Source: http://www.techlawjournal.com/alert/2003/08/27.asp
Timestamp: 2019-04-23 10:55:36+00:00

Document:
TLJ Daily E-Mail Alert No. 727, August 27, 2003.
August 27, 2003, 9:00 AM ET, Alert No. 727.
8/26. The U.S. Court of Appeals (3rdCir) issued its opinion [23 pages in PDF] in Video Pipeline v. Buena Vista Home Entertainment, affirming the District Court's preliminary injunction of Video Pipeline's online distribution of short clip reviews of Disney movies, and rejecting Video Pipeline's affirmative defenses of fair use and copyright misuse. However, while the Appeals Court ultimately held that the copyright misuse defense fails in this case, it made new law by recognizing the defense of misuse, and by extending its applicability.
History of the Doctrine of Misuse. The doctrine of misuse was first developed in patent law, which shares a common purpose with copyright law -- providing an economic incentive for creativity, and investment in creative activity, by extending to authors and inventors the right to obtain monopoly rents, for a limited time, on the sale or use their creative works or inventions.
More recently, the doctrine of misuse has been extended from patent law to copyright law. The leading cases are Lasercomb America v. Reynolds, 911 F.2d 970 (4thCir 1990); Practice Management Information Corp. v. AMA, Alcatel U.S.A., Inc. v. DGI Technologies, Inc., 166 F.3d 772 (5thCir 1999), and DSC Communications Corp. v. DGI Technologies, 81 F.3d 597 (5thCir 1996). Some of these cases have involved software licensing practices.
What is new in Video Pipeline case (other than that the 3rd Circuit had not previously recognized the defense of copyright misuse) is that the analysis is not based on any variety of competition or antitrust analysis. Specifically, it is based on suppression of criticism. But more generally, it is based on the notion that copyrights should not be enforceable where the enforcement undermines the Constitutional purpose of copyright protection -- "to promote the Progress of Science and useful Arts".
With respect to competition, the Court wrote that "Anti-competitive licensing agreements may conflict with the purpose behind a copyright�s protection by depriving the public of the would-be competitor�s creativity."
The U.S. Court of Appeals (7thCir) issued its opinion in Ty v. Publications International on May 30, 2002. There was a petition for writ of certiorari, on other grounds, to the Supreme Court, which was denied. The Appeals Court merely overturned a summary judgment in which the District Court had rejected a fair use defense, and remanded to the District Court with further guidance, and instructions that the issue of fair use go to a jury.
He also noted that "Some of the text" in PIL's guide "is quite critical, for example accusing Ty of frequent trademark infringements. Ty doesn't like criticism, and so the copyright licenses that it grants to those publishers whom it is willing to allow to publish Beanie Baby collectors' guides reserve to it the right to veto any text in the publishers' guides. It also forbids its licensees to reveal that they are licensees of Ty. Its standard licensing agreement requires the licensee to print on the title page and back cover of its publication the following misleading statement: ``This publication is not sponsored or endorsed by, or otherwise affiliated with Ty Inc. All Copyrights and Trademarks of Ty Inc. are used by permission. All rights reserved.��"
Other Possible Applications of the Copyright Misuse. In addition to the situations in the Video Product and Ty cases, one could conceive of other areas where the rationale of Video Pipeline might be applied.
One is the online publication of unpublished records of companies, organizations and political figures. Employees, shareholders, and other potential critics of companies, organizations, and public and political figures sometimes obtain copies of documents from their employers, companies or others, and publish them in web sites.
Recently, plaintiffs have had considerable success in enjoining the publication of such documents under copyright law. That is, they assert copyright in works, which they have not published, and they have no intention of publishing. In this situation there is no lost revenue or profits to the copyright holder. Moreover, in cases of public concern, the effect of an injunction is to decrease criticism and public discourse on matters of public interest. That is, the underlying purpose of copyright protection is not furthered by some such injunctions; it is undermined.
8/26. The U.S. Court of Appeals (3rdCir) issued its opinion [23 pages in PDF] in Video Pipeline v. Buena Vista Home Entertainment, a copyright case involving the affirmative defenses of fair use and copyright misuse. Video Pipeline published in a website a collection of two minute long clip previews of copyrighted movies, without authorization. The District Court rejected Video Pipleline's arguments that it is protected by the doctrines of fair use and copyright misuse, and granted a preliminary injunction. The Appeals Court affirmed.
The Appeals Court's application of the four prong fair use analysis of 17 U.S.C. � 107 is noteworthy, and constitutes the bulk of the Appeals Court's analysis. However, the case is particularly significant because the Appeals Court also recognized the defense of copyright misuse, recognized that it might apply in situations beyond the traditional anti-competitive context, and recognized that licensing terms that prohibit criticism may serve as the basis of a copyright misuse defense. However, the Court held that on the facts of this case, the defense of copyright misuse fails.
Copyright misuse is potentially an emerging area of copyright law, and one that could find application in a variety of digital copyright situations. See, related story, titled "3rd Circuit Breaks New Ground on Copyright Misuse".
Background. The Appeals Court opinion distinguishes between "movie trailers", which are approximately two minutes long pieces, composed by the movie studios, and used to market movies, from "clip previews", which are also about two minute pieces, but are composed with segments from the full movie by Video Pipeline, and which do not seek to market the movies.
Video Pipeline first displayed movie trailers, under license from Disney, on its website. It later composed and displayed clip previews, without license. It charges for its streaming clip reviews.
Buena Vista Home Entertainment (which is a party to this case) holds an exclusive license to distribute Miramax (another party) and Walt Disney Pictures and Television (not a party) home videos. Buena Vista, Miramax, and Walt Disney Pictures and Television are subsidiaries of The Walt Disney Co. (not a party). Nevertheless, the Appeals Court refers to Buena Vista and Miramax as "Disney".
Disney also makes its movie trailers available on the internet. It displays them on its own web sites in order to attract and to keep users there and then takes advantage of the users' presence to advertise and sell other products. It also licenses them to others.
Disney's license agreement with some other entities includes the following language, as recited in the Appeals Court opinion: "The Website in which the Trailers are used may not be derogatory to or critical of the entertainment industry or of [Disney] (and its officers, directors, agents, employees, affiliates, divisions and subsidiaries) or of any motion picture produced or distributed by [Disney] ... [or] of the materials from which the Trailers were taken or of any person involved with the production of the Underlying Works. Any breach of this paragraph will render this license null and void and Licensee will be liable to all parties concerned for defamation and copyright infringement, as well as breach of contract."
District Court. Video Pipeline began the litigation. It filed a complaint in the U.S. District Court (NJ) seeking a declaratory judgment that its online use of the clip previews does not violate federal copyright law. Disney counterclaimed for copyright infringement. The District Court entered a preliminary injunction prohibiting Video Pipeline from displaying clip previews of Disney films on the internet. (See, opinion published at 192 F. Supp. 2d 321.) Video Pipeline then brought this interlocutory appeal.
Appeals Court Holding on Fair Use. The Appeals Court addressed the four factors of Section 107 in order.
The Court held that the first factor ("the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes") weighs in favor of Disney. The Court found that since Video Pipleline charges for streaming videos, its purpose is commercial. However, it added that this finding is not necessarily dispositive on this factor. It also considered whether the clip reviews were "transformative". It concluded that they were not. They were copied verbatim from the original movies. Moreover, the clip reviews share the same purpose and character of the movie trailers made by Disney.
The Court held that the second factor ("the nature of the copyrighted work") weighs in favor of Disney. It wrote that fair use is more difficult to establish when the works are "creative, non-factual expression", such as with Disney movies.
The Court held that the third factor ("the amount and substantiality of the portion used in relation to the copyrighted work as a whole") weighs in favor of Video Pipeline because it copied only about two minutes out of each hour and a half to two hour movie.
The Court held that the fourth factor ("the effect of the use upon the potential market for or value of the copyrighted work") weighs in favor of Disney. The Court wrote that this analysis takes into consideration not only harm to the market for original works (the movies), but also harm to the market for derivative works (Disney's movie trailers). And, Video Pipeline's clip reviews harmed the market for Disney's movie trailers.
So, the Appeals Court concluded that "Three of the four statutory factors indicate that Video Pipeline�s internet display of the clip previews will not qualify as a fair use. From our consideration of each of those factors, we cannot conclude that Video Pipeline's online display of its clip previews does anything but ``infringe[ ] a work for personal profit.�� Harper & Row, 471 U.S. at 563. The District Court therefore correctly held that Video Pipeline has failed to show that it will likely prevail on its fair use defense."
This case is Video Pipeline v. Buena Vista Home Entertainment, Inc. and Miramax Film Corp., No. 02-2497, an appeal from the U.S. District Court for the District of New Jersey, D.C. No. 00-cv-05236, Judge Jerome Simandle presiding. Judge Thomas Ambro wrote the unanimous opinion for the three judge panel of the Court of Appeals.
8/26. Richard Breeden, the Corporate Monitor in the MCI WorldCom bankruptcy proceeding, released his report [156 pages in PDF] to the U.S. District Court (SDNY) on corporate governance.
The report is titled "Restoring Trust: Report to The Hon. Jed S. Rakoff The United States District Court For the Southern District of New York On Corporate Governance For The Future of MCI, Inc."
Breeden begins with the observation that "As CEO, Ebbers was allowed nearly imperial reign over the affairs of the Company, without the board of directors exercising any apparent restraint on his actions, even though he did not appear to possess the experience or training to be remotely qualified for his position. One cannot say that the checks and balances against excessive power within the old WorldCom didn�t work adequately. Rather, the sad fact is that there were no checks and balances."
The report contains 78 recommendations pertaining to "selection of directors, qualification, conflicts and independence standards for board members, the functioning of the board and its committees, establishment of the position of non-executive chairman, specific limits on compensation practices, equity compensation programs, accounting and disclosure issues, ethics and legal compliance programs and other areas."
8/26. Computer Associates International announced in a release "plans to settle all outstanding litigation related to claims about past accounting issues. Included are shareholder and ERISA class-action suits and related derivative litigation. As part of the settlement, CA plans to issue to the shareholder classes up to 5.7 million shares of CA common stock."

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