Summary:  Raise your hand if you have read or drafted an agreement with:

(a)        A proprietary rights assignment provision;

(b)        A provision with a long list of examples or other “things” assigned;  or

(c)        Both.

Well, the 9th Circuit just yanked from Mattel its claim for roughly $1,000,000,000 (that’s a billion dollars) in its slugfest with MGA over IP infringement arising from the Bratz doll.  That decision turns in part on scrutinizing the assignment language in an employment agreement (I admit:  The entire opinion did not turn on just one word).  The court looked at the meaning of one word:  “inventions.”  Then the court looked at the list of terms that were supposed to explain that word in that provision.

As many lawyers who draft agreements will see, that word—and the list used to explain that word—is what most lawyers find in their templates for assignment provisions.  Call it boilerplate.  In the future, call it a drafting mistake not to pay attention more closely to that metal.  And remember ejusdem generis from your 1st-year contracts class.

(As of the date of this post the opinion had not been provided a standard citation.  You can find it at http://bit.ly/bdqtrQ.)

There is some “messy” language about the application of California Labor Code Section 2870.  I think that the court got the analysis wrong (but it’s largely in footnotes).  We’ll comment in passing on this point.  Also, the court applied its own (and widely disliked) Apple v. Microsoft “extrinsic/intrinsic” test for infringement.  We’ll save that for another lawyer to address.

By the way, this post is not about the case itself but about its lessons for lawyers and their clients about agreements.  And one lesson is:  Make sure that the language really, really covers what you want covered.

Introduction

OK, so a Mattel employee quits Mattel and joins another company and there makes a doll that becomes the “Bratz” toy line that whacks Barbie in the marketplace.  (MGA eventually acquires the rights.)  Mattel sues MGA in federal district court, claiming, among other things, that the employee had assigned all his rights by operation of the proprietary rights assignment provision in his employment agreement.  The district court agrees and finds for Mattel (and on several other bases not relevant to this post).  MGA appeals and the 9th Circuit Court of Appeals vacates the judgment (for all that money) and remands (sends it back) to the district court.  Technically, the Court chastised the lower court for failing to take into account more evidence on critical points and to make findings of fact on these matters.  So, if it goes to back to that court (rather than gets resolved through settlement), then we can expect a more robust discussion of these matters.

It’s Just a Word.  Welllll . . ..  Can You Say “Ejusdem Generis” (and pronounce it properly)?

Reviewing the agreement on a de novo basis (never a good sign for the lower court), the 9th Circuit quotes some of the relevant language from that assignment provision:

I agree to communicate to the Company as promptly and fully as practicable all inventions (as defined below) conceived or reduced to practice by me (alone or jointly by others) at any time during my employment by the Company. I hereby assign to the Company . . . all my right, title and interest in such inventions, and all my right, title and interest in any patents, copyrights, patent applications or copyright applications based thereon. (Emphasis added.) At 10532-3.

The opinion then quotes the contract definition of inventions:

[T]he term ‘inventions’ includes, but is not limited to, all discoveries, improvements, processes, developments, designs, know-how, data computer programs and formulae, whether patentable or unpatentable.” At 10533.

(We regularly see a definition that doubles and even triples that list.)

The Court looks at whether or not the word “inventions” includes “ideas.”  And without even mentioning the age-old phrase, ejusdem generis, the Court at least quotes one application of the hoary rule:  “[C]ourts avoid constructions that would make “a particular item in a series . . . markedly dissimilar to other items on the same list[.]”  At 10533.  Just before that quote from a previous case, the Court notes that “ideas” differ quite a bit from the list in the agreement.  (Note to readers:  Make the comparison yourself).

Oops. I’ll bet the lawyer who wrote that agreement is squirming;  I’ll double up on the bet that Mattel and MGA lawyers are now digging through their files on all employment agreements.  Uh-oh.  (And I’ll triple that bet by arguing that most other lawyers who draft those types of agreements—and clients who use those agreements—have not yet started to pay attention. But wait:  I’m not a betting man.)

Yikes!  It gets worse.  The Court later takes note that Mattel actually signed agreements with other employees (and probably independent contractors) by which inventions and ideas are assigned.  Uh-oh.  I think some lawyers may be looking to create an ABA Lawyer Protection Program.  Or perhaps look for a career in another industry.

So What?

The Royal We empathize with the Mattel lawyers.  That language is in so many agreements in the technology world that it has become boilerplate not closely scrutinized.  Many lawyers assume that those at the client with technical expertise have vetted the applicability of that language.  Budget and time pressures from the client often force a lawyer into a kind of “issue triage,” relying upon the wisdom presumably intrinsic in the language having been applied without challenge in thousands of previous uses of that provision.

None of this makes it right.  Every lawyer should know that ejusdem generis compels one to use clear drafting to specify precisely what is to be covered.  One simple way of explaining one application of that rule is that the more items are added to the list then the narrower the applicability of that list.  Don’t quote me, though.  Say what you mean in the language.  If the employee is not going to be involved in, say, computer programming or databases then why would one include “data computer programs and formulae?”

And every client should check this language to make sure that it is clear in what it actually covers.  Is it ideas and inventions?  Now, We are not convinced that ideas can indeed be assigned (it depends upon the jurisdiction).  But that’s a discussion a client should have with its lawyer.  And that’s a discussion for which the client should happily pay the legal fees.  Is it worth the risk of losing a billion dollars in damages to save a few thousand dollars?

Wait, There’s More.

We are truly baffled that the Court did not address in more detail the applicability of California Labor Code Section 2870.  Perhaps it was briefed and perhaps the lower court did not find it necessary to address the issue.  Quoting again from the 9th Circuit opinion

shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities or trade secret information except for those inventions that either (1) relate at the time of conception or reduction to practice of the invention to the employer’s business . . . or (2) result from any work performed by the employee for the employer.’ ” Footnote 5 at 10538 (Emphasis added in blog post)

As far as we can tell, the exceptions to that rule should protect Mattel.  Mattel made Barbie.  The employee was working on Barbie.  Uh-huh.

Whatever the outcome of the case, the reasoning of the opinion should get lawyers who draft to sharpen their pencils.  And re-read their notes from 1st-year contracts classes.

Our thanks to the legal eagles at Law.com whose Corporate Counsel newsletter alerted us to another development in this case.

James C. Roberts III is the Man(www.globalcaplaw.com)aging Partner of Global Capital Law Group and CEO of the strategic consulting firm, Global Capital Strategic Group. He heads the international, mergers & acquisitions and transactional practices and the industry practices concentrating on digital, media, mobile and cleantech technologies.  He is currently involved in opening the Milan office.  Mr. Roberts speaks English and French and, with any luck, Italian in the dist(www.globalcapstrat.com).ant future.  He received his JD from the University of Chicago Law School, his MA from Stanford University and his BS from the University of California—Berkeley.  You can reach him at jcrext@globalcaplaw.com.

The Global Capital firms counsel domestic and international clients on strategic and legal issues inherent in the deployment of intellectual & financial capital—a merger or acquisition, foreign market expansion, a strategic alliance, a digital content license, a mobile deal, foreign and domestic labor and employment policies, starting a new entity or raising capital. Clients range from global Fortune 100 corporations such as Deutsche Bank and News Corporation and its subsidiaries, MySpace.com and Fox Interactive Media, to start-ups.  Industries represented include digital media, Internet, software, medical and biotechnology, nanotechnology, consulting firms, environmental technology, advertising, museums and other cultural institutions and manufacturing.

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(Author’s note:  In this article, I get to use one of my favorite theories:  The Sergeant Schulz Theory.  Read on.  Also, I posted this initially at Tubefilter.tv.)

By now you probably know that Google won the most recent round of its legal battle with Viacom (which initially sued YouTube, now owned by Google).  A federal district court judge in New York issued a summary judgment that dismisses the $1 billion claim of infringement against postings on YouTube that were, in the opinion of Viacom, infringing on their copyrights.  It’s an opinion worth reading. [LINK HERE.]  If you are a legal wonk, then you will appreciate the succinct manner in which Judge Stanton weaves together the holdings of previous DMCA cases. (Here’s a hint: The Coase Theorem.)

The judge bought the argument that Google made—namely, that it was protected under the “Safe Harbor” provisions of the Digital Millennium Copyright Act from the copyright infringement claims made by Viacom.  More important, Judge Stanton said that YouTube’s actions demonstrated that the “takedown” provisions in the DMCA actually worked.  (Those provisions enable copyright holder to require that copyrighted material to be removed from public view.)

There are some unintended consequences (the Sergeant Schulz Theory) that may arise from this opinion, but they are likely to be acceptable for the time being.

It is not over yet.  Viacom has vowed to appeal the decision.

So What?

In a nutshell:

The burden of policing copyright infringement now squarely sits on the shoulders of the copyright owner (or the one with the rights).

With a little more detail:

  • The Safe Harbor Is Open. The DMCA safe harbor provisions are available for certain types of companies if they have and actually use the takedown provisions of the DMCA.
  • You Are Your Own Policeman. If you own (or hold rights in) a copyright, then you are responsible for policing the use of that copyright by others.

The Details

Let’s go a bit deeper in what the opinion means.  The merits of the positions of either side are not relevant here.  What is relevant is what the opinion means to players in the digital content space.

1.         Companies like Google Have a Safe Harbor. Companies that post digital content can rely on the “Safe Harbor” provisions of the DMCA when that content is posted, provided that they are serious about taking down content that may be infringing (more on that point below).  This holding is important because there was some confusion as to whether or not a company like Google was actually permitted entry to that harbor.  One view of the DMCA provisions holds that it applies almost exclusively to ISPs, but this view now appears to carry little weight in the federal courts.  Getting there was not without some abstruse legal reasoning to adapt the language of a statute written before places like YouTube existed, but it is probably solidly established by the various legal opinions on this point.

But be careful: It is not clear what sites would have this protection.  Google made the (winning) argument that, in essence, it was just providing transmission, storage and indexing of the content—sort of like an ISP.  Another UGC site might not be so lucky.  For sites that aggregate content from other sources, this opinion may incrementally strengthen their position, but they would have to fight holdings going the other way in other courts.

2. The Safe Harbor Has Some Rules. Judge Stanton emphasize that the takedown procedures worked in this case.  YouTube immediately responded to Viacom’s takedown notice:  Within 24 hours of receiving the notice, YouTube removed almost all of the more than 100,000 clips that Viacom claimed were infringing.

So the implication is clear for companies posting digital content: The Safe Harbor is available if and only if your takedown procedure actually works.

3.         Red Flags and Knowledge. The opinion also turned on the “red flags” of infringement that would be enough for YouTube to take down allegedly infringing content.  It gets complicated but Judge Stanton accepted (and essentially paraphrased) Google’s argument in its court filings that there was no practical way to check every posting for infringement.  The opinion essentially holds that a company in the position of Google’s YouTube basically has to have notice or actual knowledge of infringement of specific content.  Although the judge did not say it, the standard for actual knowledge would be, say, that Eric Schmidt (head of Google) went to the YouTube site and watched Iron Man the day after it was relased.

So the rule is: If you receive a takedown notice about specific content or if you have a really, really good reason to believe that it is infringing, then take it down.  Immediately. Then you’ll be OK.  (True, taking something down can cause other problems but that’s outside of the scope of this article.)

4.         Unintended Consequences:  The Sergeant Schulz Theory. Remember Sergeant Schulz on the TV show, Hogan’s Heroes?  He knew nuzzeen, he saw nuzzeen and that way he did not get in trouble with his superior.  Think about it for a moment:  If the opinion says that if you don’t know about the infringement then you don’t have liability.  Therefore, if you don’t try to find out if something is infringing, then you’ll be OK.  By definition, you see nuzzeen if you don’t look too hard.  And so you won’t.

5.         For Copyright Owners: Spend All Your Time Scouring the ‘Net. The implication of the opinion is that copyright owners (or the rightsholders) must now police the use of their copyrights.  Their first remedy for companies sitting in the position of Google’s YouTube is the “takedown” procedure specified in the DMCA.  It’s a clunky system, to be sure, but it is pretty much all you have.  Moreover, other recent opinions are now shifting the burden of policing the use of IP rights to those who hold such rights.

There is some hope.  First, as noted above, it is not clear that all sites can avail themselves of the Safe Harbor provisions.  For example, one could argue that Facebook would not qualify (a tall order).  However, the burden of proof now probably rests with the plaintiff and judges now have a well-reasoned (though not necessarily correct) opinion on which to rely.

Second, the holding now opens up opportunities for companies (say, startups) to create Internet policing services.  Whether they are automated (think “watermark”), manual (think outsourcing to foreign countries) or a combination, there is now a market opportunity.  There are already several such services out there.  They aren’t foolproof but they are good.

To close, the decision is not exactly binding on anyone except those within the district of the New York court.  Plus, Viacom’s vow of an appeal makes the permanence of the holding somewhat uncertain.  Both of these points are largely legalistic, because the opinion, as it now stands, will be used as an important bulwark of any argument in court by a defendant to a claim of infringement.  The bottom line:  Assume it applies.

Summary:  A librarian decides that iPhone users can jailbreak their phones.  The Librarian of Congress exercise his rulemaking authority and determined classes of works that are exempt from DMCA prohibitions of circumventing security technologies on digital media.  The basic principle is that access constraints should not preclude what would otherwise be fair use such as commentary, education or criticism.  In addition to setting free the smartphones, the rules also extend a class to documentary filmmakers (and others, though those “others” are not discussed here).

By coincidence, a 5th Circuit ruling was issued at about the same time (July 26, 2010) confirming many of the principles inherent in the rulemaking by the Librarian of Congress.  See MGE UPS Systems Inc v. Power Protc Svc LLC, et al.

Introduction

Marian the Librarian in Music Man notwithstanding, it is rare that decisions by a librarian generate vast amounts of commentary that can be fairly called “breathless exultation.”

Well, OK, so it’s the librarian who runs the Library of Congress.  He’s in charge of copyrights.  And it’s the iPhone.

In case you have been living in a cave for the past 48 hours: the Librarian of Congress ruled that jailbreaking a smartphone for two particular purposes does not cause liability under a particular section of the Digital Millennium Copyright Act (for the legal wonks, the ruling relates to Section 1201).

But wait there’s more:  In addition to other “uses” that are now permitted, certain users can crack the Digital Rights Management program on movie DVDs for purposes that have always been considered fair use.  And a teaser so you’ll read more:  Documentary filmmakers now have a bit of freedom.

The Context

Before getting into a bit more detail, let’s consider the setting.  The DMCA makes it a bozo no-no to crack the security codes preventing access to copyrighted material (let’s call that “jailbreaking”).  However, DMCA also commands the Librarian of Congress every three years to review the impact of this section on Fair Use and to create classes of works exempted from prohibitions on jailbreaking.  And that is just what he did (see the entire document—which is worth reading.  See

http://www.copyright.gov/1201/2010/Librarian-of-Congress-1201-Statement.html.)

By ironic coincidence, a 5th Circuit opinion was issued that also provides common law basis for certain types of jailbreaking.  You can find the opinion at http://www.appellaterecord.com/uploads/file/MGE.pdf.

How Fair Use Is Involved

Basically, the Librarian articulates a principle that he (OK, the Library of Congress) does not like technologies that, in blocking access, also preclude what would otherwise be “fair use.”  In the case of the iPhone, it is personal, non-commercial use.  In the case of movie DVDs, it is for education, commentary and criticism.

Jailbreaking Smartphones

The ruling enables users to jailbreak smartphones for two purposes.  The first is to enable a user to download and use pretty much whatever applications that user wants to use.  Google Voice, long prohibited from the iPhone, can now be used.  This also means that you can create your own apps and use them on your iPhone (though why you would do that is anybody’s guess:  the App Store works pretty well).

The second permitted use is somewhat more compelling.  You can jailbreak a smartphone in order to use it on other networks.  Yep.  That got you to sit up.  That’s right:  You can now use your iPhone on the Verizon, T-Mobile, Sprint or other mobile networks.

What you cannot do: Well, you probably cannot make a business out of this.  The decision by the Librarian of Congress rests entirely upon the use being personal and non-commercial.

Jailbreaking Movie DVDs

The Librarian also expanded a previously created class of works, in this case by adding the use by documentary filmmakers of short clips in their films that are commentary or criticism.  Quoting from the website above, the rulemaking permits jailbreaking the DVD

when circumvention is accomplished solely in order to accomplish the incorporation of short portions of motion pictures into new works for the purpose of criticism or comment, and where the person engaging in circumvention believes and has reasonable grounds for believing that circumvention is necessary to fulfill the purpose of the use in the following instances:

(i)         Educational uses by college and university professors and by college and university film and media studies students;

(ii)        Documentary filmmaking;

(iii)       Noncommercial videos

It looks like documentary filmmakers could use these clips for commercial purposes.  However, what this decision does not do is change the Fair Use doctrine and its accreted case law.  In other words, when a filmmaker uses a clip from a DVD then he or she must still take the risk that the use of the clip will be protected by the Fair Use defense if the copyright owner files suit.  (Remember:  Fair Use is not a “permit” but only a defense if sued.)