Source: https://www.shadesofgraylaw.com/author/naomijg/page/6/
Timestamp: 2019-04-20 20:15:36+00:00

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Holden Caulfield might have called it a crumby old rule. Using more diplomatic terms, the Second Circuit concluded that the standard it has long applied to preliminary injunctions in copyright cases is “inconsistent with the ‘test historically employed by courts of equity,’” and has been abrogated by the Supreme Court’s ruling in eBay v. MercExchange. Salinger v. Colting, __ F.3d __ (2d Cir. 2010).
Salinger pitted J.D. Salinger against an author who wrote a sequel to the iconic novel “Catcher in the Rye” entitled “60 Years Later: Coming Through the Rye.” As its title implies, “60 Years Later” picks up the story of Holden Caulfield (referred to as “Mr. C”) in his 70’s, in a world that also includes Mr. C’s now-elderly author, a fictionalized Salinger. Faux Salinger is haunted by his creation and wants to bring him to life to kill him, but ultimately cannot bring himself to do so. Instead, he frees Mr C, who then reunites with his younger sister, Phoebe, and estranged son, Daniel.
Consistent with his famous and longstanding practice of refusing to authorize adaptations of his work, Salinger sued to enjoin the U.S. publication of “60 Years Later.” In July 2009, the District Court granted Salinger’s motion for a preliminary injunction, finding that (1) Salinger has a valid copyright in “Catcher” and the Holden Caulfield character; (2) “60 Years Later” does not constitute a fair use; and (3) “60 Years Later” infringes Salinger’s copyrights. Courts in the Second Circuit have long issued preliminary injunctions in copyright cases upon a finding of irreparable harm to the plaintiff coupled with a likelihood of success on the merits; significantly, courts presumed irreparable harm if the plaintiff could establish a prima facie case of copyright infringement. The District Court adhered to this standard in granting Salinger’s request for a preliminary injunction. Though the court noted that the Supreme Court had recently rejected the practice of presuming irreparable harm in the eBay case, it reasoned that eBay “dealt only with the presumption of irreparable harm in the patent law context, and thus is not controlling in the absence of Second Circuit precedent applying it in the copyright context.” Salinger v. Colting, 641 F. Supp. 2d 250, 268 n.6 (S.D.N.Y. 2009).
In considering the first factor – the probability of success on the merits – the Second Circuit cautioned courts to be “particularly cognizant of the difficulty of predicting the merits of a copyright claim at a preliminary injunction hearing,” especially where the defendant has raised a “colorable” fair use defense. With respect to the second and third factors – irreparable harm and balancing of hardships – the only relevant harm is that which occurs to the parties’ legal (commercial) interests and which cannot be remedied after a final adjudication. Both plaintiffs and defendants in copyright suits have property interests in their respective works, as well as First Amendment rights of expression (including, on the part of plaintiff copyright owners like Salinger, the right not to speak) at stake.
The Second Circuit vacated the preliminary injunction and remanded to the District Court to consider the remaining eBayfactors. It was careful to note, however, that it agreed with the District Court that Salinger was likely to prevail on the merits and would not disturb that finding. Moreover, it cautioned that its ruling “is not to say that most copyright plaintiffs who have shown a likelihood of success on the merits would not be irreparably harmed absent preliminary injunctive relief. As an empirical matter, that may well be the case, and the historical tendency to issue preliminary injunctions readily in copyright cases may reflect just that.” This caveat seems practically to invite district courts to continue to find irreparable harm as a matter of course where the plaintiff has established a likelihood of success on the merits.
Today, the parties in Viacom v. YouTube, No. 07-2103 (S.D.N.Y. filed March 13, 2007) made public redacted copies of their summary judgment motions and supporting declarations, which were originally filed under seal on March 8. The volume of materials is staggering, though not surprising in such a significant and vigorously disputed case. Whatever else one concludes about the filings, there appears to be a very thoroughly developed record here. I will be posting my reactions to the filings in the coming days, but in the meantime, here are copies of the briefs and most of the declarations (not all exhibits are included).
Section 411(a) of the Copyright Act provides that “no civil action for infringement of the copyright in any United States work shall be instituted until . . . registration of the copyright claim has been made. . .” For decades, courts have ruled and commentators (including myself) have pronounced that registration is a “jurisdictional prerequisite” to the filing of an infringement action. Yesterday, however, the Supreme Court ruled that “Section 411(a)’s registration requirement is a precondition to filing a claim that does not restrict a federal court’s subject-matter jurisdiction.” Reed Elsevier, Inc. v. Muchnick, 559 U.S. __ (2010). The case follows a recent Supreme Court trend against so-called “drive-by jurisdictional rulings,” which reflexively characterize limitations as jurisdictional in nature without conducting a thorough analysis to distinguish true jurisdictional conditions from mere claim-processing rules or preconditions to filing suit.
The Court found that the limiting phrase “that issue” refers only to a court’s authority to determine the registrability of a copyright claim which has been denied by the Register of Copyrights, even if the Register does not appear in the infringement action. Congress added this provision to relieve copyright claimants of the necessity of seeking mandamus against the Register of Copyrights before bringing suit, which had been a requirement under prior law. Thus, the use of the word “jurisdiction” in this context does not authorize a court, as a general matter, to adjudicate claims for infringement of unregistered works.
Moreover, § 411(a) explicitly allows courts to hear claims with respect to three particular types of unregistered works: (1) foreign works; (2) claims involving the rights of attribution and integrity under § 106A; and (3) works which the Register of Copyrights denied registration. And § 411(c) authorizes courts to adjudicate infringement actions involving certain types of broadcast works if the copyright owner declares an intention to seek registration and then registers the work within three months of its transmission. The Court reasoned that it would be “at least unusual to ascribe jurisdictional significance to a condition subject to these sorts of exceptions.” Structurally, § 411(a)’s registration requirement is located in a provision separate from those granting federal courts subject-matter jurisdiction over copyright claims (28 U.S.C. §§ 1331, granting jurisdiction over federal questions generally, and 1338(a), addressing copyright claims specifically), lending further weight to the argument that Congress did not intend the section to act as a limit on judicial power.
Jurisdictional rules “speak to the power of the court rather than to the rights or obligations of the parties,” whereas claim-processing rules establish a substantive element of a particular claim. Because a court has no power to act without jurisdiction, a jurisdictional requirement may not be waived either intentionally or unintentionally by the parties or by the court. The question of the court’s jurisdiction may be raised at any time during the litigation, including after judgment and on appeal. And the court may raise the issue itself (“sua sponte”) even if the parties do not. In Arbaugh, the defendant employer did not raise the employee-numerosity issue until after it lost at trial. Had the requirement been jurisdictional in nature, the trial court would have been required to throw out the jury verdict and dismiss the case entirely (in fact, the trial court so concluded and the Fifth Circuit affirmed). Instead, the Supreme Court held that it constituted an element of the plaintiff’s claim. The objection that a plaintiff has failed to state a cause of action may not be made after judgment; thus, it is likely that on remand the defendant employer would have been found to have waived the objection.
In Reed-Elsevier, the jurisdictional issue arose only on appeal after lengthy proceedings below. The Reed-Elsevier case stemmed from the Supreme Court’s 2001 opinion in New York Times Co. v. Tasini, 533 U.S. 483 (2001), in which the Court held that the publishers of various online databases such as LEXIS/NEXIS infringed the copyrights of freelance authors by reproducing their works electronically without permission. On remand, the case was consolidated with other lawsuits brought by freelance authors based on the same theory of liability.
The consolidated Reed-Elsevier complaint asserted claims by named plaintiffs, each of whom owned at least one copyrighted work registered pursuant to § 411(a), and also purported to state claims on behalf of a class of authors, some of whom had not registered their copyrighted works. Because of the size and complexity of the consolidated action, the District Court referred the case to mediation. The parties conducted extensive negotiations over a period of three years before reaching a proposed settlement agreement in 2005. The parties then moved to certify a settlement class and to approve the settlement agreement. A handful of freelance authors objected to the settlement. The District Court overruled the objections, certified the class, and approved the settlement agreement.
The objectors appealed, raising both procedural and substantive objections to the settlement agreement. At no time, however, did any party argue that the District Court lacked subject-matter jurisdiction over the unregistered copyright claims. (Indeed, no party objected to subject-matter jurisdiction even before the Supreme Court; the Court was forced to appoint amicus counsel to play devil’s advocate and argue against jurisdiction.) Shortly before oral argument, the Court of Appeals, acting on its own initiative, ordered the parties to submit briefs on the question whether § 411(a) deprived the District Court of subject-matter jurisdiction over those claims. A divided panel of the Second Circuit held that the District Court lacked jurisdiction to certify a class and to approve a settlement involving unregistered works.
The Supreme Court’s opinion leaves unresolved the procedural and substantive objections to the settlement raised below, which will be addressed on remand. But the parties have at least survived to fight another day, rather than seeing the culmination of three years of arduous negotiations evaporate at the flick of the Second Circuit’s pen.
The Supreme Court also declined to address the question whether § 411(a)’s registration requirement is a “mandatory precondition” to suit that district courts may enforce sua sponte by dismissing claims even absent objection by the opposing party. And as a related matter, debate continues to rage at the district court level as to what, precisely, constitutes registration adequate to initiate suit. Must a plaintiff actually receive the registration certificate from the Copyright Office in order to proceed, or is the submission of the application, deposit copy and application fee sufficient? Compare, e.g., In re Napster, Inc., 191 F. Supp. 2d 1087 (N.D. Cal. 2002) with La Resolana Architects v. Clay Realtors Angel Fire, 416 F.3d 1195 (10th Cir. 2005). Resolution of these issues must await another day.
The United States became a member of the Berne Convention for the Protection of Literary and Artistic Works effective March 1, 1989. The Berne Convention is the foremost multilateral copyright treaty in effect today; most of the economically significant countries in the world adhere to it. The most significant accomplishment of the Berne Convention was to eliminate the requirement of any “formalities” as a prerequisite to copyright protection. I’ve always thought of this as the “black tie optional” rule for copyright; works are protected by copyright in Berne member countries even if they are published without a copyright notice and if they are never registered for copyright protection. Before the U.S. signed onto Berne, works published without a copyright notice risked injection into the public domain. Today, works are protected from the moment they are fixed in a tangible medium of expression, without need for notice or registration.
Registration remains essential, however, for the enforcement of copyright in domestic works and for the availability of certain remedies. Under Section 412 of the Copyright Act, in order to be eligible to recover statutory damages for infringement and attorney’s fees, a copyright owner must have registered the work before the infringement began (or within three months of first publication of the work). Statutory damages are critical in cases where it is difficult to prove actual damages, and provide copyright owners with significant leverage in settlement negotiations. Thus, Section 412 acts as a powerful incentive for authors and owners to register their works promptly.
In Elsevier B.V. v. UnitedHealth Group, Inc., 2010 U.S. Dist. LEXIS 3261 (S.D.N.Y. Jan. 14, 2010), the Southern District of New York addressed the question whether, by virtue of the Supremacy Clause, the Berne Convention supersedes Section 412 with respect to unregistered foreign works. In other words, may plaintiffs suing to enforce copyrights in unregistered foreign works recover statutory damages and attorney’s fees? The answer hinged on whether Berne was a “self-executing” treaty under U.S. law – that is, a treaty which becomes law upon ratification. By contrast, Congress must affirmatively enact treaties which are not self-executing in order for their provisions to take effect under domestic law.
“(1) Any country party to this Convention undertakes to adopt, in accordance with its constitution, the measures necessary to ensure the application of this convention.
Because the Berne Convention was not self-executing, the court concluded that it could not preempt Section 412 of the Copyright Act. Owners of foreign works who might seek to enforce their copyrights in the United States would thus be well advised to register their works in order to maximize the tools and remedies available to them in the event of infringement.
Tenenbaum buried his most interesting, and potentially most successful, argument at the end of the brief – that the $675,000 statutory damages award is so grossly excessive that it violates his Constitutional right to due process. The Supreme Court has held that statutory damages violate due process where they are “so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.” St. Louis, I.M. & S. Ry. Co. v. Williams, 251 U.S. 63, 67-68 (1919). In Williams, the Court upheld a $75 statutory damages award against a railroad that had overcharged passengers by 66 cents per ticket. Relying on the Williams standard, Tenenbaum contrasted the “bankrupting” size of the award with his conduct, which he characterized as “at most comparable to shoplifting music from a record store.” Assuming a purchase price of 99 cents per song, Tenenbaum calculated that the ratio between the award and the actual damage to the plaintiffs was 22,500 to 1 – far in excess of the 113 to 1 ratio which the Williams Court found acceptable.
The shoplifting analogy is a compelling one. The consequences for theft can be severe, but it is almost inconceivable that Tenenbaum would have been assessed a six-figure penalty for walking out of a record store with a handful of CD’s stuffed under his jacket. The methodology he used to arrive at his 22,500:1 ratio is flawed in that it fails to account for the fact that a single song, made available over a peer-to-peer system, could be copied innumerable times, thus resulting in more than one lost sale to the plaintiffs. Nonetheless, the award is strikingly high given the nature of the offense. The judge has already expressed considerable sympathy for Tenenbaum and distaste for the record industry’s strategy of suing individual file sharers; the argument that a penniless college student should not be bankrupted for a relatively petty offense could well resonate with the court.
Tenenbaum also argued that the damages award violated due process under the standard applied to punitive damages. A punitive damages award which is “grossly excessive” in relation to the state’s interest in punishment and deterrence enters “the zone of arbitrariness that violates the Due Process Clause of the Fourteenth Amendment.” BMW v. Gore, 517 U.S. 559, 568 (1996). Courts examine three “guideposts” to determine whether punitive damages are appropriate: (1) the degree of reprehensibility of the defendant’s conduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the damages award; and (3) the difference between the award and the civil penalties authorized or imposed in comparable cases. Id. at 575. Tenenbaum contended that his conduct was not reprehensible, involving only economic harm not motivated by intentional malice and conduct that “even now many see as having been unauthorized but not morally wrong”; that the Supreme Court has noted that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process”; and that statutory damage awards in file-sharing cases in which the defendants lost by default or on summary judgment have been limited to the minimum possible statutory damage amount.
In citing Williams as the standard for assessing the appropriateness of a statutory damages award in the copyright context, and addressing Gore as an alternative argument, Tenenbaum departed from the post-trial strategy employed by Jammie Thomas-Rasset, the other file sharer to seek modification of a massive statutory damages award. Thomas-Rasset was found liable for copyright infringement for sharing 24 songs, and a jury initially awarded the plaintiffs $222,000. The court vacated that award due to concerns over the propriety of the jury instructions concerning liability. After a second trial, Thomas-Rasset was again found liable, and the jury awarded the plaintiffs $1.9 million in damages. Thomas-Rasset moved for a new trial, relying primarily on the standard set forth in Gore, essentially conflating the two tests (“The Due Process jurisprudence that is today embodied in BMW v. Gore has its roots in Williams, a case involving statutory damages”).
Tenenbaum then argued that if the court does not grant him a new trial, it should reduce the statutory damages award to the minimum amount. Remittitur is appropriate where an award is “grossly excessive, inordinate, shocking to the conscience of the court, or so high that it would be a denial of justice to permit it to stand.” Here, Tenenbaum’s strategy mirrored Jammie Thomas-Rasset’s; she also sought remittitur as an alternative to her due process argument. The court recently granted Thomas-Rasset’s request, reducing the $1.9 million award to $54,000.
Tenenbaum argued that Congress set the currently applicable range of statutory damages to combat large-scale commercial piracy of software over the Internet, but did not intend to subject consumers like Tenenbaum to the upper limit of available damages. According to Tenenbaum, Congress sought to remedy the tremendous costs of software piracy to software companies, their employees and the economy – concerns that sound strikingly familiar in the music file-sharing context – but that it envisioned imposing those damages on those who made the software available for download on a widespread basis and not the individuals who actually downloaded them. Of course, Tenenbaum himself placed songs in the shared folder of his hard drive, making them available for download to anyone within his peer network, so it is unclear how, in practical effect, his conduct differed from that of the software pirates, except perhaps in degree.
Moreover, Tenenbaum offered no justification for why the minimum statutory damages amount is the appropriate award, as opposed to some other amount. This omission underscores the difficulty associated with his request; namely, how the court can defensibly set a damages award within such a large range of potential statutory damages. Perhaps the court will look for guidance to the recent decision in the Thomas-Rasset case; there, the judge settled on a trebling of the minimum award per sound recording as the appropriate amount, based on treble damage provisions in other federal statutes.
The Department of Justice, intervening to defend the constitutionality of the Copyright Act’s statutory damages provisions, and the plaintiffs have submitted their briefs opposing Tenenbaum’s motion. A hearing is scheduled to occur on February 23, 2010.
Effective February 24, 2010, electronic works published in the United States only in online, and not physical, form will be exempt from mandatory deposit unless the Copyright Office makes a demand for deposit of such works. The interim regulation will identify categories of online works subject to demand, the first of which will be electronic serials. The regulation will also establish procedures for issuing and responding to a deposit demand; redefine the term “complete copy” as applied to deposit of online-only works; and establish criteria for determining the “best edition” of online works to be deposited. The Copyright Office will seek comments on the implementation of the regulation later in 2010. A more detailed discussion of the contents of and rationale behind the interim regulation can be found at 75 Fed. Reg. 3863.
It is important to remember that mandatory deposit is distinct from the deposit requirement associated with registration. Copies deposited with an application for registration serve to identify the work. The purpose of mandatory deposit, on the other hand, is to provide the Library of Congress with an archival copy of all works published in the United States. Although copyright registration is optional, all copyrightable works that are published in the United States (with limited exceptions) are subject to mandatory deposit.
Within three months of publication, two copies of the “best edition” of every copyrightable work must be deposited with the Copyright Office. No application for registration need accompany the mandatory deposit; however, a deposit made in connection with registration will satisfy the mandatory deposit requirement.
At any time after a work is published, the Register of Copyrights may demand the required deposit copy. If the required deposit is not made within three months of this demand, the person or entity obligated to make the deposit may be liable for a fine, plus the retail price of the copies. Copyright Office Circular 7d discusses the requirements of mandatory deposit in more detail.
In another major victory for content owners over file sharers, the Central District of California found the owner and operator of a “torrent” file-sharing service liable for inducing copyright infringement in Columbia Pictures Indus., Inc. v. Fung, et al., 2009 U.S. Dist. LEXIS 122661 (C.D. Cal. Dec. 21, 2009). The Fung case reflects the continued evolution of peer-to-peer file-sharing technology since the Napster service was found to be infringing nearly a decade ago. Napster maintained a centralized index of song titles available for sharing and matched a user seeking a particular song directly with a user who had a copy of it. The Grokster, KazAa and Gnutella services did not maintain a centralized index of song titles, but upon request would search users’ computers for a copy of a particular song title and then match the requester with the user who had a copy of it.
In contrast, a torrent user visits a website to find “torrent files” relating to content the user wants to find. The torrent file does not contain the actual content the user is looking for; instead, it contains metadata which allows the torrent software to find and retrieve content from individual users’ computers. When a user selects a particular torrent file for download, the torrent software then identifies multiple locations where the content resides, and downloads pieces of it from all of those locations simultaneously. This approach allows for much faster and more efficient downloading of files and lessens the bandwidth strain on participating systems.
Fung operated a number of torrent websites which provided users with the torrent files necessary to find and share copyrighted content. Under the standards enunciated by the U.S. Supreme Court in Grokster, the court found Fung liable for inducement of copyright infringement.
Because the Copyright Act has no extraterritorial effect, and the servers that Fung used to maintain his websites were located in Canada, the court addressed as a threshold matter whether the Copyright Act could reach Fung’s conduct. A contributory infringer may be liable for actions occurring abroad which knowingly cause direct infringement within the United States. Accordingly, Fung’s liability hinged first on evidence that users located in the United States used his websites to transmit or retrieve copyrighted content. Though Fung argued that the plaintiffs needed to show that U.S.-based users both transmitted (uploaded) and received (downloaded) copyrighted content, the court found that either act, standing alone, could constitute the necessary direct infringement, since transmission violates the copyright owner’s distribution right and retrieval violates the copyright owner’s reproduction right.
Moreover, Fung, as well as various moderators of his sites, actively promoted infringement by providing users with technical assistance in downloading and viewing copyrighted works. Though Fung argued that the First Amendment protected this verbal conduct, the court held that under Grokster, his statements themselves were not illegal; rather, they were probative of an intent to infringe, and supported a finding of secondary liability.
Finally, Fung’s sites implemented a number of technical features designed to foster infringement, such as allowing users to locate and upload torrent files and automating the collection of torrent files from other sites which were well-known to contain infringing content.
The court rejected an attempt by Fung to find refuge in the DMCA’s safe harbor provisions. The DMCA shields a service provider from liability for users’ infringement if the provider is unaware of the facts and circumstances from which infringing activity is apparent. If the provider has actual knowledge of infringement, the DMCA does not apply. “Willful ignorance” will likewise strip a provider of the safe harbor; thus, if the provider becomes aware of a “red flag” from which infringement is apparent, the provider may not invoke the DMCA.
On December 7, 2009, the District of Massachusetts issued a remarkable written opinion elaborating upon its earlier ruling that individual file sharing did not constitute fair use in Sony BMG Music Entm’t v. Tenenbaum, 2009 U.S. Dist. LEXIS 112845. The case stemmed from Boston University graduate student Joel Tenenbaum’s file-sharing activities, which spanned several years and multiple file-sharing services.
Tenenbaum made none of these arguments, however, and the court deplored – in unusually harsh and explicit terms – his counsel’s performance in the case. Among a litany of other transgressions, the court chastised counsel for litigating the fair use defense “as an afterthought, and literally on the eve of trial,” and characterized the defense as “truly chaotic” and based on “perfunctory” papers. Indeed, Tenenbaum’s papers opposing summary judgment on fair use were structured skeletally, resembling an outline more than a substantive brief; cited only sparsely to the record and to caselaw; addressed the four traditional fair use factors in cursory fashion while emphasizing arguments drawn from unrelated legal doctrines; and invoked generalized incantations of “fairness” more reminiscent of the playground than the courtroom.
Possibly the most interesting insight into Tenenbaum’s defense, however, comes from his own attorney’s legal blog. Following Tenenbaum’s loss at trial, and public criticism of his fair use defense, his attorney, Harvard Law School professor Charles Nesson, solicited feedback in the blogosphere on what alternative defenses commentators felt might have prevailed. In response to one commentator’s list of potentially successful arguments, Mr. Nesson wrote, “these defenses do not join the fundamental issues. this [sic] trial was not an exercise in getting joel off the hook.” The notion that counsel’s job could consist primarily of anything other than exonerating his client should boggle any practicing litigator’s mind. Presumably, Tenenbaum – now saddled with a $675,000 verdict – might wish that his counsel had been more concerned with getting him “off the hook” than with transporting the fair use doctrine to a galaxy far, far away.
Despite its apparent desire to find in Tenenbaum’s favor, the court correctly noted that the fair use “analysis is not some open-ended referendum on ‘fairness,’ as [Tenenbaum] would have it, but an effort to measure the purpose and effects of a particular use against the incentives for literary and artistic creation that drive copyright protections.” Consistent with mainstream fair use jurisprudence, the court examined each of the four statutory factors and concluded that each one weighed against a finding of fair use. But the court’s overt predisposition in Tenenbaum’s favor unmistakably influenced its reasoning.
Similarly, in its treatment of the portion of each copyrighted work infringed, the court urged that if Tenenbaum had “just sampled individual songs as a prelude to purchasing the full albums on which those songs appeared[,] [t]hat could well present a compelling argument for fair use.” Tenenbaum admitted, however, that his purpose in downloading songs was not to sample them in anticipation of later purchases, which the court ultimately acknowledged. The disappointment that results when the facts do not support a cherished theory of the case is familiar to many a litigator.
After finding that each of the four traditional fair use factors weighed against a finding of fair use, the court then addressed the creative and unusual “non-statutory factors” that Tenenbaum advanced. These included that: (1) the copyright owners assumed the risk of infringement by releasing their works in an environment where file sharing was rampant; (2) the copyright owners aggressively marketed their works while failing to protect them in any meaningful way, essentially creating an attractive nuisance; (3) Tenenbaum was forced to engage in file sharing because only entire albums, not individual songs, were available for legal purchase; (4) it is unfair for parents and universities to bear the costs of policing the file-sharing activity of children and students; and (5) the “injustice of the action” weighed in favor of fair use.
The Sixth Circuit Court of Appeals recently issued an opinion which should serve as both a warning and a reminder to corporate counsel about the pitfalls of intellectual property in the context of mergers and acquisitions. In Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009), a software licensee was found to have violated restrictions on the transferability of the software following a series of corporate mergers.
The licensor, Cincom, granted a nonexclusive license of its software to Alcan Rolled Products Division, an Ohio corporation. The license specifically prohibited any transfer of the rights granted under it. Alcan installed the software on a single computer in a facility it owned in New York state. Years later, Alcan created and then merged into a separate corporation known as Alcan of Texas. Following a further merger of Alcan of Texas with its subsidiaries, and a few subsequent name changes, Novelis emerged as the sole surviving corporate entity. Through all this corporate activity, Cincom’s software remained installed on the single computer located in New York state, now owned by Novelis.
The Sixth Circuit rejected this restrictive interpretation, holding that “in the context of a patent or copyright license, a transfer occurs any time an entity other than the one to which the license was expressly granted gains possession of the license.” Thus, Novelis breached the license because “the only legal entity that can hold a license from Cincom is Alcan Ohio.
The case should serve as a reminder to mergers and acquisitions counsel of the importance of thorough due diligence to identify any existing copyright licenses and to determine whether a particular corporate reorganization or merger might result in an unauthorized transfer. In such a case, the licensee would be well advised to seek permission from the licensor to transfer the license as part of the contemplated merger in order to avoid post-merger liability.
The case is also interesting because of the Court’s heavy reliance on patent precedent and federal common law rather than copyright law in support of its holding. The license agreement included an explicit prohibition on transfers, and it is generally agreed that under the Copyright Act, a nonexclusive license like the one at issue here is not transferable. Yet, citing a patent case, the Court relied on federal common law for the proposition that “in the context of intellectual property, a license is presumed to be non-assignable and non-transferable in the absence of express provisions to the contrary.” Though an essential element of the Court’s reasoning was that “where state law [of corporate mergers] would allow for the transfer of a license absent express authorization, state law must yield to the federal common law rule prohibiting such unauthorized transfers,” state law would similarly give way to the federal Copyright Act.

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