Intellectual Property Newsletter Issue No. 14 July 2001

• Montana Enacts the Uniform Electronic Transactions Act

• Ninth Circuit Upholds Preliminary Injunction Against Napster

• The Three Stooges Live On

• Who Owns Rights in Works Made for Hire?

• What the Heck are MEGA Tags?

The 2001 Montana Legislature has enacted the Uniform Electronic Transactions Act, which went into effect July 1. Like the federal Electronic Signatures in Global and National Commerce Act enacted last year, the primary purpose of the Uniform Electronic Transactions Act is to remove barriers to electronic commerce by establishing the validity of contracts that are memorialized by an electronic record and signed by an electronic signature. The Act will prevent a party to a qualified electronic transaction from using the statute of frauds as a defense to avoid obligations arising under the transaction.

The Uniform Electronic Transactions Act only applies to transactions which the parties have agreed to conduct electronically. To be effective, an electronic record must be capable of being retained by the recipient. An electronic record will not be effective if the sender or the sender’s information processing system inhibits the ability of the recipient to print or store the record. The Act does not eliminate any of the legal requirements for a binding contract other than those requiring pen and ink. The Act does not apply to records or signature requirements under the Uniform Commercial Code, with the exception that it does apply to Articles 2 and 2A, which concern sales and leases of goods. The Act also does not apply to wills, codicils, or testimentary trusts.

Montana has not adopted another major uniform law concerning e-commerce, the Uniform Computer Information Transactions Act ("UCITA"). Because the Montana Legislature convenes in odd-numbered years only (except under special circumstances), it will not have another opportunity to consider UCITA until 2003.

On March 5, 2001, the United States District Court for the Northern District of California entered a revised preliminary injunction restraining Napster, Inc. from facilitating its users in downloading unauthorized copies of music recordings over the Internet. A & M Records, Inc. v. Napster, Inc., No. C 99-05183, C 00-1369 (N.D. Cal. Mar. 5, 2001). The injunction does not prevent Napster from operating altogether, and places a significant burden upon the record companies that sued Napster to identify recordings that are being copied. What the courts’ treatment of Napster will mean for its future and for future of the market for downloaded recordings remains to be seen.

Napster operates an Internet Web site that can be used for obtaining copies of audio recordings which are digitally stored in the MP3 format. Napster does not copy recordings or store copies on its own servers. Instead, it allows users to download MP3 files from the computer hard drives of other users who are logged on to the Napster system. Napster provides free software and a searchable directory of the available music files, which changes depending upon which users are logged on to the Napster system at any given time.

Several record companies sued Napster for contributory copyright infringement on December 6, 1999. The district court entered a preliminary injunction on July 26, 2000, in which it prohibited Napster from assisting its users to download copyrighted recordings pending trial. A & M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D. Cal. 2000). The United States Court of Appeals for the Ninth Circuit entered a stay of the preliminary injunction pending an appeal by Napster. In a decision issued on February 12, 2001, the Ninth Circuit affirmed the preliminary injunction, but required the district court to modify it so as to place more of a burden on the record companies to identify recordings that are being copied. A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001).

In its revised injunction, the district court directed the recording companies to provide Napster with notice of song titles, artists’ names, and specific file names corresponding to works that are being copied. Napster is required to police its directories and block access to identifiable infringing files. Napster must also preemptively block access to copies of any new release if the record company provides the required information in advance of the release date.

The Ninth Circuit’s written opinion in Napster is noteworthy for several reasons. First, the court agreed that the record companies had a reasonable likelihood of proving at trial that Napster’s users were committing direct copyright infringement, a necessary prerequisite to a finding of contributory infringement by Napster. The court rejected Napster’s argument that copying by its users is a non-infringing "fair use." The court observed that Napster’s users were obtaining something for free for which they otherwise would have to pay, and that they were engaged in wholesale copying on an unprecedented scale. According to the court, this copying had the probable effect of reducing the market for the sale of the plaintiffs’ audio CDs, as well as raising barriers for the plaintiffs to enter the market for digitally downloaded music themselves.

Relying on evidence that Napster had actual and constructive knowledge that specific infringing material was being copied by its users, the Ninth Circuit also found that there was a likelihood that the record companies would be able to prove that Napster had committed contributory infringement. The court cited an internal memorandum in which a Napster executive stated that Napster users were exchanging pirated music. The court also relied upon the fact that the Recording Industry Association of America had informed Napster of more than 12,000 infringing files.

The Ninth Circuit held out one ray of hope for Napster. The court recognized that Napster might be able to establish, at trial, a defense to the plaintiffs’ copyright infringement claims under one of the safe harbor provisions of the Digital Millennium Copyright Act, 17 U.S.C. § 512 (see Intellectual Property Newsletter, Issue No. 7 (Mar. 1999)). The statute protects online "service providers" from liability for copyright infringement, if they fulfill certain requirements aimed at controlling unauthorized copying.

In light of the Ninth Circuit’s pronouncements in Napster, authors of copyrighted works may wish to take measures to monitor the Internet to detect unauthorized copying. Authors should document any such activity, and provide notice to the computer system operator involved. Of course, it is always a good idea to mark the work with the appropriate copyright notice, and to register copyrighted works.

Operators of Web sites that may qualify as online service providers under the Digital Millennium Copyright Act should take steps to insure that they are in compliance with the Act in order to avoid possible liability for contributory copyright infringement. Requirements for the Act’s safe harbor provisions include:

• Designating an agent to receive notification of claimed infringement;

• Providing information about the designated agent on the service provider’s Web site and to the Copyright Office;

• Developing a policy for the termination of repeat infringers and informing its users of the policy;

• Ensuring that its system accommodates and does not interfere with standard technical measures used by copyright owners to identify or protect copyrighted works; and

• Complying with requirements for removing or blocking access to infringing material and, under certain circumstances, replacing the material upon request by the user.

A recent California case concerning the right to use the likenesses of The Three Stooges illustrates the growing legal recognition of a right to publicity. In Comedy III Productions, Inc. v. Gary Saderup, Inc., 21 P.3d 797 (Cal. April 30, 2001), the California Supreme Court determined that an artist that marketed lithographs and t-shirts bearing likenesses of The Three Stooges was liable for trading upon the celebrity of the famous comedians without permission.

Comedy III Productions, Inc. is the registered owner of all rights to the former comedy act known as The Three Stooges. The actors that played the characters of The Three Stooges are all deceased. The defendants in Comedy III v. Saderup had sold lithographs and t-shirts reproduced from a charcoal drawing Gary Saderup had made of the Stooges. Comedy III sued the defendants for violation of a California statute prohibiting the unauthorized use of a deceased personality’s name, voice, signature, photograph, or likeness on products or for purposes of advertising.

On appeal, the California Supreme Court affirmed an award of the defendants’ profits of $75,000 plus $150,000 attorney fees. The court agreed that the defendants’ use of The Three Stooges’ likenesses on lithographs and t-shirts violated California’s right-to-publicity statute. The court also determined that Comedy III’s right to generate income from The Three Stooges’ likenesses outweighed the defendants’ First Amendment rights of free speech and free expression. In reaching this conclusion, the court found that literal and imitative elements, rather than creative elements, predominated in Saderup’s charcoal drawing. In contrast to such works of art as Andy Warhol’s celebrity portraits, Saderup’s portrayal of The Three Stooges was too literal to merit First Amendment protection.

The ability of famous people to cash in on their celebrity is so well-recognized in our society that few people would probably question the right of a famous person to enforce his or her right of publicity. For example, if Reebok were free to use Tiger Wood’s likeness in its advertising without paying him, this would hamper his ability to negotiate lucrative endorsement contracts with Nike. At least twenty-seven states have recognized a right of publicity, either by statute or court decision. Fifteen of these have recognized that this right extends past the death of the famous person. Thus, there appears to be a trend towards protecting the rights of both celebrities and their heirs and transferees from the unauthorized use of a celebrity’s persona. The question that Comedy III v. Saderup leaves unanswered is the extent to which "creative elements" must predominate in a given image before First Amendment concerns outweigh the right of publicity.

In contrast to the defendants in Comedy III v. Saderup, the defendant in Comedy III v. New Line Cinema did not incur any liability for the unauthorized use of part of a Three Stooges film. Comedy III Productions, Inc. v. New Line Cinema, 200 F.3d 593 (9th Cir. 2000). New Line Cinema, a well-known production company, used less than thirty seconds of a classic Three Stooges film, DISORDER IN THE COURT, which is in the public domain. The clip appeared on a television set in the background of one scene in the film THE LONG KISS GOODNIGHT. Comedy III did not assert a claim under the California right-to-publicity statute, probably because New Line Cinema had not used The Three Stooges name or the film footage in its marketing efforts. Instead, Comedy III argued that the film clip was an enforceable trademark because it was particularly distinctive of the Stooges’ slapstick comedic style. The fact that New Line Cinema had not used The Three Stooges name or the film clip in their marketing efforts doomed Comedy III’s trademark infringement claim. Ironically, the court observed that, "had New Line used the likeness of The Three Stooges on t-shirts which it was selling, Comedy III might have had an arguable claim for trademark violation."

You (‘the hiring party") contract with another party (the "hired party") to create a work. For example, a builder contracts with an architect or designer to prepare house plans, or a manufacturer of video games contracts with a software developer to create new software to be used in its games. The contract for the work, however, is silent as to who owns the copyright.

How may you, the hiring party, use the work without exposing yourself to a possible lawsuit for copyright infringement by the hired party?

The hiring party’s use may arise in several situations. You might allow third parties to use the work, or you might copy and distribute the work, or you might prepare a derivative work, even though you have not specifically contracted for any of these uses of the work.

Both of the works described in the examples above, house plans and video game software, are copyrightable works governed by the Federal Copyright Act ("Act"). Under the Act, copyright protection arises when the work is "fixed in a tangible medium of expression," and the copyright in the work vests in the author, i.e., our "hired party." Even though the hired party conveys the physical work, he does not convey the copyright unless there is an agreement to that effect. 17 U.S.C. § 202.

A work made for hire is a work: (1) "prepared by an employee within the scope of his or her employment; or (2) a work specifically ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audio/visual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire." 17 U.S.C. § 101. Under the second definition of a work made for hire, the Act limits such works to the nine specific types listed in section 101. If the work does not fit one of the nine types, it cannot be a work made for hire. For example, while the video game program mentioned above may be a "part of" an "audio/visual work," the building plans would not fall within any of the nine examples, and the builder would not be able to claim copyright ownership as a work made for hire. In addition, section 101 requires that the hiring party and the hired party must have agreed in writing that the work was a work made for hire. If the work is a work made for hire, then the hiring party is considered the author, and accordingly, the owner of the copyright in the work.

At first glance, you as the hiring party might expect that you can claim copyright ownership as a work "prepared by an employee." In reality, however, the hiring party often fails to comply with the formalities necessary to be deemed to be an employer of the author. See, e.g., Community for Creative Non-Violence v. Reed, 490 U.S. 730 (1989).

Since the author gains copyright ownership upon creation, unless the work is one made for hire, the possibility arises that the hiring party may have contracted and paid for a work but could have no rights to copy, distribute, or produce the work. The hiring party may be able to claim such rights were transferred by the contract with the hired party. Again, however, the copyright act requires a writing signed by the owner of the copyright to make such a transfer valid. 17 U.S.C. § 204.

Section 204 of the Act provides that a transfer of copyright "is not valid unless an instrument of conveyance… is in writing and signed by the owner of the rights conveyed…." The Ninth Circuit has interpreted the rule strictly and requires that the writing be "executed more or less contemporaneously with the agreement to transfer, and it must be a product of the parties’ negotiations." Konigsberg Int’l, Inc. v. Rice, 16 F.3d 355 (9th Cir. 1994). In short, even if the parties orally agreed to convey the copyright but did not memorialize the agreement in a writing shortly thereafter, the transfer of copyright might not be valid.

If, in contracting for a copyrightable work, you desire to have rights to copy or distribute the work, any agreements between you and the maker should enumerate the work either as a work made for hire, if applicable, or provide for conveyance of the copyright in the work. As an alternative, if the parties have agreed to specific use rights short of an outright transfer of copyright ownership, the parties should specifically enumerate each party’s rights in the work in a written license or use agreement.

The uniqueness of the Internet and its commercial applications has created new trademark infringement concerns stemming from META tags. "The term ‘META description’ refers to words that identify an Internet site, and the term ‘META’ keywords refers to keywords that are listed by the Web page creator when creating the Web site. An Internet user then uses a Web search engine that searches the ‘META’ keywords and identifies a match or a ‘hit.’ " Niton Corp. v. Radiation Monitoring Devices, Inc., 27 F. Supp. 2d 102, 104 (D. Mass. 1998).

META tag information is buried in a Web page, invisible and unknown to the user, but detectable by search engines. As a result, the unauthorized use of a trademark or name in a META tag, for example "Ford," will result in Internet users retrieving non-"Ford" sites from a search run. For this reason, most users have at one time received search results that are seemingly inconsistent with the search request. Although the use of the trademark or name is not readily detectable, it is still an intentional use of that trademark or name to sell or promote other goods and/or services.

"Section 1114 of the Lanham Act forbids a party to ‘use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered mark in connection with the sale, offering for sale, distribution, or advertising of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or deceive.’" Planned Parenthood Federation of America, Inc. v. Bucci, 1997 WL 133313 (S.D.N.Y.). "The ‘keystone’ of trademark infringement is ‘likelihood of confusion’ as to source, affiliation, connection or sponsorship of goods or services among the relevant class of customers and potential customers." AT&T Corp. v. Synet, Inc., 1997 WL 89228 (N.D. Ill.).

Indeed, META tag use in this manner is a classic example of commercial confusion and unfair competition in that it is literally the use of a competitor’s trademark or name as a means by which to compete against him. See e.g., Niton Corp. v. Radiation Monitoring Devices, Inc., 27 F. Supp. 2d 102, 104 (D. Mass. 1998); Playboy Enterprises, Inc. v. Calvin Designer Label, 985 F. Supp. 1220 (N.D. Cal. 1997).