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CJEU rules that lending an e-book is legal if the first sale right has been exhausted

By Marie-Andrée Weiss

The Third Chamber of the Court of Justice of the European Union (CJEU) ruled on 10 November 2016 that it is legal under EU law for a library to lend an electronic copy of a book. However, only one copy of the e-book can be borrowed at the time, the first sale of the e-book must have been exhausted in the EU, and the e-book must have been obtained from a lawful source. The case is Vereniging Openbare Bibliotheken v. Stichting Leenrecht, C-174-15.

 

Legal framework

Article 2 of Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society (the InfoSoc Directive) provides authors exclusive rights in their works, including, under its Article 3, the exclusive right to communicate their works to the public by wire or wireless means. Its Article 4 provides that these exclusive rights are exhausted by the first sale or by other transfers of ownership of the work in the EU.

Article 6(1) of Directive 2006/115/EC of the European Parliament and of the Council of 12 December 2006 on the rental right and lending right and on certain rights related to copyright in the field of intellectual property, the Rental and Lending Rights Directive (RLR Directive), gives Member States the right to derogate from the exclusive public lending right provided to authors by Article 1 of the RLR Directive, provided that authors are compensated for such lending.

Article 15c(1) of the Dutch law on copyright, the Auteurswet, authorizes lending of a copy of a literary, scientific, or artistic work, provided that the rightsholder consented to the lending and is compensated for it. The Minister of Justice of the Netherlands set up a foundation to that effect, the Stichting Onderhandelingen Leenvergoedingen (StOL), which collects lending rights payments as a lump sum from lending libraries and then distributes those payments to rightsholders through collective management organizations.

The Dutch government took the view that e-books are not within the scope of the public lending exception of the Auteurswet and drafted a new law on that premise. The Vereniging Openbare Bibliotheken (VOB), which represents the interests of all the public libraries in the Netherlands, challenged this draft legislation and asked the District Court of The Hague to declare that Auteurswet covers lending of e-books.

The Court stayed the proceedings and requested a preliminary ruling from the CJEU on the question of whether Articles 1(1), 2(1)(b) and 6(1) of the Renting and Lending Rights Directive authorize e-lending, provided that only one library user can borrow the e-book at a time by downloading a digital copy of a book which has been placed on the server of a public library.

If this is indeed authorized by the Directive, the District Court asked the CJUE whether article 6 of the Directive requires that the copy of the e-book which is lent has been brought into circulation by an initial sale or other transfer of ownership within the European Union by the rightsholder, or with her consent within the meaning of Article 4(2) of the InfoSoc Directive.

The District Court also asked whether Article 6 of the RLR Directive requires that the e-book which is lent was obtained from a lawful source.

Finally, the District asked the CJEU to clarify whether e-lending is also authorized (if the copy of the e-book which has been brought into circulation by an initial sale or other transfer of ownership within the European Union by the right holder or with her consent) when the initial sale or transfer was made remotely by downloading.

 

First: Is e-lending legal under the renting and lending rights directive?

The CJEU noted that Article 1(1) of the RLR Directive does not specify whether it also covers copies which are not fixed in a physical medium, such as digital copies (§ 28). The CJEU interpreted “copies” in the light of equivalent concepts of the WIPO Copyright Treaty of 20 December 1996, which was approved by the European Community, now the European Union. Its Article 7 gives authors the exclusive right to authorize “rentals” of computer programs. However, the Agreed Statements concerning the WIPO Copyright Treaty, which is annexed to the WIPO Treaty, explains that Article 7’s right of rental “refer[s] exclusively to fixed copies that can be put into circulation as tangible objects,” thus excluding digital copies from the scope of Article 7.

The Court noted, however, that “rental” and “lending” are separately defined by the RLR Directive. Article 2(1) (a) defines “rental” as “making available for use, for a limited period of time and for direct or indirect economic or commercial advantage,” while Article 2(1) (b) defines “lending” as “making available for use, for a limited period of time and not for direct or indirect economic or commercial advantage, when it is made through establishments which are accessible to the public.” The Court examined preparatory documents preceding the adoption of Directive 92/100, which the RLD Directive codified and reproduced in substantially identical terms, and noted that there was “no decisive ground allowing for the exclusion, in all cases, of the lending of digital copies and intangible objects from the scope of the RLR Directive.” The Court also noted that Recital 4 of the RLR Directive states that copyright must adapt to new economic developments and that e-lending “indisputably forms part of those new forms of exploitation and, accordingly, makes necessary an adaptation of copyright to new economic developments” (§ 45).

The CJEU noted that borrowing an e-book as described by the District Court in its preliminary question “has essentially similar characteristics to the lending of printed works,” considering that only one e-book can be borrowed at the time (§ 53). The CJEU therefore concluded that that “lending” within the meaning of the RLR Directive includes lending of a digital copy of a book.

 

Second: May only e-books first sold in the EU be lent?

The InfoSoc Directive provides that the exclusive distribution rights of the author are exhausted within the EU after the first sale or other transfer of ownership in the EU of the work by the right holder or with his consent. Article 1(2) of the RLR Directive provides that the right to authorize or prohibit the rental and lending of originals and copies of copyrighted works is not exhausted by the sale or distribution of originals and copies of works protected by copyright.

The CJEU examined Article 6(1) of the RLR Directive in conjunction with its Recital 14, which states it is necessary to protect the rights of the authors with regards to public lending by providing for specific arrangements. This statement must be interpreted as establishing a minimal threshold of protection, which the Member States can exceed by setting additional conditions in order to protect the rights of the authors (at 61).

In our case, Dutch law required that an e-book made available for lending by a public library had been put into circulation by a first sale, or through another transfer of ownership, by the right holder or with his consent within the meaning of Article 4(2) of the InfoSoc Directive. The Court mentioned that Attorney General Szpunar had pointed out in his Opinion that if a lending right is acquired with the consent of the author, it may be assumed that the author’s rights are sufficiently protected, which may not be the case if the lending is made under the derogation provided by Article 6(1) (Opinion at 85). AG Szpunar concluded that therefore only e-books which had been made first available to the public by the author should be lent. The CJEU ruled that Member States may subject as condition to e-lending the fact that the first sale of the e-book has been exhausted in the EU by the right holder.

 

Third: May a copy of an e-book obtained from an unlawful source be lent?

Not surprisingly, the CJEU answered in the negative to this question, noting that one of the objectives of the RLR Directive, as stated by its Recital 2, is to combat piracy and that allowing illegal copies to be lent would “amount to tolerating, or even encouraging, the circulation of counterfeit or pirated works and would therefore clearly run counter to that objective” (at 68).

The Court did not answer the fourth question as it had been submitted only in the case the Court would rule that it is not necessary that the first sale of the e-books being lent had been exhausted in the EU.

This is a welcome decision since, as noted by AG Szpunar in his Opinion, it is crucial for libraries to be able to adapt to the fact that more and more people, especially younger ones, are now reading e-books instead of printed books.

After many twists and turns, the CJEU holds that the Rubik’s cube trademark is invalid

By Marie-Andrée Weiss

The First Chamber of the Court of Justice of the European Union (CJEU) held on 10 November 2016, that the famous Rubik’s cube cannot be registered as a three-dimensional mark because its shape performs the technical function of the goods, a three-dimensional puzzle. The case is Simba Toys GmbH & Co. KG v. EUIPO, C-30/15 P.

 

The validity of the Rubik’s cube trade mark was challenged by a competitor

British company Seven Towns Ltd., acting on behalf of Rubik’s Brand Ltd., filed in April 1996 an application for registration of a Community trade mark at the Office for Harmonisation in the Internal Market (OHIM), now named the European Union Intellectual Property Office (EUIPO), for a three-dimensional sign, the famous Rubik’s cube. The mark was registered in April 1999 and renewed in November 2006.

A few days later, competitor Simba Toys applied to have the trade mark declared invalid under Council Regulation 40/94, which has been repealed and was replaced by Council Regulation 207/2009. The CJEU considered the case to be still governed by Council Regulation 40/94. Articles 1 to 36 are the same in both Regulations, and so the case is relevant under current EU trademark law.

Article 7(1)(e)(ii) of Council Regulation 40/94 prevents registration as a trademark of a sign, such as the Rubik’s cube product, “which consists exclusively of… the shape of goods which is necessary to obtain a technical result.” The CJEU had held in the 2002 Koninklijke Philips Electronics NV v. Remington Consumer Products Ltd. that a sign consisting exclusively of the shape of a product cannot be registered as a trademark if the essential functional features of the shape are attributable only to a technical result (Philips § 79 and § 80).

Simba Toys argued that the Rubik’s cube mark should be declared invalid under the grounds [absolute ground for refusal] that the mark is the shape of the goods necessary to achieve a technical result. According to Simba, the Rubik’s cube black lines are attributable to technical functions of the three-dimensional puzzle.

The OHIM dismissed Simba’s application for a declaration of invalidity and the Second Board of Appeal of OHIM affirmed the dismissal in September 2009, reasoning that the shape of the trade mark does not result from the nature of the Rubik’s cube itself. On 25 November 2014, the General Court dismissed the action for annulment as unfounded. Simba appealed to the CJEU.

 

What are the essential characteristics of the Rubik’s cube trade mark? 

The essential characteristics of three-dimensional signs are the most important elements of the signs, Lego Juris v. OHIM, C-48/09, § 68 and 69. They must be properly identified by the competent trademark registration authority, Lego Juris v. Ohim § 68, which must then determine whether the essential characteristics all perform the technical function of the goods (General Court § 41). The General Court identified the essential characteristics of the Rubik’s cube trademark is a “cubic grid structure,” that is the cube itself and the grid structure appearing on each of its surfaces (General Court § 45). Simba did not challenge this finding on appeal at the CJEU.

 

Do the essential characteristics of Rubik’s cube perform the technical function of the goods?

Under Article 4 of Regulation 40/94 and Regulation 207/2009, any sign capable of being represented graphically can be a trade mark, unless, under article 7(1)(e)(ii) of both Regulations, the sign consists exclusively of the shape of goods which is necessary to obtain a technical result.

Article 7(1) grounds for refusal to register a mark must be interpreted in light of the public interest underlying them. The public interest underlying Article 7(1)(e)(ii) is to prevent the use of trademark law to obtain a monopoly on technical solutions or the functional characteristics of a product (General Court § 32, citing Lego Juris v. OHIM, § 43). Advocate General Szpunar explained further in his Opinion that allowing such marks to be registered would give the registrant “an unfair competitive advantage” and thus trade mark law cannot be used “in order to perpetuate, indefinitely, exclusive rights relating to technical solutions” (AG Szpunar Opinion § 32 and § 34).

For the General Court, Article 7(1)(e)(ii) applies only if the essential characteristics of the mark perform the technical functions of the goods “and have been chosen to perform that function.” It does not apply if these characteristics are the result of that function (General Court § 53). Simba argued in front of the CJEU that the General Court erred in this interpretation of Article 7(1)(e)(ii).

Simba claimed that the black lines of the cube performed a technical function (General Court § 51). But the General Court found that an objective observer is not able to infer by looking at the graphic representation of the Rubik’s cube mark that the black lines are rotatable (General Court § 57). The General Court held that Simba’s “line of argument… [was] essentially based on knowledge of the rotating capability of the vertical and horizontal lattices of the Rubik’s cube. However, it [was] clear that that capability cannot result from the black lines in themselves or, more generally, from the grid structure which appears on each surface of the cube… but at most from [an invisible] mechanism internal to that cube” (General Court § 58). Therefore, the grid structure on each surface of the cube “d[id] not perform, or are not even suggestive of, any technical function” (General Court § 60). The General Court concluded that registering the Rubik’s cube shape did not create a monopoly on a technical solution and mechanical puzzles competitors could also incorporate movable or rotatable elements (General Court § 65).

But, for AG Szpunar, the General Court erred in its analysis as it should have taken into account the function of the Rubik’s cube, which is a three-dimensional puzzle consisting of movable elements. He noted that in both the Philips and the Lego Juris cases, the competent authorities had analyzed the shape of the goods using additional information other than the graphic representation (AG Szpunar Opinion § 86). While the competent authority does not have to concern itself with hidden characteristics, it must nevertheless analyze “the characteristics of the shape arising from the graphic representation from the point of view of the function of the goods concerned” (AG Szpunar Opinion § 88).

The CJEU followed its AG’s Opinion on this point and found that the General Court should have defined the technical function of the actual goods, namely, the three-dimensional puzzle, and it should have taken this into account when assessing the functionality of the essential characteristics of that sign (CJEU § 47). The General Court “interpreted the criteria for assessing Article 7(1)(e)(ii) . . . too narrowly”(CJEU § 51) and should have taken into account the technical function of the goods represented by the sign when examining the functionality of the essential characteristics of that sign (CJEU § 52). Failing to do so would have allowed the trademark owner to broaden the scope of trademark protection to cover any three dimensional puzzles with elements in the shape of a cube (CJEU § 52).

This case confirms, after Pi-Design AG v. Bodum, that the CJEU takes the view that the essential characteristics of a trade mark must not be assessed solely by the competent authority based on visually analyzing the mark as filed, but that the authority must also identify the essential characteristics of a sign, in addition to the graphic representation and any other descriptions filed at the time of the application for registration. This is necessary to protect the public interest underlying Article 7(1)(e)(ii), which is to ensure that economic operators cannot improperly appropriate for themselves a mark which incorporates a technical solution.

Partial victory for BMI: Federal judge rules against full-work licensing requirement

By Martin Miernicki

On 16 September 2016, Judge Stanton issued an opinion interpreting the BMI Consent Decree. He concluded that the decree does not require BMI to issue “full-work” licenses.

 

Background

On 4 August 2016, the U.S. Department of Justice (DOJ) published a closing statement concluding its review of the ASCAP and BMI Consent Decrees. It stated that said decrees prohibited ASCAP and BMI from issuing fractional licenses and required them to offer full-work licenses.[1]  Both ASCAP and BMI immediately announced to fight the opinion, the latter seeking a declaratory judgement, asking the “rate court” for its opinion.[2]

 

The court’s opinion

In its declaratory judgement, the court rejected the DOJ’s interpretation of the BMI Consent Decrees, ruling that “nothing in the Consent Decree gives support to the [Antitrust] Division’s view.” It held that the issue of full-work licensing remained unregulated by the Consent Decree; rather, this question should be analyzed under other applicable laws, like copyright or contract law. In conclusion, the court explained that the decree “neither bars fractional licensing nor requires full-work licensing.” The court furthermore distinguished the question at hand from its decision in BMI v. Pandora,[3] where it struck down attempts by major publishers to partially withdraw rights from BMI’s collective licensing regime.

 

The way forward

The court’s opinion is a clear success for BMI, but also for ASCAP, since it can be expected that Judge Stanton’s ruling will be influential in analogous questions regarding the ASCAP Consent Decree. However, this success is not final. BMI reported that the DOJ appealed the decision on 11 November 2016. It is hence up to the Court of Appeals for the Second Circuit to clarify the meaning of the decree.

[1] Under a full-work license, a user obtains the right to publicly perform the entire work, even if not all co-owners are members of the organization issuing the license. Conversely, a fractional license only covers the rights held by the licensing organization.

[2] For more information on the background of the decision see Transatlantic Antitrust and IPR Developments Issue No. 3-4/2016.

[3] BMI v. Pandora, Inc., No. 13 Civ. 4037 (LLS), 2018 WL 6697788 (S.D.N.Y. Dec. 19, 2013).

Who’s on Second (Circuit)? Transformative fair use

By Marie-Andrée Weiss

The Second Circuit found on 11 October 2016 that verbatim use of the famous ‘Who’s on First’ Abbott and Costello routine in the Hand to God play was not transformative enough to be fair use. The Second Circuit nevertheless affirmed the dismissal of the lower judgment as Plaintiffs did not have a valid copyright interest in the routine. The case is TCA Television Corp. v. McCollum, No. 1:16-cv-0134 (2d Cir. Oct. 11, 2016).

William ‘Bud’ Abbott and Lou Costello formed a comedy duo which was popular in the thirties and forties. Who’s on First is one their most famous routines, where Abbott plays the manager of a baseball team which Costello just joined. The newbie wants to know the name of his fellow players and the manager obliges: they are “Who,” “What,” and “I Don’t Know.” Misunderstandings ensue, fired up at a rapid pace. The routine was named “Best comedy routine of the 20th Century” by Time magazine in 1999.

The play Hand to God, written by Robert Askins, was shown off-Broadway in 2011 at The Ensemble Studio Theatre, and has since been shown on Broadway and in London. The play is about Jason, an introverted young man from a small Texas town who participates in his church’s “Christian Puppet Ministry,” a sock puppet show. Tyrone, Jason’s sock puppet takes a life on its own and blurts out embarrassing facts, maybe because it is an incarnation of the devil, maybe because Jason uses him to say what he truly thinks. Jason recites Who’s on First, with Tyrone as his partner, to a young woman in order impress her, and then pretends that he is the one who came up with the routine. Tyrone then calls him a liar and tells the girl she is stupid for believing that Jason indeed created the routine. An excerpt of that scene was used in a promotional video for the play.

When Abbott and Costello’s heirs learned about this use, they filed a copyright infringement suit against the Ensemble Studio Theatre and the playwright in the Southern District of New York (SDNY). Defendants conceded that they had used part of the routine, but argued in defense that is was “part of a sophisticated artistic expression” and also that Plaintiffs do not own a valid copyright in the routine.

On December 17, 2015, Judge Daniels from the SDNY dismissed the copyright infringement suit brought by Plaintiffs because, while Plaintiffs had indeed established a continuous chain of title in the copyright, use of the routine by Defendants was fair use. Plaintiffs appealed.

 

The use of the routine is not protected by fair use

Plaintiffs had argued that the play had not added anything new to the original routine as Jason merely recited it without transforming it, and that therefore is was not fair use. The Second Circuit agreed.

When examining whether a particular use of a work protected by copyright is fair, courts use the four factors enumerated by Section 107 of the Copyright Act: the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used and the effect of the use on the market.

Judge Daniels had found, when examining the purpose and the character of the use of the routine in the play, that it was transformative enough to be fair use. He had cited the Second Circuit Cariou v. Prince case, where the Court had found that Richard Prince’s use of Cariou’s photographs to create new works was transformative enough to be fair use because Prince had “employ[ed] new aesthetics with creative and communicative results distinct from Cariou’s” and also had incorporated “new expression” in his works.

For Judge Daniels, “the performance through the anti-hero puppet… create[d] new aesthetics and understandings about the relationship between horror and comedy that are absent from Abbott and Costello’s… routine.” He further explained that “[t]he contrast between Jason’s s seemingly soft-spoken personality and the actual outrageousness of his inner nature, which he expresses through the sock puppet, is, among other things, a darkly comedic critique of the social norms governing a small town in the Bible Belt.”

The Second Circuit found this reasoning to be “flawed in what it identifies are the general artistic and critical purpose and character of the [p]lay” and that the court did not explain how “extensive copying of [the] routine was necessary to this purpose.” Section 107 enumerates the uses which are fair: criticism, comment, news reporting, teaching, scholarship and research. For the Second Circuit, the use of the routine “does not appear to fit within any of these statutory categories.”

Even though the Second Circuit had held in Cariou that it is not essential that a use comments on the original work to be transformative, it also held that a use is transformative only if it alters the original work with “new expression, meaning, or message.” For the Second Circuit, this was not the case as the routine had not been altered in the play, but used for what it is, a famous classic routine, instantly recognizable by the audience. The Court quoted its own On Davis v. Gap, Inc. case which explained that a use is not transformative if it used the original “in the manner it was made to be” used. The Court pointed out that it was necessary that the routine is not altered, so that the audience can recognize it and laugh when Jason pretends he created it. For the Second Circuit, the use of the routine is  a mere “McGuffin,” an event which sets the plot, in that case informing the audience that Tyrone the sock puppet can speak unprompted and has a foul mouth. However, not “any new dramatic purpose justif[ied] [d]efendants’ extensive copying of the [r]outine.” As the use was not transformative, the purpose and character of the use factor weighed in Plaintiff’s favor.

The Court also found that the nature of the work factor weighed in favor of Plaintiffs, as the routine was created to entertain the public, and thus is “at the heart of copyright’s intended protection.” It dismissed Defendants’ argument that use of the routine was justified by the need to use “an instantly recognizable “cultural” touchstone in the relevant scene” because Defendants could have used another cultural touchstone, such as “inventing the Internet” or “out-swimming Michael Phelps.” These examples are not convincing as they are not examples of cultural touchstones performed by a duo, a format which was needed in a play about a man and his evil sock puppet.

The amount and substantiality of the use factor weighted “strongly” in favor of Plaintiffs as the copying of the original work was “substantial” and because, while even a substantial use can be fair use “if justified,” it was not the case here. The fourth factor, the effect on the potential market, also did weigh in favor of Plaintiffs because there is a licensing market for the routine.

However, even though all of the fair use factors weighed in favor of Plaintiffs, the Second Circuit nevertheless affirmed the dismissal of the case because Plaintiffs failed to prove they own a valid copyright in the routine.

 

Plaintiffs do not own the copyright in Who’s on First

Judge Daniels had found that Plaintiffs had proven a continuous chain of title in the copyright of the routine, but the Second Circuit disagreed.

The routine was first performed in 1938 on the radio. It was also performed by Abbot and Costello in their 1940 One Night in the Tropics movie (Tropics) and in 1945 in their Naughty Nineties movie. As both the routine and the two movies were created before January 1, 1978, date of the entry into force of the 1976 Copyright Act, they are subject to the 1909 Copyright Act, which only protects published or registered works. A work was protected for twenty-eight years under the 1909 Copyright Act, if it was published with the required copyright notice. However, public performance of a work was not a publication under the 1909 Copyright Act, Silverman v. CBS Inc. (SDNY 1986), and therefore the routine was not first published in 1938, but in 1940. Unpublished and unregistered works were protected indefinitely by common law, but became automatically protected by copyright on January 1, 1978.

In November 1940, Abbot and Costello allegedly assigned their rights in the routine as performed in the two movies to Universal Pictures Company (UPC), which registered the copyright of Tropics in 1940 and of The Naughty Nineties in 1945, and timely renewed both copyrights. As the common law copyright of the routine as first performed in 1938 was never assigned, Abbot and Costello had retained it. They registered a copyright for “Abbott and Costello Baseball Routine” in 1944, but did not renew it and thus the work is in the public domain since 1972.

Plaintiff did not rely on the 1944 registration to claim they own the copyright, but rather in an agreement made in 1984 where UPC quitclaimed all of its rights in the performance of the routine to Abbott &Costello Enterprises (ACE), a general partnership formed by the comedians’ heirs. ACE was later dissolved and copyrights’ ownership were divided among Abbot and Costello heirs.

Defendants had argued that the routine was in the public domain because only Abbott and Costello could have renewed the copyright of the movies, but Plaintiffs argued that UPC had the authority to do it because the comedians had assigned ownership of their common law copyright in the routine to UPC, the routine had merged into Tropics, and the copyright was transferred to ACE by the quitclaim.

For Judge Daniels, the 1940 registration of the One Night movie by UPC in 1940 “extinguished whatever common law copyright Abbott and Costello had in the unpublished version of the [r]outine.” However, the Second Circuit found that Abbott and Costello had merely intended to license the use of the routine to UPC, not to assign their common law copyright in it. The Second Circuit did not interpret the agreement as being a work-for-hire agreement either, because the routine had already been created in 1938 and thus could not have been created at UPC’s “instance and expense” as required it to be a work for hire, Playboy Enters., v. Dumas (2d Cir. 1995). The routine had not merged in the movies either, as “authors of freestanding works that are incorporated into a film… may copyright these ‘separate and independent works’”, 16 Casa Duse, LLC v. Merkin (2d Cir. 2015) and the routine is such a freestanding work.

When is the output of a copyright-protected software program itself protected by copyright?

By Marie-Andrée Weiss

When is the output of a copyright-protected software program itself protected by copyright? This is a case of first impression for any court of appeals which is pending at the Ninth Circuit. The case is Design Data Corporation v. Unigate Enterprise, Inc., 14-16701. On 17 October, 2016, counsels for both parties presented their arguments at the Ninth Circuit to a three-judge panel, composed of Judge Consuelo M. Callahan, Judge Michael Daly Hawkins and Judge Andrew D. Hurwitz.

Design Data Corporation (DDC) has created a computer aided design (CAD) steel detailing software, SDS/2, which can be used to draw 2-D and 3-D drawings and models of structural steel components. The designs can only be viewed through the SDS/2 software, the SDS/2 Viewer software, and in electronic images exported from SDS/2. Unigate Enterprise (UE) is a company which provides steel detailing CAD files to its clients in the U.S. It does not produce the files itself, but instead outsources their production to contractors in China.

DDC believed that UE had used the SDS/2 software illegally. Representatives of DDC visited UE’s office in August 2012 and UE allowed the representatives to search UE’s computers and copy some files. They found a folder containing installation files for SDS/2 and three patch files which can be used to circumvent SDS/2’s licensing requirement. Defendants admitted during discovery that one of its co-owners downloaded a copy of SDS/2 to an external hard drive, but that she believed this copy to be a free demonstration copy of the software, and that she did not install the software, nor did she try to use it. UE admitted that SDS/2 had been used to create files and drawings in five of its projects, but argued that they were made by contractors in China.

DDC sued UE for direct copyright infringement, claiming it had illegally downloaded a copy of the software and also had copied files and images which are output of the SDS/2 software protected by copyright. It also sued UE for contributory copyright infringement claiming that UE imported from China infringing files and images generated by SDS/2 in violation of 17 U.S.C. §602.

UE moved for summary judgment, claiming that merely downloading a software program without installing or using is de minimis copying and that therefore not direct infringement. UE also argued that it cannot be held liable for contributory infringement, as “wholly extraterritorial acts of infringement cannot support a claim under the Copyright Act even when authorized by a party in the United States,” quoting Subafilms, Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088, 1092, 1995 (9th Cir.1994).

On August 6, 2014, Judge William Orrick from the Northern District Court of California granted Defendants’ motion for summary judgment both for contributory infringement and direct infringement. Defendants had correctly argued that they could not be sued for contributory infringement. Judge Orrick also found that downloading a copy of SDS/2 “without any evidence that the copy was installed or used… amount[ed] at most to a de minimis ‘technical’ violation that is not actionable as a matter of law.”

DDC appealed to the Ninth Circuit, asking the Court to reverse summary judgment. DDC’s counsel argued before the Ninth Circuit that UE did “consciously implement a business model… that was designed to exploit a breach in the copyright protection afforded to software developers by shifting its infringement of [Plaintiff’s software] overseas.” However, as UE cannot be sued for contributory infringement, DDC argued instead that UE directly infringed its copyright by downloading the software and by reproducing the output of the software program which is protected by copyright.

 

Direct infringement: did UE violate copyright law by copying DDC’s software?

Judge Callahan and Judge Hurwitz were both troubled by the fact that UE had advertised on its site that it used the SDS/2 software. UE’s counsel answered that UE was counting on contractors to use it, but admitted that UE had never asked DDC if it was indeed true that the contractors were legally using the software. UE admitted it had downloaded the software, and therefore copied it, but argued it had not used it and therefore this de minimis copying was not actionable. DDC argued that, by downloading the software, UE had copied the entire SDS/2software code and therefore the copying was not de minimis.

Judge Hurwitz asked UE’s counsel whether the de minimis doctrine should apply each time someone copies a work protected by copyright, even if he does not use it, and the UE’s counsel answered in the affirmative.

 

Direct infringement: is the output of the software protected by copyright?

DDC argued also that UE has directly infringed the SDS/2 software because it has copied the steel component designs which are a visual display of the software, and are as such output of the software also protected by copyright. For Judge Hurwitz, this is the “really interesting issue in this case.” However, not every output of a software is protectable by copyright. The question of when the output of a computer program is protectable by copyright has not yet been answered by any court which makes it an issue of first impression.

Software’s source code, which is human-readable, and its object code, which is machine-readable, are both protectable by copyright as literary works, if they are original and fixed in a tangible medium of expression. However, the functional elements of the software, such as its systems or procedures, are not protected by copyright since copyright law does not protect process, system, and method of operation. Judge Orrick had quoted Altai and found that the “job files” and the other documents produced by the SDS/2 software “are data not covered by copyright”

Courts often use the abstraction-filtration-comparison test, first coined by the Second Circuit in Computer Assocs. Int’l v. Altai, to assess which parts of a software program are protected by copyright. The Second Circuit specified that the decision “[did] not control infringement actions regarding categorically distinct works, such as… products of computer programs.” There is no case where a court used the abstraction-filtration-comparison test to determine whether the output of a software has been infringed.

Judge Hurwitz asked DDC’s counsel what makes in her view a particular output protectable by copyright. She offered a test: an output would be protected by copyright if one can tie some sort of creative expression that is included in that output as having emanated from the software. Judge Hurwitz asked her what percentage of creative expression would trigger copyright protection. What if 80% of the creative expression originates from the software user? She conceded that in this case the output would “probably not” be protected by copyright. Judge Callahan found this test too complicated.

UE’s counsel then proposed another test. The output would be protected to the extent that it includes creative expression that has been fixed in the software and embodied in the output. However, if there is additional creative content added to the output by a user, and therefore the proportionality is too imbalanced and weights too heavily in favor of the user, it could be found under the abstract-filtration-comparison test not original and thus not protected. Judge Hurwitz said, that while there is no case addressing the issue, some seem to suggest that the output of a software program may be, in some instances, so substantially similar to the software program that it deserves protection. Judge Hurwitz noted, however, that plaintiff must show substantial similarity.

DDC’s counsel argued that there is not only substantial similarity, but even identity, because, if one inputs the same data into the software, one gets the same design out of it, in an expression which is fixed. But Judge Callahan quoted paragraph 721.6 of the Compendium of U. S. Copyright Office Practice about the “Relationship Between a Computer Program and a Work Created with a Computer or a Computer Program,” which explains that “ownership of the copyright in a work is distinct from ownership of any material object that may be used to create that work.” Judge Callahan asked DDC’s counsel whether this was relevant to the case and she answered that DDC owns the copyright in the software and also owns a copyright in “unnecessary creative expression that accompanies that.” She specified that DDC is not arguing that it owns the copyright in the entire design of the component, only in the expression that accompanies it. DDC considers this to be direct infringement, as it is a derivative work of the component of the software image files.

On rebuttal, Judge Hurwitz asked again DDC’s counsel to explain the relationship between both the creative input of the software and the creative input of its users, and how and when the ratio of these two creative inputs would trigger, or not, the copyright protection of the output. DDC’s counsel answered that DDC is focused on expressive content that is not in the actual design of the component, such as the font or the colors used, the shape of a comment box, or the placement of certain components around the design which appear in the design file, but which are not the design itself. She argued that these elements must be identified using the abstraction-filtration-comparison test to find out whether some elements are protected by copyright, but conceded that there was not any computer software case which used this test.

The exhaustion rule does not authorize the resale of the back-up copy of a computer program

By Marie-Andrée Weiss

The Court of Justice of the European Union (CJEU) ruled on 12 October  2016 that while the original acquirer of a software can resell his used copy of the program because the exclusive rights of the copyright holder have been exhausted by the first sale, reselling a back-up copy of the program is subject to the authorization of the rightsholder. The case is Ranks and Vasiļevičs, C-166/15.

Mr. Ranks and Mr. Vasiļevičs (Defendants) sold online, from 28 December 2001 to 22 December 2004, more than 3,000 back-up copies of Microsoft computer programs protected by copyright, for an amount evaluated at  264,514 euros. Defendants claimed to have bought these copies from the original owners. However, some of these programs were copies, which Defendants claimed had been legally made by the original owners after the original programs had been damaged, destroyed or lost.

Defendants were charged by a Latvian court for selling unlawfully objects protected by copyright and found guilty. On appeal, the Criminal Law Division of the Riga Regional Court requested a preliminary ruling from the CJEU, asking the Court (1) if the acquirer of a copy of a computer program stored on a non-original medium can resell this copy, in such a case that the original medium of the program has been damaged and the original acquirer has erased his copy or  no longer uses it, because in such case the exclusive right of distribution of the right holder has been exhausted, and (2) if the person who bought the used copy in reliance of the exhaustion of the right to distribute can sell this program to a third person.

The Latvian court cited Directive 2009/24 in its request. However, as the facts took place before the Directive entered into force on 25 May 2009 and repealed Directive 91/250, the CJEU considered that these two questions had to be interpreted under the equivalent provisions of Directive 91/250, that is, its articles 4(c) about the first sale of computer program doctrine, and its articles 4(a), 5(1), and 5(2) about the exceptions to the exclusive right of reproduction of a computer program.

 

The exhaustion right protects the right of the original acquirer to resell his copy of the program

Article 4(a) of Directive 91/250 and Article 4.1(a) of Directive 2009/24 give the rightsholder the exclusive right to reproduce a computer program, by any means whatsoever, whether temporarily or permanently. That right is, however, exhausted, under Article 4(c) of Directive 91/250 and Article 4.2 of Directive 2009/24, if the copy of the program has been placed on the market in the European Union (EU) by the rightsholder or with her consent. The CJEU held in UsedSoft that the right of distributing a computer program is thus exhausted regardless of whether it is a tangible or an intangible copy of the program (UsedSoft paragraphs 55 and 61) and specified that “sale,” within the meaning of Article 4(2) of Directive 2009/24, includes purchasing the right to use a copy of a computer program for an unlimited period (UsedSoft, paragraph 49).

The CJEU noted that “the holder of the copyright in a computer program who has sold, in the European Union, a copy of that program on a material medium, such as a CD-ROM or a DVD-ROM, accompanied by an unlimited licence for the use of that program, can no longer oppose the resale of that copy by the initial acquirer or subsequent acquirers of that copy, notwithstanding the existence of contractual terms prohibiting any further transfer” (Ranks and Vasiļevič paragraph 30).

Reselling a back-up copy of a computer program is subject to the authorization of the rightsholder

However, the issue in our case was not about the right of the original acquirer to resell his used copy of a computer program, but instead whether the right of exhaustion gives a person who acquired, either from the original acquirer or from a subsequent acquirer, a used copy of a computer program stored on a non-original material medium, the right to resell that copy.

Microsoft argued that a non-original copy of a computer program can never benefit from exhaustion of the right of distribution and thus cannot be sold by the user without the rightsholder’s authorization. Defendants argued that even non-original copies benefit from the exhaustion right, if, as stated in UsedSoft, the right holder gave the acquirer of a program, in return for a fee corresponding to the economic value of the work, the right to use the copy for an unlimited period, and if the original acquirer had made every copy in his possession unusable at the time of the resale of the program.

Advocate General Saugmandsgaard wrote in his 1 June 2016 Opinion of the case that article 4(c) of Directive 91/250 must be interpreted as meaning that the right holder’s exclusive right of distribution is infringed if the user makes a copy of the computer program and then sells it without the right holder’s authorization, even if the original medium has been damaged and the seller makes all of his copies unusable (Opinion at 25 and 54). The CJEU followed the opinion of its AG.

While article 5(2) authorizes making a back-up copy of the computer program, it may only be done “to meet the sole needs of the person having the right to use that program” and, therefore, such copy cannot be made to resell the computer program to a third party, even if the original copy has been destroyed, damaged or lost (Ranks and Vasiļevič paragraph 43).

The CJEU had held in UsedSoft that the exclusive right of distribution of a computer program is exhausted after the first sale of the program in the EU. However, UsedSoft could be distinguished from this case as Mr. Ranks and Mr. Vasiļevič were not the original acquirer of the computer programs, and instead had been selling copies of computer programs “on non-original material media.” There was “nothing to suggest that they initially purchased and downloaded those copies from the rightholders website”( Ranks and Vasiļevič paragraph 51).

A back-up copy of a computer program cannot be transferred to a new acquirer without the authorization of the copyright holder, even if the original copy has been damaged, destroyed or lost (Ranks and Vasiļevič paragraph 44). For the CJEU, Mr. Ranks and Mr. Vasiļevič thus indeed possessed infringing copies of a computer program, which is forbidden by article 7.1(b) of Directive 91/250 and Directive 2009/24, and sold them, which is forbidden by article 7.1.(a) of Directive 91/250 and Directive 2009/24.

This case restricts the scope of the digital resale market.

McFadden vs. Sony Entertainment – ECJ prohibits anonymous open WLANs

By Maria Sturm

On 15 September 2016 the ECJ presented its judgement in the case Tobias McFadden vs. Sony Entertainment Germany. The judgement is interesting for two reasons: 1) it clarifies some questions about the liability of WLAN providers and 2) the judges deviated from the opinion of advocate general Szpunar, delivered on 16 March 2016.

In this case, the ECJ had to give a preliminary ruling according to Article 267 TFEU in a case brought before the district court I in Munich. Mr. McFadden operated an anonymous access to a wireless local area network (WLAN) free of charge in the vicinity of his business of selling and leasing lighting and sound systems. He did so, because he wanted to draw the attention of customers of the shops nearby. Through his open WLAN  a musical work owned by Sony Entertainment Germany was made available to customers, but without Sony’s consent.

The district court of Munich had several questions related to EU law which it could not answer without the prior interpretation of the ECJ. So it requested the Court to give a ruling according to Art. 267 TFEU. The most important explanations of the ECJ covered three areas:

 

  1. Can a service free of charge still be an economic activity?

Making a network available to the general public free of charge can be an information society service according to Article 12 (1) of Directive 2000/31 (Directive on electronic commerce) if it is provided for purposes of advertising. In the case in question, Mr. McFadden offered the free WLAN to draw the attention of passers-by to his shop. This is important, because the relevant directives only cover economic activity. However, we talk about economic activity in the context of EU law only when the service provided is not free of charge. Here, the ECJ sees an indirect remuneration via advertising, and therefore held that this is economic activity.

 

  1. How far goes the limitation of liability of access providers according to Directive 2000/31?

Article 12 (1) of Directive 2000/31 limits the liability of access providers. Therefore, if its preconditions are fulfilled, the provider does not have to compensate rightsholders for the infringement of their rights. That includes also reimbursement of the costs of giving formal notice and court costs. However, rightsholders may still claim injunctive relief against the continuation of the infringement against the provider. And in this case, they can also claim the costs of giving formal notice and court costs. Costs of giving formal notice and court costs are accessory claims. They can only be granted, if the main claim is successful. Without liability, no accessory claims to the liability claim exist. But if there is an injunctive relief claim, the accessory claims to the injunctive relief claim can be enforced. The ECJ made this clear distinction in interpreting Article 12 (1), because before how far the provider liability limitation extended was in dispute.

 

  1. How can an equilibrium between the different basic rights with regard to the internet be achieved?

The ECJ had to decide about an equilibrium of three different basic rights affected in the case of the infringement of copyrights via the internet: first, there is the right to intellectual property of the rightsholder, second, the provider has a right to entrepreneurial freedom, and third, the user has a right to access free information. Closing internet access completely would of course protect the rightsholder’s copyright most effectively, but would also excessively harm the two other rights. One could require the access provider to monitor all of the information transmitted. However, this measure would harm the access providers right to entrepreneurial freedom as it would require too much time and effort. Apart from that, this measure is already forbidden by Art. 15 (1) of Directive 2000/31. According to the advocate general, securing the WLAN with a password would harm the fair balance of the affected rights, too. In contrast, the ECJ decided that the only feasible measure would be to protect the WLAN via a password. This measure harms the entrepreneurial freedom and the right to free information to a smaller degree and offers at least some protection to the copyright, because the access is no longer anonymous and thus may deter possible  infringers. However, concerning this last point we must keep in mind another consideration: the McFadden case was a preliminary ruling. This means that the ECJ only answered the questions the district court of Munich posed and the district court of Munich only asked, if the password solution was admitted by EU law. However, there are other technical measures, e.g. the blocking of certain ports[1], which might have the same effect and might offer an equilibrium between the affected rights, too.

[1] In the internet protocol suite, a port is an endpoint of communication in an operating system.