serial infringement may justify liability under Tiffany v. eBay

Posted on September 26, 2014 by rtushnet
Mori Lee, LLC v. Sears Holdings Corp., 2014 WL 4680739, No. 13cv3656 (S.D.N.Y. Sept. 8, 2014)
Mori Lee, a dressmaker, sued Sears for trademark infringement and unfair competition.  In 2010, Sears opened an online marketplace at Sears.com where third-party merchants could sell directly to consumers.  Defendants UiMobile and Better Deals sold allegedly counterfeit goods on the marketplace. They allegedly used photographs of Mori Lee dresses, falsely associated Mori Lee’s name and marks with their dresses, and sold inferior imitations of Mori Lee attire.
On May 3, 2013, Sears got two emails charging that several of UiMobile’s counterfeit dresses infringed Mori Lee’s marks.  “Sears investigated those complaints promptly and banned the UiMobile listings identified in the emails, as well as all listings advertised by UiMobile that mentioned a Mori Lee product or dresses made by Siris.”  On May 31, Sears learned of this lawsuit, which listed UiMobile Marketplace advertisements as well as a Better Deals advertisement, though the dress in that ad was not identified as a Mori Lee.
Sears took no additional action against UiMobile because its ban on all UiMobile bridal dress-related listings continued in place. Sears investigated the allegations about Better Deals but didn’t find any Better Deals listings using the Mori Lee name; Better Deals primarily advertised electronic goods. On June 18, 2013, Sears discovered a Better Deals ad using a Mori Lee photograph, and Sears banned that ad, as well as any other Better Deals advertisements with “Mori Lee” or “Siris” in their product listing. Mori Lee identified an additional infringing Better Deals ad, which Sears took down promptly.
Contributory infringement required Mori Lee to show either intentional inducement to infringe or continuing supply of services “to one whom it knows or has reason to know is engaging in trademark infringement.” More than general knowledge or reason to know is required.  Under Tiffany v. eBay, “[s]ome contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.”  When a service provider reacts promptly to notice of infringing activity by a user, there’s no contributory liability.
Here, Sears got notice of UiMobile’s infringing activity in two emails.  It investigated, removed the ads promptly, and banned UiMobile from posting new ads for bridal dresses or using “Mori Lee.” It also promptly reacted to notice of Better Deals’ infringing ads.  Mori Lee argued that Sears’ policing was less sophisticated than eBay’s.  But Tiffanydidn’t impose an affirmative duty to investigate, and Sears didn’t turn a blind eye to infringement. 
“If that was all, then no contributory liability could be found.”  (Ruh-roh.)  Sears also “had specific information that UiMobile was a serial infringer of bridal dress’ copyrights before UiMobile infringed Mori Lee’s rights.” In March, a different company sent Sears a takedown notice identifying 32 infringing UiMobile advertisements, found under “wedding gowns” and “prom gowns.”  Sears then purported to ban the offending UiMobile ads and informed that company’s counsel that “[i]f you search the web site for ‘bridal gowns,’ you will see there are currently no bridal gowns being sold online by UiMobile.”  Then, that same month, another company sent a takedown notice identifying infringing UiMobile ads.  Whatever the scope of Sears’ ban, it was ineffective, because by May, UiMobile had switched to listing Mori Lee dresses. 
These events raised a genuine issue of fact as to whether “the notice” (unfortunately, it’s not clear whether this is a typo and the court meant to say “the notices” [from the other dressmakers]) “sufficiently informed Sears that UiMobile [was] engaged in trademark infringement.”  In addition, whether Sears was an innocent infringer also turned on these facts. “If Sears is an innocent infringer, Mori Lee is only entitled to injunctive relief—which would likely be moot since Sears has taken down the infringing advertisements.”
False advertising: “In various post-sale emails, Sears represented to purchasers that the dresses bought from the Marketplace were from, for example, the ‘OEM New MoriLee Design Hot Sell Evening Dresses.’”  Sears argued that these emails weren’t commercial advertising because they weren’t made for the purpose of influencing consumers to buy a particular product and they weren’t disseminated to the public, but only to buyers for post-sale shipping confirmation.  The court agreed with Gillette Co. v. Norelco Consumer Products Co., 946, F.Supp. 115 (D. Mass. 1996), which held that a packaging insert accompanying a product and available only after the purchase was made was not “commercial advertising or promotion” because it was inside the package and did not affect the purchase decision. So too here.  Summary judgment for Sears.
Mori Lee’s unfair competition claims were dismissed because they required likely confusion aobut origin or sponsorship.  First, Mori Lee failed to establish rights in  “OEM,” “ML,” and “Ml,” the former of which just means original equipment manufacturer and the latter two of which could refer to other haute couture manufacturers, such as Monique Lhuillier.  Sears did use Mori Lee’s “marks” in post-sale emails, e.g. a shipping confirmation of “OEM New MoriLee Design Hot Sell Evening Dresses BL357” and “OEM New Intricately Beaded Embroidery on Venice Lace Ivory Wedding Dress ML1911.” But this “merely aped” UiMobile’s use of the words in ads by reproducing the product name in the confirmation email.  (Why isn’t this just contributory liability too?)  Sears didn’t make any “independent representation that the product is an authentic Mori Lee dress.” Thus, these acts didn’t cause likely confusion.

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Advertising dysfunction: claim against male sexual enhancement pill proceeds

Posted on September 25, 2014 by rtushnet
Dorsey v. Rockhard Laboratories, LLC, 2014 WL 4678969, No. CV 13–07557 (C.D. Cal. Sept. 19, 2014)
 
Dorsey sued over Rockhard Weekend (RHW), “a male sexual enhancement product,” primarily promoted by labeling on the packaging. The chemical formulation and packaging have changed several times over the years, but Dorsey alleged that the name, purported use, and overall message remained the same.  There are multiple packages (one-capsule retailing at around $5, 3-capsule around $15, and 8-capsule around $30).  RHW called itself a “sexual performance enhancer for men” or “the 72–hour sexual performance pill for men.” The packaging also promised “Doctor Tested,” “Doctor Approved,” “Fast & Effective,” and “Rockhard Results.”  Further, Rockhard advertised RHW as “All Natural,” even though some of the ingredients of RHW were allegedly “synthetic, chemically reduced and/or have carcinogenic properties.”  Dorsey alleged that he relied on these claims to his detriment, and that they were false because none of the ingredients in any version of RHW enhanced male sexual performance.  Also, he alleged that the labeling was unlawful because it is a “new drug” unapproved by the FDA in making claims to be an aphrodisiac.  The usual California claims resulted.
 

Rockhard Weekend package with challenged claims
Rockhard argued that Dorsey hadn’t pled reliance because he didn’t specify which iteration of RHW he bought, and the packaging changed over time.  However, “it is clear from looking at the packaging of various iterations of the product that the same messages were conveyed to all potential purchasers of RHW.”  Given that RHW was a single-use/limited-use product, it was unsurprising that Dorsey no longer had the packaging; given the similarities among the iterations, it was also unsurprising that he couldn’t differentiate among them.  The allegations sufficed to show his reliance.
 
Although Dorsey could have been more specific about how or why RHW didn’t perform as advertised, he still alleged that “[n]one of the ingredients in any iteration of RHW … will enhance male sexual performance.”  Even without “specifics regarding what happened when Plaintiff took RHW,” this demonstrated an injury in fact: the product allegedly contained no ingredient that had the effect that the packaging represented the product to have.  And he alleged that he wouldn’t have bought RHW but for the misrepresentations, a highly plausible allegation given that there’s really only one reason to buy a product that purports to enhance male sexual performance.
 
As for iterations he didn’t purchase, his ability to represent purchasers thereof would be better decided at the class certification stage. At this stage, Dorsey’s claims were sufficiently similar to those of putative class members who purchased a different iteration of the RHW product to potentially allow him to represent them in this class action.  The various versions of the packaging attached to the complaint showed very similar phrasing on every version and a consistent marketing scheme persisting through formula and packaging changes.  And the name never changed.
 
Then the court found that the complaint satsified Rule 9(b), alleging the specific language of the false statements (and attaching images of the packaging), when and where he bought RHW, and that the ingredients didn’t work; he alleged “what consumers would understand the statements to mean and how that understanding is misleading”  He made similar allegations about “All Natural” and “Doctor Tested, Doctor Approved”: he alleged that “a reasonable consumer would expect an ‘all-natural’ product to contain ingredients found in nature, derived from natural sources, absent of manmade processes, and which are wholesome and safe,” and that a reasonable consumer was likely to believe that RHW was “used, endorsed, or recommended by doctors practicing medicine in clinical settings.”
 
Rockhard argued that many of the representations on its packaging were mere puffery (no pun intended?), such as “Sexual Performance Enhancer for Men,” “Fast & Effective,” and “Rockhard Results.”  Taken as a whole and in context, these weren’t puffery, but instead specific claims about the benefits of taking RHW. “These statements create the impression that, by taking the product, a consumer will have enhanced sexual performance, that the effect will happen quickly, and that the consumer can expect to have a ‘Rockhard’ erection.”
 
Rockhard also argued that reasonable consumers wouldn’t be deceived by “All Natural.” Though some cases so conclude, each statement must be evaluated in context and consumers don’t need to search the ingredient list for disconfirming evidence.  Dorsey alleged a plausible interpretation of what the phrase would mean to a reasonable consumer, and identified the ingredients that didn’t fit this interpretation. Plus, nothing but the small type nutrition facts panel on the back would lead a consumer to question “All Natural,” and there was no indication that Dorsey would have had reason to read the nutrition facts. Under Williams, “[s]imply listing the actual ingredients of the product does not absolve Defendants of all potential liability for making false statements that contradict the ingredient list.”
 
Rockhard also argued that Dorsey’s claim against “Doctor Tested, Doctor Approved” was an improper lack of substantiation claim, based on Dorsey’s allegation that “Defendants have not and cannot cite any research studies or unsolicited endorsements of RHW by medical doctors, nor is RHW used in clinical settings for the treatment of male impotence or any other condition.”  The complaint sufficiently alleged false advertising, not just lack of substantiation.  Dorsey alleged what “Doctor Tested, Doctor Approved” would mean to a reasonable consumer, and then alleged that RHW wasn’t used in any clinical setting to treat any condition, which sufficiently alleged falsity.
 
The court did dismiss claims under the “unfair” prong of the UCL; the allegations went to “unlawful” and “fraudulent” conduct.
 
The “unlawful” claim was based, in part, on allegedly unlawful labels purportedly advertising RHW as an aphrodisiac in violation of the FDCA’s new drug rules.  Rockhard alleged that RHW was a dietary supplement, not a drug, and thus not required to seek preapproval.  Under the FDCA, a drug is an “article [ ] intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in man or other animals.”A dietary supplement is “a product … intended to supplement the diet [that has certain ingredients].”  RHW’s label said it was a dietary supplement.  And, although the packaging as a whole might convey that RHW would improve male sexual performance, there was no statement that RHW was designed to cure erectile dysfunction, impotence, or any other “disease.” “Aphrodisiac” didn’t appear on any of the packaging. Thus, Dorsey didn’t plausibly allege that RHW was a “drug,” requiring prior approval of its labeling by the FDA.  Claims dismissed to the extent they were based on FDCA violations.
 
Warranty claims: Presuit notice isn’t required in California where the defendant is a manufacturer with whom the purchaser didn’t deal, as here.  Nor were the claims puffery—see above.  So express and implied warranty claims survived.
 
Magnuson-Moss Warranty Act (MMWA) claims: Under the MMWA, a warranty “relates to the nature of the material or workmanship and affirms or promises that such material or workmanship is defect free or will meet a specified level of performance over a specified period of time.” But a product description isn’t a warranty under the MMWA.  For “Sexual Performance Enhancer for Men” and “Fast & Effective,” Dorsey stated a plausible claim under the MMWA. These related to the nature of the product and weren’t mere product descriptions.  But “Doctor Tested, Doctor Approved” was; the statement contributed to the message that RHW contained an active, effective ingredient but didn’t relate directly to the “material or workmanship” of the RHW pill.
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Paid spokesperson engaged in "advertising or promotion" for Lanham Act purposes

Posted on September 25, 2014 by rtushnet
Underground Solutions, Inc. v. Palermo, 2014 WL 4703925, No. 13 C 8407  (N.D. Ill. Sept. 22, 2014)
 
UGSI sued Palermo for trade libel, interference with prospective economic advantage, interference with contract, false advertising under the Lanham Act, and violation of the Illinois Uniform Deceptive Trade Practices Act (IUDTPA).  UGSI sells fusible polyvinyl chloride (PVC) pipe, which is used “in water and wastewater pipeline applications, as well as for conduit for electrical and fiber optic applications.” Indeed, it is “the sole supplier of thermally buttfused PVC pipe in the United States.”  Palermo was allegedly hired as a paid spokesperson for UGSI’s competitor, Performance Pipe, which makes high-density polyethylene (HDPE) pipe. (More on previous litigation between the parties.)
 
USGI alleged that, since October 2010, Palermo presented false and misleading information about USGI’s products (albeit without using USGI’s name) at multiple industry conferences and on his website.  He allegedly didn’t disclose his affiliation with Performance, which misled audiences into believing that his conclusions were “based on objective scientific evidence and valid third party investigation.”  UGSI also alleged that Palermo “contacted UGSI’s customers following pipeline incidents involving Fusible PVCTM pipe and told the customers that the Fusible PVCTM pipe and/or thermally butt fused PVC joints caused the incident, despite Palermo’s failure to conduct a thorough and complete investigation of the cause of such pipeline incidents.”
 
USGI alleged harm to existing and prospective business relations, including that its pipes were excluded from consideration by at least two consulting engineering firms that design systems for clients. The complaint quoted e-mails from two consulting engineers who expressed hesitation about using UGSI’s pipes after reading Palermo’s reports. As a result of Palermo’s misrepresentations, engineers and municipalities that “had previously specified Fusible PVCTM pipe as the only acceptable material for their projects changed the specifications to include an alternate product, such as HDPE.”
 
Palermo sought to have the complaint dismissed on the ground that the statute of limitations expired before UGSI sued on November 21, 2013.  A one-year limitations period applied to the trade libel claim, and three years to the Lanham Act and IUDTPA claims.  The court found that California’s two-year limitations period applied to the tortious interference claims.
 
The complaint didn’t plead facts sufficient to conclude that the claims were time-barred. The court assumed for these purposes that the single publication rule applied to Lanham Act claims as well as libel claims, but that only applies to copies of “any one presentation to an audience.” UGSI alleged that Palermo made multiple presentations and published “variations” of his slide show on his website.  Each new presentation could trigger liability, so USGI’s claims weren’t time barred as to Palermo’s live presentations within the limitations periods.  The limitations period begins to run when a website is first published, but the complaint alleged that different versions of the slideshow were posted online, including one during or after 2012, so the single publication rule didn’t bar the claim on the pleadings.  Nor could the court determine whether the discovery rule tolled the statute of limitations on the pleadings.  UGSI also argued that its trade libel action accrued only after it suffered special damages (making its cause of action complete); this too prevented dismissal.
 
As for the Lanham Act and IUDTPA claims, the majority of the accused presentations apparently took place after the November 21, 2010 accrual date.  Courts have applied “continuing wrong” principles to Lanham Act claims, allowing plaintiffs to pursue relief for time-barred acts linked to acts within the limitations period. This too might apply.
 
Palermo then argued that UGSI insufficiently alleged special damages for its trade libel claim.  To prevail, UGSI would have to identify specific lost sales, but on a motion to dismiss it was enough to identify a concrete loss.  Though the plaintiff must allege “some actual pecuniary loss,” “an estimation of final total dollar amounts lost is unnecessary.” UGSI’s allegations that it was “required to expend extensive time and effort to address customers’ and prospective customers’ questions about Fusible PVCTM pipe and assuage their concerns” and that it received e-mails from consulting engineers expressing concern about Palermo’s reports sufficiently alleged special damages.
 
Palermo then argued that there could be no trade libel because the allegedly defamatory statements were about fused PVC in general, not UGSI.  UGSI rejoined that it was the only seller of butt-fused PVC pipe in North America and thus identified by implication.  California cases suggested that the “of and concerning” requirement allowed a plaintiff to be identified by clear implication, so that theory survived a motion to dismiss.
 
Intentional interference with prospective economic advantage: Palermo argued that Noerr–Pennington immunized him because his statements were directed at municipal customers and non-profit associations that set pipe standards for municipalities.  Outside the antitrust context, Noerr-Pennington hasn’t been applied to fraud and misrepresentation claims.  Also, even in the absence of intentional falsity, it didn’t seem that Palermo directly petitioned any government official.  Statements in communications between private parties don’t have much to do with the right to petition the government.
 
As for harm, plaintiffs should allege a lost contract, failed negotiation, or ongoing business relationship to state a claim for intentional interference under California law.  UGSI’s allegations that its products “were being considered by several municipalities for upcoming projects” and that potential customers “were dissuaded” based on Palermo’s statements were insufficient.  Though engineers expressed concerns and UGSI’s pipes were allegedly excluded from consideration by at least two firms, that still didn’t identify any pending contract or negotiations that were ended by the alleged misrepresentations. Thus, the claim was dismissed with leave to amend.  Similarly for the tortious interference with contract claim.
 
Lanham Act false advertising: Lexmark undercut Palermo’s argument about lack of competition.  He argued, however, that he hadn’t engaged in “commercial advertising or promotion.” UGSI contended that Palermo engaged in promotion by giving speeches and posting reports as a paid spokesperson for Performance.  True, courts have refused to allow Lanham Act claims based on face-to-face meetings with a small number of people. But the distinction rests on whether a communication is a “generalized solicitation rather than an individualized communication.” Fortunately, the Seventh Circuit has “clarified” its previous exclusion of communications at trade shows from the Lanham Act, Sanderson v. Culligan International Co., 415 F.3d 620 (7th Cir. 2005), and has held that advertising or promotion need not be published or broadcast to the general public, Neuros Co. v. KTurbo, Inc., 698 F.3d 514 (7th Cir. 2012), where promotion in the relevant industry takes other forms.  Palermo’s presentations to a large group of industry members for the purpose of directing customers to select Performance Pipe’s products were “advertising or promotion,” as were material published online.
 
Illinois deceptive trade practices: Palermo argued that there wasn’t a sufficient nexus to Illinois. IUDTPA claims only apply “if the circumstances that relate to the disputed transaction occur primarily and substantially in Illinois.”  Factors that determine this include the plaintiff’s residence, where the deception occurred, where the damage to the plaintiff occurred, and whether the plaintiff communicated with the defendant or its agents in Illinois.  UGSI didn’t allege that Palermo’s misrepresentations “occurred primarily and substantially in Illinois.” All it alleged was that a Performance Pipe sales manager presented Palermo’s materials at an Illinois conference and that Palermo contacted an Illinois customer after a pipeline incident, and that two emails from Illinois engineers expressed concerns about his reports.  Claim dismissed with leave to amend if UGSI could show a better nexus to Illinois.
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Mark Lemley is our king

Posted on September 24, 2014 by rtushnet

But then, you knew that anyway.  Here, have a list of the most cited IP articles over the past ten years, compiled with diligent effort by Ted Sichelman. 

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Oh No They Didn’t infringe: Livejournal gets DMCA safe harbor

Posted on September 24, 2014 by rtushnet
Eric Goldman on Mavrix Photographs LLC v. LiveJournal, Inc., No. 8:13-cv-00517-CJC-JPR (C.D. Cal. Sept. 19, 2014): plaintiff refuses to send DMCA notices to host website, sues instead.  As Eric says, this is a great case for a fee-shift, since (1) it was unreasonable not to send DMCA notices here, and (2) Mavrix’s arguments are rehashes of already-rejected legal theories.
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Ascertain this: All Natural liability class certified

Posted on September 24, 2014 by rtushnet
Lilly v. Jamba Juice Company, No. 13-cv-02998, 2014 WL 4652283 (N.D. Cal. Sept. 18, 2014)
Earlier Jamba Juice proceeding.  Plaintiffs moved to certify a California class of purchasers of certain frozen Jamba Juice Smoothie Kit products using “All Natural” prominently on the front of the package. These kits contain ascorbic acid, xanthan gum, steviol glycosides, modified corn starch, and gelatin, which are allegedly not “natural.”  This opinion is notable both for certifying an “all natural” class action and for dealing extensively with ascertainability, the latest defendant-side argument.
Jamba Juice argued that the class wasn’t ascertainable because nobody would have receipts.  The Ninth Circuit and the Supreme Court haven’t specifically required “ascertainability” or “definiteness” over and above the enumerated Rule 23 factors, though those concepts can be relevant to certification, and ascertainability is an inherent requirement of at least Rule 23(b)(3) class actions. “A class definition is sufficient if the description of the class is ‘definite enough so that it is administratively feasible for the court to ascertain whether an individual is a member.’” This must be a manageable process that doesn’t require much individual factual inquiry, but not every member need be identified at the outset.
Courts have looked at three types of ascertainability concerns. First, an identifiable class exists if its members can be determined by reference to objective criteria, rather than subjective standards like state of mind or merits determinations like whether they personally were discriminated against.  The class definition here was based on objective criteria.  Second, some courts deny certification if the class includes any members who will not be able to recover. The court found this an inappropriate standard.  Third, some courts require plaintiffs to show they can locate absent class members.  The Third Circuit has adopted this view.  Carrera v. Bayer Corp., 727 F.3d 300, 308 (3d Cir. 2013).  Since no one has records demonstrating which specific individuals bought the challenged smoothie kits, Jamba Juice argued that the class wasn’t ascertainable.
It’s not the law in the Ninth Circuit that if consumers don’t have receipts and manufacturers don’t have records of end consumers, there can’t be certification.  Carrera’s approach would substantially impair consumers’ ability to obtain redress for their injuries.  “Few people retain receipts for low-priced goods.”  (Great footnote: See Mitch Hedberg, Minibar, on Strategic Grill Locations (Comedy Central Records, 2003) (“I bought a doughnut, and they gave me a receipt for the doughnut. I don’t need a receipt for the doughnut, man. … I just cannot imagine a scenario where I would have to prove that I got a doughnut. Some skeptical friend? ‘Don’t even act like I didn’t get that doughnut. I got the documentation right here.’”)  But “it is precisely in circumstances like these, where the injury to any individual consumer is small, but the cumulative injury to consumers as a group is substantial, that the class action mechanism provides one of its most important social benefits.”  Without the class action, there’d be no redress for the injury.  Though difficulties identifying class members can frustrate compensation, class actions also deter misconduct.
But, the court continued, it would look more deeply at the reasoning behind Carrera.  First, there seems to be a concern that if you can’t find class members and give them notice, it’s unfair to bind them to any final judgment.  “This concern is legitimate, but our law has long recognized that direct notice to every class member is not always possible.”  All that’s required is the best notice practicable under the circumstances.  Here, plaintiffs submitted a detailed plan for notice prepared by an expert, including direct notice where contact information is on file with the retailer (for example, when they bought using store membership cards) as well as a targeted internet and print campaign.  The court saw no reason this would conflict with due process.
Second, Carrera expressed concern with the defendant’s due process right to challenge individual class members.  But plaintiffs weren’t trying to establish the “fact or extent” of Jamba Juice’s liability through the notice and claim administration process.  “[T]he amount of liability will be proven at trial.”  There’d be a problem if a non-judicial administrator determined class membership based only on self-identification, with no opportunity to challenge that determination, and then enhanced the defendant’s bill each time a form was submitted.  But Jamba Juice’s liability “will be proven by admissible evidence submitted at summary judgment or at trial, or it will not be proven at all.”  Plaintiffs had the burden of producing evidence of the total damages to which the class would be entitled; responses to the class notice couldn’t lighten that burden unless they were admissible evidence.  But neither could Jamba Juice avoid a class action by claiming that those responses would affect its liability. 
The Third Circuit reasoned that “[i]f fraudulent or inaccurate claims materially reduce true class members’ relief,” those true class members might be able to succeed in challenging the adequacy of the named plaintiff’s representation.  The court commented that this concern was “at best, premature at this stage of the litigation.” The court could revisit the issue if it looked to be a problem.  But that’s no reason to refuse certification entirely.  “If the problem is that some absent class members may get less relief than they are entitled to, it would be a strange solution to deprive absent class members of any relief at all.”
Typicality, adequacy, numerosity, and superiority were all present.  Jamba Juice argued that the named plaintiffs were unrepresentative and atypical because they sometimes consumed other products that contain the ingredients they complain of here.  But when they did so, they knew what they were eating, because the ingredients were disclosed.  Their consumption “does not harm their case any more than a person who sometimes eats ice cream would be deprived of her legal ability to challenge a product falsely labeled to contain no sugar.”
Commonality was present because of the common questions: whether Jamba Juice’s “All Natural” representations were false and misleading, whether the challenged ingredients could legally be included in a product labeled “All Natural,” and whether the representations constitute “unfair” or “unlawful” practices under the UCL, constitute a breach of warranty, or are likely to deceive reasonable consumers in violation of the FAL, CLRA, and UCL.
Predominance: For CLRA claims, “an inference of common reliance arises if representations are material, and materiality is judged by an objective standard rather than any understandings specific to the individual consumer.”  So too with the FAL and UCL fraudulent clams, as well as the unfair/unlawful UCL claims.
Jamba Juice argued that there was no common definition of “All Natural,” since there was no regulation defining the term and different consumers understand it to mean different things. Thus, there could be no objective materiality, and reliance would have to be shown individually, defeating predominance.  But cases refusing to certify misrepresentation class actions “generally involve representations that differ for each proposed class member or unique individual decisions.” In this case, only one representation was at issue – “All Natural” on five products with substantially the same challenged ingredients.
Jamba Juice also argued that plaintiffs failed to provide a damages model that could measure damages on a classwide basis.  Plaintiffs offered three methods: (1) restitution of the full purchase price, (2) restitution from Jamba Juice’s net profits, and (3) restitution from the portion of revenue attributed to the challenged ingredient.  But plaintiffs didn’t submit any “evidence, expert reports, or even detailed explanation, about how those damages models can be fairly determined or at least estimated.”  Jamba Juice also argued that any damages model had to address differences in damages among individual class members, as a matter of predominance.  But Comcast didn’t impose that high of a burden.  Even after Comcast, “[i]n this circuit … damage calculations alone cannot defeat certification.”
Still, after Comcast, Jamba Juice’s argument that plaintiffs failed to provide evidence that damages could be feasibly and efficiently calculated had “considerable force.”  Where, as here, a defendant could make at least a prima facie showing that damage calculations are likely to be complex, “expert reports or at least some evidentiary foundation may have to be laid to establish the feasibility and fairness of damage assessments.”  Though plaintiffs were seeking full refunds, restitution can require the court to take into account the benefit consumers received even from a mislabeled product.  Likewise, disgorgement might require plaintiffs to demonstrate what portion of Jamba Juice’s revenue stemmed from its purportedly unlawful conduct.  Without evidence in the record showing the feasibility and efficiency of the damages models, a damages class couldn’t be certified.  However, liability could still be established on a class-wide basis; some of the difficulties in determining individual damages might be removed after a liability determination.  Thus, the court certified a liability-only class.

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Gratuitous promises: Uber class action continues

Posted on September 19, 2014 by rtushnet
Ehret v. Uber Technologies, Inc., No. C-14-0113 (N.D. Cal. Sept. 17, 2014) 
Ehret’s putative nationwide class action alleged that Uber customers had been charged a 20% fee above the metered fare for each ride, misrepresented as a “gratuity” automatically added “for the driver.”  Instead, a substantial portion was allegedly retained by Uber for its own benefit. Ehret alleged that this was deceptive, misrepresenting the actual fare.  Ehret, who took an Uber trip in Chicago, sued under the California UCL and CLRA, and for breach of contract.  Uber managed to kick out the breach of contract claims, but not the statutory consumer protection claims.
Rule 9(b): because Ehret alleged when and where she took a ride, and that she relied on the “gratuity” representation, she’d done enough. She didn’t have to allege the precise web pages she viewed or the precise date she viewed the representation, since she alleged the date she relied on it.  “To so require would be unrealistic and needlessly impede access to an important remedial statute.” Though she didn’t allege how much was “substantial” in terms of what Uber kept for itself, her allegations were sufficient on a motion to dismiss; they were specific enough to give Uber notice of the alleged misconduct.
Uber argued that she failed to state a claim because (1) the UCL does not apply to non-California residents alleging non-California conduct; and (2) she failed to allege standing under either statute.
However, the court found that Ehret’s claims didn’t require extraterritorial application of the UCL or CLRA.  It’s true that those statutes don’t apply to conduct outside California, but multiple courts—including the California Supreme Court—have found the statutes implicated where the plaintiffs’ claims were based on alleged misrepresentations disseminated from California, as was the case here. This is also consistent with Tobacco II, in which the Supreme Court instructed that the UCL’s focus is on the defendant’s conduct, not the plaintiff’s damages, “in service of the statute’s larger purpose of protecting the general public against unscrupulous business practices.”  Ehret alleged that Uber, a Delaware corporation, had its headquarters in San Francisco, and that the deceptive practices alleged were “conceived, reviewed, approved and otherwise controlled from Defendant’s headquarters.”  Moreover, the misrepresentations were contained on Uber’s website and app, maintained in California.  The billing and payment for Uber’s services were processed in California. These allegations, if true, created a sufficient nexus between California and the misrepresentations.
Standing: Uber argued that Ehret suffered no economic harm (lost money or property) because she’d pay the “gratuity” anyway: she received a taxi ride at the stated price. How Uber distributed the “gratuity” was a matter of mere curiosity to Ehret, according to Uber.  Under Kwikset, however, it sufficed to allege that she wouldn’t have agreed to or paid Uber the full amount Uber charged her if the truth had been disclosed.  If the misrepresentation was material, then she didn’t get the benefit of her bargain.  And materiality is generally a question of fact. 
The court cited Kasky v. Nike, Inc., 27 Cal. 4th 939 (2002): “For a significant segment of the buying public, labor practices do matter in making consumer choices.”  (I know this will make many eyes roll, but there is good evidence that consumers engage in mental accounting that is not purely additive and would see a tip differently from a base charge in determining whether to take an offer.  And certainly whether Uber helps or furthers the immiseration of drivers is a hotly debated issue, which the amount of the gratuity might reasonably seem relevant to.)  Materiality under the UCL doesn’t require but-for causation; it merely requires that a reasonable person would attach importance to the fact at issue.  It didn’t matter that the “gratuity” was mandatory.  There’s a “longstanding rule that under the UCL even a mandatory charge can be deceptive if it is labeled as something it is not.” 
Nor did Ehret have to allege that she wouldn’t have engaged in the transaction at all if not for the representation.  Otherwise, many people who didn’t get the benefit of their bargains would be unable to recover.  “Allowing standing in the case at bar – where a false representation is made to raise the price of a service which the plaintiff would not have agreed to pay had the truth been told, does not frustrate the purpose of Proposition 64; rather, it furthers it.”  The court commented that “it is also plausible that had Uber not made the alleged misrepresentation, the total fee it charged would have been less than what it charged with the misrepresentation.”  So, plausibly, consumers paid more than they would have but for the misrepresentation.  (Mental accounting again: consumers will pay more if you tell them the money is going somewhere they approve of.)
Ehret also stated a claim under the UCL’s fraud and unfairness prongs.  Given that Uber allegedly advertises that there’s no need to tip the driver, reasonable consumers plausibly would expect drivers to receive the whole gratuity, making its representations misleading. As for unfairness, California balances “the ‘impact on the its alleged victim’ against ‘the reasons, justifications, and motives of the alleged wrongdoer.’” At the pleading stage, the court couldn’t conclude that the costs of the alleged misrepresentation were justified.  The “unlawful” prong of the UCL also applied: see the immediately forthcoming CLRA analysis.
If Uber represented that it remitted a 20% gratuity to drivers and didn’t, then plausibly its service was advertised as having a characteristic it didn’t have within the meaning of the CLRA’s prohibition on such conduct.  California law also bars a defendant from “[r]epresenting that a transaction confers or involves rights , remedies, or obligations which it does not have or involve, or which are prohibited by law.”  Ehret sufficiently alleged a violation of this provision as well, since Uber allegedly misrepresented the “obligation” arising from the charged fee. However, Ehret didn’t state a claim based on the statute’s prohibition of “false or misleading statements of fact concerning reasons for, existence of, or amounts of price reductions.” 
Ehret did fail to state a breach of contract claim because she wasn’t contractually bound to leave the driver any tip, and so as to customers, drivers were donee beneficiaries with no legal rights. She didn’t suffer any damages for contract purposes (aimed at placing plaintiffs in the position they’d have been in had defendants performed their contractual obligations). 
The UCL, by contrast, isn’t so limited. “Stated another way, the breach of contract claim looks at the 20% gratuity statement and asks how Plaintiffs can be put in the same situation they would be in had Defendants performed.  The UCL claim looks at the 20% gratuity statement and asks how Plaintiffs would be positioned had the misrepresentation not been made.”

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A hologram and a straight-up application of Dastar

Posted on September 19, 2014 by rtushnet
Pulse Entertainment Corp. v. David, No. CV 14-4732 (C.D. Cal. Sept. 17, 2014) 
This case concerns a lifelike animation of Michael Jackson performing a previously unreleased song that appeared during the 2014 Billboard Music Awards and a related CNN interview segment.  Pulse alleged that its team developed the animation over eight months, and that the animation was meant to coincide with and publicize its launch as a new company.  “David owns Hologram USA—Pulse’s competitor in the field of human animation.”  Pulse alleged that defendants had no involvement with the creation of the animation, and that they didn’t own or control the technology used to create it.  In May, Hologram sued Pulse for patent infringement for creating the animation.
Also in May, David gave a CNN interview that aired with the caption “MICHAEL JACKSON HOLOGRAM: HOW’D THEY DO IT?  Company behind hologram gives CNN demonstration.”  In the interview, David allegedly said that he and Hologram created and produced the animation and the underlying animation techniques and technology.  He also used “we” while describing the process employed to create the animation.  While the animation played on screen, the interviewer stated that “[t]his MJ likeness used at the Billboard Music Awards was created by Hologram USA.”  CNN took the interview segment down from its website after it was informed that neither David nor Hologram was involved in the creation of the animation. But David allegedly republished the segment on his companies’ websites and on his Twitter account.
Pulse’s §43(a)(1)(A) claim failed because of Dastar.  §43(a)(1)(A) doesn’t ban false designations of “the author of any idea, concept, or communication embodied” in goods.  Pulse didn’t allege physical reverse passing off.  The animation here, as Pulse alleged, “exists wholly separate and apart from any projection technique. . . [It] is not dependent on a method of projection, and it can be displayed in a variety of ways.  In that regard, it may be likened to a cartoon animation or a CG character in a feature film or television program.” So, the complaint alleged false designation of authorship status, which is exactly what happened in Dastar. The dismissal was with leave to amend, though the court expressed skepticism that this could successfully be done.
On to §43(a)(1)(B).  The court used the standard definition of “commercial advertising or promotion” (obligatory note that Lexmarkought to affect the “defendant in commercial competition with plaintiff” aspect), and asked whether the speech at issue was commercial speech. Relevant considerations include “(1) whether the statements are in a typical advertising format; (2) whether the statements refer to a commercial product; and (3) whether the defendant had an economic or commercial motivation for making the statements.”   Also, false advertising claims are grounded in fraud and thus must be pled with particularity.
Pulse didn’t specify David’s exact statements, but alleged that he falsely took credit for the animation.  Pulse also alleged the following allegedly misleading statements: (1) “What you saw at the Billboard, you saw a digital head connected to an actor.  We capture the body and the head in real time.  And, we have the sync marks and we can attach the two together”; (2) “What you saw at the Billboard was ‘Super Michael.’  You saw Michael beyond the controversy, beyond the problems that he faced in his real life”; (3) that the animation could be adapted for “education, military, politics—it can apply—be applied across the board”; and (4) that “there is no end to how you can apply this, all we really need to do is apply our imagination.”  In addition, Pulse alleged that the interviewer stated that “[t]his MJ likeness used at the Billboard Music Awards was created by Hologram USA.”  Further, Pulse alleged that after the segment was removed from CNN’s website, Hologram republished the segment, with the complained-of caption and interviewer’s statements, on their websites and on David’s Twitter account. 
To the extent the complaint relied on the original CNN broadcast, it failed to satisfy Rule 9(b):
Most of the obviously false and deceptive statements were made by CNN (or its interviewer) rather than by Defendants. Even though Defendants participated in the interview, Pulse fails to plead sufficient facts to show that Defendants either knew of the false caption and interviewer’s statement before the broadcast aired or otherwise participated in their creation. 
The only specific statements attributed to David weren’t materially deceptive.  They were just descriptions of the animation and the technology’s potential uses.  In a footnote, the court also noted that CNN’s initial broadcast wouldn’t qualify as “commercial advertising or promotion.” “David’s statements were made in an ordinary interview format on a national news program regarding an event that received widespread publicity. There are no facts alleged indicating that Defendants had an economic motivation or that the statements were intended to influence consumers to buy defendants’ goods or services.” 
The allegations of republication came closer to stating a claim, since reposting “arguably” adopted the false statements.  (I’d go much further—beyond arguably.  There are a number of cases, including the foundational Gordon & Breach, finding that use of someone else’s noncommercial speech in one’s own commercial speech is subject to Lanham Act false advertising claims.)
However, here Pulse didn’t specify “exactly when the segment was reposted, all of the websites to which it was reposted, for how long it was made available, or provide any other contextual facts that would allow Defendants to prepare a responsive pleading.”  Again, dismissal was with leave to amend—and here I suspect that’s possible.

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House hearing on 1201

Posted on September 18, 2014 by rtushnet
House Judiciary Hearing, Subcommittee on Courts, the Internet, and Intellectual Property: 1201
Bonus Library Copyright Alliance statement.
Rep. Marino: DMCA is important but there are concerns about misuses; fortunately courts have generally gotten it right to avoid anticompetitive behavior.  We want to hear more about ensuring 1201 is used to protect copyrighted works and not printer cartridges.  Copyright Office just announced the new rulemaking process. Congress recently enacted cellphone unlocking legislation: template?  1201 has a lot to do with digital distribution.
Rep. Nadler: DMCA was enacted to implement WIPO treaties.  Wants to hear how 1201 is working and what changes might be appropriate.  DMCA has been effective in allowing companies to promote new/innovative business models.  (I’d love to see the evidence of this.)  Promotes creation of new online services used to access movies etc. Often use TPMs to prevent unauthorized access: access controls. Also copy controls.  © owners depend on these as an effective way to respond to infringement and make works available online. Plays key role in reducing piracy.  Should study whether triennial rulemaking process is working correctly.  New procedures to enhance public understanding—allowing parties to provide basic information; short submission form to allow public to register their views.  While DMCA didn’t always work as intended, led to innovation and benefits for consumers. Helps creators have confidence to provide video over internet despite risks, and deters theft/unauthorized access.
Rep. Conyers: Keep in mind: we need to ensure that 1201 remains strong to prevent piracy and keep the US competitive globally. © is critical to job development and overall economy; foundation for our inventiveness and dynamic business culture, and US competitiveness. IP-intensive industries account for nearly 35% of nation’s GDP in 2010, and 40 million jobs directly or indirectly.  (I’ll just note that Coca-Cola is counted as IP-intensive in these measures because of its brand value.)  Piracy costs billions of dollars and millions of jobs.  Chinese piracy and counterfeiting cost American businesses approx. $40 billion in 2009. Over 2 million jobs could’ve been created in the US if China complied w/its current obligations.  (If this is so, the DMCA is completely irrelevant and even a distraction.)  We need to provide more resources to protect © domestically and abroad, fully funding federal enforcement, including deterrents to infringement and prosecutions of commercial infringers.  Encourage other countries to enact strong copyright laws and enforce them.  China again. 
Oppose efforts to weaken 1201 because it encourages the use of TPMs to protect copyright.  This strengthens © by cultivating innovative business models encouraging lawful innovation and discourages piracy.  Some ignore its effectiveness by wanting to weaken or eliminate it. Some contend that © owners use 1201 as a tool to stifle competition—laser printer/garage door opener.  Fortunately, courts ruled against those companies.  Others contend that the triennial rulemaking process is too narrow.  1201 maintains necessary balance between strong protection and consumer-friendly market.  (Um, that’s not a balance.)  There have been dozens of exemptions granted since 1998.  (Largely because you have to ask for your exemption every three years.)  We can make it more efficient.
Mark Richert, VP Public Policy, American Foundation for the Blind (link goes to written testimony): Helen Keller was a fierce advocate, not just inspirational.  Needless complexity in 1201 process. Bottom line: it’s time for the entire © regime to be looked at very carefully. Piecemeal process should be looked at more generally.  AFP worked to enact the Chafee Amendment, allowing people with disabilities to reproduce materials in accessible formats without needing permission. That language really helped codify the notion part of © for a long time: for certain purposes, particularly access to those with disabilities, certain uses are fair.  Limited to nondramatic literary works, but important first step.  That was narrow and incremental, and it needs to be revised for the internet.  Our experience with 1201: significant limitations.  © Office has recognized exemptions, but threatened to take them away too—nearly lost our ebook exemption.  What that shows is that, even though the rights haven’t changed, the process can fail people with disabilities.
Jonathan Zuck, president, ACT: the App Association: represent over 5000 app developers and IT businesses who create and license content.  Vibrant success story for apps.  68 billion over 6 years, employing over 750,000 Americans.  App industry didn’t exist in 1998.  Protecting content v. potential impediments to future innovations.  Courts have consistently rejected attempts to abuse DMCA to block competition or legit research, and we’ve added new exemptions for unlocking/accessiblity for the blind.  DMCA is having little if any adverse impact on innovation.  Consumers have endless options for consuming movies, music.  Technical and easy to misinterpret and misunderstand; we published a white paper “explaining” the DMCA.  Takeaway: explosive growth in tech innovation in content delivery prove the DMCA created an environment in which this is possible. Curated app store demonstrates how DRM/DMCA create a virtuous cycle for consumers and developers.  Invisible protection for developers; consumers can trust apps in store and benefit from ability to replace lost/corrupted apps with a few clicks.  Consumers don’t have to deal with viruses from noncurated app stores. TPMs are essential to success of industry. Yes, there’s app piracy, but just because in 16 years there’ve been a handful of bad cases doesn’t mean we should ignore innovation of last decade.  Over a million apps available in marketplace. Virtually no barriers to becoming an entrepreneur. There may be ways to improve DMCA, but proceed w/caution before dismantling compromises that worked.
Christian Genetski, senior VP/GC, Entertainment Software Association: Leading video game publishers and console manufacturers.  100s of millions of gamers worldwide; $21 billion to US economy.  TPMs spur innovation.  DMCA is fundamentally sound and largely working as intended.  Prevent piracy and promote broader dissemination of legit content: these incentives are working.  Platforms, publishers, and gamers have benefited.  Piracy remains a concern, but TPMs/DMCA played pivotal role in reducing their scope. Our industry understands that reducing piracy in the long run requires offering consumers a better experience. Does not reduce consumer choice.  TPMs help expand consumer choice by expanding across platforms and price points.  Explosion of free to play game offerings available on mobile phones; console has become robust online hub; enabled new digital gaming services across platforms and devices. Consumer-focused approach relies heavily on TPMs. Accepting that no tech is impervious, DMCA establishes baseline of respect for TPMs and deterrent.  Critical that any consideration to address outlier cases/unintended consequences shouldn’t undermine these benefits.  Circumvention for only noninfringing uses = embolded pirates. Not theoretical concern: recognized in last rulemaking when videogame circumvention exemption was rejected—very same steps required to hack for noninfringing uses were overwhelmingly used for piracy. No law is perfect. Where DMCA is perceived as restricting fair use, exemption process works.  We liked the exemption process a lot, though targeted efforts to improve it could be discussed.  Unrivaled innovation after DMCA.  Access to more varied/higher quality content with choice more than any other time in history.
Corynne McSherry, EFF: We regularly counsel security researchers, innovators, ordinary users, remix artists about DMCA issues.  Based on our experience we’ve seen the real price of 1201, which is too high. Was supposed to deter © infringement, but over and over we’ve seen it used to thwart not just legal but copyright-irrelevant activities.  Last year consumers discovered unlocking phones was illegal—Copyright Office has veto power over normal uses of their own devices. Congress temporarily restored unlocking; we’re grateful for that, but we should be disturbed it was necessary to do so in the first place.  A few practical examples: flaw in security protection on CDs that could potentially allow hacker to take over computers—500,000 networks including gov’t.  Researchers hesitated to share this knowledge because they’d already faced DMCA threats for past similar security work. Security is hugely important; we’re all at risk when leading researchers can’t do their jobs. DMCA also used to block competition, not just in 2 cases, but computer repair etc.  Legit competition moves into courtroom; used against hobbyists who want to make their stuff work better.  Inhibits a nation of tinkerers.  Phones, cars, fridges, farm equipment—software helps goods work. But repair/recycling may require circumvention; this is bad for the environment and consumers.  Also bad for the people it’s supposed to help: artists.  1201 stands in the way of fair use.  Exemption isn’t adequate—takes many hours of work, legal and tech expertise, and if you win you have to start all over again.  Copyright Office is dedicated, but small and overburdened and shouldn’t be the ones to make the decisions shaping the future of tech.  Individuals and companies engaging in infringement—“pirates”—aren’t deterred. They’re already on the hook for substantial infringement penalties. Best outcome: get rid of 1201.  Or limit it to the situations it was supposed to target: circumvention that aids infringement. This would get back to purpose and avoid the costs of the exemption rulemaking.
Rep. Chabot: App from his district, allow kids to play with food creating machine.  Created interactive gaming company—great success story.  Piracy threatens startups.  Pirates create copycat apps and sell them under different name.  How significant is this? Are DMCA or other remedies sufficient? What additional remedies would you like to see to protect developers and consumers?
Zuck: Piracy is an ongoing problem.  DMCA has gone a long way by allowing curated stores to have a much better record of finding and removing pirated and poorly intentioned software.  (I didn’t know that curated stores were mandated by the DMCA or would disappear without it; I’d sort of thought they served the economic interests of their curators.)  DMCA has altered the previous software landscape and allowed apps to survive.  Piracy/malware is a problem.  But DMCA is a big deal.
Chabot: could you describe how TPMs have allowed innovation?
Genetski: (1) as a matter of tech, backstopped by law, it’s been effective in not completely eliminating but diminishing piracy.  Historical difference in piracy rates between PC platform (no TPMs) and those on game consoles (use TPMs)—drastically different. PC package game market was severely undercut by piracy.  (2) TPMs have played a role in reinventing PC game market—moving to the cloud with server-based games that can authenticate legit users.  (3) TPMs incredibly useful in allowing publishers to compete with free.  By allowing users to do things like have 48 hour free trial period to evaluate whether they like it.  Start the game on their phone, then play more at tablet, then resume on TV screen at home. Users want this and TPMs are the backstop to making piracy not a consumer choice.
Rep. Goodlatte: Comprehensive review of © law.  DMCA came because of concern over mass piracy. TPMs were intended to allow self-help.  Either have been effective tool or have simply been a small speed bump for dedicated pirates. © owners have reevaluated need for TPMs: music industry has turned away from them.  Changes: Some want a scalpel and others with blunter suggestions.  Those of us involved with the drafting wouldn’t have anticipated some of the litigated issues; interested in ways to better focus 1201 on protecting copyright works from piracy rather than non-copyright industries from competition.
Rep. Conyers: Genetski mentions targeted efforts to approve efficacy/efficiency of rulemaking.  What kind of changes would you recommend?
Genetski: We all share frustration at need to return repeatedly and seek renewal where no one’s opposed an exemption.  Now we have several iterations where we’ve seen some patterns emerge. There are clearly areas emerging like Richert’s that may warrant thought about how to address. Contrast to video game console proceeding,where process worked well with voluminous record and argument from both sides.  Isolate instances where there’s room for targeted improvement.  (Excellent non-answer.)
Conyers for Zuck: do you think there are opportunities to improve the law?  Why do you want us to be wary of dismantling existing compromises?
Zuck: Agrees that there’s room for improvement in rulemaking and review particularly.  Make it more fluid, fewer impediments to legitimate exemptions.  (Which are?)  But the facts are with the law: as a whole, it’s worked. Facilitated the app industry—protects consumers from malware, need to replace software.  Instances along the way where law’s been tested doesn’t make it different from any other law.  If you got rid of every law with excesses you’d have very little law left. Deal with exceptions but remember it’s successful.  Use a scalpel.  (On what?)
Rep. Issa: We don’t have a librarian here—need that perspective.  If we leave the system in place, and Congress continues to be faced with decisions we don’t like (unlocking), where people bought something where the software was incidental to the hardware, is there flexibility to allow Congress’s view to be seen, or do we have to hope that there’s a large enough public outcry each time?
McSherry: that flexibility exists: Congress can set © policy, but it’s remarkably cumbersome to do it again for each innovation that comes up.  It’s not just occasional that these TPMs are litigated; EFF has an increasingly longer paper on unintended consequences. Rather than piecemeal backstop of Librarian of Congress: reform 1201 so that acts of circumvention creating liability have a relationship to infringement or facilitation of infringement.  Reform so that exemptions that are created apply to tools, not just acts of circumvention; big flaw in current process.
Issa: Congress is cumbersome compared to court review—do we need further administrative review that has more bias toward the intent of the DMCA?  Blind people often find themselves w/o accommodation, need circumvention.  Review under Copyright Office, or real reforms with administrative bias towards fair access?
Genetski: design of the statute with balance of prohibitions and exemptions for security testing/interoperability is fine.
Issa: this three-year review with Congress as a backstop doesn’t have any other recourse but Congress.
Zuck: largely worked, worth exploring a process to see if there’s a more fluid process in the absence of objections.  Tech people are sympathetic to innovation, but change is possible if done in targeted way.
Richert: True, visually impaired/blind people have only one recourse right now. There is another way: if rightsowners assure accessiblity of the stuff they make available.  We went to the © Office because folks who were blind or visually impaired were trying to read ebooks they’d paid for, and they wouldn’t get anything at all/they’d get a message that accessibility had been disabled at the request of the © owner.  We wouldn’t have initiated our efforts 12 years ago if the underlying works were made accessible.  Thus we suggest an overall approach to © reform, because ensuring a limited monopoly to promote progress surely means at a minimum that all people, including people w/disabilities, can use what everyone else can use.  If the underlying work isn’t optimized for the tech that assists people with disability, we should be able to make it accessibility. Presumption that these materials should be made accessible.
Issa: there are none so blind as those who will not see the needs of their customers.
Rep. Chu: Submits written statement from Copyright Alliance about the ways artists use TPMs to protect their work.  TPMs impact piracy rates in video games, comparing platforms: PC v. console.  How does the rate of piracy differ?  How does the industry combat infringing use?
Genetski: rates historically/currently: 80-85% higher for PC game titles, in many cases the same game titles.  Infringing download sites—29/30 most popular titles are PC titles. More compelling part of the story is the response to that reality: find a way to reinvent that market, recognizing the issue and using TPMs in a way that grows the market (online play).  Often free play, paying only for what they want. Need rulesets to admit only those who will play by the rules, not cheats and hacks to disrupt the experience for the majority.  TPMs play critical role in nurturing that.
Rep. Chu: Innovative game delivery mechanism—what role do TPMs play in determining whether content owners decide to make content available through new mechanisms, and what role does triennial review play?
Genetski: Steam, an online digital gaming service.  Origin is another platform: allows purchase of digital content.  EA has GameTime: 48 hour window to try a game.  Lawful means to sample.  These require TPMs for when the 48 hours ends. Steam is pro-consumer, nonrestrictive service. TPMs are the backbone to account-based services.  Few restrictions once you’ve purchased the product, but the architecture behind the scenes is important.
Rep. Chu: what are our treaty obligations?
Genetski: WIPO treaty was a motivating factor: requires effective/adequate remedies against circumvention. FTAs with Korea, Australia, etc. that are more specific to the current 1201 provisions. Repeal/rollback of current prohibitions to where adequacy/effectiveness would be called into question would be a problem.
Rep. Farenthold: EFF member.  Where could this go?  Traditionally patent law protects things and copyright law protects works.  Now more and more things have software, which you license when you purchase.  Can we distinguish software as an integral part of a thing v. an app, so you can do what you want with a thing you buy?  If I buy a car, can the car company prevent me from selling it on the used market by using software to turn the car off on transfer?
McSherry: this is one of our biggest concerns. Lots of unexpected uses.  Problem will only get worse.  Your hypo is not hypothetical: people have always tinkered with our cars but cars now have a lot of software.  Can be used to lock folks down to one repair option—all too common.  If you buy an object but only license the software, you may not know about all the restrictions. 
Rep. Farenthold: moving through courts is slow and expensive. How do we streamline the process for fair use, reverse engineering, etc.?
Zuck: while the judicial process is slow, it’s inevitable at the beginning of the life of a law. Most of the examples are old; people are now less fearful about the implications of hacking.  Hacking/modification is alive and well now.  Don’t think about it as the rule rather than exception. There are opportunities to streamline but it’s a mistake to look at experience as a whole and see DMCA as problematic; the numbers don’t support that.
Rep. Deutch: specifically, what changes would you want?
Zuck: the renewal process of an exemption could be modified and streamlined, especially when there are no objections, which is very often the case.  (Excuse me?)  The cumbersome nature of the process has been the exception and not the rule because most of the TPMs in place are seamless.
Deutch: we all agree the Office made the wrong call on cellphones.  But what next?  Only with intent?
McSherry: circumvention or tools designed to facilitate infringement.
Deutsch: but you can infringe without intent to infringe.
McSherry: only when there’s an actual tie to copyright infringement.  The way to deal with that: if someone is designing a tool in good faith, and someone happens to use it to infringe that shouldn’t be their fault.
Deutsch: Genetski says TPMs have helped innovation.  What’s your objection?
McSherry: when we look at 1201, it’s cost/benefit.  We don’t think its benefits justify its costs. 
Deutsch: you say pirates are going to be pirates.  But address the benefits Genetski laid out.
McSherry: we’re conflating TPMs and 1201.  They’ve argued for the benefits of TPMs.  It may be that they’ve been helpful.  I don’t think 1201 as a backstop to the TPMs.  Whether there’s an overall benefit to TPMs is different. 1201 has inhibited things like security research.  (It’s not just that pirates will be pirates.  It’s that 1201 doesn’t make what they’re doing any more unlawful; it’s already unlawful.  So they’ve already decided that they’re going to infringe.  And their cracking of TPMs will also contribute to infringement and they’d be liable for secondary infringement even without 1201.  Given that, 1201 interferes with people who’d like to comply with the law, not with people who’ve already decided to ignore it.)
Genetski: TPMs are a sound business choice.  Delivering consumers content in the way they want. But it establishes normative behavior. People understand it’s unlawful to hack. Where tech fails, and it always does, having a law as a backstop helps the majority of users understand the bargain.  (What’s the evidence that the majority of users know what the DMCA is?)
Zuck: backstop is important.  Open source software has bugs/security holes too.  There’s no comparison between benefits and costs.
Genetski: reduce amount of scope on consoles.  Last rulemaking: EFF proposed circumvention for game consoles for noninfringing uses.  However, we showed that the community of users that would use the tools to circumvent basically broke the lock. Once the lock is broken there’s no fixing it, and it allows playback of pirated content. May also allow a sliver of noninfringing use?
Rep. Holding: how much money are you losing?
Genetski: difficult to quantify, but we do 100s of thousands of takedowns monthly, so it’s a significant problem.
Rep. Jeffries: Richert: your resources are being expended to vindicate a civil right that’s already been established. You support reform for noncontroversial exemptions?
Richert: Short answer: yes—we want a comprehensive approach to © to accessibility. Specifically to 1201: we recommend specific reforms. 
Jeffries: how do you define a noncontroversial exemption? Seems easier said than done, especially around this place—the Export/Import bank was noncontroversial until it became controversial.  Would it be based on lack of objections?  Would it be based on repeated reauthorization?  Some combination?
Richert: Noncontroversial is not the best definition. People often think of accessibility as like motherhood and apple pie, until it’s time to actually regulate.  When someone can make a case that the use is clearly fair and traditionally, consistently recognized as such, that’s a no-brainer.
Jeffries: current framework has allowed for innovation, but what to do?
Genetski: right focus would be lack of opposition.  Perhaps not de novo review, but burden to stay the same in the absence of opposition.  (As I recall, the Joint Owners technically opposed all the exemptions, but didn’t deign to argue about the blind. Would that count?)
McSherry: we sought an exemption that would allow you to turn your console into a general purpose computer. There used to be consoles that could be modified to run Linux—useful for research because less expensive. Console design changed to prevent that. Could be easily circumvented for lawful purposes, so we sought an exemption.  Related ask for circumvention for “homebrew” games—games they developed themselves.
Rep. Smith: Any downsides to that exemption?
Genetski: record established that running Linux on a console was incredibly uncommon until there was a publicly released hack that allowed circumvention—the feature also prevented running pirated content.  After it was removed, that console manufacturer granted authorization to use that part of the system to bona fide security researchers who asked. There was very little harm.  Grave harm for opening up that door.  (I thought consumers understood the DMCA and understood lawful/unlawful.)
McSherry: be clear: that hack was widely available.  Only legitimate users were inhibited. This is the difference between TPMs and 1201.
Rep. Collins: most of EFF’s cases are old.  You eventually set precedents to fix them.  Why not remove robbery from the books?  Console developers granted permission to security researchers.  People need a profit motive to make stuff.
McSherry: Independent repair people don’t know if they can stay in business. Cars have TPMs in them.  And that’s just cars.
Collins: problems are opportunities.  Marketplace provides medicine for this problem.  (Because producers routinely encourage competition?)
Rep. Marino: we know there’s a lot of piracy, trade secret theft, trademark infringement internationally. From an international perspective, what impact does 1201 have?
Genetski: DMCA grew out of WIPO internet treaties; US has been a leader in exporting protection against circumvention.  FTAs: laws that track 1201. That has important practical impact.  Was involved in actions around the world on behalf of game publishers. We pursued cases under the local version of 1201.  The ability to have these remedies exported and used to create worldwide norms is critical.
Zuck: Prices have fallen dramatically in our industry.  Some of the incentives for piracy have decreased, while some of the consumer benefits from TPMs have increased.  Protection from malware in a curated store means that you have a better chance of exporting those protections, so rather than jailbreaking my phone I’m using cheap/free apps.  Decrease incentives for pirates and for consumers to make use of pirated goods.
McSherry: skeptical about exporting 1201, given that we already have copyright penalties.  The evidence does not show deterrence of piracy.  Given the concerns that many of us agree on, it’s wrong to export 1201 wholesale.  Even if we shouldn’t scuttle it, there are significant flaws.

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7th Circuit doesn’t like transformativeness or factor 1, still finds fair use

Posted on September 16, 2014 by rtushnet
Kienitz v. Sconnie Nation LLC, No. 13-3004 (7thCir. Sept. 15, 2014)
Just the facts:
While a student at the University of Wisconsin in 1969, Paul Soglin attended the first Mifflin Street Block Party, whose theme (according to Soglin) was “taking a sharp stick and poking it in the eye of authority.” Now in his seventh term as Mayor of Madison, Wisconsin, Soglin does not appreciate being on the pointy end. He wants to shut down the annual event. For the 2012 Block Party, Sconnie Nation made some tshirts and tank tops displaying an image of Soglin’s face and the phrase “Sorry for Partying.” The 54 sales, on which Sconnie Nation cleared a small profit, led to this suit, in which photographer Michael Kienitz accuses Sconnie Nation and its vendor of copyright infringement. Sconnie Nation concedes starting with a photograph that Kienitz took at Soglin’s inauguration in 2011. Soglin (with Kienitz’s permission) had posted it on the City’s website, from which Sconnie Nation downloaded a copy. The photograph was posterized, the background was removed, and Soglin’s face was turned lime green and surrounded by multicolored writing. Here are the original and the revision: A magistrate judge, serving by consent under 28 U.S.C. §636(c), granted summary judgment for the defendants, holding that Sconnie Nation had made fair use of the photo.
Kienitz’s photo and T-shirt graphic
The court of appeals affirmed, albeit narrowly.  It began with factor one, commenting that transformativeness doesn’t appear in the statute, though the Supreme Court “mentioned” it in Campbell.  (“Mentioned” is sort of like saying WMDs were “among” the reasons the US offered for war in Iraq.  But ok, set the tone.)  The court then expressed “skeptic[ism]” about the approach of Prince v. Cariou, “because asking exclusively whether something is ‘transformative’ not only replaces the list in §107 but also could override 17 U.S.C. §106(2), which protects derivative works.”  Instead, it’s better to stick with the statutory list, “of which the most important usually is the fourth (market effect).”  (Richard Primus refers to this kind of interpretive re-prioritizing of Supreme Court decisions by courts of appeals as “underruling.”)
I think it’s important to pause for a moment here, because we’re all used to the clever and extremely readable rhetoric of 7thCircuit opinions, but let’s not rush too fast past what this opinion is doing.  Having not quoted either the Supreme Court or the Second Circuit’s definition of transformativeness (which might allow one to assess whether there is too great an overlap with the derivative works right, or for that matter with the reproduction right since that’s what the majority of Second Circuit transformativeness findings deal with), the Seventh Circuit tells us to stick to the statute.  But it doesn’t tell us what the first factor does attempt to privilege and deprivilege. Instead, the court goes to its own economic lingo-driven test: “whether the contested use is a complement to the protected work (allowed) rather than a substitute for it (prohibited).”  Where this appears in the statute is left as an exercise for the reader, though by placement in the opinion we might possibly infer that it is the appropriate rephrasing of factor one, as opposed to inappropriate transformativeness (though the court later says that factor one isn’t relevant at all).  However, complement/substitute requires some baseline for understanding the appropriate scope of the copyright right—the markets to which copyright owners are entitled—just like transformativeness does.
Anyhow, t-shirts and tank tops don’t substitute for the original photographs.  (Do they serve as complements?  Judging by the analysis below, no.)  Kienitz didn’t argue that his plans for licensing the work for apparel were disrupted by defendants’ use or that demand for the original or any other use he contemplated was reduced.  
Other than market harm, only the amount taken mattered here:
Defendants removed so much of the original that, as with the Cheshire Cat, only the smile remains. Defendants started with a low resolution version posted on the City’s website, so much of the original’s detail never had a chance to reach the copy; the original’s background is gone; its colors and shading are gone; the expression in Soglin’s eyes can no longer be read; after the posterization (and reproduction by silkscreening), the effect of the lighting in the original is almost extinguished. What is left, besides a hint of Soglin’s smile, is the outline of his face, which can’t be copyrighted. Defendants could have achieved the same effect by starting with a snapshot taken on the street.
Factor one didn’t do much: the use was for-profit, but the choice of design was a “form of political commentary.” The nature of the work was likewise “unilluminating,” and then the court repeats its market harm conclusion, apparently now as a matter of the nature of the work: “Kienitz does not argue that defendants’ acts have reduced the value of this photograph, which he licensed to Soglin at no royalty and which is posted on a public website for viewing and downloading without cost.”
Kienitz had two points on his side:
First, defendants did not need to use the copyrighted work. They wanted to mock the Mayor, not to comment on Kienitz’s skills as a photographer or his artistry in producing this particular photograph. There’s no good reason why defendants should be allowed to appropriate someone else’s copyrighted efforts as the starting point in their lampoon, when so many noncopyrighted alternatives (including snapshots they could have taken themselves) were available.
Except: If the factor (3) analysis is correct, how is there any appropriation of the copyrighted work? Feistsays second-comers aren’t required to duplicate fact-gathering efforts, as a matter of constitutional law.  But never mind!  Fair use isn’t designed to protect the lazy, the court says.  Instead, it’s to facilitate uses that wouldn’t be possible if negotiation with copyright owners were always required, like parodies or academic uses.
Another point in Kienitz’s favor is that “this use may injure Kienitz’s longrange commercial opportunities, even though it does not reduce the value he derives from this particular picture. He promises his subjects that the photos will be licensed only for dignified uses. Fewer people will hire or cooperate with Kienitz if they think that the high quality of his work will make the photos more effective when used against them!”  (Judicial factfinding at its finest.  Even on its own terms this doesn’t make any sense, since the factor (3) analysis hangs on the extreme distortion of the crappy low-res version on the website, which could happen to any photo.)
But Kienitz didn’t make this argument that the Seventh Circuit just made up for him, and anyway that’s not enough to outweigh the fact that, “by the time defendants were done, almost none of the copyrighted work remained.” (Or, you know, the Campbell rule of law that demand suppression of this sort isn’t actionable, but that rule is both normative rather than efficiency-based and also comes from the Supreme Court and not the Seventh Circuit, so I guess it can safely be ignored.)  Affirmed.

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