Possible Prison Sentences for Operators of Illegal Movie Downloading Website

Earlier this week, the U.S. Department of Justice released its announcement that two individuals from the Northwest, Joshua David Evans of North Bend, Washington and Jeremy Lynn Andrew, of Eugene, Oregon, pleaded guilty to criminal copyright infringement for their participation in the NinjaVideo.net website. 

NinjaVideo.net was “a website that provided millions of users with the ability to illegally download infringing copies of copyright-protected movies and television programs in high-quality formats,” according to DOJ releases.  Hundreds of television shows and movies were available for downloading on the website, including movies that were still playing in theaters and some that had yet to be released in theaters.  Many downloads were available for free, but even more content was available to website visitors who donated at least $25.  NinjaVideo.net also generated income from online advertising.  It generated a total of $505,000 in income during its two and one-half years of operation.  It was shut down by law enforcement in June 2010.

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Wall Street Firms Cannot Protect Business Model with “Hot News” Misappropriation Claim

Fly, despite the Firms’ understandable desire to protect their business model, is breaking it.

(Opinion pdf page 60).

Financial services firms Barclays Capital, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., and Morgan Stanley & Co., Inc., (the Firms) sued news aggregator (pdf) Theflyonthewall.com (Fly) for copyright infringement and for committing the New York state law tort of “hot news” misappropriation.  Fly did not dispute the copyright claims.  The district court ruled in favor of the Firms on the “hot news” misappropriation claim.  On appeal, the Second Circuit Court of Appeals reversed the district court’s ruling on that issue.

The Parties.  The Firms generate research reports on publicly traded companies, employing hundreds of research analysts and spending hundreds of millions of dollars on these activities each year.  Before the market opens in the morning, the Firms release their Recommendations generated by their research activities to a select group of people.  The Firms believe that investors are more likely to place a trade with a Firm if the investor receives that information directly from the Firm.  “They assert that the timely, exclusive delivery of research and Recommendations therefore is a key to what they frequently refer to as their ‘business model.”  (Opinion pdf pages 12-13). 

Fly is a news aggregator, defined by the court as “a website that collects headlines and snippets of news stories from other websites.”  (Opinion pdf page 13).  Fly offers a subscription service providing early access to investors who are not authorized by the Firms to receive their Recommendations.  Fly compiles information and does not perform any independent analysis.  Fly views itself as a source of breaking financial news.  It continually updates its online newsfeed between 5:00 a.m. and 7:00 p.m. on market days.  Fly obtains its information from news outlets, chat rooms, IM blasts and conversations with its industry contacts.  The Firms view Fly’s activities as a threat to their business model and filed suit against it.

Copyright Preemption in generalPreemption is the principle that federal laws made pursuant to the U.S. Constitution are “the supreme law of the land” and that federal law displaces state law when there is a conflict between the two.  My blog post Ninth Circuit Upholds Script Writer’s Implied Contract Claim under California State Law discusses preemption as viewed by the Ninth Circuit, which is slightly different from the Second Circuit’s discussion.

Title 17 U.S.C. § 301, enacted in 1976, sets forth a two-part test to determine whether a state-law claim is preempted by the Copyright Act, with a further ‘extra elements’ exception we discuss below. Such a claim is preempted (i) if it seeks to vindicate ‘legal or equitable rights that are equivalent’ to one of the bundle of exclusive rights already protected by copyright law under 17 U.S.C. § 106 — the ‘general scope requirement’; and (ii) if the work in question is of the type of works protected by the Copyright Act under 17 U.S.C. §§ 102 and 103 — the ‘subject matter requirement.’

(Opinion pdf pages 36-37).

The Second Circuit in Fly discussed the three prong “extra-element” test from the NBA case described below, declined to apply the test, but did not articulate its own test.

What is “hot news”?  The court illustrated what “hot news” is through its discussion of two other hot news cases:  International News Service v. Associated Press (INS) and National Basketball Association v. Motorola, Inc. (NBA).

In INS, AP investigated and reported the news.  INS took news facts from AP bulletins and wired them to INS papers, representing those facts as resulting from its own work, when it did not gather the facts or independently investigate them.  The U.S. Supreme Court “held that INS’s conduct was a common-law misappropriation of AP’s property.”  (Opinion pdf page 41).  The INS court indicated that the facts gathered by AP were the news of the day and were not copyrightable.  The decision was based on unfair competition law and not on copyright law.

The INS court defined the ‘hot news’ tort in part as ‘taking material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and appropriating it and selling it as the defendant’s own.’

(Opinion pdf page 61).

In NBA, one of the defendants gathered information on NBA games as they were occurring, including score changes, ball possession, free-throw bonus, the quarter and time left in the quarter.  These statistics were transmitted to pagers owned or leased by Motorola almost simultaneously with the live games.  The NBA sued Motorola and the statistics gathering firm, claiming hot news misappropriation.  The Second Circuit ruled that since the statistics firm incurred the expense of gathering its own statistics, the defendants were not free-riding on the NBA’s product and that the defendants did not misappropriate the NBA’s hot news.

Although the Second Circuit in NBA ruled that Motorola did not commit the tort of hot news misappropriation, the court set out some factors to determine when the hot news misappropriation tort has been committed.  Both the district court judge and the parties in Fly thought that the correct analysis was to apply the NBA factors.  The Second Circuit disagreed:

[I]n NBA, the Court held that the facts of that case could not support a non-preemted “hot news” claim.  Its language regarding the elements that might in some later case allow a claim to avoid preemption, and its discussion of why such an exception to preemption was narrow, were useful commentaries on the reasoning and possible implications of the Court’s holding.  But the language itself was not meant to, and did not, bind us, the district court, or any other court to subsequently consider this subject.

(Opinion pdf, footnote 32, page 54).

The Second Circuit in Fly pointed out that the NBA opinion sets out two inconsistent five-part tests and a three prong “extra element” test as further justification that those parts of the opinion cannot be the law.

Copyright Preemption applied to this case.  The court ruled that the Firms claims under the New York state law tort of “hot news” misappropriation were preempted by the Copyright Act:

  • The Firms’ reports and Recommendations are works of the type covered by 17 U.S.C. §102, i.e. original works of authorship fixed in a tangible medium of expression, fulfilling the subject matter requirement.
  • The Firms’ reports and Recommendations fulfill the “general scope” requirement because the rights in those materials may be diminished by an act that, by itself, such as reproduction, performance or distribution, would infringe an exclusive right under the Copyright Act.
  • Fly is not “free-riding” on the Firms’ efforts.

The rest of this post focuses on the court’s third point – the lack of free-riding.  Free-riding in this context is “unfair use of another’s labor, skill, and money, and which is salable by complainant for money.”  (Opinion pdf page 61).  The term “free-riding” implies acts that are inherently unfair.  Fly collects, collates and disseminates factual information.  The Firms’ Recommendations are news in and of themselves.  The court noted that Recommendation of the Firms can influence the price of a stock, at least in the short term.

The court also made the point that

In pressing a “hot news” claim against Fly, the Firms seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.

(Opinion pdf page 62).

The court summed up by stating:

We conclude that in this case, a Firm’s ability to make news — by issuing a Recommendation that is likely to affect the market price of a security — does not give rise to a right for it to control who breaks that news and how.

(Opinion pdf page 71).

The panel consisted of Judges Rosemary S. Pooler, Robert D. Sack and Reena Raggi.  Judge Sack wrote the opinion for the panel.  Judge Raggi wrote her own concurring opinion.  She agreed that the Firms’ hot news misappropriation claim was preempted by federal copyright law, but did not think the NBA five factor test should be rejected.

This case is Barclays Capital Inc. v. Theflyonthewall.com, Inc., No. 10-1372.

Apple Successfully Defends Copyright Misuse Claim

When Apple, Inc.brought a copyright infringement lawsuit against computer manufacturer Psystar Corp., Psystar claimed that Apple misused Apple’s copyrights.  Last week, the Ninth Circuit Court of Appeals upheld the district court’s ruling in Apple’s favor (pdf) on the copyright misuse claim.

Facts.  Apple’s Software License Agreement (SLA) for its Mac OS X operating system requires users to run the software only on Apple computers and expressly prohibits running the software on a non-Apple computer.  Apple registered its copyright for each version of its operating system. 

Psystar manufactured and sold computers running Mac OS X.  Psystar created a master image by imaging an Apple computer and adding some software of its own.  It shipped its computers with a copy of the master image installed and an unopened copy of Mac OS X in the box.  Psystar argued that because it purchased a copy of the Mac OS X software for every computer sold, it did not make unauthorized copies or distributions and that the Copyright Act did not apply.

Apple filed this case against Psystar in July 2008.  In response, Psystar sought a declaratory judgment of copyright misuse by Apple.  Although Apple initially claimed copyright, trademark, trade dress and state and common law unfair competition violations, Psystar’s copyright misuse defense was the major issue before the Ninth Circuit on appeal.

First Sale Doctrine.  The court discussed the first sale doctrine as a prelude to its copyright misuse discussion.  The distinction between a sale and a license was a key underlying factor in the court’s decision. 

The first sale doctrine allows owners of copies of copyrighted works to resell their copies without restriction.

(Opinion pdf page 9).

Once someone has purchased a copy of a copyrighted work, she is free to transfer that copy to whomever she pleases or publicly display that copy, without violating the copyright owner’s exclusive right to distribute under 17 U.S.C. §106(3) or to publicly display under §106(5).

17 U.S.C. §109 embodies the first sale doctrine.  Under §109(d), the first sale doctrine does not apply to “any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it.”  The copyright owner can agree to license the copy, allowing someone else to use that copy, without transferring ownership of that copy to the other person.  The first sale doctrine therefore does not apply to a license.  In Vernor v. Autodesk, Inc., the Ninth Circuit developed a three factor test to distinguish between a software licensee and an owner of a copy:

We hold today that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.

(Opinion pdf page 11).

The court ruled that it was clear from Apple’s licensing agreement that purchasers of Mac OS X software were licensees of the software, not owners.

Copyright Misuse.

As defined by the Ninth Circuit,

Copyright misuse involves restraining development of competing products.

(Opinion pdf page 14).

The purpose of the copyright misuse defense is to prevent copyright holders “from leveraging their limited monopoly to allow them control of areas outside the monopoly.”  (Opinion pdf page 13). 

The court indicated that “[a] software licensing agreement may reasonably restrict use of the software as long as it does not prevent the development of competing products.”  (Opinion pdf 15-16).

Psystar argued that Apple’s SLA impermissibly extended the reach of Apple’s copyright by requiring purchasers to run their copies of the Mac OS X only on Apple computers and therefore amounted to copyright misuse.

The court ruled that Psystar’s copyright misuse defense failed because it was an attempt to apply the first sale doctrine to a valid licensing agreement.  The court also indicated that Apple’s licensing agreement did not prevent others from developing their own computers or operating systems and appropriately attempted to prevent infringement and to control the use of the copyrighted material.

This case is Apple Inc., v. Psystar Corporation, No. 10-15113.