Is the Aereo decision a setback for innovation?

One of the big questions preceding the Supreme Court’s decision in the Aereo case earlier this week was whether a holding against Aereo would put cloud services into such a legally precarious position that the innovation and investment climate would chill. While the decision clearly makes Aereo’s use of its technology illegal, one should not be too quick to foretell a drastic impact on all hosted services. Here are some reasons why.

What cloud?

Let’s be clear about what we mean by “the cloud” in this context. Aereo’s technical model – which the court found to infringe copyright – captured over-the-air television content using one tiny antenna per customer, transcoded that content into one copy per customer, which Aereo stored and then streamed on-demand to the customer. The court found that model bore an “overwhelming likeness to the cable companies targeted by the [1976 Copyright Act]” to an extent that Aereo was “for all practical purposes a traditional cable system.” Aereo’s technological attempts such as the one-copy-per-customer method that it used to distinguish itself from traditional cable services were immaterial to the court. Aereo looked like a cable company, so the court treated it as one, with all the copyright consequences that go along with that status.

Aereo was a cloud service inasmuch as it stored the TV content and served it to its users when those users initiated the performances. It was the cable-like functions that got it into trouble, not necessarily the cloud-provider functions. That arguably leaves the rest of what we consider cloud services – online collaboration tools, centralized communications systems, most hosted applications, and the like – outside the scope of the court’s decision. Most software-as-a-service models, whether to the consumer or at the enterprise level, are unlike cable systems and thus likely stand clear of the sweep of the Aereo sickle.

The technology could live on.

One must also be sure to recognize that the court’s decision did not kill the technology altogether, but instead killed the use of the technology in the hands of one who does not have ownership or license to the content being delivered. Since the court found that Aereo’s service was “substantially similar” to cable systems, Aereo, its successors, or other players in the space could look to monetize the technology while paying the compulsory licenses that Section 111 of the Copyright Act spells out in dizzying complexity. Or the broadcasters and other content stakeholders could acquire Aereo-like technology and use it to supplement the other means of content delivery currently at play. In either scenario, the needs for investment and innovation in providing infrastructure (as well as the need for clarity on network neutrality) remain firmly intact.

The real likely effect.

This is not to say that Aereo will have no effect on development of technology in areas outside the particular facts of the case. The court’s decision expands the class of online intermediaries who may be liable for direct copyright infringement. In that respect, the case differs from other important technology-provider copyright cases like the Betamax case, Grokster and the Cablevision case. In those cases, the main question before the courts was whether the providers were secondarily liable for the infringement committed by their users. In Aereo, however, the question was whether Aereo itself was liable for infringement committed by providing the technology to others. The Supreme Court held that Aereo was a direct infringer because its functionality so closely resembled a cable company.

So the court has given copyright plaintiffs some new, additional angles to consider when pursuing infringement litigation against technology providers. Does the technology so resemble the technical model of a cable delivery system, particularly from the perspective of the end user, such that it de facto publicly performs the works delivered by the system? If so, then the Aereo test forbids it. Moreover, the case fuzzies the relatively bright line that began to be drawn almost 20 years ago with Religious Technology Center v. Netcom, requiring that for an internet intermediary to be liable for direct infringement, it need undertake some volitional conduct in furtherance of the infringement. That fuzziness will no doubt embolden some plaintiffs who otherwise would not have seen the potential for a cause of action against future defendant-innovators.

In reality, few platforms are likely to actually get “Aereoed” in litigation. The ones at greatest risk will be those that facilitate access to streaming content provided by others. But the fact that ultimate liability may not lie against a provider will likely do little to stop aggressive copyright plaintiffs from trying out the theory against all forms of remote storage providers. That’s the problem Justice Scalia identified in his dissent when he said the decision “will sow confusion for years to come.” Let’s hope that’s mostly an overstatement.

Evan Brown is an attorney in Chicago advising clients on matters dealing with technology, the internet and new media.

No infringement means no injunction in software dispute

Former members of a limited liability company, who participated in the development of four pieces of software while a part of the company, sued the LLC and its remaining members for copyright infringement. Defendants moved for summary judgment, arguing that plaintiffs’ infringement claims must fail because defendants had not used the allegedly copyrighted software outside of the licensing agreements the LLC signed while plaintiffs were still with the company. The court granted defendants’ summary judgment motion.

Plaintiffs agreed that the software had not been used outside the license agreements with companies the LLC had entered while plaintiffs were with the company. But plaintiffs still sought injunctive relief with respect to their infringement claims.

To demonstrate copyright infringement, plaintiffs were required to prove “(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original.” Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 362, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991)). In this case, plaintiffs essentially conceded that the second element of the Feist test was not met.

The court cited Arista Records, LLC v. Doe 3, 604 F.3d 110, 117 (2d. Cir.2010)) to note that in the second Feist element, “the word copying is shorthand for the infringing of any of the copyright owner’s five exclusive rights described in 17 U.S.C. § 106”. Those exclusive rights allow the owner to: (1) reproduce the copyrighted work; (2) prepare derivative works based upon the copyrighted work; (3) distribute copies of the copyrighted work; (4) perform the work publicly; and (5) display the copyrighted work. Because plaintiffs conceded that defendants had not used the software outside of the license agreements with its customers that were made while plaintiffs were still a part of the LLC, defendants had not infringed on plaintiffs purported exclusive rights.

Plaintiffs nevertheless claimed that they were entitled to injunctive relief to prevent defendants’ potential future use of the copyrighted software. Plaintiffs were required to show that: (1) they had suffered an irreparable injury; (2) that remedies at law were inadequate to compensate that injury; (3) that the balance of hardships warranted a remedy in equity in favor of plaintiffs; and (4) that the public interest would not be disserved by a permanent injunction.

Here, plaintiffs conceded that they had not suffered an injury – the copyrights had not been infringed. Instead, plaintiffs were arguing for a prospective injunction to prevent defendants from infringing upon a copyright for which there was no evidence defendants intended to infringe. The court denied the injunction, holding that a prospective injunction could be entered only on the basis of current, ongoing conduct that threatened future harm.

Brightharbour Consulting, LLC v. Docuconsulting, LLC, 2014 WL 1415186 (N.D.Ga. April 14, 2014)

Evan Brown is an attorney in Chicago, advising clients in technology transactions, intellectual property disputes, and other matters involving the internet and new media.

Court sides with software developer in open source dispute

Case provides rare opportunity to get court’s analysis of GPL.

300px-Heckert_GNU_white.svgPlaintiff wrote an XML parser and made it available as open source software under the GPLv2. Defendant acquired from another vendor software that included the code, and allegedly distributed that software to parties outside the organization. According to plaintiff, defendant did not comply with the conditions of the GPL, so plaintiff sued for copyright infringement.

Defendants moved to dismiss for failure to state a claim. The court denied the motion.

Plaintiff claimed that defendant directly infringed its copyright by distributing the software without any attribution to plaintiff, without plaintiff’s copyright notice, without reference to plaintiff’s source code, and without any offer to convey the source code.

Defendant argued that it did not violate the terms of the GPL because its “distribution” of the software was merely internal, mainly to its own financial advisors. Accordingly, defendant argued, the requirements under the GPL to, among other things, attribute plaintiff and provide the source code were not triggered.

The court rejected defendant’s argument, looking to the allegations in the complaint that defendant distributed the software to it vendors in India, as well as providing it to “thousands of non-employee financial advisors.”

Despite the popularity of open source software, not a lot of courts have interpreted and applied the provisions of open source licenses. This case — if it does not settle — provides a rare opportunity to see serious legal treatment of the oft-used GPL.

XimpleWare Corp. v. Versata Software, Inc., 2014 WL 490940 (N.D.Cal. February 4, 2014)

Evan Brown is a Chicago technology and intellectual property attorney helping software vendors and customers alike navigate the many issues pertaining to technology development and licensing.

Unjust enrichment claim over unauthorized use of software was not preempted by the Copyright Act

preemptionThe Copyright Act is a federal law, and is drafted to “preempt” state laws that purport to give individuals rights that are “equivalent” to rights granted under the Copyright Act. The purpose of this preemption is to displace the effect of any equivalent state law, so that the federal framework gets to deal exclusively with copyright.

So when a plaintiff goes to court suing for copyright infringement and also adds a state law claim against the defendant based on the same underlying facts, defendants routinely move to dismiss that state law claim as preempted by the Copyright Act.

That is what happened in a recent case involving a plaintiff software developer who filed a copyright infringement case against a company for whom he had done some work. He added an “unjust enrichment” claim based on state law, which defendants moved to dismiss. But the court denied the motion, holding that in this situation, the unjust enrichment claim was not dealing with rights that were equivalent under the Copyright Act.

Plaintiff’s unjust enrichment claim was based on the fact that he had not been paid any money for the development work he provided to defendants. In other words, he delivered the copyrighted software, which defendants used without paying him. Sounds a lot like copyright infringement, doesn’t it? Or, more precisely, it sounds like the rights he was claiming were equivalent to those provided under the Copyright Act.

But the court held otherwise, namely, that plaintiff had pled an “extra element” that rendered his unjust enrichment claim to not be equivalent to rights under the Copyright Act.

The court drew an important distinction within the doctrine of unjust enrichment, between “implied-in-law” (quasi-) contracts, and “implied in fact” contracts. An implied-in-fact contract claim passes the threshold of having an “extra element” that defeats a preemption challenge, while an implied-in-law contract does not.

An implied-in-law contract is a “fictional” contract created by a court for equitable, not contractual, purposes. It is not an actual contract, but is a legal substitute formed to impose equity between two parties. An implied-in-fact contract, on the other hand, is indeed a contract that is agreed to by non-verbal conduct, rather than explicit words.

Infringement is the unauthorized use of a work, and a court applying an implied-in-law contract would simply be stepping in to remedy an injustice of that infringement. That is why an unjust enrichment claim based on an implied-in-law contract would be preempted. But the implied-in-fact contract has more to it – actual conduct (a factual reality) that is more than just the conduct of the infringement that took place. That is why an implied-in-fact contract claim of unjust enrichment passes the no-preemption test.

(Compare this to the 2010 case of Christen v. Iparadigms that dealt with

Mahavisno v. Compendia Bioscience, Inc., 2014 WL 340369 (E.D.Mich. January 30, 2014)

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