Under copyright law, among the exclusive rights that are held by copyright holders is the right of public performance. In some cases, the copyright holder is free to negotiate any fee or royalty that it desires for public performance, or even refuse such performance outright, while in other cases, the copyright holder must accept statutorily mandated royalties. Until the innovation of cable, public performance simply entailed providing a copyrighted work directly to the public (as in a movie theater or nightclub) or broadcasting it over the airwaves.
In an effort to bring cable systems within the scope of the Copyright Act, Congress amended the Copyright Act in 1976 by clarifying that to “perform” an audiovisual work meant “to show its images in any sequence or to make the sounds accompanying it audible.” The “Transmit Clause” was also added, specifying that an entity performs a work publicly when it “transmits” a performance to the public, i.e., communicates the performance “by any device or process whereby images or sounds are received beyond the place from which they are sent.” These changes were necessary in the age of technology in order for copyright holders to maintain their statutory monopoly on public performance rights of their works: there are many ways to transmit a performance other than by traditional broadcast. In 1976, of course, Congress was thinking of cable delivery. The Internet was barely even conceived.
In 2012, along came a service called Aereo, launched by Barry Diller’s IAC/Interactive Corp., a $3 billion company. The idea behind Aereo’s service was simple: “an automated system consisting of routers, servers, transcoders, and dime-sized antennae” that allowed consumers to watch television programming whose signals are relayed by Aereo to its customersvia the Internet. The reality is a little bit more convoluted:
Respondent Aereo, Inc., sells a service that allows its subscribers to watch television programs over the Internet at about the same time as the programs are broadcast over the air. When a subscriber wants to watch a show that is currently airing, he selects the show from a menu on Aereo’s website. Aereo’s system, which consists of thousands of small antennas and other equipment housed in a centralized warehouse, responds roughly as follows: A server tunes an antenna, which is dedicated to the use of one subscriber alone, to the broadcast carrying the selected show. A transcoder translates the signals received by the antenna into data that can be transmitted over the Internet. A server saves the data in a subscriber-specific folder on Aereo’s hard drive and begins streaming the show to the subscriber’s screen once several seconds of programming have been saved. The streaming continues, a few seconds behind the over-the-air broadcast, until the subscriber has received the entire show.
Convoluted though Aereo may be, the Supreme Court’s decision on June 25, 2014, that Aereo’s service infringed on copyrighted programming was a no-brainer. That’s because Aereo did not simply act as equipment provider, but transmitted each particular program that a subscriber selected to watch. The dissent (written by Scalia, and joined by Thomas and Alito), believed that because transmission was triggered by the subscriber, Aereo’s transmission could not be deemed a transmission at all and viewed the Aereo as akin to having a library card. (It’s a bit difficult to square that view with the actual wording and intent of the law.) The majority opinion, written by Breyer and joined by Roberts, Kennedy, Sotomayor, Ginsburg and Kagan, found Aereo’s service to have an “overwhelming likeness to the cable companies targeted by the 1976 amendments,” with the only difference being that cable systems transmit programming continuously, while the Aereo system transmits them only when “a subscriber indicates that she wants to watch a program. Only at that moment, in automatic response to the subscriber’s request, does Aereo’s system activate an antenna and begin to transmit the requested program.” The majority found the distinction to be unimportant, in part because in both systems the method is invisible both to broadcasters and subscribers alike. (As a cable subscriber, you can only watch those channels to which you turn your dial. As an Aereo subscriber, you can only watch those channels you click on.)
There has been some recent fury in the press characterizing the decision as an attack on “disruptive innovation,” a currently vaunted theory that purports to understand how technological innovation really happens. See, e.g., Michael Wolff’s article in USA Today, Concept of disruption under attack, July 7, 2014. Wolff claimed that Aereo was akin to Google and suggested that opposition to it is an attack on the future. (“Clever ideas are the future. Established ones are the past. Choose your side,” Wolff says.)
However, Aereo was not doing “disruptive innovation” — and neither was Google. Google developed search engine technology that depended on aggregating information from existing websites and publications and provided the means for people to find that information. The argument that Google was infringing copyright by copying information to facilitate searches has nothing to do with the theory of disruptive innovation, which is “the selling of a cheaper, poorer-quality product that initially reaches less profitable customers but eventualy takes over and devours an entire industry.” Google wasn’t disrupting or cannibalizing an already existing marketplace.
It might be that Aereo offered a poorer-quality product and reached less profitable customers, but it did nothing more than re-route the information for which cable operators – which do on land what Aereo was doing online – pay license fees. Actually, the fact that the Supreme Court viewed Aereo as substantially similar to cable companies has recently given Aero’s lawyers new hope:
The high court concluded that the streaming service was so similar to cable companies, which are required to negotiate a deal if they want to carry broadcasters’ programming, that it could not simply pluck signals from the airwaves without paying. That’s significant, Aereo says, because the classification also means that it’s “now entitled’ to work out a deal — which broadcasters, in turn, must negotiate in good faith. Indeed, Aereo says, its eligibility for what’s known as a compulsory license ‘must be decided on an immediate basis or [its] survival as a company will be in jeopardy.”
As for the supposedly new “attack” on “disruptive innovation,” this is mere palaver. Aereo was not innovative, but clever — actually too clever by half. For quite a few years now, services that take copyrighted content and re-distribute it without paying royalties or fees to the copyright holders have regularly been found by courts to run afoul of copyright law, regardless of how popular the service is.
It can also be said that Barry Diller’s IAC/InterActiveCorp hardly fits the model for a company engaged in disruptive innovation. IAC/InterActive’s revenues exceed $3 billion per year. Founded in 1995, and traded on NASDAQ, it is very far from being a feisty startup (the standard bearer for disruptive innovation). Diller’s strategy was likely a calculated risk that if he didn’t slip through a loophole, he could get big enough to bring the content providers to the table. With Aereo’s latest argument, as the case goes back to the lower court on remand, he just might succeed.
 The reasons for statutorily mandated royalties are beyond the scope of this article, but see our post, Copyright 2014: Understanding the Issues. It should also be noted that while copyright owners of audiovisual works and musical compositions do have the exclusive right to control public performance of their works, sound recording copyright holders currently have that right only for public performance via the Internet (and not via land-based radio stations). That exception may well be eliminated in the near future.
 This is a quote from Jill Lepore’s article, The Disruption Machine (The New Yorker, June 23, 2014), criticizing the theory of “disruptive innovation,” but her description is accurate. See http://www.newyorker.com/reporting/2014/06/23/140623fa_fact_lepore?currentPage=all
 For a thumnail sketch of IAC/InterActive, see http://en.wikipedia.org/wiki/IAC/InterActiveCorp
On June 18th, the United States Trademark Trial and Appeal Board (TTAB) granted a petition to cancel six registrations for word and design marks containing the word, REDSKINS for entertainment services. The action, Amanda Blackhorse, Marcus Briggs-Cloud, Philip Gover, Jillian Pappan, and Courtney Tsotigh v. Pro-Football, Inc., Cancellation No. 92046185 (June 18, 2014) (“Blackhorse”), was brought by six Native Americans (later narrowed to five), who argued that the word “Redskin” was disparaging to Native Americans. Two of the three judges on the TTAB panel agreed and one dissented.
This was the second cancellation action brought by Native Americans against trademarks owned by the Washington Redskins. In the first, Harjo v. Pro Football, Inc., brought in 1992, the TTAB granted the petition for cancellation, but the federal courts ruled that the petitioners were barred by the doctrine of laches — i.e., they had waited too long after reaching the age of majority to file their action.
The registrations sought to be cancelled in Blackhorse were registered between 1974 and 1990. When the petition was filed in 2006 (shortly after the federal courts dismissed the Harjo petition), each of the petitioners had only recently reached the age of majority. Laches was no longer at issue.
Under 15 USC § 1052 of the Lanham Act, marks that “may disparage” persons or institutions “or bring them into into contempt or disrepute” are forbidden from being registered. Moreover, while the Lanham Act requires many cancellation petitions to be brought within five years of registration of the disputed mark, it provides no statute of limitation for cancellation petitions based on disparagement. Under 15 U.S.C. § 1064(3), such petitions may be brought “[a]t any time.” In the final Harjo appeal, Pro-Football, Inc. v. Harjo, 415 F.3d 44 (2005),the Court speculated that Congress “may well have denied companies the benefit of a statute of limitations for potentially disparaging trademarks for the very purpose of discouraging the use of such marks,” citing In re Riverbank Canning Co., 25 C.C.P.A. 1028, 95 F.2d 327, 329 (1938), which noted that the “field is almost limitless from which to select words for use as trademarks, and one who uses debatable marks does so at the peril that his mark may not be entitled to registration.”
Nevertheless, there was no fixed test for determining whether a mark is disparaging until Harjo. As re-stated in Blackhorse, the test is two-fold:
- What is the meaning of the matter in question, as it appears in the marks and as those marks are used in connection with the goods and services identified in the registrations?
- Is the meaning of the marks one that may disparage Native Americans?
In answer to the first question, the TTAB found that REDSKINS, even when used in connection with the presentation of football games, clearly refers to Native Americans. This is demonstrated by the design marks (visible on Washington Redskins helmets and elsewhere) and by the use of Native American garb and headdresses by the Washington Redskins’ band and cheerleaders (called “Redskinettes”).
In answering the second question, the TTAB noted that in addition to other evidence, it must take into account the views of a “substantial composite,” but not necessarily a majority, of the group which the mark is claimed to disparage. In addition, it had to find that REDSKINS was disparaging in connection with entertainment services (i.e., the presentation of football games) at the time the marks were registered.
Petitioners submitted two types of evidence to prove their case. General evidence as to the meaning of the word REDSKINS consisted of dictionary definitions, reference books and testimony from experts in linquistics. Specific evidence as to the views of Native Americans consisted of personal testimony and letters, newspaper articles and official records, including a 1993 Resolution of the National Congress of American Indians declaring that the REDSKINS trademarks were “offensive and disparaging.” The evidence left no doubt in the minds of the majority that REDSKINS was disparaging at the time the marks were filed. The respondent’s argument, that REDSKINS had acquired a separate meaning as the name of a football team, thereby neutralizing any disparaging effect, was rejected.
The dissent, on the other hand, believed that the petitioners failed to prove that the term was disparaging at the time of registration when used in connection with football. Furthermore, he said, dictionary definitions that labelled REDSKIN as “usually offensive” left open the possibility that it might not be in certain contexts, one of which could be football.
The TTAB ruling does not affect the ability of the Washington Redskins owner to continue using its REDSKINS trademarks. The only issue at stake in the case was whether federal law permitted registration of the mark in the US Patent and Trademark Office, thereby invoking the additional protections that registration provides. There is no question but that the USPTO made the right decision. Indeed, no federal agency should put a stamp of approval on conduct (or a trademark) that plainly disparages a segment of the population on the basis of race, religion, ethnicity, gender or sexual orientation.
As Paul Bonanos predicted in Billboard magazine on April 10, 2014, Amazon has now officially entered the music streaming market through Amazon Prime, which now boasts over one million songs (tens of thousands of albums), unlimited listening, no ads and, of course, no extra charge for Amazon Prime members. As Amazon states in its press release:
Prime members can choose exactly which songs and albums to listen to, or they can sit back and listen to hundreds of expert-programmed Prime Playlists…. Prime members can also download songs from the Prime Music catalog to their mobile devices for offline playback on planes, trains and anywhere they’re without an internet connection
Prime Music is a bit different from that of other streaming services in that Amazon won’t be providing listeners with new releases, but only music that has already been released for some months, and then only a selection of participating record companies’ catalogs. For this, Amazon was able to negotiate lump sum payments, rather than royalties based on the number of plays. For now, Universal’s releases, which account for 36.7% of the market in sound recordings, will not be included in Amazon Prime. (According to Bloomberg, Universal considered Amazon’s lump sum offer too low.)
It remains to be seen how much money paid by Amazon to Warner Music Group and Sony Music Entertainment will filter down to their artists and whether their artists are even being advised that their music was offered as part of the deal.
The House will hold hearings today, June 10th, and again on June 25th on royalties payable to copyright holders of musical compositions by terrestrial and digital media services. The Songwriter Equity Act is expected to be the focus of the June 10th hearings. The bill, introduced by Rep. Doug Collins (R-GA, the “Most Conservative Georgian in Congress”), is the House version of a bill introduced in the Senate by Orrin Hatch (R-Utah) and Republican Senators from Tennessee, Lamar Alexander and Bob Corker.
Collins says he is hoping for “swift and thorough consideration” of the bill, which would determine how Copyright Royalty Judges set compulsory royalties for the following reproductions of music compositions:
- Mechanical royalty rates for the reproduction of musical compositions by way of CDs, vinyl records and similar devices,
- permanent downloads,
- limited downloads
- interactive streaming
If passed, the law would require that the Copyright Royalty judges
establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In establishing such rates and terms, the Copyright Royalty Judges shall base their decision on marketplace, economic, and use information presented by the participants. In establishing such rates and terms, the Copyright Royalty Judges may consider the rates and terms for comparable uses and comparable circumstances under voluntary license agreements.
What does this mean in practice?
First, Copyright Royalty Judges are currently prohibited from considering the royalties paid for the use of sound recordings by interactive digital services. (For an explanation of the licensing differences for interactive vs. non-interactive digital transmissions, see our previous post.) This is not necessarily a bad thing, but setting musical composition royalties against sound recording royalties is a zero-sum game, albeit one in which sound recordings owners are currently the clear victors. Some leveling of the playing field may be called for — keeping in mind, however, that songwriters invest very little money, if any, in writing a song, while sound recording owners spend (and risk losing) substantial sums of money before they have a finished sound recording.
Second, the Songwriter Equity Act would strike from the law the section that currently sets the mechanical royalty rate at 9.1 cents (for reproductions of musical compositions and digital downloads). This is probably a bad thing. The current rate of 9.1 cents is comparable or higher than the compulsory mechanical licensing rates of other countries, including the United Kingdom, where music is at least as cherished and important an industry as in the United States.
Moreover, gutting the current method for determining mechanical royalties will, if the rate is raised substantially, cause financial harm to any recording artist who records a cover version of a song. The reason why mechanical royalties were established to begin with is that lawmakers realized that there were no “willing sellers” — i.e., songwriters who were willing to let anyone record their song. But because copyright law is a limited monopoly that must also serve the public interest by advancing the arts, etc., lawmakers decreed that once a musical composition was recorded, anyone can re-record it, provided they remain faithful to the original. The compulsory mechanical royalty sets the terms by which cover versions can exist.
Typically record companies limit the amount of mechanical royalties they are willing to pay their recording artists. (Were recording artists to demand higher mechanical royalty rates, record companies would simply reduce their artist royalties. Again, it’s a zero sum game.) That means that if a recording artist were to release 10 songs, 8 of which were written by the recording artist and 2 of which were cover versions written by others, the artist wouldn’t simply give up a proportional share (i.e., 20% ) of the available mechanical income. Rather, the percentage would depend upon how high the rate was set vs. how much was left over for the songs penned by the recording artist. So much for songwriter equity. Add to this the fact that an uncountable number of recording artists are subject to a statutory rate fixed at the time they made their deals, while the statutory rate for licensed works (for cover versions and samples) are rarely fixed. Those recording artists will see their publishing income slip even further if the Songwriter Equity Act is passed. (Of course, Congress could, for instance, preserve the mechanical royalty for records and downloads, but still raise rates for streaming services.)
Although the goal of higher royalties for songwriters is laudable, at least in the abstract, attempting to set royalties according to what “a willing buyer and a willing seller” would do is a complete fiction, given the monopoly power of the performing rights organizations (which control 100% of performing rights income) and three major record companies (which collectively control 75% of the market for sound recordings). Streaming services pay 60-70% of their income to recording companies not because they are “willing buyers” to the record companies’ “willing sellers,” but because they can’t succeed without offering their subscribers the majors’ sound recordings.
The Songwriter Equity Act is, not surprisingly, opposed by the Digital Media Association (DiMA), which includes Pandora, Google, Apple and Amazon. According to the DiMA’s Executive Director Lee Knife, the Songwriter Equity Act and other currently proposed legislation in this area “create additional anomalies” and “cater to the unique interests of only a limited group of stakeholders.” What he means by the latter — and he is correct — is that any increase in royalties is likely to be felt only by the richest publishers and the most popular artists.
Over the past year, Congress has been reviewing various provisions of the Copyright Act, including those affecting how copyright royalty rates for radio and streaming services are determined, in order to assess whether reforms are necessary or desirable. The U.S. Department of Justice recently announced that it would review the anti-trust consent decrees that determine what ASCAP and BMI are able to collect on behalf of publishers and songwriters. (More on that below.) The Copyright Office has also gotten involved, soliciting comments from rights holders and the public. (The comment period closed on May 23rd.) For the most part, however, the public is left scratching its collective head: are there serious issues at stake or is this just another rights grab by copyright holders? This post is intended to provide the reader with some perspective in the current discussions and, in particular, the issues surrounding music streaming services like Pandora and Spotify.
Some Basics: Musical Compositions vs. Sound Recordings
Every song involves two sets of copyrights: the copyright in the musical composition and the copyright in the sound recording, which is a particular performance of the musical composition. The musical composition copyright is owned by a music publisher or songwriter, while the sound recording copyright is owned by the record company that records it or the artist whose performances are embodied on it.
The scope of rights that goes along with each of these copyrights is slightly different. Owners of musical compositions have the right to receive compensation from public performances of the musical composition. Owners of sound recordings, however, have that right only with respect to digital (cable, satellite and web-based) transmissions and cannot claim any public performance royalties when their recordings are played on “terrestrial” radio and television stations. To complicate matters a little further, sound recordings made prior to 1972 are not protected under copyright law, but under state unfair competition and anti-piracy laws. When Congress passed the 1976 Copyright Act, it decided that “pre-1972 sound recordings” should be entitled to federal copyright protection only in 2047. That date was subsequently amended to 2067, at which time state law protections for sound recordings will also be pre-empted. Nobody really knows why Congress did it that way.
How is Income from Musical Compositions and Sound Recordings Generated?
The main income streams for musical compositions are:
- mechanical royalties (i.e., royalties paid by record companies to publishers for the right to make each physical or digital copy of a sound recording bearing the publisher’s musical composition);
- synchronization fees (i.e., the reproduction and use of a musical composition in “synchronization” with visual images, as in the case of videoclips, films, television programs or commercials);
- public performance royalties, i.e. the broadcasting or transmission of musical compositions via broadcast and cable radio and television; Internet simulcasts of “terrestrial” broadcasts; satellite; both non-interactive and interactive Internet streaming; and in restaurants, clubs, retail stores or other establishments that have live or pre-recorded music;
- fees and royalties from third party licenses (e.g., uses in video games and software, theatrical productions and audio-only commercials); and
- sheet music royalties.
The main income streams for sound recordings are:
- record sales (including downloads);
- synchronization fees (i.e., the reproduction and use of a sound recording in “synchronization” with visual images);
- fees and royalties from third party licenses (e.g., uses in video games and software, theatrical productions and audio-only commercials);
- public performance royalties for sound recordings broadcast or transmitted by (1) eligible nonsubscription services (i.e., noninteractive webcasters and simulcasters of “terrestrial” broadcasters that charge no fees); (2) preexisting subscription services (i.e., residential subscription services which began providing music over digital cable or satellite television before July 1998); (3) new subscription services (i.e., noninteractive webcasters and simulcasters that charge a fee, as well as residential subscription services providing music over digital cable or satellite television since July 1998; and (4) preexisting satellite digital audio radio services (i.e., SiriusXM Radio).; and
- interactive Internet streaming royalties and fees.
How Are Royalty Rates Determined?
Synchronization fees and royalties and fees for third party licenses are unregulated and determined separately by the rights holders, i.e., the owners of the musical compositions and sound recording, in negotiation with the licensee. (Owners of musical compositions and sound recordings negotiate their own deals, but generally they do so in parity with each other.)
Mechanical royalty rates for the reproduction of musical compositions by way of CDs, vinyl records and similar devices, permanent downloads, ringtones, limited downloads, and the rates for interactive streaming are set by Copyright Royalty Judges. For physical records and permanent downloads, the rate is currently 9.1 cents per musical composition or 1.75 cents per minute of playing time or fraction thereof, whichever is greater. These rates have remained unchanged since 2006. For ringtones, the rate is 24 cents. The formulas for calculating rates for musical compositions embodied in limited downloads or transmitted via interactive streaming are highly complex, as a quick glance at 37 C.F.R. §§ 385.10 – 385.17 will confirm.
Public performance royalties for musical compositions, which include royalties on non-interactive streaming, are governed by consent decrees with ASCAP and BMI that are overseen by the U.S. Department of Justice’s Antitrust Division. The consent decrees, which date back to 1941, were the result of actions brought against ASCAP and BMI to address their substantial monopoly power over the market for public performances. (Together they control about 95% of the market, with a third performing rights organization, SESAC, taking up the slack.) The actual rates under the consent decree, however, are regularly addressed in court. In January 2012, for instance, the U.S. District Court in Manhattan, which is the court with jurisdiction over the consent decrees, approved a settlement that set the fees radio stations must pay to ASCAP through 2016.
Royalty rates for sound recordings are subject to far less regulation. The use of sound recordings in interactive streaming isn’t subject to any kind of control. Interactive service providers (such as Spotify) therefore must obtain licenses directly from the sound recording copyright holders at whatever rate can be negotiated. All other public performance royalties for sound recordings are statutorily mandated to be set either through voluntary negotiations between sound recording owners and service providers or by trial-type hearings before the panel of three Copyright Royalty Judges who use a number of criteria that attempt to take into account the concerns of rights holders, service providers and consumers.
The current battle over copyright royalties focuses on rates regulated by statute and/or determined under the consent decrees and by Copyright Royalty Judges. For those who have a knee-jerk reaction to any royalty rate that might be set by a government body or a court, there are good reasons either to maintain the status quo or to use statutory and jurisprudential mandates to level the playing field even further between sound recording copyright owners, musical composition copyright owners, recording artists, songwriters and different types of service providers. Even Senator Orrin Hatch (R-Utah), one of the sponsors of the Songwriter Equity Act, saw no reason to eliminate the ASCAP and BMI consent decrees, which ensure that songwriters receive 50% of public performance income earned by their musical compositions.
Who are the Rights Holders?
The market in sound recordings is largely dominated by the three “Majors,” Universal Music Group (UMG), Sony Music Entertainment and Warner Music Group. Collectively they own the sound recordings that account for 75% of the market, with Universal currently controlling nearly half that — 36.7%. This figure does not include sound recordings owned by independent labels that are distributed through the Majors, and thus underestimates the actual power the three majors wield in the marketplace.
With two exceptions, the Majors generally earn the lion’s share of income earned from sound recordings, ceding a small percentage to their recording artists. The first exception is synchronization income, where the royalty split is usually 50-50. (The Majors also have a variety of ways to reduce the recording artist’s share of this income, but those wrinkles and tricks are beyond the scope of this article.) The second exception is in public performance of sound recordings via cable, satellite and the Internet, where the micropayments that accrue are distributed by an organization called Sound Exchange on a rather more equitable basis: 50% to the copyright owner, 45% to the featured artist or artists, and 5% to non-featured performers. Copyright owners and featured artists are paid directly by Sound Exchange, but non-featured artists are paid only through one of two unions, the American Federation of Musicians (AFM) or the American Federation of Television and Radio Artists (AFTRA). Note that Sound Exchange public performance royalties are different from the royalties that non-interactive streaming services like Spotify have to pay to sound recording copyright owners. In the latter case, the owners, not the artist, are likely to earn the greater share.
The market with respect to musical compositions is also dominated by the Majors through their publishing affiliates, which collectively account for 65.2% of that market. Income distribution from music publishing tends to be more evenly distributed between companies and songwriters than on the sound recording side. Although there are many exceptions (as well as plenty of royalty-reducing wrinkles and tricks), 50% of royalties earned in respect of musical compositions go to publishers and 50% go to songwriters. (Some songwriters do much better than this if they can negotiate an administration deal, some do worse.) The 50-50 basis is also how ASCAP, BMI and SESAC distribute public performance royalties they collect from radio, television, restaurants, clubs, retail stores and other establishments that have live or pre-recorded music.
The Lawsuits over Pre-1972 Recordings
As mentioned above, owners of pre-1972 sound recordings do not enjoy a federally protected right to license public performances over terrestrial radio and television. The issue for these owners (who will not be copyright holders until 2067) is how to get paid now. The Turtles, who recorded the pop hit “Happy Together” in 1967, filed class action suits in August 2013 in New York, California and Florida on behalf of all owners of pre-1972 sound recordings whose works are played by SiriusXM. The suits allege that their public performance rights are covered by state statute or common law. A month after they filed suit, Capitol Records, Warner Music Group, Sony Music Entertainment, UMG Recordings, and ABKCO Music & Records, also filed a similar suit in California state court alleging infringement of California statutory and common law copyright. Given that there is no express exclusive right of public performance for sound recordings under any state law, the suits are likely to turn on whether making copies of those sound recordings for sole purpose of facilitating transmission amounts to bootlegging. There is a substantial likelihood that these suits will be dismissed. (A motion for summary judgment is pending before Judge McMahon in New York.)
Are Current Royalty Rates Fair?
In order to answer the question of whether the rates are fair, one needs to take into account a number of facts about the current music business and how the various rights holders envision their future. ASCAP and BMI are not collecting the public performance royalties they were a decade ago because the advertising revenues of terrestrial radio and television stations have steadily declined, and it is on the basis of revenues that the performing rights organizations earn their royalties. Currently, terrestrial music stations pay ASCAP 1.7% of “revenues subject to fee from radio broadcasting,” which basically means all revenue received by the station from advertising and promotion, less a 12% deduction to cover costs attributable to administration and commissions.
Unlike terrestrial radio stations, Pandora has to pay ASCAP 1.85% of its annual revenue. ASCAP, not to mention all its publishers and songwriters, was unhappy with the decision: it asked for 3% for 2014 and 2015. Based on Pandora’s net profits, it is difficult to see why the publishing industry believes that non-interactive streaming services should pay more than terrestrial radio. But according to ASCAP’s CEO, John LoFrumento, the fact that Apple agreed to pay songwriters and publishers 10% of its revenues for iTunes Radio in a direct deal (i.e., without resort to the rate court) proves that the “market rate” for online streaming is much higher than what Pandora was ordered to pay. As it is, Pandora will pay a total of about 4% of its revenue to the music publishing industry and another 50-60% to record companies (and most of that to the Majors).
With the help of this rather lengthy introduction, the reader will hopefully be well-disposed to consider these additional facts and circumstances:
- The Record Industry is in Crisis. For the Majors and other sound recording owners whose economic survival is based on the sale and exploitation of sound recordings, streaming appears to be their best, and for the foreseeable future maybe their last, hope. Although downloads have made up some of the loss in physical record sales, the iTunes and Amazon model of selling individual tracks destroyed the prospect of record companies being able to sell albums to consumers. Why buy an album when you can buy the few great songs on it for a third or a quarter of the price? But ever since the advent of the LP, it was in album sales that record companies have earned their money.
Now, of course, consumers don’t even want to buy downloads, but are preferring in ever greater numbers to being able to access a wide range of music on their computers, tablets and mobile photos. The preference is a response to a number of factors, among them, the Majors’ policy (only partially abandoned) to force digital rights management on purchased downloads; the fact that the purchaser doesn’t own the download (it’s “licensed,” not owned) and can’t legally share it with others; and efforts by the Majors (through the RIAA) to teach the public through well-publicized litigation that consumers who receive purchased music from others may be liable for copyright infringement. It’s no wonder that consumers have come to prefer streaming services. The market has spoken: “Just give me the music and let me listen to it when and where I want.” That leaves record companies trying to wrest from streaming services the income they’re losing from album sales. Publishers are in a similar position, because when albums were sold they could earn mechanical royalties on music compositions that would never receive radio play or any other licensing opportunities.
- Streaming Services Aren’t Profitable. It’s no secret that Pandora and Spotify aren’t profitable. Nor will they be for the foreseeable future if they have to rely on subscriptions from listeners. In March, Recon Analytics said that Beats Music could become profitable if it had 5-10 million subscribers. That assessment, however, was based on Beats Music’s subscription fee at the time, which was $119.88 per year. Now that Beats Music is owned by Apple (and can take advantage of Apple’s unlimited deep pockets), the subscription price has slipped to $99.00, and if competition heats up between streaming services, it may go even lower. That means Beats Music will need many more subscribers — not merely 20% more, because more subscribers also means that Beats Music has to pay higher royalties to rights holders. Moreover, even the $99.00 per year price is unrealistic, given that the average music fan spends between $48 and $64 per year on music. It’s a tall order to expect consumers to pay for streaming two times what they would pay for purchased music.
Although Pandora hopes to turn a profit in 2014, if it does, it will not do so from subscription sales. People tend to be impressed by Pandora’s revenue figures, which were $194.3 million for the first quarter of 2014, but $140.6 million of that was from advertising revenues and Pandora posted a net loss for the quarter of $28.9 million. Pandora paid “only” 55.7% of its revenues for content acquisition (which includes payments to ASCAP and BMI) in the first quarter of 2014, far lower than the 74.5% it spent in the first quarter of 2013, but whether Pandora will sustain that lower rate seems doubtful in the face of strong opposition to lower rates from the record and music publishing industries, as well as recording artists and songwriters.
This problem of unsustainable royalty obligations is not limited to Pandora. Online music services that offer interactive streaming, like Spotify, are generally paying 60-70% of their revenue for content licensing. Despite such large payouts, Spotify and other streaming services has been excoriated by artists including David Byrne, Thom Yorke, Bette Midler and Coldplay, among many others. Independent artists and songwriters are also disgusted. In addition to earning literally almost nothing from the streaming services, they have accused Spotify of ” giving independent and unsigned musicians a lower royalty rate than major label musicians for the same number of streams.” (Note that on the musical compositions side, the ASCAP and BMI consent decrees prohibit this kind of discrimination.)
In the face of all this opposition, no one really expects that streaming services are going to be paying less to rights holders at any time in the future. The solution, then, appears to be in selling advertising revenue, linking streaming services with mobile deals and bundling — i.e., offering music streaming services together with other services, like paid-for downloads. Stand-alone streaming services might also sell users’ behavioral data (i.e., what they listen to) to advertisers and others who “could use that information to better target their advertising.”
The most viable business model, however, will be to offer streaming services as part of much bigger packages, as Amazon may do with Amazon Prime, which for $99 a year, gives its customers free two-day shipping.
By bundling product shipping, video and music together, Amazon can deftly hide the price of each of the services from consumers, encouraging them to buy all instead of none — and overcoming signup barriers music services have always faced…
Just as cable companies offer its subscribers bundles of channels they’ll never watch (just so they can receive those that they want), so Amazon could offer its customers an overall package price covering 2-day shipping, music and video streaming and e-book lending. Few customers will use all those services to maximum benefit, but their money will fund content acquisition across the board. Of course, Amazon could also subsidize its streaming service by bundling it with paid-for downloads, thereby fostering greater customer loyalty. This is what Amazon did with Amazon Prime, “where the company makes up for its losses on shipping costs by turning casual Amazon customers into frequent buyers.”
Then there is Apple, which is in the position to subsidize its streaming services through selling far more profitable platforms and devices (iPhones, iPads, Apple computers and Beats headphones) on which to use those services. It is only because Apple doesn’t need to earn a profit on music streaming that it could offer publishers and songwriters a much higher royalty rate than its competition, and then turn around and make deals with recording artists like Coldplay, The Black Keys and Beyoncé, who have given iTunes varying degrees of exclusivity to their music. Standalone streaming services like Spotify and Pandora are no match for this kind of integrated market power.
- There’s no such thing as a benevolent monopoly. When companies have monopoly power, they use it. First, it’s no secret that the Majors (and not publishers) earn most of the money paid by streaming services to rights holders. This is solely due to the fact that public performance rights for musical compositions and public performance rights for non-interactive streaming of sound recordings are regulated, while the use of sound recordings in interactive streaming is not. Consequently, services offering interactive streaming have to cut deals with each of the Majors, who use their monopoly power to extract high fees and other terms (such as high advances and royalty guarantees) from the service providers.
Second, it is manifestly clear that if music publishers could use their monopoly power in the same way as the Majors, they would. Under prodding from publishers, in 2011, ASCAP tried to get around the consent decree royalty structure by allowing its members to withdraw new media services (i.e., digital rights) from ASCAP’s performing rights licenses, but it was rebuffed by the court. Had ASCAP succeeded, the Majors’ publishing affiliates could have negotiated “steep license fees, which ASCAP could then use to establish higher royalties in the rate court” for independent publishers. Independent publishers were understandably less enthusiastic, as they knew that the big three publishers would take a disproportionate piece of the royalty pie, leaving crumbs for the independents.
Third, using their monopoly power, the Majors have and will continue to set an extremely high bar for new entrants in the music streaming business. Similarly, Amazon and iTunes will continue to use and extend their monopoly power market to shut out their competition wherever they can.
Congress needs to decide whether the current state of affairs needs to be addressed through legislation. Do publishers and songwriters receive too little a share of the overall royalty pie? The answer appears to be “yes.” Are the Majors extracting too much money from streaming services? To the extent that they leave independent companies and artists with a disproportionately lesser share of royalties, the answer also appears to be “yes.” Congress should consider leveling the playing field for sound recording copyright owners in general, much as the consent decrees leveled the playing field for publishers and songwriters by ensuring that performing rights royalties for publishers and songwriters are paid at the same rate, rather than a rate determined by the relative negotiating power publishers.
However, Congress also needs to decide whether greater competition among streaming services is itself a worthy goal and whether that goal can co-exist with the royalty rates that record companies, music publishers, recording artists and songwriters say they need. To put this into proper perspective, any talk of “fair market value” is empty rhetoric given the high degree of concentration in the music recording and publishing industries and, increasingly, music streaming services. “Fair” is simply whatever the market will bear at any given moment, and one can hardly begrudge rights holders from negotiating the highest possible royalty rates and then engaging in tactics intended to push those rates even higher. What is clear is that rights holders do not view the stand-alone streaming service, whether interactive or non-interactive, to be a viable business model because such a service could never generate the revenues that rights holders want. Rights holders are also aware that consumers will only pay so much for music streaming and that their only viable recourse is to require the streaming services to seek alternative sources of income.
Congress must also address whether terrestrial radio and television should continue to be exempt from paying performing rights royalties for sound recordings. That exemption was won by broadcasters back in 1970 and maintained ever since then under the theory that radio play gives record companies free promotion, which stimulates record sales. However, the rationale fails to be persuasive when digital broadcasters are required to pay such royalties. If Congress decides that terrestrial radio must pay, then it will also need to decide how rates will be set — whether by statute, rate courts or private negotiation, where the Majors can freely exercise their monopoly power. (The latter seems unlikely.)
Finally, Congress should bring pre-1972 recordings under federal copyright law now, so that the owners of these recordings can participate in sound recording performance royalties. Ending state and common law protections for pre-1972 recordings would also reap a positive benefit to the public, since at the moment, there are no pre-1972 recordings in the public domain and won’t be until 2067. Admittedly, it would open up a can of worms: Congress would have to decide exactly when pre-1972 recordings would enter the public domain and under what criteria. Due to the piecemeal way in which Congress has historically dealt with copyright laws, copyrightable works (other than sound recordings) published without a copyright notice prior to January 1, 1978, are currently in the public domain, as are works that were published with a copyright notice between 1923 and January 1, 1964, but never renewed via registration at the Copyright Office. (Works published after 1977 are not required to be registered and enjoy copyright terms ranging from 70 years from the death of the author, 95 years from the date of publication, or 120 years from the date of creation, depending on a number of factors.) Obviously, copyright protection for pre-1972 recordings cannot depend upon whether they were released with copyright notices – none were – but Congress will have to determine, somewhat arbitrarily, when their copyright terms will expire. Congress will have to address other problems as well, such as what to do about orphan works and the extent to which statutory damages should apply to infringements.
 Federal Copyright Protection for Pre-1972 Sound Recordings, A Report of the Register of Copyrights, December 2011, pp. vii and 13-16, http://www.copyright.gov/docs/sound/pre-72-report.pdf
 “Federal Court Approves Radio Industry Settlement with ASCAP,” http://www.radiomlc.org/pages/4795848.php
 The explanation here is necessarily simplified. For a more complete explanation, see http://www.soundexchange.com/service-provider/licensing-101/#sthash.n4MSXwCV.dpuf. For a look at procedural regulations governing the Copyright Royalty Board, see http://www.loc.gov/crb/fedreg/2005/70fr30901.html.
 Comments of Public Knowledge and the Consumer Federation of America, “In the Matter of Music Licensing Study: Notice and Request for Public Comment,” Docket No. RM 2014-3, before the United States Copyright Office (hereinafter, “Public Knowledge”), p. 11, http://www.publicknowledge.org/assets/uploads/documents/PKCFAComments.pdf
 Id., p. 16
 In April of 2013, a New York appellate court decided that the Digital Millennium Copyright Act’s “safe harbor” provisions did not protect a website with user-generated content from claims of infringement on pre-1972 recordings on the grounds that pre-1972 recordings do not enjoy protection under federal copyright law. The New York high court, called the New York Court of Appeals, declined an appeal from the appellate court decision. Eric Goldman, “More Evidence That Congress Misaligned the DMCA Online Copyright Safe Harbors (UMG v. Grooveshark),” April 24, 2013, http://www.forbes.com/sites/ericgoldman/2013/04/24/more-evidence-that-congress-misaligned-its-online-copyright-safe-harbors-umg-v-grooveshark/. The United States District Court, Southern District of New York, reached a similar conclusion in a case involving the video-sharing service, Vimeo. An appeal of that decision is pending before the 2d Circuit Court of Appeals. See, Richard L. Crisona, S.D.N.Y. Intellectual Property Law, http://ipblog.abv.com/2013/12/court-certifies-interlocutory-questions.html. Nevertheless, the New York courts have not yet decided whether broadcasting pre-1972 recordings online violates New York misappropriation laws or “common law” copyright.
 “Federal Court Approves Radio Industry Settlement with ASCAP,” http://www.radiomlc.org/pages/4795848.php
 Ed Christman, Rate Court Judge Rules Pandora Will Pay ASCAP 1.85% Annual Revenue, http://www.billboard.com/biz/articles/news/publishing/5937528/rate-court-judge-rules-pandora-will-pay-ascap-185-annual
 Bruce Houghton, Beats Music Added 1000 Subscribers Daily In First Month [Report], 3/20/2014, http://www.hypebot.com/hypebot/2014/03/beats-music-added-1000-subscribers-daily-in-first-month-report.html
 David Pakman, The Price of Music, March 18, 2014, http://recode.net/2014/03/18/the-price-of-music/
 Stuart Dredge, “Mobile now 76% of Pandora’s business, but profits remain elusive,” April 25, 2014, http://musically.com/2014/04/25/pandora-financial-results-mobile/. Regarding anger by songwriters, see, e.g., http://www.hollywoodreporter.com/earshot/bette-midler-critiques-pandora-spotify-693961 and
 Lucas Mearian, “Music industry sucks life from subscription services,” Feb. 14, 2014, http://www.computerworld.com/s/article/9246365/Music_industry_sucks_life_from_subscription_services, quoting a market report from Generator Research.
 Public Knowledge, p. 15, 17.
 Mearian, footnote 13.
 Paul Bonanos, Business Matters: How Amazon Could Have ‘Tens of Millions’ of Paid Streaming Music Subscribers Instantly,” April 10, 2014, http://www.billboard.com/biz/articles/news/digital-and-mobile/6049214/business-matters-how-amazon-could-have-tens-of-millions
 Andre Mouton, “Can Apple Win Over a Music Industry Burned by Pandora?” http://www.minyanville.com/sectors/technology/articles/Can-Apple-Win-Over-A-Music/5/27/2014/id/55096?refresh=1
 Public Knowledge, p. 16.
 “Copyright Term and the Public Domain in the United States, 1 January 2010, http://www.copyright.cornell.edu/resources/publicdomain.cfm.
 The issues have been greatly simplified in this article for brevity. For a broader discussion of the problem, see, Laura Moy, “Protecting Sound Recording Artists and Getting It Right This Time,” December 4, 2013, https://www.publicknowledge.org/news-blog/blogs/protecting-sound-recording-artists-and-gettin.
What you need to know if you want to “trademark” a product configuration.
by Lawrence Stanley and Gordon Troy
In an era of fierce competition, brand owners are constantly looking for ways to foster brand identity, distinguish their products from those of competitors, and build and protect their marketing space. One method of doing that is by creating and promoting unique product configurations. Product features that have successfully registered as trademarks in the United States include shapes, designs, colors and smells. The possibilities are wide-ranging.
Furniture manufacturer Knoll has registrations for configurations of a couch, a table, two different chairs and a stool. Chocolate-maker Lindt and Sprungli registered a mark for chocolate in the three-dimensional shape of a closed umbrella. Guitar manufacturers have obtained registered marks for guitar body shapes, pearl fret board inlays and designs encircling the guitar’s sound hole. After taking its case to the Trademark Trial and Appeal Board (TTAB), confectioner Hershey’s succeeded in registering the manner in which squares of its chocolate bars are scored. The TTAB also permitted registration of a fragrance (Plumeria blossoms) for thread and yarn; and allowed Bottega Veneta’s “intrecciato” leather weave design to be published for opposition, potentially paving the way for registration.
One of the attractions of making a key aspect of a product function as a trademark is that it eliminates the need to stamp the brand owner’s logo all over the product in order for it to be recognizable. The most compelling attraction, however, is that it closes off competitors from imitating a brand owner’s non-functional designs. It is the question of fair competition that leads the United States Patent & Trademark Office (USPTO) and the TTAB to disfavor registration in all but the most compelling instances. As one TTAB judge has observed:
[W]hen one is faced with a putative source indicator such as the configuration of a product or its packaging or any product feature that enhances the attractiveness of the product, it is logical to ask as a first question whether the public interest is best served by refusing to permit a particular feature to be taken from the “public domain.” This is, at root, a public policy question, and turns on whether the non-traditional indicator should remain permanently available for competitors to freely use.
While product features are almost never inherently distinctive, they can acquire distinctiveness – and hence, trademark status in the US – through exclusive use if they also satisfy certain criteria. A brief explanation of the analytical framework employed by the USPTO to determine the registrability of product configuration trademarks is helpful.
For a trademark to be registrable, it must be “distinctive.” A mark is “inherently distinctive” if its very nature serves to identify a particular source. Yves Saint Laurent’s interlocking “YSL” is inherently distinctive, but the shape of a product, a type of weave or a color must acquire distinctiveness by accruing what is referred to as “secondary meaning” in the mind of the consumer. A bit of a misnomer, “secondary meaning” occurs when the primary significance of the product feature is its association with the brand owner. Section 2(f) of the Trademark Act, 15 U.S.C. 1052(f), permits the registration of a mark “which has become distinctive of the applicant’s goods in commerce,” and provides that the USPTO may accept as prima facie proof of distinctiveness “substantially exclusive and continuous use” of the mark during the five years prior to “the date on which the claim of distinctiveness is made.”
In practice, however, the degree of proof of distinctiveness required by the USPTO will depend upon the particular product configuration. The umbrella-shaped chocolate mentioned above was accepted for registration without the submission of any proof of distinctiveness. But generally speaking, such proof will include declarations showing that the product has been in the marketplace for at least five years; the feature for which registration is sought has been promoted as the applicant’s trademark (as shown by the nature and extent of the applicant’s advertising); and the geographic distribution of the product has been widespread. The USPTO may also require declarations from distributors, shop owners and/or customers who claim to recognize the product feature as originating with the applicant.
A brand owner who can show that the feature for which it seeks registration has acquired distinctiveness may still need to defend against a claim that the mark is “functional.” There are two types of functionality: utilitarian and aesthetic. A product feature is said to have utilitarian functionality when the feature is essential to the use or purpose of the product, is dictated by the functions to be performed, or has a direct bearing on the product’s cost or quality. A
leather strap on a handbag is an example of utilitarian functionality: no brand owner could prevent another from using a leather strap. However, the particular way that the strap is attached to the bag, if non-essential, is capable of acquiring distinctiveness by identifying the brand owner as the bag’s source.
Brand owners who advertise a product feature as making their product more effective or superior to competing products are unlikely to overcome this hurdle. Bose, the company that manufactures “901” speakers, was denied registration of the unique shape of its cabinets despite the fact that it had clearly acquired distinctiveness among consumers in the 27 years that the speakers had been on the market. In upholding the Examining Attorney’s refusal to register, the TTAB found that Bose’s two expired utility patents “repeatedly disclose the utilitarian advantages of this particular configuration” and that its advertisements “tout the utilitarian advantages of the product design.” Aesthetic functionality is more difficult to parse. In general terms, a feature is aesthetically functional if the brand owner’s right of exclusive use would put competitors at a significant non-reputational disadvantage. In other words, trademark protection does not extend to ornamental features of a product that would significantly limit the range of competitive designs available. At the same time, however, “competitors are not guaranteed the greatest range for their creations, but only the ability to compete ‘fairly’ within a given market.” Consequently, the test for aesthetic functionality is both fact-specific and subjective.
In 2013, the TTAB refused registration by Florists’ Transworld Delivery of the color black as applied to packaging for flowers. Colors, the TTAB found, serve an aesthetic function because they carry particular meanings when it comes to flowers. The color black may convey elegance or may be used “on somber occasions, such as the context of death” and there is thus a “competitive need” to use the color black to communicate the appropriate or desired message from the purchaser to the recipient of flowers.
A case in point
When Bottega Veneta (BV) sought US registration of its well-known leather weave in 2007, it must have been confident that its application would sail through the USPTO. BV had been using the intrecciato weave (the term used by the company in its advertising) since 1975. It appeared on over 80% of BV’s leather goods. Sales in the six years prior to the application were US $275 million. Advertising expenditures in the same period totaled US $18 million and many advertisements publicized the uniqueness of the design. Fashion reviewers referred to the intrecciato as BV’s “signature.” In addition, companies selling imitations or near-imitations made reference to BV – a de facto recognition that the weave is a source identifier. As one seller wrote:
Don’t let the woven leather fool you — this is not a Bottega Veneta bag … To the ladies and gentlemen who buy the intrecciato Bottega Veneta bags … everyone knows you’re spending the dough because the intrecciato is “exclusive” at the moment.
Despite the fact that the intrecciato had become distinctive, the mark would not be published for opposition until December 2013. BV’s application and the Office Actions that followed provide a textbook case of what not to do when filing an application to register a product feature and what can go wrong.
BV’s application was filed under Section 44(e) of the Lanham Act, which permits registration under the Paris Convention based on a prior foreign registration, in this case, in Italy. While a 44(e) registration normally grants the applicant certain advantages, BV still had to satisfy the requirements of Section 2(f) that its mark was both distinctive and non-functional.
BV started out on the wrong footing. First, it failed to provide an adequate description of the goods in Class 18. Instead, it recited nearly the entire description of products in the Italian registration (consisting of the full Nice classification heading), thus running afoul of basic USPTO procedure which requires applicants to list in ordinary commercial terms only those goods or services for which the applicant actually uses or has a bona fide intent to use the mark. Second, the description of the mark was inadequate because it failed to describe the mark accurately. The application’s description read: “The mark consists of Interlaced woven strips of leather arranged in a distinctive repeating pattern that is used over all or substantially all of the goods.”
It was this overbroad description, potentially encompassing a wide range of designs of interwoven strips of leather, which led the Examining Attorney to look at BV’s weave generically rather than focusing on the specific nature of the intrecciato and how it differed from the weaves of nearly all of BV’s competitors. His objections to registration set out in five Office Actions attacked BV on every technical and substantive ground available. He argued that the
intrecciato design lacked distinctiveness, could not function as a trademark because it was solely ornamental, and was functional from both a utilitarian and aesthetic perspective. Combing the internet, he found thousands of products with leather weave designs to support his contentions.
In the face of this opposition, BV began amending the description of the mark and the delineation of goods, and gathered evidence that the weave was non-functional and widely recognized as unique in the fashion world. BV easily demonstrated that the intrecciato wasn’t stronger than other weaves and that it provided no economic advantage to BV because it was actually more expensive. The Examining Attorney, however, was unmoved. A weave is a weave is a weave, he found, eventually issuing a Final Refusal.
When the matter reached the TTAB, BV was describing its mark narrowly and precisely: “a configuration of slim, uniformly-sized strips of leather, ranging from 8 to 12 millimeters in width, interlaced to form a repeating plain or basket weave pattern placed at a 45-degree angle over all or substantially all of the goods.” The TTAB criticized the Examining Attorney for failing to distinguish the intrecciato from other weaves: “After carefully reviewing all of the evidence showing weave designs on handbags, there are a very small number that can be considered to have the very same features as those described in applicant’s mark,” the TTAB observed.
By giving a “very narrow reading of the proposed mark,” the TTAB was able to find that the intrecciato was not aesthetically functional because BV’s competitors would be able to use any weave other than the specifically described BV configuration. As for manufacturers and sellers of similar bags uncovered by the Examining Attorney, the TTAB held that if they were not intentionally imitating the intrecciato because their bags have “the look of applicant’s bags” and “it is the association with applicant that consumers want to obtain,” then the best place for them to be heard would be in an opposition following publication of the mark. Following that decision, the mark was published. As of this writing, the mark has been opposed for footwear (Class 25) and BV filed a request to divide the application so that registration may issue for goods in Class 18.
The practitioner applying to register product configuration trademarks must be aware of the hurdles that clients may face and begin to address them in the initial trademark application. While it is always difficult to predict how an Examining Attorney will respond to an application, the client should be advised long in advance what evidence it may need to gather to demonstrate that its unique product configuration functions as a trademark and is registrable as one.
(Initially published in The Trademark Lawyer, March/April 2014. You can download the printed article here: 2014 Trademark Lawyer)
I have been filing trademark registrations for international clients for more than twenty-seven years. For trademark filings based on international clients’ “home country” applications or registrations, problems frequently arise when their U.S. applications simply repeat the generalized descriptions and identifications of goods and classes of goods that are often acceptable overseas.
The Nice classifications (either all goods in class or the class headings) are not sufficiently specific for a successful application in the US Patent and Trademark Office. Rather, it is necessary to describe the claimed goods with a greater degree of specificity in their ordinary commercial terms. A failure to narrow descriptions of goods and classes sufficiently can lead to delays and even refusals to register. A textbook example of this can be seen in the Bottega Veneta application for its famous, and soon-to-be-registered, leather weave. When the application was first filed in June 2007, the description of goods in Class 18 encompassed a major part of the heading for class 18:
Leather and imitations of leather, and goods made of these materials and not included in other classes; animal skins; hides; trunks and traveling bags.
After a number of office actions (which attacked the application on multiple grounds), in January 2009, Bottega Veneta finally amended the class 18 description (at the PTO’s urging) in keeping with its actual intended use:
wallets, purses, handbags, shoulder bags, clutch bags, tote bags, business card cases, credit card cases, key cases, cosmetic cases sold empty, briefcases, attache cases, valises, suitcases and duffle bags, all made in whole or in substantial part, of leather” in Class 18.
Bottega Veneta’s specific list of items fell within the plain meaning of the general language in the original filing (i.e., “goods made of these materials and not included in other classes,” and “trunks and traveling bags”). However, the use of the class heading can also prevent a later amendment, as it did recently in In re Fiat, 109 USPQ2d 1593 (Serial No. 79099154 TTAB 2014)
There, the applicant requested an amendment to the scope of its services from the class 35 heading (“Advertising; business management; business administration; office functions”) to “advertising services; retail store and on-line retail store services featuring a wide variety of consumer goods of others.” In deciding whether to accept an amendment, however, the Trademark Office looks at the “plain meaning” of the initial description to determine whether it encompasses the added goods or services. In other words, an applicant may amend an application to clarify or limit the identification of goods or services, but not to broaden it. Looking at the original description, the TTAB held that the addition of “retail store and on-line retail store services featuring a wide variety of consumer goods of others” was an impermissible expansion of the scope of the original recitation, despite the fact that those services are properly included within class 35. The “plain meaning” rule, the TTAB explained, “is necessary to provide the public with notice as to the scope of goods and/or services for which applicant is seeking registration and to enable the USPTO to reach informed judgments concerning likelihood of confusion.”
The U.S. practitioner who takes on a registration for international clients under the Madrid Protocol or international convention — Section 44(d) (based on an application) and Section 44(e)) (based on a registration) — must be aware of these issues, among many others, in order to avoid delays and refusals which may cost the client both time and money — and even loss of trademark protection in the United States.
Universal Furniture International, Inc. v. Paul and Leonard Frankel, Court of Appeals, 4th Circuit 2013
In Universal Furniture International, Inc. v. Collezione Europa USA, Inc., 618 F.3d 417 (4th Cir. 2010), the Fourth Circuit Court of Appeals affirmed a district court judgment against Collezione Europa USA, finding it liable for copyright infringement and awarding the plaintiff $11 million in damages. Collezione declared bankruptcy shortly after the judgment was rendered, so Universal pursued Collezione’s owners and managers, Paul and Leonard Frankel. Leonard defaulted, while Paul attempted to contest his liability.
Collezione was in the business of producing “knock-offs” of others’ furniture designs and offering them at lower prices. The Frankels were Collezione’s only corporate officers. Paul was Vice President, Secretary, and Treasurer, and was responsible for various financial aspects of the business and certain distribution matters. In the trial against Collezione, he testified that he was aware of the cease-and-desist letter sent by Universal and “told his brother that it would be a good idea to redesign the furniture.” Paul was also present when
a photographer took pictures of the apparently-Collezione-but-actually-Universal furniture, and that he received those pictures and distributed them to salespeople (although he maintains that he was not aware of any intellectual property violations). Finally, Paul was involved in the decision to hold orders during the redesign of the furniture to give customers a chance to purchase the new design, and personally contacted at least one of those potential buyers. He had responsibility for the flow of Collezione product, and as a co-owner of the business, he was generally familiar with its operations.
Holding that Paul either knew, should have known or willfully blinded himself to knowing of the infringements, the District Court found that the facts were sufficient to justify finding Paul directly or vicariously liable. The Fourth Circuit affirmed.
“It is copyright infringement not only to copy another’s design, but to authorize distribution of such copies to the public for sale,” the Court noted. Furthermore, a party is guilty of vicarious infringement if he possessed (a) the right and ability to supervise the infringing activity and (b) an obvious and direct financial interest in the exploited copyrighted materials.” Most corporate officers will, ipso facto, have such a direct financial interest. As the Court observed in this case, Paul “had every incentive to see that his company successfully marketed its knock-off furniture, and to ensure that it did so without committing copyright infringement. His failure to prevent infringing distribution thus leaves him at least vicariously liable for that infringement.”
The latter sentence is phrased rather oddly, but what the 4th Circuit meant is that Paul was involved in making calculated decisions that the furniture his company manufactured and sold was close enough to pass as a knock-off, but not so close that it would be infringing. For that reason, Paul was found to have had “knowledge” (i.e., that he knew or should have known) of the infringements. Simply put, a person’s belief that his or her copy or imitation does not infringe on the original work is not a defense to copyright infringement.
You’ll find the 4th Circuit’s August 20th 2013 decision here.
[Note that the decision is designated as "Unpublished." This means that the judges have, for some reason, decided to give it less value as binding precedent and that the decision will not appear in the hardbound official reporters published by the West Publishing Co. However, the Internet has really changed the meaning of "Unpublished." Today "unpublished" decisions can be readily found online (including Google Scholar) and are even occasionally posted on federal court websites. Prior to January 1, 2007, the federal courts had the discretion of barring parties from using unpublished decisions in their legal arguments. Once that discretion was removed by the enactment of Fed. R. App. P. 32.1, the party citing the "unpublished" opinion simply needed to furnish a copy of the decision so the judge's clerk needn't go looking for it. For more on the controversy over "unpublished" opinions, see "Non-publication of legal opinions in the United States" at Wikipedia.]
A recent court order denying a motion to dismiss an action for trademark and copyright infringement reiterates the well-established principle that corporate officers who engage directly in conduct that infringes on the intellectual property rights of others may be held liable for the infringement despite having acted in his or her corporate capacity.
Asher Worldwide Enterprises, LLC (“AWE”), owner of reliabuy.com, sued Housewaresonly.com, Incorporated and its principals, Stuart and Marcia Rubin (collectively, the “Rubins”) for unfair competition under the Lanham Act and for copyright infringement. AWE alleged, among other things, that the Rubins infringed on AWE’s copyrights by copying product descriptions from reliabuy,com and reproducing them on housewaresonly.com, a competing website. (See, Asher Worldwide Enterprises, LLC v. Housewaresonly.com, Incorporated, United States District Court, Northern District of Ill., Case No. 12 C 568.)
As alleged by AWE, the Rubins’ copying wasn’t inadvertent. In late 2009 and early 2010, AWE published 65 product descriptions on reliabuy.com and several months later 47 of them appeared on housewaresonly.com. In August 2010, AWE published 25 more descriptions and all of them subsequently appeared on housewaresonly.com. The Rubins allegedly copied descriptions again in October 2010, publishing 75 of 139 new reliabuy.com product descriptions. And when AWE redesigned its website to focus on discount commercial restaurant equipment, the Rubins started a competing site (restaurantkitchenwarehouse.com) and copied over 200 product descriptions that had been created by AWE.
The Rubins unsuccessfully argued that they could not be held liable for infringements by their corporation unless there was some “special showing” — for example, that the corporation served as their “alter ego.” That argument was quickly shot down by the court. Citing Seventh Circuit precedent, the district court ruled that the plaintiff need only allege that the corporate officers “acted willfully and knowingly and personally participated in the infringing activities or used the corporation to carry out their own deliberate infringement.”
While merely being an officer in a corporation is not enough to invoke personal liability, the court held, “[w]hen corporate officers are in control of the decisions of the corporation at all times, [ ] they may be liable for the intellectual property infringements of the corporation.”
That an individuals was acting on behalf of his or her corporation is no defense to personal liability for trademark and copyright infringement.
The standards for imposing personal liability on corporate officers — and employees — are similar in most, if not all, federal circuits and state courts. The Supreme Court spoke on the subject in Calder v. Jones, 465 U.S. 783 (1984), a libel case brought by Shirley Jones against the National Enquirer and two of its employees, an editor and writer who were responsible for the offending article. In ruling that the individual defendants could be haled into court in California, Justice Rehnquist observed that “their status as employees does not somehow insulate them from jurisdiction… In this case, petitioners are primary participants in an alleged wrongdoing intentionally directed at a California resident.”
That principal has not changed over the years. In 2009, the Ninth Circuit held that an individual “is liable under the Lanham Act for ‘torts which he authorizes or directs or in which he participates, notwithstanding that he acted as an agent of the corporation and not on his own behalf.’” POM Wonderful LLC v. Purely Juice, Inc. and Paul Hachigian, No. 08-56375 (9th Cir. 2009), citing Coastal Abstract Serv., Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 734 (9th Cir. 1999) (quoting Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1015 (9th Cir. 1986.)
McCarthy also teaches that trademarks, like copyrights, may be infringed upon by individuals as well as a corporation, and “all participants, including those acting merely as officers of a corporation, may be jointly and severally liable.” McCarthy on Trademarks, Chapter 25, Section 25:24.
In short, corporate officers and employees who engage directly in infringing conduct do not escape personal liability merely because they acted in a corporate capacity. A copy of the AWE decision, dated August 26, 2013, can be accessed here.
Time and again clients come to us with a letter from a third party demanding that they cease and desist from using an image on their website and hand over an accounting of their income and profits. In many such cases, the client or their web designer found the infringing image on the Internet, liked it and decided to use it. Hey, it was on the Internet and there wasn’t a copyright notice on it, so it’s in the public domain, right? WRONG.
The use of a copyright notice is no longer required under United States law (and the laws of most foreign countries) and many people understandably don’t like using them, as it detracts from an image’s appearance. While the lack of a copyright notice might (sometimes) be an issue for works first published prior to 1989, web owners should assume that ALL images posted on other people’s websites are protected by copyright unless proven otherwise. An assessment of whether a given image is in the public domain is no simple matter and should be left to someone with sufficient knowledge both of copyright law and the circumstances of the image’s initial publication. A table showing what works are in the public domain according to their year of first publication and national origin can be viewed here, but as the reader will quickly see, the issue is somewhat of a minefield.
What’s the penalty for using a work that is under copyright? It could be high. For works first published in the United States, a copyright holder must, in order to invoke the protection of the copyright laws, register the copyright with the United States Copyright Office. This can be done before or after the infringement has commenced. If registration is done before the infringement first occurs, the owner will be entitled to statutory damages and attorney’s fees. (More on that below.) If registration is done after infringement commences, the owner will only be entitled to an award of actual (non-speculative) monetary damages and profits. For works first published outside the United States, if the owner has not also registered his or her copyright in the United States — and most owners of foreign copyrights don’t — the owner will only be entitled to the same award as the U.S. owner who files after infringement commences, i.e., actual monetary damages and profits.
Section 504 of the Copyright Act explains, in general terms, what statutory damages, damages and profits are available to the owner. “Actual damages and profits” means the actual damages suffered by the owner “as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages.” For example, if an owner lost out on a contractual opportunity due to an infringement, that would count as an actual damage. Furthermore, an owner’s claim that he or she would have charged the infringer $1,000, had he or she asked for a license, might in some circumstances serve as a measure of damages: the owner would at least have to show that it entered into “benchmark” licenses with other persons for similar uses of the same copyrighted property.
As for profits, the copyright owner “is required to present proof only of the infringer’s gross revenue.” Then the infringer is “required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” For non-commercial infringements, the calculation might seem easy: if there is no sale of an infringing item, then there is no profit. But it’s not quite that simple. If an image is used to advertise a product or service, some portion of the profits earned from that product or service will likely be awarded to the copyright owner, and the onus will be on the infringer to prove exactly what percentage. (Courts have awarded higher than twenty percent of the infringer’s profits in such cases.) For commercial infringements — as in the use of an image on an article of clothing — the calculation of profits will generally be more straightforward: gross income less cost of goods sold less expenses of the business amortized against sales.
At any time before final judgment in a copyright case, the copyright owner who has registered his or her copyright prior to the commencement of the infringement may choose statutory damages instead of actual damages and profits. This option is not only less time-consuming, but it will generally result in higher awards than damages and profits. The statutory sum per infringement (not per infringing copy) is a minimum of $750 or a maximum of $30,000, as the court considers just. If the case involves only one infringing copy, statutory damages should be at the lower end of that range, while if the case involves hundreds or thousands of infringing copies, statutory damages will be at the upper end. However, in 2012 the Supreme Court upheld an award of $675,000.00 against a college student in Boston for illegally downloading 30 songs — an award of $22,500.00 per infringement. There is a lot to criticize about the Court of Appeals decision that was affirmed by the Supreme Court, but the case shows the extent of what is at stake when statutory damages are available. Even worse, where the copyright owner proves that the infringement was committed willfully, the court may increase the upper range to $150,000. A copyright owner who publishes his or her work without a copyright notice may have a more difficult time proving willful infringement than one who has stamped the work with a “c-in-a-circle” – © –” followed by the year of copyright and the name of the copyright owner. Caveat: Online copyright notices don’t need to be on the image itself for an argument of willful infringement to succeed. They may appear anywhere on a web page or website, or may be included in the metatags of an image or other download.)
On the other hand, if the court finds that the infringer wasn’t aware of the infringement and had no reason to believe that his or her acts constituted infringment, then at the court’s discretion, the award of statutory damages may be reduced to a mere $200. This is often a difficult circumstance to prove, because ignorance of the law is never an excuse — that is, “I found it on the Internet” is not a defense.
These measures of damages are in addition to the substantial legal fees, and sometimes expert fees, that the infringer will incur in defending a case. They are also in addition to the legal fees of the copyright holder who has registered his or her copyright prior to the commencement of the infringement. Legal fees are the primary reason that the parties in most copyright infringement cases want to settle quickly. The majority of infringements involve low or no profits. Even an infringement that turns a profit of $20,000 is probably not high enough to litigate over, considering that going to court will exceed that amount. Thus it is usually better to split the difference and come to a settlement that both parties can live with.
The next time you use an image you found on the Internet, however, think twice and follow this simple rule: if you are in doubt, don’t use it. Also be sure that you know the sources of all your web designers’ images. Copyright infringement could cost you serious money.