Court Finds Trademark Infringement against Fictional Restaurant

When IJR Capital Investments filed an intent-to-use trademark application for THE KRUSTY KRAB for restaurant services in December 2014, it never imagined that it was walking into a federal lawsuit. That’s because federal courts lack jurisdiction over trademark infringement matters until the defendant actually uses its trademark in commerce. WarnerVision Entertainment v. Empire of Carolina, 101 F. 3d 259 (2d Cir., 1996) (A trademark holder cannot prevent a party who has filed an intent-to-use application from using its mark “on the grounds that [the trademark holder] has used the mark subsequent to the filing of the ITU application.”)

Nevertheless, on November 23, 2015, Viacom sent IJR a cease and desist letter, demanding that IJR drop THE KRUSTY KRAB name and withdraw the pending trademark application. Not long after, Viacom filed suit in the United States District Court, Southern District of Texas.

“The Krusty Krab,” as any cartoon-watcher knows, is the name of a fictional under-the-sea restaurant in “SpongeBob SquarePants” that airs on Viacom’s Nickelodeon network. Since 1999, the façade of “The Krusty Krab” (shown here) has been shown in 166 of 203 aired episodes, was depicted in two SpongeBob SquarePants feature films, and was licensed for consumer products. However, while Viacom’s “The Krusty Krab” does not actually provide any restaurant services, it does offer a fictional “Krabby Patty” to cartoon characters.

On summary judgment, Judge Gray H. Miller held that although Viacom never registered THE KRUSTY KRAB, it was still entitled to trademark protection as a “specific ingredient of a successful TV series” that the “public directly associates with the plaintiff or its product.” (Previously, courts have held that “Kryptonite” and “Daily Planet” are protected by common law trademark rights because they have been a “staple of the Superman character and story” and “regularly appeared on licensed consumer merchandise over they years.” DC Comics v. Kryptonite Corp., 336 F. Supp. 2d 324, 332 (S.D.N.Y. 2004); DC Comics v. Powers, 465 F. Supp. 843, 845, 847 (S.D.N.Y. 1978).)
THE KRUSTY KRAB, Judge Miller ruled, merited trademark status because it acquired “distinctiveness,” or “secondary meaning,” by Viacom’s exclusive use of the name in numerous episodes over the course of 17 years; its expenditure of $197 million in advertising expenses and gross earnings of $470 million for the two SpongeBob SquarePants films; and by numerous print and Internet advertisements for “The Krusty Krab” licensed consumer merchandise.

In other words, because Viacom used THE KRUSTY KRAB widely (and with heavy advertising), the name is capable of being associated, in the minds of consumers, with a particular source of goods and services, here, Viacom.

From these facts, but ignoring the essential principle that to sue for trademark infringement the plaintiff must be able to show actual use by the defendant, Judge Miller ruled that there was a “likelihood of confusion” between Viacom’s “The Krusty Krab” and the same mark that IJR intended to use, and therefore IJR was guilty of trademark infringement. Judge Miller made a mistake of law, not fact: “The court finds that IJR has not used the mark in commerce,” he wrote.

Of course, the minute that IJR would use “The Krusty Krab,” Judge Miller’s decision would in all likelihood hold. Although Viacom’s restaurant is merely fictional, Judge Miller wrote, “Context here is critical, because a consumer seeing either Viacom’s or IJR’s marks will likely think of a restaurant. Consumers may mistakenly believe that IJR’s restaurant is an officially licensed or endorsed restaurant, similar to how Viacom’s parent company, Viacom, Inc., through its subsidiary Paramount Pictures Corporation, has licensed its marks for restaurants, including Bubba Gump Shrimp Co., a seafood restaurant chain inspired by the 1994 film “Forrest Gump.” Moreover, survey evidence submitted by Viacom showed that 30% of restaurant-going consumers nationwide believed that a restaurant called “The Krusty Krab” would be “operated, affiliated with, connected to, or approved or sponsored by Viacom.

What Judge Miller should have done is dismiss the case for lack of subject matter jurisdiction, and directed Viacom to bring its complaint to the United States Patent & Trademark Office (USPTO), where it could initiate an opposition proceeding against IJR’s trademark application at the appropriate time. Instead, Judge Miller, who was appointed by George W. Bush, bent the law and made an apparent bow to corporate power. However, further skirmishes, including an appeal from his decision, appear likely. A week after Judge Miller’s decision, Viacom filed three use-based trademark applications in the USPTO. A week after that, IJR asked the USPTO to extend its time to commence use of “The Krusty Krab,” which extension the USPTO is likely to grant. It appears to us that IJR could win the battle, but will lose the war.

The Line Between Trademark Infringement and Parody

 

The Second Circuit Court of Appeals affirms that a canvas tote bag with a graphic image of Louis Vuitton’s trademark is parody, not trademark infringement.

Louis Vuitton Malletier, S.A. v. My Other Bag, Inc., 16-241-cv, 2d Circuit Court of Appeals, Dec. 22, 2016.

Trademarks facilitate purchasing decisions by consumers by signaling that behind certain goods or services stands a particular source. Of course, trademarks can also be used as decoration on t-shirts and other goods; but sometimes, the decoration itself is the trademark — that is, it uniquely identifies the source. Like the red soles of Christian Louboutin, Louis Vuitton’s configuration of the interlocking letters, “LV,” surrounded by flower-like symbols (the “Toile Monogram” design) serves as both decoration and trademark.

Trademark law exists to prevent competitors from copying trademarks for two reasons: first, to protect the consumer’s decision-making process; and, second (in the words of Supreme Court Justice Breyer) to help “assure a producer that it (and not an imitating competitor) will reap the financial, reputation-related rewards associated with a desirable product. The law thereby encourages the production of quality products and simultaneously discourages those who hope to sell inferior products by capitalizing on a consumer’s inability quickly to evaluate the quality of an item offered for sale.” Qualitex Co. v. Jacobson Products Co., Inc., 514 U.S. 159, 163-4 (1995).

In May 2014, Louis Vuitton Malletier, S.A. (“LVM”) sued My Other Bag, Inc. (“MOB”), for reproducing graphics of LVM leather bags on one side of MOB’s canvas tote bag. The other side of the MOB bags read “My Other Bag…” — a reference to the long-standing joke occasionally seen on bumper stickers on unglamorous cars, e.g., “My other car is a Porsche.” MOB used graphics of two different LVM bags, shown here, one with the Toile Monogram design trademark, and the other with the checkerboard “Damier” design, but instead of an interlocking “LV,” MOB used its own initials. Picturing an LVM bag on the side of a canvas tote bag was a joke, but LVM didn’t find it funny.[1] In fact, LVM’s case against MOB is the latest in a series of failed litigation brought by LVM against parodies.

In 2006, LVM went after Haute Diggity Dog, LLC, a small business that manufactured and sold pet products, many of them parodying famous marks, including “Chewy Vuiton” dog toys, which took the form of little plush “handbags” suggesting (but not mimicking) LVM’s Toile Monogram design. (Among other differences, Haute Diggity used an interlocking “CV” instead of “LV”.) LVM claimed trademark infringement and “trademark dilution,” a cause of action granted to famous marks to punish “blurring” (i.e., misappropriating a mark for use on a dissimilar product) and “tarnishment” (misappropriating a mark for use on low quality or unsavory products). LVM also claimed copyright infringement, since the Toile Monogram, as a design existing apart from handbags, is protected by copyright. In addition to objecting to the use of the Toile Monogram mark on dog toys, LVM claimed that the toys were also likely to tarnish LVM’s marks because they “pose a choking hazard for some dogs.”

The District Court slapped down LVM’s claims, and the Fourth Circuit Court of Appeals agreed: “Chewy Vuiton” dog toys were successful parodies,[2] and the distinctiveness of LVM’s marks was not threatened by “Chewy Vuiton.” Parody, a form of fair use, is a complete statutory defense to a charge of trademark dilution, but not against trademark infringement (e.g., passing off a product under a third party’s trademark, thereby leading consumers to believe that the product came from the trademark owner).

In 2007, LVM sent a cease and desist letter to Danish artist Nadia Plesner, for selling t-shirts and posters to raise money for the charity “Divest for Darfur.” The artwork showed a malnourished child holding a chihuahua dressed in pink in one arm, and carrying on the other arm a bag that resembled Louis Vuitton’s “Audra” bag, with an altered Toile Monogram design. (Here, the interlocking “LV” was replaced by an interlocking “SL” for the name of the artist’s campaign, “Simple Living.”) Plesner was living in Holland at the time.

Unable to afford to go to fight a court case, Plesner stopped selling the t-shirts and posters. In 2010, however, she repainted the Darfur child in a painting that she titled “Darfurica,” which was exhibited for the first time in the Odd Fellow Palace in Copenhagen in January 2011. By the end of the exhibit, she received an injunction, obtained (unbeknowst to Plesner) by LVM from a court in The Hague. Plesner was ordered to stop showing the painting in the gallery and online, and to pay 5,000 Euros per day until she complied. In May, she went to The Hague and made her case. A month later the court reversed the injunction and ordered LVM to pay part of her legal costs.

Louis Vuitton’s attack on Plesner’s artwork is a real head-scratcher, given that Mattel tried a similar thing in 1999 when it sued artist Tom Forsythe, who produced a series of photographs of a nude and provocatively posed Barbie in or around various household appliances. (She ends up in a blender.) Mattel lost and was ordered to pay the artist $1.8 million in legal fees.

Unlike LVM`s case against Plesner, the case against MOB involved not a work of art, but a commercial product. MOB’s purpose was parody, but to LVM, MOB was merely trading on the strength of the Toile Monogram mark. As in LVM`s failed litigation against Haute Diggity Dog, LVM also claimed both “trademark dilution” and copyright infringement claim.

In order to prove trademark infringement, LVM needed to prevail on a host of factors used to analyze whether the use amounts to an infringement. In the Second Circuit, courts use the “Polaroid Factors,” a set of criteria first mentioned by Judge Friendly in the 1961 case, Polaroid Corp. v. Polarad Electronics Corp., 287 F.2d 492 (2d Cir., 1961). “The problem of determining how far a valid trademark shall be protected with respect to goods other than those to which its owner has applied it,” Judge Friendly wrote, “has long been vexing…”

Where the products are different, the prior owner’s chance of success is a function of many variables: the strength of his mark, the degree of similarity between the two marks, the proximity of the products, the likelihood that the prior owner will bridge the gap [i.e., begin selling directly competing products], actual confusion, and the reciprocal of defendant’s good faith in adopting its own mark, the quality of defendant’s product, and the sophistication of the buyers. Even this extensive catalogue does not exhaust the possibilities — the court may have to take still other variables into account.

Polaroid Corp. v. Polarad Electronics Corp., supra, 287 F.2d at 496.

LVM failed to prevail on any of the Polaroid Factors. Although LVM`s handbags and MOB’s canvas tote bags could theoretically be purchased by the same consumers, there is an enormous gulf between the quality of the products, their prices, and the venues in which they are sold. LVM was unable to come up with any convincing evidence of consumer confusion – and consumers were considered sophisticated enough to know that LVM, whose handbags run upwards of one or two thousand dollars, was not the source of an inexpensive canvas tote bag prominently marked “My Other Bag.” The court also found that there was no likelihood that MOB would be entering the luxury handbag market (i.e., “bridge the gap”).

Unsurprisingly, given the Haute Diggity Dog decision, LVM lost both in the District Court and on appeal to the Second Circuit. LVM attempted to argue that the District Court erred by finding that MOB’s use of the Toile Monogram design was parody, but the Second Circuit would have none of it. “At the same time that they mimic LV’s designs and handbags in a way that is recognizable,” the Second Circuit wrote,

they do so as a [graphic image] on a product that is such a conscious departure from LV’s image of luxury—in combination with the slogan “My other bag”—as to convey that MOB’s tote bags are not LV handbags. The fact that the joke on LV’s luxury image is gentle, and possibly even complimentary to LV, does not preclude it from being a parody.

In any event, the nature of MOB’s business—it sells quite ordinary tote bags with [graphic images] of various luxury-brand handbags, not just LVM’s, printed thereon—and the presence of “My other bag,” an undisputed designation of source, on one side of each bag,  independently support summary judgment for MOB on this designation-of-source issue.

LVM fared no better on its copyright claim: “MOB’s parodic use of LVM’s designs,” the Court held, produces a “new expression and message that constitutes transformative use.”

Parodists should probably thank LVM for losing cases involving trademark parody in two federal jurisdictions. In 1994, the Supreme Court ruled in Campbell v. Acuff-Rose Music, Inc. that rap group 2 Live Crew’s appropriation of Roy Orbison’s song, “Pretty Woman,” was not copyright infringement, but parody. (As with trademark dilution, parody is a statutory defense against claims of copyright infringement.) Since that decision, the courts have come to embrace the idea that parody should also be permitted (at least under some circumstances) as a defense to trademark infringement. Despite this trend, it has been the practice of many major trademark owners to make overbroad claims and excessive threats, sometimes commencing litigation knowing that the parodist can’t afford to fight, and will quickly give in to their demands. Hopefully, this most recent decision, which has received ample publicity, will make companies like LVM think twice before engaging in such tactics.

Endnotes

[1] The Toile Monogram was first registered with the United States Patent and Trademark Office in 1932. While LVM’s case against MOB was pending in New York, the General Court of the E.U. invalidated the Damier Trademark because it was “a basic and banal feature composed of very simple elements” and lacked any brand-specific features. It is also likely unprotectable in the United States.

[2] For trademark purposes, “[a] ‘parody’ is defined as a simple form of entertainment conveyed by juxtaposing the irreverent representation of the trademark with the idealized image created by the mark’s owner … A parody must convey two simultaneous — and contradictory — messages: that it is the original, but also that it is not the original and is instead a parody. People for the Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 366 (4th Cir. 2001). This second message must not only differentiate the alleged parody from the original but must also communicate some articulable element of satire, ridicule, joking, or amusement. Thus, [a] parody relies upon a difference from the original mark, presumably a humorous difference, in order to produce its desired effect. Jordache Enterprises, Inc. v. Hogg Wyld, Ltd., 828 F.2d 1482, 1486 (10th Cir.1987) (finding the use of “Lardashe” jeans for larger women to be a successful and permissible parody of “Jordache” jeans).” Louis Vuitton Malletier S.A v. Haute Diggity Dog LLC, 507 F. 3d 252 (4th Cir. 2007). (Internal quotes omitted.)

USPTO Changes in Requirements for Declarations of Use

We previously reported the Declarations of Use pilot program by the USPTO. Examiners could request additional evidence when they questioned the evidence filed. These requests applied to both national and international registrations. As a result of the pilot program, the goods and services listed in the vast majority of the registrations questioned were limited to those in actual use. The USPTO is now proceeding to make the pilot program procedures part of the official rules. The objective is to have a more precise register of trademarks. Although the entire rulemaking process is not complete, these new regulations are likely to be implemented swiftly.

The key provision is:

The Office may require the owner [or holder of an International Registration] to furnish such information, exhibits, affidavits or declarations, and such additional specimens as may be reasonably necessary to the proper examination of the affidavit or declaration under section 8 [section 71] of the Act or for the Office to assess and promote the accuracy and integrity of the register.

See Federal Register – 6/22/2016 amending TMEP Sections 2.161 and 7.37

This rule gives the USPTO great latitude. Examiners can request additional information from a registrant to determine that the affidavit of use is accurate, and in particular that the mark is in use for all of the goods and services listed in the registration. United States law requires that an application filed on the basis of intent-to-use and converted to use, or based on use, must be in use for all of the goods and services. This is also true for the filing of Declarations of Use.

This new rule will be particularly problematic to foreign registrants where there is a tendency to include items in the list of goods and services that are beyond the scope of the business of the trademark owner. This common practice is because foreign trademark rights are more specifically limited to the actual goods and services listed in the registration. Rather under US law rights are evaluated under a likelihood of confusion analysis which can extend beyond the specific goods and services listed in the registration.

This rule further supports our regular recommendation to trademark owners to list those goods and services that are in actual use for the mark in order to minimize problems with the registration in the future. A likelihood of confusion determination is made on a variety of factors. Importantly, when pursuing an infringement, a trademark owner should not have to defend the registration from attack on the basis of non-use or fraud in the procurement or maintenance of the registration. The mark must be in use for all of the goods and services listed.

The USPTO published in the Federal Register on February 10, 2017, that there would be a 60 day freeze of the implementation of the foregoing rule change given the January 20, 2017 Presidential Executive Order requiring that any agency rule change comply with the order. The effective date was March 21, 2017, and as of now, no additional rules or regulations have been published or apparently implemented.

We note that the proposed rule went through exhaustive testing, analysis and public comment, and the Trademark Bar has supported the implementation of the rule to effectuate a cleaner and more accurate registry of trademarks.

Copyright gone amok: Privacy policies, tweets & selfies

Copyright is a limited monopoly on the right to copy, disseminate, create new works from and exploit works protected under copyright law, e.g., photographs, paintings, drawings, sculpture, mixed media works, video, film, musical compositions, sound recordings (but currently only sound recordings made after Feb. 15, 1972), and literary works and other writings that have at least a modicum of creative expression. With the rise of the Internet, the number of people creating and disseminating matter that is potentially protectible under copyright law — let’s call them “disseminators” — has increased exponentially. At the same time, an uncountable number of disseminators, both individual and corporate, have sought to extend the bounds of copyright protection, often to the point of absurdity.

Take for instance the typical website Terms of Use and Privacy Policy. There is a belief out there that these are protected by copyright. Indeed, even law firms whose practice focuses on intellectual property have a bad habit of placing copyright notices on their Terms of Use and Privacy Policy pages, despite the fact that these documents consist of legal notices, statements of law and instructions to the user. They don’t contain protectible matter because there is no original authorship. The content is driven by law, potential and imagined liabilities, and convention. Moreover, they are written with the intent to fulfill a function, not to create literary expression. There might be ways to create literary expression out of such documents, but the result would probably qualify as parody.

Even more to the point, who would ever issue a cease and desist letter or threaten to sue over someone copying their Terms of Use or Privacy Policy? And knowing you would never go after someone for re-using a terms of use or privacy policy, why would you put a copyright notice on it? Lawyers and others who perpetuate the notion that there is a copyright interest in these documents contribute to the overall misunderstanding among the public of the very spirit and purpose of copyright law. Copyright law appropriately sets the bar very low for the amount of expression that it takes to qualify as protectible, but many legal documents don’t — and shouldn’t — qualify.

***

techdirt made some news this past week by attempting to register the copyright for the following Tweet:

Monkey bar fallacy: a bad person using something makes it bad. E.g., users of monkey bars include: children, TERRORISTS #tor

The Copyright Office declined registration, probably because the Tweet falls under the what-is-not-protected-by-copyright categories, “works consisting entirely of information that is common property” and “short phrases.” Definitions, which the Tweet appeared to be, are not protected by copyright because words or short phrases belong to no one, at least when they aren’t used as trademarks. Note, however, that text that may accompany a definition, such as sentences using the word being defined, may be protected. In addition, “monkey bar fallacy” is a short phrase. This isn’t to say that no Tweets are copyright-protectible. It simply means that techdirt‘s “a-bit-of-data department” (which sought the registration) picked a bad example.

One thing about that article really bothered me. It kept referring to “copyrighting” something. You can’t “copyright” anything. You can register a copyright (at least in the United States), but something either is or isn’t protected by copyright. (Copyright isn’t copywrite, which is writing copy for advertising and marketing.) This goes along with using “trademark” as a verb. You brand a product or service; you register a trademark.

***

And that brings us to the selfie taken by a nameless crested black macaque using a camera that he appropriated from a British wildlife photographer named David Slater. Slater went to Indonesia in 2011 at great expense, but the way he tells it, he was not a co-author of the macaque’s selfie. Rather, the macaque grabbed Slater’s camera and began taking thousands of selfies, a few of which turned out to be brilliant. (Surely this validates, at least in principle, the infinite monkey theorem.)

Actually, the photographs have been around since 2011, but Slater, the owner of the camera, recently got into a dispute with the Wikimedia Foundation when one of the photos was added to the Wikimedia Commons collection of public domain images. The Foundation refused to remove the photo and for good reason. It was made entirely by the macaque, without any contribution whatsoever from Slater other than being there. Slater wasn’t responsible for the framing, the angle, the lighting, the focus or the snap of the shutter. Here was Slater’s dubious factual rationale (and specious legal rationale) for why he should be considered the “author” of the photographs:

It was my artistry and idea to leave them to play with the camera and it was all in my eyesight. I knew the monkeys were very likely to do this and I predicted it. I knew there was a chance of a photo being taken.[1]

This contradicts another, more recent, account that he apparently gave the Washington Post:

One day, he said, he set up a tripod and walked away for a few moments. When he returned, the monkeys had grabbed his camera and started snapping pictures.[2]

The latter sounds more like the truth. One can imagine Slater standing around, nervously hoping he would get his camera back in one piece. But even if Slater “predicted” that one of the macaque would take cute selfies — in fact, all but a handful of the thousands of images snapped were out of focus and otherwise unusable — neither the ownership of tools nor predictions will confer copyright ownership. Think of it this way: if someone stole your paintbrush that you cleverly left outside an art school and used it to paint a masterpiece, do you really think you could claim that you were the copyright owner?

The lack of a legitimate copyright claim hasn’t stopped Slater or his news agency, the Caters News Agency, from claiming that Slater owns the copyright. The shame of it is that the Huffington Post paid for use of the image, as if paying for an image in the public domain were a noble act.[3] When Slater tried to go after techdirt in 2011, techdirt correctly stood on its legal rights,[4] just as the Wikimedia Foundation has now done.

For better or worse, copyright law does not recognize works created by animals. Only people and corporations qualify. Of course this is bad news for elephants who make and sell their paintings, if only for peanuts.

 

End notes.

[1] See, https://www.techdirt.com/articles/20110714/16440915097/photographer-david-slater-claims-that-because-he-thought-monkeys-might-take-pictures-copyright-is-his.shtml

[2] See, http://www.washingtonpost.com/news/the-intersect/wp/2014/08/06/if-a-monkey-takes-a-selfie-in-the-forest-who-owns-the-copyright-no-one-says-wikimedia/

[3] http://www.huffingtonpost.com/2014/08/06/monkey-selfie_n_5654752.html

[4] See also, https://www.techdirt.com/articles/20110712/01182015052/monkeys-dont-do-fair-use-news-agency-tells-techdirt-to-remove-photos.shtml and https://www.techdirt.com/articles/20110706/00200314983/monkey-business-can-monkey-license-its-copyrights-to-news-agency.shtml

Improper Descriptions of Use in TM Registrations

The United States Patent and Trademark Office (“USPTO”) is currently considering ways to ensure that trademark registrants claim only those goods and services for which they are actually using their marks. All the proposals involve time and expense to the trademark owner. For that reason alone, it’s important to get registration – and subsequent Declarations of Use – right the first time. But there’s more you need to know…

Trademark registration in the United States, unlike most of the rest of the world, is based on use: that is, the USPTO requires that the registrant actually use (or have a bona fide intent to use) its mark in U.S. commerce on all the goods and/or services listed in the application. In order to enforce that requirement, the registrant is required to attest to such actual use through post-registration “Declarations of Use” under Section 8 of the Trademark Act. Declarations of Use must be filed between the 5th and 6th anniversaries of registration, between the 9th and 10th anniversaries of registration, and in each successive ten-year period thereafter. For a fee, the registrant may file within a six-month grace period, but failure to file a Declaration will result in cancellation of the registration.

Normally, a registrant submits a specimen showing use of the mark on one of the goods and/or services listed in each class of goods/services listed on the registration, and attests that “[t]he mark is in use in commerce on or in connection with all of the goods or services listed in the existing registration for this specific class…”

The Declaration also gives the registrant the opportunity to delete goods and services that are not in use or to explain an excusable failure to use the mark in connection with particular goods or services. The registrant is warned that “willful false statements and the like are punishable by fine or imprisonment or both” and “may jeopardize the validity of this document.”

In fact, the penalty can be severe if the registrant’s mark is ever challenged by a third party in a cancellation proceeding before the Trademark Trial and Appeal Board. If the mark is not being used in connection with all the listed goods and services, the entire registration may be cancelled on the basis of non-use and falsely representing that the mark was in use when it wasn’t.

Even given that risk, the USPTO is aware that many registrants are not using their trademarks on all the goods and services listed on their registrations. This is particularly the case with registrants under Section 44(e) (registrations based on a foreign registration) and Section 66(a) (registrations based on Madrid Protocol). In many countries outside the U.S., the registrant, aiming to obtain a greater scope of protection, will register its mark using descriptions of goods and services that are much broader than the USPTO permits, with the only risk being the deletion of some goods or services from the registration after the first 3 or 5 years. We have assisted numerous non-U.S. clients in avoiding this potential pitfall in their United States registrations by querying them closely as to actual use and narrowing the description of goods and services where appropriate.

Recently the USPTO completed a pilot program, which was really a spot check of 500 randomly selected registrations for which Declarations of Use were being filed. The results confirmed our observation in practice that non-U.S. registrants who obtain their registrations based on a foreign registration or the Madrid Protocol often have difficulty understanding the requirements of the USPTO.

Among the 500 registrants was a statistically significant sample of registrations under Trademark Act Sections 1(a) {use-based}, 44(e) {foreign registration based}, 66(a) {International Registration/Madrid Protocol based}, and 1(a) and 44(e) combined (dual basis). Each of the selected registrants was required by the USPTO to submit proof of their marks for two additional goods and/or services per class, in addition to the specimen(s) submitted with their Declarations of Use. If the registrant failed to submit the required proof or requested that goods and/or services be deleted, the USPTO asked for additional proof.

The results were striking. The majority of foreign-based registrations – 56% of Section 44(e) registrants, 61% of Section 66(a) registrants and 63% of dual basis registrants – ended up requesting deletion of goods and/or services that they weren’t using. In contrast, 27% of Section 1(a) registrants requested deletions of goods and services. The latter figure is still unacceptably high, however, and highlights the necessity among trademark registration service providers to take the time to limit their clients’ descriptions of goods and services to those that the client is actually using or has an excusable reason for not using. Had any of these registrants’ marks been challenged by third parties, their U.S. registrations could have been cancelled.

REDSKINS Marks Cancelled, Found to Disparage Native Americans

REDSKINS

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:

  1. 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?
  2. 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.

Amazon Enters the Music Streaming Market

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.

 

Do we need the Songwriter Equity Act?

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,
  • ringtones,
  • 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.

Copyright Reform 2014: Understanding the Issues

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.[1]

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.[2]

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.[3]

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.[4]

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.[5] 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.)[6]

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.[7]

Unlike terrestrial radio stations, Pandora has to pay ASCAP 1.85% of its annual revenue.[8] 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).[9]

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.[10] 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.[11] 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.[12]

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.[13] 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.)[14]

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.”[15]

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…[16]

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.[17] 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.”[18]

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.[19] 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.[20]

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.

Some Conclusions.

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.)[21] 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.[22]


[1] 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

[2] “Federal Court Approves Radio Industry Settlement with ASCAP,” http://www.radiomlc.org/pages/4795848.php

[3] 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.

[4] 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

[5] Id., p. 16

[6] 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.

[7] “Federal Court Approves Radio Industry Settlement with ASCAP,” http://www.radiomlc.org/pages/4795848.php

[8] 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

[9] Id.

[10] 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

[11] David Pakman, The Price of Music, March 18, 2014, http://recode.net/2014/03/18/the-price-of-music/

[12] 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

[13] 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.

[14] Public Knowledge, p. 15, 17.

[15] Mearian, footnote 13.

[16] 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

[17] Id.

[18] Id.

[19] 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

[20] Public Knowledge, p. 16.

[21] “Copyright Term and the Public Domain in the United States, 1 January 2010, http://www.copyright.cornell.edu/resources/publicdomain.cfm.

[22] 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.

The Pitfalls of Using Class Headings in USPTO Trademark Applications.

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.

Corporate Officers Held Personally Liable for Copyright Infringement

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.]