company for the Dora program, and compared it to the allegations in the lawsuit complaint, filed by the law firm of Balestriere Fariello. (Agreement is here, complaint is here.)

And the comparison showed that the contract IS bad, but not confusingly bad, just transparently bad— extremely but obviously one-sided in Uptown’s favor. Despite that, Caitlin and her family signed the Agreement and several subsequent documents literally within minutes of receiving them, without negotiating or asking an attorney to assist them. That was akin to Dora the Explorer not chanting, “Swiper, no swiping!” when the larcenous fox was in plain sight.

In doing so, they made the same mistake that many artists, actors, musicians, designers, and other creative people make when they are approached by television, music, or theatrical producers—they silence their questions and sign, for fear of being ditched and missing their big break.

The framework for the Agreement between Uptown and Caitlin is that Uptown would pay for Caitlin’s exclusive services for seven episodes of the Fifth Cycle of the Dora series and would retain options for 10 episodes for each of the Sixth through Tenth Cycles of the show. Caitlin was to receive: a salary of $5,115 per episode (increasing 5% per cycle); plus residuals based on the number of re-broadcasts of the original episodes; plus merchandise license fees. She was also required to do a “reasonable” amount of promotional appearances and interviews.

(1) The complaint alleges: Nickelodeon “fail[ed] to fully compensate Caitlin for products she voiced, for which she is due a percentage of the products [sic].” Uptown has only paid Caitlin $9,636.39 in merchandising royalties to date, according to the complaint. Caitlin’s attorney claims that that is an absurdly low and definitely incorrect figure in light of the fact that Nickelodeon claims gross retail sales of $11 billion in Dora merchandise since 2002.

The contract states: Uptown “shall pay you 5% of 100% of the ‘net receipts’ actually received by [Uptown] from merchandising, should your name, voice or likeness be used alone in connection therewith, reducible to 2-1/2% of 100% if other artists are used…; ‘Net receipts’ shall mean the amount remaining after deduction of a distribution fee of 50% of the gross receipts actually received from agents and distributors; and all costs related to such merchandising use.”

Our take: Caitlin would get royalties based on only the subset of Dora merchandise that featured Caitlin’s voice or her actual (not Dora’s) image, and that the revenue stream on which the royalties would be calculated could be easily manipulated by Uptown’s “creative accounting.”


How do you say, “Swiper, no swiping!” in Swedish?

(more…)

Licenses 2, Sales 0 in Eminem and Autodesk 9th Circuit Rulings

Wednesday, September 22nd, 2010

The growing popularity of licensing as a strategic business and legal tool is likely to grow even greater as a result of a pair of cases decided one week apart in the federal Ninth Circuit Court of Appeals that broadened the scope of and increased the powers of licenses.

The first Ninth Circuit decision, F.B.T. Productions vs. Aftermath Records, involved a dispute between rap artist Eminem and his record label Aftermath about whether Aftermath’s provision of Eminem’s songs to iTunes was a “sale” or “license” for purposes of a contract drafted in the pre-digital age. The difference was significant, because the agreement provided that the label would pay Eminem royalties of between 12% and 20% of the adjusted retail price of all “full price records sold in the United States… through normal retail channels,” but would pay 50% of its net receipts “[o]n Masters licensed by us… to others for the manufacture and sale of records or for any other uses.” The agreement was signed in 1998, before iTunes was established, and did not further define either “sale” or “license.”

The record label argued among other things that the custom in the recording industry was that the “masters licensed” provision applied only to “compilation records and incorporation into movies, TV shows, and commercials,” and furthermore, that the iTunes download was functionally no different than a purchase of a vinyl record or CD at a record store.

The court rejected that argument, and held that under copyright law, a license is, “an authorization by the copyright owner to enable another party to engage in behavior that would otherwise be the exclusive right of the copyright owner, but without transferring title in those rights.” Because the record label retained ownership of the copyrights for the Eminem songs as well as title to the digital music files that it made available to iTunes in exchange for periodic payments based on the volume of downloads, the transaction was a license, and the higher 50% royalty rate applied.

One week later, in the case of Vernor vs. Autodesk, Inc., the court ruled that most written license agreements will preserve the licensor’s right to prohibit resales not only under the license agreement, but also under the Copyright Act. There the issue was whether Timothy Vernor could sell on eBay outdated copies of Autodesk’s AutoCAD software for a few hundred dollars that normally sell for several thousand dollars per copy when new.

Copyright law confers several exclusive rights on copyright owners, including the exclusive right to reproduce their works and to distribute their works by sale or rental. An important exception to this exclusive right is the so-called “first sale doctrine” codified at Section 109 of the Copyright Act, which says that the, “owner of a particular copy or phonorecord… is entitled without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” So for example if a publisher sells a book to a bookstore, the bookstore is free to resell it to anyone, and the purchaser is in turn free to sell the same book to anyone on eBay.

Vernor had purchased the AutoCAD software from an architectural firm that had licensed it from Autodesk. The AutoCAD license agreement contained standard provisions prohibiting transfer to or use by any party other than the original licensee, however, it did not require the licensee to return old installation disks. Vernor argued that under prior case law in the Ninth Circuit, since the license did not require the architectural firm to return its copies of the install discs, the firm was an “owner of a particular copy,” which kicked in the first sale doctrine which exempted the firm and any of its purchasers from a copyright infringement claim arising out of resale of the discs. Although the architectural firm had violated its license agreement by reselling the discs, Vernor argued that he had not, because he had neither installed the software nor agreed to any online license agreement before the eBay sales.

After an extensive review of prior case law the appeals court disagreed with Vernor, and held that a software user is a licensee rather than an “owner of a copy” where the copyright owner: 1) specifies that the user is granted a license; 2) significantly restricts the user’s ability to transfer software; and 3) imposes notable use restrictions. Like most well-drafted software license agreements, the Autodesk agreement passed with flying colors, despite the absence of a requirement to return old install discs. Thus, because the architectural firm was a licensee, not an “owner,” then the first sale doctrine did not apply, and Vernor had infringed Autodesk’s exclusive distribution rights in violation of copyright law.

Takeaway: the Eminem case is not expected to have much of a practical impact on the recording industry, because since the time of that agreement, almost all record label agreements deem that provision of songs to iTunes will be treated as a “sale” at a 12% to 25% royalty rate. But when the nature of a copyright transaction is unclear, the Ninth Circuit will presume it is a license rather than a sale where the copyright owner retains control of the copyright, retains title to the media on which the content is delivered (CD, mp3 file, etc.), and receives periodic payments after the original transaction. Vernor says that when a standard license agreement is in place during the original transaction, the copyright owner can use both the license agreement and copyright law to prohibit later resale or disposition of the content. This will encourage copyright owners to cast transactions as licenses rather than sales, and with the proliferation of digital content that can be made easily subject to clickwrap license agreements even after the original point of sale, they will likely succeed in their efforts. So the purchaser of a hard copy of The Girl With the Dragon Tattoo will be able to resell it, because she (and the bookstore before her) took title to the media (book) on which the content was delivered. But she might not be able to resell her e-book version, if she purchases it subject to a standard license agreement at the time of download. One practical effect is that copyright owners will now be able to easily assert that resale of software, digital games, and many other kinds of digital content is a copyright infringement. Please note that these rulings only apply in the Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam), and that other circuits may not follow them.

The Bratz Are Back

Thursday, July 29th, 2010

Did You Miss Me?

They suffered a legal whipping, but the Bratz are back with more attitude than ever.

A federal appeals court last week reversed a decision in Mattel v. MGA Entertainment handing ownership of the billion-dollar brand of high fashion, high attitude, multiethnic dolls to Mattel, home of archrival California beach blonde Barbie.

As reported earlier, after Mattel proved at trial that its former employee, Carter Bryant, came up with the concept, name, and preliminary sculpture and sketches for the Bratz while still employed by Mattel, Judge Stephen Larson dropped a legal bomb on the Bratz’ owner, MGA Entertainment, and ordered:

  • MGA to pay damages of $100 million for copyright and trademark infringement
  • MGA to transfer ownership of the Bratz dolls and their molds to Mattel
  • MGA to withdraw infringing product from store shelves
  • a receiver to monitor MGA’s finances and collect royalties pending full transfer of ownership to Mattel

However, the Ninth Circuit Court of Appeals put the transfer on hold pending its review of the decision, and last week reversed major parts of that decision, leaving Mattel with little choice but to retry major portions, and probably the entire, trial from scratch.

The appeals court first questioned Judge Larson’s determination that Bryant’s employment agreement with Mattel transferred all his “ideas” to Mattel, including the name “Bratz” and the name of one of the original dolls, “Jade.” That error by itself would compel a retrial, the panel ruled. But even assuming that the trial judge’s reading of the contract was correct, the appeals court ruled that Judge Larson’s transfer of the entire Bratz trademark portfolio, which included dozens of other doll names, was excessive and unfair, because MGA had created a multi-billion dollar brand by virtue of its own added development, marketing, and investment since 2000. Rather, only those specific trademarks devised by Bryant while a Mattel employee (presumably just “Bratz” and “Jade”) could be transferred to Mattel, assuming that Bryant’s contract actually vested ownership in Mattel.

The appeals court also questioned Judge Larson’s determination that almost all Bratz dolls infringed Mattel’s copyrights in Bryant’s preliminary sketches and sculpture of the Bratz dolls. Again, the appeals court ruled that the trial judge was too sweeping in his interpretation of Bryant’s employment agreement with Mattel. The judge had determined that the agreement transferred ownership of any “design” devised by Bryant during his employment with Mattel. But it was also possible to interpret that the agreement only transferred ownership of designs devised during Bryant’s working hours and/or within his normal working duties as a collectible Barbie fashion and hair stylist, not a doll designer, and the appeals court ordered Judge Larson to make that distinction at the retrial. The appeals court further ruled that even if the agreement had clearly transferred ownership of the preliminary sketches and sculpture from Bryant to Mattel, it was an error for Larson to then rule that virtually all Bratz dolls infringed Mattel’s copyrights. The main similarities between the preliminary sketches and most of the later Bratz dolls was a certain “bratty” attitude, and big-headed, pouty appearance, however, both attitude and general appearance are “ideas,” and ideas are not protectable by copyright. In the retrial, the jury would need to find similarities among specific physical details of faces, hairstyles, body features, clothing, etc. in order to support a finding of copyright infringement.

Takeaway: MGA gets the Bratz back, and has announced plans to relaunch the line in August, but it is a somewhat bittersweet victory. The question is whether there is much left of the brand after almost two years in legal limbo. In addition, there is a second, separate trial pending in which Mattel has accused MGA of racketeering and theft of trade secrets. Which gets back to our original point: when accepting contributions of intellectual property, especially from independent contractors and new employees, know who originally created it, and where it really came from, and back it up with documentation.

Update, 4/25/11: A California jury last week gave the Bratz something to pout about, big time. In 2008, Barbie maker Mattel not only put the Bratz out of business but also won $100 million in damages against MGA, but that was overturned on appeal (above). After a retrial, the jury found that on the contrary not only had MGA not infringed Mattel’s rights, but that Mattel had stolen MGA’s trade secrets, and awarded MGA $89 million in damages. In addition, the jury ruled that Mattel’s theft was willful and malicious, raising the possibility that the court could award punitive damages that would increase total damages to three times the initial verdict. In doing so, the jury implicitly rejected Mattel’s argument that all IP rights in the Bratz belonged to Mattel because Bratz designer Carter Bryant developed the names and images while still a Mattel employee, and subject to an employment agreement that transferred all his ideas and designs to Mattel. However, the jury’s precise rationale was not apparent from the jury verdict sheet. Despite incurring an estimated $400 million in legal expenses to date, a bloodied but not bowed Mattel has declared that it will make a motion for a retrial, and reserved its right to appeal. So take that!

Entertainment Licensing Corner: Darth Laser

Thursday, July 8th, 2010

Don't call this bad boy a "lightsaber": Wicked Lasers' Spyder III

It is one of those fun stories that gets widely published by the mass media and the tech-oriented blogosphere: the maker of the Star Wars movies threatening to sue the maker of “the world’s most powerful portable laser” because of its supposed resemblance to a Star Wars lightsaber. (For officially licensed Star Wars candy lightsabers, see here. For non-Star Wars candy Lifesavers, see here.)

But not only Star Wars geeks, but also we IP geeks like this kind of story because: 1) Lucasfilm, Ltd. is one of the most successful licensors of all time, earning an estimated $24 billion in revenues from Star Wars licensed merchandise; and 2) there are lots of neat IP angles to the story.

So is Lucasfilm the righteous Luke Skywalker here, just trying to protect what belongs to it, or an evil Darth Vader, trying to intimidate a brave entrepreneur with its legal storm troopers?

First, some background. Hong Kong-based Wicked Lasers recently began selling its $197.97 Pro Arctic Spyder III laser, which it describes as “the most dangerous laser ever created.” With a tubular white grip, it inevitably prompted excited coverage in the blogosphere as, “your own personal lightsaber.” But nowhere on Wicked Lasers’ website or advertising are either Star Wars or lightsabers mentioned.

That was quickly followed by both a Lucasfilm press release and a Lucasfilm attorney cease-and-desist letter to Wicked Lasers, demanding that they stop selling, “a highly dangerous product… that is designed to look like a lightsaber from Star Wars.”

Unfortunately, only portions of Lucasfilm’s cease-and-desist letter were published, so it is impossible to say precisely what legal claims Lucasfilm is making against the Spyder III. But that won’t stop us from speculating:

1) Trademark infringement, for giving the impression that the Spyder III is an official Star Wars lightsaber endorsed by or affiliated with Lucasfilm. The problem with that claim is that all of the lightsaber comparisons are being made by third parties. As mentioned above, Wicked Lasers nowhere mentions Star Wars or light sabers in connection with the Spyder III.

2) Trade dress infringement. Trade dress is elements of product packaging or promotion that the public perceives as a product identifier– think of the appearance of the striated, green glass Coca-Cola bottle or the contour of a Corvette Stingray. The problem with that claim is it is difficult to argue that the handle of the lightsaber is actually part of its packaging, and not a functional part of the product itself. In fact, in Kellogg Co. vs. National Biscuit Co., the US Supreme Court ruled that the pillow shape of shredded wheat cereal was functionally dictated by cost and quality considerations, and therefore, not eligible for trade dress protection.

3) Copyright infringement. Lucasfilm has registered the handle of various lightsaber models as a form of “sculpture” with the US Copyright Office. So if another sculpture were substantially similar to the Star Wars lightsaber handle, it could be copyright infringement. The problem with that claim is that Wicked Lasers could reply that the handle of its laser is not an ornamental “sculpture,” but a functional, utilitarian device not subject to copyright. In fact, a British seller of Star Wars stormtrooper armor prevailed against Lucasfilm in an English court with a similar defense under UK law (below).

So Lucasfilm does not have a slam dunk case here.

But Star Wars is one of the world’s most lucrative licensing franchises, and Lucasfilm has aggressively defended its franchise with legal action.

In 2006, Lucasfilm sued Maryland-based High-Tech Magic for selling light sabers, and obtained a $250,000 settlement. High-Tech Magic had prominently advertised its lightsaber as, “a Star Wars Lightsaber that looks as good as those in the movies.”

Lucasfilm was not so fortunate when it sued the original designer of the Star Wars glossy white storm trooper armor helmets, who had begun selling helmets and body armor from his own website. Lucasfilm won a $20 million default judgment for copyright and trademark infringement against industrial designer Andrew Ainsworth in a Northern California court, but when it attempted to enforce the judgment in the UK, an appellate court ruled in December, 2009 that there was no copyright infringement because the storm trooper armor was not an ornamental, expressive work of art, but rather intended to be a functional, utilitarian object, and therefore not copyrightable as a sculpture. (This ruling surely pleased Star Wars fans, for whom this stuff is REAL.) Under UK law, Ainsworth is eligible to request that Lucasfilm pay his £2.5 million in attorneys fees.

Update, 8/5/10: Wookies of the universe, rejoice! Peace reigns once again in the Star Wars Empire, as Lucasfilm General Counsel David J. Anderman has sent a letter to Wicked Lasers CEO Steve Liu, offering to withdraw his prior cease and desist demand if Wicked posts a disclaimer on all web pages or advertisements related to the Spyder III: “THIS PRODUCT IS NEITHER LICENSED NOR ENDORSED BY LUCASFILM LTD.” Meanwhile, CEO Liu claims that sales of the Spyder III have tripled as a result of the publicity.

Fashion Licensing Corner: Legal Protection for Fashion Designs

Tuesday, June 15th, 2010

Fashion Pirate

This is truly the age of Fast Fashion.

Within days of an innovative new design appearing on a fashion runway in a global metropolis, that design is tweaked, manufactured in China, and loaded on the racks of Forever 21, H&M, Uniqlo, and other fast fashion retailers for under $50 in suburban malls around the world.

Can designers do anything to stop knockoffs? Under existing US intellectual property law, not much, but that could change.

Below is a thumbnail guide to US and European law protecting fashion designs.

The two most relevant forms of intellectual property protection for fashion designers are copyright and trademark law.

Current US Copyright Law

US copyright law protects “original expressions,” such as text or graphics, but not functional elements. Fashion accessories such as belt buckles or jewelry are considered decorative non-functional items that are eligible for copyright protection, while the shape and silhouette of apparel are considered to be “utilitarian” and therefore not eligible for copyright protection. Accordingly, copyright normally protects only the completely decorative elements of apparel, such as graphic images or patterns (including stitching) on fabric. Even then it is often easy to design around any potential copyright infringement claim. The standard of copyright infringement is substantial similarity between the original and the knockoff, specifically whether the knockoff has the same aesthetic appeal as the original to an ordinary observer. But if the knockoff has a distinguishable variation from the original, and is not merely a slavish copy, it will not infringe the original.

Proposed Amendment to US Copyright Law

The above state of affairs would change under the proposed Design Piracy Prohibition Act (HR Bill No. 2196), which would grant copyright protection for a term of three years to most varieties of apparel, handbag, and eyeglass frame designs (defined to include “the appearance as a whole” of an article of apparel) registered with the Register of Copyrights, and impose liability on designs that copy them, except if the accused design: 1) is original and not closely and substantially similar in overall visual appearance to a protected design; 2) merely reflects a trend; or 3) is the result of independent creation. The penalty for copying would be the greater of $250,000 in the aggregate or $5 per copy, and secondary liability could be imposed on parties that benefit from the infringements, including sellers and distributors.

The arguments for and against the bill echo the usual open source versus closed source IP arguments. Supporters of the bill, including many high-end fashion designers, argue that the ability of designers to profit from their designs is the greatest driver of fashion innovation, while opponents argue that the free exchange of ideas has always been the greatest driver of fashion innovation, and in any case, it is unlikely that a purchaser of a $100 Diane von Furstenberg knockoff would pay 10 times that amount for an original if the bill were enacted.

The debate may be moot. Similar bills have been introduced in the previous two sessions of Congress without passage, and no companion bill to HR 2196 has been introduced in the Senate during this session of Congress, so it has slight prospect for enactment in the near future. Update, 8/11/10: Senator Charles Schumer has introduced a fashion design copyright bill in the Senate (Senate Bill No. 3728), that he hopes to have enacted during the current session of Congress.

European Copyright Law

The European Community has already enacted an even higher level of IP protection for designers under the Community Design System than that proposed by the Design Piracy Prohibition Act. The Community Design System gives exclusive rights to the creator of a design (including but not limited to fashion designs) for three years in the case of unregistered designs and five years in the case of registered designs (renewable every five years to a maximum of 25 years). Some individual EC countries such as France have even more stringent laws. However, while they may disagree about the reasons, many analysts agree that the Community Design System has done little to deter knockoffs. In fact, three of the world’s biggest “fast fashion” retailers — H&M, Topshop, and Zara — are all headquartered in Europe.

US Trademark Law

While the purpose of copyright law is to protect original creations, the purpose of trademark law is to prevent consumer confusion as to the source or quality of goods and services. Thus, trademark law primarily protects the integrity of a designer’s name. Trademark law can also protect a design element of apparel, but not a single season design innovation, rather a design element that has become associated with a particular designer over time such that it is the designer’s “trademark.” Think for example of the Burberry beige, black, and red tartan pattern, or the Louis Vuitton gold “LV” initials and geometric shapes against a dark brown background. But in the case of Wal-Mart Stores v. Samarra Bros. Inc., the US Supreme Court ruled that there is a higher evidentiary hurdle to establish trademark protection for an apparel design element compared to a word or a packaging design trademarks. Conversely, it is comparatively easy to secure trademark protection for the words or logo on a fashion label. Which explains why many famous fashion designers often use their “label” as a prominent design feature of their fashions. They are fully aware that copyright law is unlikely to prevent knockoffs of the cut or silhouette of their designs, but that trademark law is likely to punish pirates of their names. The standard of trademark infringement is whether the challenged trademark (label, packaging, design element) is likely to confuse consumers that the product or service was produced by or originated with the owner of the accusing trademark.

Takeaway: unless copyright law changes, it will be difficult for fashion designers to knock out knockoffs, but trademark law gives them plenty of ammunition to sink label pirates.

The Uncertain Law of Dead Celebrity Goods, Sexy Einstein Edition

Thursday, May 27th, 2010

E = mc squared, baby

Thank you, Albert Einstein, for making our point.

Great minds think alike.

Unknown to The Licensing Law Blog, one day before we posted “The Uncertain Law of Dead Celebrity Goods,” representatives of the estate of Albert Einstein sued General Motors Company for an advertisement featuring the head of the Father of Relativity Theory photoshopped onto the ripped, tattooed naked torso of an underwear model, with the caption, “IDEAS ARE SEXY TOO.”

The ad ran in the November 30, 2009 “Sexiest Man Alive” issue of People Magazine to promote the GMC Terrain SUV, explaining, “THAT’S WHY WE GAVE IT MORE IDEAS PER SQUARE INCH.”

GMC was sued in federal court in Los Angeles by The Hebrew University of Jerusalem (HUJ), which was the beneficiary of all of Einstein’s intellectual property rights in his will, for trademark infringement and misappropriation of Einstein’s rights of publicity. (HUJ also claimed a subsidiary cause of action for unfair competition.) Einstein is the fourth highest grossing deceased celebrity property, earning about $18 million annually, according to Forbes magazine.

What makes this case interesting from a legal point of view is the rights of publicity issue as applied to dead celebrities. HUJ sued GMC under both New Jersey common law rights of publicity and California common law and statutory law rights of publicity.

New Jersey case law is clear that rights of publicity are property, and survive the death of the owner, as mentioned in the previous blog post. What is not clear is how long after death the rights survive. Einstein died in 1955 in Princeton, New Jersey. Did his rights of publicity survive 55 years after his death? The judge in the 1981 case Estate of Presley v. Russen said he had no idea what the survival period was without further guidance from the New Jersey State Legislature (which has not addressed the issue to date), although he suggested in a footnote that a good reference point might be postmortem survival periods under copyright law, which would be at least 70 years after death.

Also, there is the question whether California or New Jersey law controls. Usually (but not always) choice of law principles dictate that the law in rights of publicity cases is controlled by the state of the celebrity’s domicile at the time of death. But after cases involving Marilyn Monroe’s postmortem rights of publicity, in which courts in both New York and Los Angeles ruled in 2007 that the law of New York (Marilyn’s domicile) not California (Marilyn’s place of death) applied, California revised its rights of publicity law in an attempt to preserve postmortem rights of publicity for “personalities” regardless of date or domicile at death. In the unlikely event that this case ever reaches the decision stage, it will be interesting to see whether the court applies New Jersey or California law on rights of publicity.

By the way, no one will accuse GM of being Einsteins in the licensing field. A GM spokesperson said she believed GM had paid a “reputable organization” for rights to run the Einstein ad, but our guess is that they only paid for a copyright license for the Einstein photo, and not for rights of publicity or trademark licenses. In 2005, New England Patriots quarterback Tom Brady also sued GM for using his image in an advertisement without a license.

P.S. In case you are wondering about the impact of GM’s bankruptcy on the Einstein lawsuit, there is none. GM filed for Chapter 11 bankruptcy on June 1, 2009, and sold its assets to a new entity on July 10, 2009, which then took the General Motors Company name, and left the “old GM” to settle its debts with the proceeds it received from selling its assets to the “new GM.” So the entity that published the ad at issue on November 30, 2009 was never involved in bankruptcy, therefore the HUJ lawsuit will in no way be restricted or impeded by bankruptcy law.