Northwest Business Litigation

A safe harbor protects filesharing websites from claims of copyright infringement

The Ninth Circuit recently measured the scope of a safe harbor for service providers accused of copyright infringement, holding that it's broad enough to protect operators of filesharing websites. In UMG Recordings, Inc. v. Shelter Capital Partners LLC, the Ninth Circuit interpreted and clarified the part of the Digital Millenium Copyright Act that created the safe harbor, 17 U.S.C. § 512(c).

Defendant Veoh Networks maintained a website that allowed users to share videos with other users. To make the videos accessible, Veoh Networks automatically made four different copies of each uploaded file in different formats. Veoh Networks acknowledged that some users were able to download copyright-protected videos despite its efforts to prevent infringement. These efforts included blocking access to infringing material, requiring users to agree not to infringe on any copyright, filtering uploaded files for infringing videos, and terminating users who repeatedly violated the terms of use. Based on the acknowledged instances of unauthorized downloading, Universal Music Group (UMG) sued Veoh Networks for copyright infringement, and Veoh Networks asserted the service provider safe harbor as an affirmative defense.

UMG offered three reasons for denying to Veoh Networks safe harbor protection. First, UMG argued that the automatic copying of uploaded files to enable access fell outside the plain meaning of "infringement of copyright by reason of the storage [of material] at the direction of a user." (emphasis added). The Ninth Circuit disagreed, holding that the service provider safe harbor encompasses the access-facilitating processes that automatically occur when a user uploads a video to Veoh Networks.

Second, UMG insisted that Veoh Networks had actual knowledge of infringement or was aware of facts from which infringing activity was apparent, in violation of specific provisions of the safe harbor. Again, the Ninth Circuit rebuffed UMG's argument, holding that a service provider must have specific knowledge of particular infringing activity to have actual knowledge. It is not enough that a service provider has general knowledge that its services could be used to share infringing material. With respect to the facts from which infringing activity was allegedly apparent, the Ninth Circuit held that the red flags were insufficient because a service provider has no duty to determine whether stored materials are actually infringing.

Finally, UMG argued that Veoh Networks was ineligible for the safe harbor because it received financial benefit directly attributable to the infringing activity, which it had the right and ability to control. The Ninth Circuit affirmed the District Court and held that the "right and ability to control" under the safe harbor requires control over specific infringing activity the service provider knows about.

With this opinion, the Ninth Circuit has reassured the operators of filesharing websites that the safe harbor in the Digital Millenium Copyright Act is real.

Ninth Circuit opens a potential circuit split over the copyright misuse defense

The Ninth Circuit recently rejected a small computer manufacturer's copyright misuse defense against Apple's claim that it had infringed on Apple's copyright in Mac OS X. In Apple, Inc. v. Psystar Corp., the Ninth Circuit attempted to distinguish the Fifth Circuit's acceptance of the copyright misuse defense in Alcatel USA, Inc. v. DGI Techs., Inc. Careful review of the two opinions reveals they are more similar than the Ninth Circuit has let on. It remains to be seen whether the circuit courts will harmonize Apple and Alcatel or whether they will split on the copyright misuse defense.

A copyright holder has a limited monopoly that it can protect by suing persons who infringe on its copyright. The copyright misuse doctrine is a defense against copyright infringement. The purpose of the doctrine is to prevent a copyright holder from leveraging its limited monopoly to areas outside the monopoly. With respect to software, a copyright holder does not misuse its copyright through licensing  as long as it does not prevent the development of competing products. The plaintiffs in both Apple and Alcatel imposed restrictions on the use of their software. The question was whether these restrictions prevented the development of competing products.

In Alcatel, DSC sold switches and expansion cards to long-distance telephone service providers that enabled the providers to route calls through their networks. These switches ran on software in which DSC held a copyright. To increase network capacity, the service providers could buy expansion cards, but the expansion cards also ran on DSC's copyrighted software. DSC licensed this software to its customers under the conditions that they not copy the software and that they use the software only in conjunction with equipment manufactured by DSC. In essence, DSC was using its copyright to monopolize the market in expansion cards. It is important to note that DSC was not preventing other switch manufacturers from developing their own software or selling their own switches. Nonetheless, the Fifth Circuit upheld the jury's finding that DSC's licensing agreement constituted copyright misuse.

The Ninth Circuit, in Apple, rejected the copyright misuse defense under circumstances that bear many similarities to the facts in Alcatel. Psystar is a small computer manufacturer that makes Apple clones. To avoid blatant copyright infringement, Psystar includes a shrink-wrapped copy of Mac OS X with each computer it sells. Like the licensing agreement in Alcatel, Apple restricts the use of Mac OS X to hardware manufactured by Apple. The Ninth Circuit held that Apple's licensing agreement does not constitute copyright misuse because Mac OS X was designed to operate on Apple computers and the licensing agreement does not prevent competitors from developing their own computers or operating systems.

The Ninth Circuit attempted to distinguish Alcatel by noting that DSC's licensing agreement effectively prohibited its licensees from using any competing expansion cards, whereas Apple's license does not restrict competitors from developing their own software or using non-Apple components with Apple computers. According to the Ninth Circuit, Apple's license simply limits the use of Apple's software to its own hardware.

This distinction does not hold up under scrutiny. DSC, like Apple, had a licensing agreement that required its customers to use its software on only its products. In addition, DSC did not prevent competitors from developing competing switches and software. In fact, many of DSC's customers were dual-sourced, meaning they bought switches from DSC and one of DSC's competitors. It is difficult to understand how DSC misused its copyright while Apple did not. It will be interesting to see whether the Fifth and Ninth Circuits attempt to harmonize the two cases or whether they turn this inconsistency into a full-blown circuit split.

Ninth Circuit reins in trademark infringement liability for keyword bidding

The Ninth Circuit this week cast doubt on whether an advertiser that uses the name of a competitor's product in keyword advertising is liable for trademark infringement.  In Network Automation, Inc. v. Advanced Systems Concept, Inc., the Ninth Circuit vacated a preliminary injunction preventing defendant from purchasing the name of plaintiff's product as a keyword to display sponsored ads. The court expressed skepticism about whether such trademark use creates consumer confusion, which is the essence of trademark infringement.   

Plaintiff Network Automation, Inc. (Network) and defendant Advanced Systems Concepts, Inc. (Systems) are competitors.  Systems markets software under the trademark ACTIVEBATCH.  Network purchased the keyword ACTIVEBATCH from Google AdWords in order to display a sponsored ad for Network's products when users searched the term ACTIVEBATCH.  The district court found that this use likely created initial interest confusion -- meaning that defendant used plaintiff's mark in a manner calculated to capture intial consumer attention even though no actual sale is made.  On that basis, the district court granted injunctive relief.   

The Ninth Circuit rejected that analysis, emphasizing that the owner of the mark must demonstrate "likely confusion, not mere diversion."  To determine the likelihood of confusion, the court applied the Sleekcraft factors, of which one is the degree of "consumer care."  According to the court, the degree of consumer care on the Internet is greater now than in years past, as the novelty of the Internet evaporates and online commerce becomes commonplace.  That makes confusion from a competitor's keyword advertising less likely. 

The court also added as a factor to the Sleekcraft test the labelling, appearance and context of the sponsored ads.  Network's ads did not clearly identify their source, and in certain cases that may cause initial confusion.  But the surrounding context of the ads may eliminate that confusion; Google and Bing segregate sponsored ads from search results to highlight that the ads are not the result of an objective search result.  Because the district court failed to properly consider the heightened care of consumers and the context of the ads, the Ninth Circuit ruled that the district court abused its discretion in granting injuctive relief.    

 

Copyright law won't bar resale of promotional CDs

In UMG Recordings, Inc. v. Augusto, the Ninth Circuit earlier this month held that a music company can't prevent resale of CDs it distributed for free, even though the CDs bore labels saying they were distributed for promotional purposes and not for sale.  Plaintiff UMG is a music company that sends promotional CDs to music critics and radio programmers.  Defendant Augusto was not a recipient of the CDs, but he nevertheless obtained a number of them and offered them for sale on eBay.  UMG sued for copyright infringement, contending that the restrictive label on the CDs granted only a license and prevented resale.  The Ninth Circuit disagreed, holding that the promotional distribution was a "sale" for purposes of copyright law, and once plaintiff transferred title it could not prevent re-sale.  The court applied the "first sale" doctrine, which provides that, once a copyright owner places a copyrighted item in the stream of commerce, it cannot prevent resale of that copy.

Ninth Circuit holds that software license may limit right to re-sell

Last week the 9th Circuit held that, if a software manufacturer licenses rather than sells its software, and if a licensee sells the software outside the restrictions of the license, copyright law prevents the sale of the software by the subsenquent purchaser.  The result in the case turns on the interpretation of the first-sale doctrine, and on the distinction between sale and license of a copyrighted work.

In Vernor v. Autodesk, Inc., the court found in favor of Autodesk, a manufacturer of computer-aided design software, and against an individual who sought to sell on eBay copies of Autodesk software that he purchased from one of Autodesk's direct customers.  The Autodesk license agreement prohibits transfers by licensees.  Vernor, the thwarted eBay seller, argued that he was protected by the first-sale doctrine, which provides that the seller of a copyrighted work may not place conditions on subsequent sales. 

The Ninth Circuit held that the first-sale doctrine applies only when the copyright owner sells the copyrighted work, and not when it licenses the work.  According to the court, the transferee of a copy of a copyrighted work is a licensee if the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use restrictions.  In this case Autodesk's transfer to its direct customer was a license and not a sale, and the subsequent eBay sale was an infringement of Autodesk's rights.

Ninth Circuit rules in favor of pro se defendants' use of Lexus mark in domain names

On-line auto brokers triumphed over Toyota last week when the Ninth Circuit Court of Appeals approved of the use of the Lexus trademark in their domain names.

Toyota Motor Sales USA is the exclusive distributor of Lexus vehicles in the United States and guardian of the Lexus mark.  Independent auto brokers used the Lexus mark in domain names "buy-a-lexus.com" and "buyorleaselexus.com."  This and other conduct by the brokers prompted Toyota to sue for trademark infringement and to seek an injunction to prevent use of the Lexus mark.  The brokers defended the action pro se.  The district court, applying the eight-factor test for likelihood of confusion from AMF v. Sleekcraft Boats,  concluded that the brokers had infringed Toyota's mark.  The court then enjoined use of the Lexus mark in any domain name or metatag. 

On appeal, the Ninth Circuit in Toyota Motor Sales, U.S.A. v. Tabari reversed, holding that the brokers' use of the Lexus mark in their domain names was a lawful nominative fair use.  According to the court, consumers who use the Internet for shopping will not be confused as to the sites' sponsorhip or affiliation because they are sophisticated and accustomed to domain names that incorporate marks but are not affiliated with the trademark owner.  Moreover, even if the use of the Lexus mark leads Internet consumers searching for the official Lexus website to the brokers' sites, these consumers expect trial and error in exploring websites and know at a glance that certain websites are not what they want.  Without an affirmative suggestion of sponsorship or affiliation, the Ninth Circuit reasoned, mere use of the mark in the domain name does not cause Internet users to believe there is sponsorship by, or affiliation with, the trademark owner.   

Ninth Circuit nixes 'eVisa' trademark

"She sells sea shells by the sea shore.  That's swell, but how about Shell espresso, Tide motor oil, Apple bicycles and Playboy computers?  We consider the application of anti-dilution law to trademarks that are also common English words."

With this riff on a popular tongue-twister, Judge Alex Kozinski set the stage for the Ninth Circuit's latest opinion on trademark dilution.  Last week in Visa International Service Assoc. v. JSL Corporation, Judge Kozinski, writing for the court, ruled that eVisa, the trademark for an internet English-language tutoring service, is likely to dilute the trademark of Visa, the world's largest credit card network.  

While acknowledging that the word visa already has a common dictionary usage, the court stated "the prevalence of such non-trademark use does not undermine Visa as a trademark. . . .  [T]he introduction of the eVisa mark to the marketplace means that there are now two products, and not just one, competing for association with that word.  This is the quintessential harm addressed by anti-dilution law."  And on that basis, the court affirmed summary judgment for Visa and enjoined use of the eVisa mark.

Ninth Circuit limits recall remedy in trademark case

In a trademark infringement case, a product recall may be available as a remedy when defendant has sold products improperly displaying plaintiff's trademark.  Last week the Ninth Circuit Court of Appeals held that a court may order a product recall as part of a preliminary injunction only if the infringing product poses a substantial risk of danger to the public.

In Marlyn Nutraceuticals v. Mucos Pharma, plaintiff claimed defendant sold a dietary supplement that improperly showed plaintiff's trademark on the label.  The District Court judge issued a preliminary injunction ordering defendant to stop selling the product, and to recall the product it had already sold.  Defendant appealed the scope of the preliminary injunction, contending that it was error to require a recall of the supplements with the infringing mark. 

Adopting a test used in the Third Circuit, the Ninth Circuit held that defendant should not be required to incur the cost of a recall unless plaintiff can show the court granting the preliminary injunction that (1) the infringement was willful or intentional, (2) the risk of injury to the trademark holder is greater than the burden of the recall to defendant, and (3) the infringing activity creates a substantial risk of danger to the public.

In Marlyn, because there was insufficient evidence of a public health risk from allowing the product to remain in the hands of consumers, the District Court erroneously ordered a recall as part of the preliminary injunction.

Online video-sharing service not liable for users' copyright infringement

In an opinion issued last week, a federal district court in California dismissed a lawsuit against Veoh Networks, Inc., a self-described "Internet Television Network," which provides software and a website enabling the sharing of user-submitted video content over the Internet.  The lawsuit sought to impose liability on Veoh as a result of its website users' copyright-infringing postings on the video sharing website.

The court ruled that Veoh qualifies for the safe harbor provisions of the Digital Millennium Copyright Act, 17 U.S.C. sec. 512, because it does not “actively participate or supervise the uploading of files. . . .  Instead, video files are uploaded through an automated process which is initiated entirely at the volition of Veoh’s users.”  The court added that the evidence “demonstrates that, far from encouraging copyright infringement, Veoh has a strong DMCA policy, takes active steps to limit incidents of infringement on its website and works diligently to keep unauthorized works off its Web site.”  The court found that Veoh need not shoulder the entire burden of policing third-party copyrights on its website and risk losing its business if it cannot.  Rather, the crucial issue was whether Veoh took appropriate steps to deal with copyright infringement that took place.  Because Veoh did act appropriately under the facts, it was shielded from damages that may have resulted from its users' copyright violations.

In a similar case filed in a New York federal court, Viacom is suing Google for $1 billion, alleging that Google-owned YouTube has been illegally hosting Viacom's proprietary content.  Whether other courts adopt the analysis in the Veoh decision remains to be seen; however, the result may bolster the arguments of video-hosting services seeking the benefits of the DMCA safe harbor provisions.

Portland jury awards $304.6 million in shoe trademark case

Earlier this week a jury ordered Payless Shoesource, Inc. to pay more than $304 million in damages to Adidas America, Inc., for trademark infringement.  The federal court jury in Portland found that 267 Payless shoe styles infringe on Adidas' trademarks.  The infringing styles included shoes with 2 and 4 stripes, and not just the 3-stripe design long associated with Adidas.  The verdict, consisting of $30.6 million in actual damages, $137 million in punitive damages, and $137 million in Payless profits, is believed to be the largest ever in a trademark infringement case.

See coverage of the trial here and here.