TLJ News from July 1-5, 2007

4th Circuit Issues Amended Opinion in Phelps v. Galloway

7/5. The U.S. Court of Appeals (4thCir) issued its second opinion [22 pages in PDF] in Phelps v. Galloway, a copyright case involving architectural designs.

The Court of Appeals issued its original opinion [23 pages in PDF] on February 12, 2007. TLJ wrote at that time that Court of Appeals misapplied the first sale doctrine and otherwise engaged in "strained legal analysis". See, story titled "4th Circuit Applies eBay v. MercExchange in Copyright Injunction Case" in TLJ Daily E-Mail Alert No. 1,536, February 13, 2007. The facts of the case, and the relevant statutes, are set out TLJ Daily E-Mail Alert No. 1,536, and hence, are not restated in this story.

The copyright holder (Phelps) filed a Petition for Rehearing. After rehearing, the same three judge panel issued its second opinion on July 5, 2007. The just released opinion provides no further relief for the copyright owner (Phelps). However, the amended opinion removes some of the more untenable portions of the original opinion, and limits the impact that it might have on other types of copyright.

This amended opinion remains a setback for architects and designers of homes and other buildings, although not as much as the original opinion. How much it will affect other creators and holders of copyrights is less clear.

This is case involving infringement of an architectural design copyright. The Court of Appeals affirmed the District Court's denial of an injunction of the construction, sale, or lease of an upscale house built with the copyrighted design. It so doing, it extended the Supreme Court's holding regarding the availability of injunctive relief in patent cases in eBay v. MercExchange to copyright cases.

The Supreme Court held in its May 15, 2006, opinion [12 pages in PDF] that "a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction."

The Supreme Court wrote in dicta that this applies to copyright also. See, story titled "Supreme Court Rules on Availability of Injunctive Relief in Patent Cases" in TLJ Daily E-Mail Alert No. 1,371, May 16, 2006.

Both opinions of the Court of Appeals also limited the damages of the copyright holder (Phelps) to the license fee that it would have changed ($20,000). That is, these opinions leave would be infringers of architectural designs little incentive not to infringe.

Moreover, both the original and the amended opinion affirmed the District Court's failure to award the infringer's (Galloway) profits. However, the Court accomplished this by evidentiary sleight of hand. The District Court allowed the infringer to provide opinion testimony to the jury as to the value of the completed house, although he is not an expert, and allowed the infringer to introduce as evidence the local taxing authority's valuation of the property, while excluding from the jury the testimony of the copyright holder's expert witness on the value of the property. Thus, the infringer convinced the jury that there was no profit to award to the copyright holder.

Both opinions of the Court of Appeals affirm the District Court's denial of injunctive relief. Indeed, the copyright holder has yet to recover even infringing copies of the design.

The Court of Appeals' amended opinion applies the four part eBay test, and finds that while the first two prongs weigh in the copyright holder's favor, the other two (the balance of hardships, and public interest) weigh in the infringer's favor. Hence, it affirmed the denial of an injunction against sale or lease of the house.

The amended opinion deletes the original opinion's bizarre application of the first sale doctrine. Instead, it reached the same outcome (no injunctive relief) based upon its application of the four prong eBay test.

The first sale doctrine, which is codified at 17 U.S.C. § 109, provides that "the owner of a particular copy ... lawfully made under this title" can , "sell or otherwise dispose of the possession of that copy ...".

The facts of the case are that the infringer obtained the design, not from the copyright holder, but from another home owner whose house was built according to the design, that the design contained a copyright notice, that a subcontractor warned the infringer that he would be infringing the copyright, and that the infringer responded "They’ve got to find me, catch me first". That is, he was a willful infringer, and his copies of the design, and his house, were not "lawfully made".

Nevertheless, the analysis of the Court of Appeals in its original opinion was that the copyright holder (Phelps) was made whole by the award of a license fee ($20,000), and that the infringer (Galloway) stands in the position of lawfully licensed holder of a copy.

The Court of Appeals wrote in its original opinion that "By bringing an infringement action against Galloway, Phelps & Associates essentially sold him its interest in the house in exchange for the appropriate remedies under the Copyright Act. Once those remedies have been sought and a judgment has been rendered, the copyright holder loses his right to sell that particular manifestation of his copyright." The Court of Appeals relied upon the first sale doctrine, but read the phrase "lawfully made" out of the statute.

The just released amended opinion deletes all reference to the first sale doctrine.

Nevertheless, it still hints at something equivalent to application of the first sale doctrine, without calling it such. The Court of Appeals wrote that the copyright holder (Phelps) "is limited to the other relief provided in this case. Upon satisfaction of that relief, Galloway will be entitled to peaceful ownership of the house, with good and marketable title."

Also, the amended opinion, by applying the four prong eBay test, removes the argument that the Court created a per se rule that injunctive relief is not available for completed houses that are built according to unlicensed designs, or for all works that are based upon and infringe other works.

The original opinion did nothing to suggest that the holding only applied to architectural designs in homes. However, the Court of Appeals added some dicta in the amended opinion to suggest that a different conclusion regarding injunctive relief would be warranted in cases involving digital piracy in the movie and music industries.

It wrote in its amended opinion that "While granting an injunction to destroy an infringing article might be usual with respect to personal property, especially in the garden-variety music or movie piracy case, refusing to order destruction or the inalienability of property" is appropriate in the present case.

Thus, the Court of Appeals suggests that if someone makes counterfeit copies of music CDs or movie DVDs, is sued, and has a money judgment entered against him, then he cannot then assert that the remedy of an injunction barring sale of the counterfeit copies is no longer available. But what of downstream retailers of the counterfeit copies, or purchasers? Nor does the Court's dicta go beyond "garden-variety" counterfeiting. What of a new work, an unlicensed derivative work, whether movie, music, game, or software, that incorporates all or part of a copyrighted work? To what extent does the opinion in this case stand as authority for the proposition that if the infringer is held liable for money damages, he is then free to distribute the infringing work?

This case is Christopher Phelps & Associates, LLC v. R. Wayne Galloway, et al., U.S. Court of Appeals for the 4th Circuit, App. Ct. No. 05-2266, an appeal from the U.S. District Court for the Western District of North Carolina, at Charlotte, D.C. No. CA-03-429-3, Judge Graham Mullen presiding. Judge Niemeyer wrote both of the opinions, in which Judge Motz and Judge Traxler joined.

US and EU Address PNR and SWIFT Data

7/5. The Department of Homeland Security (DHS) announced in a release that on June 28, 2007, that the DHS, Germany and the European Union "initialed an international agreement between the United States and the European Union on the transfer of Passenger Name Record (PNR) data to the Department of Homeland Security (DHS) from air carriers operating transatlantic flights to and from the U.S."

However, the DHS did not release the text of this agreement. The DHS release states that the "DHS and the EU have agreed to revise the list of data that may be collected".

Also on June 28, 2007, the EU announced in a release that "the European Union has got a set of unilateral commitments (``Representations´´) of the United States Treasury Department regarding their handling of EU originating personal data received from SWIFT in the United States under compulsion of administrative subpoenas." (Parentheses and internal quotations in original.)

However, the EU did not release the text of this document or documents.

The EU release states that this includes "Commitments by the U.S. Treasury to use any data received from SWIFT exclusively for counter terrorism purposes -- an obligation which applies also where such data are shared with other U.S. agencies and with third countries. Any other use of SWIFT data is therefore excluded, including for example use of those data for commercial or industrial purposes."

"The Representations impose strict data retention obligations, namely to retain dormant data (i.e. data subpoenaed by US Treasury which have not been identified as necessary for counter terrorism purposes) for no more than five years from the date of receipt of data or, in the case of data received before publication of the Representations, to retain those data for no more than five years from the date of publication of the representations." (Emphasis in original omitted.)

Society for Worldwide Interbank Financial Telecommunication  (SWIFT) announced in a release on June 23, 2007, that "SWIFT responded to compulsory subpoenas for limited sets of data from the Office of Foreign Assets Control of the United States Department of the Treasury".

SWIFT states in its web site that it is an "industry-owned co-operative supplying secure, standardised messaging services and interface software to nearly 8,100 financial institutions in 207 countries and territories. SWIFT members include banks, broker-dealers and investment managers. The broader SWIFT community also encompasses corporates as well as market infrastructures in payments, securities, treasury and trade."

GAO Releases Report on Data Breaches and ID Theft

7/5. The Government Accountability Office (GAO) released a report [50 pages in PDF] titled "Personal Information: Data Breaches Are Frequent, but Evidence of Resulting Identity Theft Is Limited; However, the Full Extent Is Unknown". It finds that data breaches are common, but that "most breaches have not resulted in detected incidents of identity theft". See, full story.

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7/5. The Federal Communications Commission (FCC) announced that its Joint Task Force on Media and Childhood Obesity will be "extended through the end of the summer". See, FCC release [PDF].

7/5. The U.S. Court of Appeals (4thCir) issued its opinion [17 pages in PDF] in IntraComm v. Bajaj, affirming the judgment of the District Court. This is a contract, fraud, and minimum wage and overtime law dispute between a software developer and an information technology service provider that licensed his software, and hired him to sell licenses to its customers. Baback Habibi is one of the founders of IntraComm, Inc., an information technology company, and the creator of a software integration system named IC-WEL. He entered into agreements with DigitalNet Government Solutions, LLC, under which DigitalNet employed him, obtained a 15 month exclusive license to sell IC-WEL and an option to purchase IC-WEL, and agreed to pay Habibi commissions for sales of IC-WEL licenses. He sold none. Habibi filed a complaint in state court against DigitalNet, its successor, and various individuals alleging state law contract and fraud claims. The defendants removed the case to federal court. The District Court granted summary judgment to the defendants on the state law claims, and the Court of Appeals affirmed. However, Habibi also asserted violation of the Fair Labor Standards Act (FLSA), which is codified at 29 U.S.C. § 201 et seq., in connection with the failure to satisfy the minimum wage and overtime requirements of the FLSA. The defendants asserted that he was an exempt employee. The Department of Labor (DOL), which filed an amicus curiae brief, asserted that he was not. The Court of Appeals deferred to the DOL's interpretation of its ambiguous regulations, and affirmed the judgment of the District Court that Habibi was not an exempt employee, and that the defendants violated the FSLA. This case is IntraComm, Inc., et al. v. Ken Bajaj, et al., U.S. Court of Appeals for the 4th Circuit, App. Ct. Nos. 06-1516 and 06-1539, appeals from the U.S. District Court for the Eastern District of Virginia, at Alexandria, D.C. No. 1:05-cv-00955, Judge Claude Hilton presiding.

UK's Cameron Advocates Intellectual Property Rights

7/4. David Cameron, a member of the U.K. Parliament, and head of the Conservative Party, gave a speech [10 pages in PDF] in London regarding intellectual property rights (IPR) at an event hosted by the British Recorder Music Industry, or BPI.

David CameronSummary. Cameron (at right) advocated IPR generally, criticized the Gowers report, asserted a link between "CD piracy and serious and organised crime", proposed stronger criminal enforcement of copyright laws, proposed extending the copyright term for sound recordings from 50 to 70 years, and declined to advocate censorship of music lyrics or video.

On the other hand, he made two points not typically expressed by music industry representatives. First, he said that people should be allowed to copy the content of their CDs onto music players for personal use. Second, he argued that it should be less expensive and easier to register intellectual property.

He also said that "ISPs can block access and indeed close down offending file-sharing sites".

Cameron is the leader of the opposition party in UK politics. See also, speech of George Osborne, the Conservative Party's shadow Chancellor of the Exchequer, on March 8, 2007, titled "Open Source Politics".

Rationales for IP Protection. Cameron offered several reasons for protecting intellectual property. He said that "Copyright matters because it is the way artists are rewarded and businesses makes its money and invests in the future." He elaborated on the benefits to the economy of a vibrant music industry, and the harm to low income artists of music piracy.

He also said that "piracy and illegal file-sharing is wrong."

He also argued that IP protection incents new creation, and expands consumer choice.

Finally, he said that there are "links between CD piracy and serious and organised crime".

Gowers Report. Cameron criticized the Gowers Review into the UK Intellectual Property Framework [150 pages in PDF], which was commissioned by the ruling Labour Party, and released on December 6, 2006.

He said that the Gowers report "rightly disappointed many in the creative industries by failing to do much more than suggest tinkering at the edges."

"Changes at the margins will not be good enough", said Cameron. "If we are serious about protecting intellectual property, we need to build a framework that is both flexible and accessible."

Proposals. Cameron stated that "government has three important responsibilities, "to establish a more robust intellectual property framework", "fight copyright theft" by "vigorously bringing offenders to book", and to confront "the blasé attitude that many people have towards piracy and illegal downloading".

He argued that the IP framework "has to be flexible so it reflects the changing way in which people listen to their music for personal use." He continued that this "means decriminalising the millions of people in this country for copying their CDs onto music players for personal use, and focusing all our attention on the genuine fraudsters."

He also argued that IP protection "has to be accessible so smaller companies, who currently find it so expensive to register their intellectual property, have the resources to do so."

He added that "That means working at a Europe-wide level to end the need to translate all documents and applications into all the EU languages."

He also advocated more vigorous prosecution of pirates.

He also proposed extending the copyright term for sound recordings. He said that "If we increase the copyright term, so the incentive is there for you working in the industry to digitise both older and niche repertoire which more people can enjoy at no extra cost."

He announced that "it is Conservative Party policy to support the extension of the copyright term for sound recordings from 50 to 70 years."

ISP Responsibilities. Cameron also referenced the "responsibility" of the "Internet Service Providers", who are the "the gatekeepers of the internet."

He said that "Some ISPs claim there is nothing they can do to stop illegal downloading of music. But last month alone, there were eight sites that hosted more than 25,000 illegal downloads. That is clear and visible internet traffic."

He also said that the music industry cannot "do all the work" in fighting piracy. "ISPs can block access and indeed close down offending file-sharing sites."

He added that ISPs "have already established the Internet Watch Foundation to monitor child abuse and incitement to racial hatred on the internet. They should be doing the same when it comes to digital piracy."

However, he stopped short of proposing the enactment of new statutes that would impose any new obligations or liabilities on ISPs.

Censorship. Cameron asked rhetorically, "Is some music, are some lyrics, are some videos and are some artists, helping to create a culture in which an anti-learning culture, truancy, knifes, violence, guns, misogyny are glorified?" He answered his question, "Yes."

He continued, "Can we see the effects of this on our young people, in our schools and on our streets? Yes."

"Do we think we can combat this culture by government policies, policing and criminal justice alone? No." He added that "That’s why I am not calling for censorship, legislation or the banning of content."

Instead, he called for politicians, teachers, parents, television producers, video game manufacturers, and record industry executives to "to show leadership, exercise your power responsibly and to use your judgement."

See also, copy of speech in Conservative Party web site.

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7/4. Peter Mandelson, the EC Commissioner for Trade, gave a speech regarding Doha round negotiations. He said that "The Doha Round is now going back to Geneva." He said that last month's negotiations in Potsdam, Germany, between the US, EU, India and Brazil did not succeed "in making the breakthrough we hoped for." He focused on Brazil. He said that "We all stand to gain from a Doha success: but Brazil stands to gain more than most". He continued that "Brazil needs to offer a tariff reduction proposal that removes the ability in future to raise the tariffs currently applied ... that eliminates existing applied tariff peaks ... that creates a reasonable level of new market access by lowering modestly a range of other tariffs."

7/4. The European Commission announced in a release that it fined Telefónica "over €151 million for over five years of unfair prices in the Spanish broadband market". Nellie Kroes, the EC Competition Commissioner, stated that "Telefónica has committed a very serious abuse of its dominant position on the Spanish broadband market by structuring its wholesale and retail prices in such a way that the margin between them did not allow competitors to compete on the market without making losses." Kroes elaborated in her statement that "For more than five years, from September 2001 to December 2006, Telefónica kept wholesale prices artificially high compared to its retail prices. Because potential competitors in Spain were largely dependent on Telefónica's fixed telephone network to provide broadband access, through ADSL technology, Telefónica's price structures raised its competitors' costs, restricted competition on the retail market, and made consumers pay the price." She added, "I want to send a strong signal to dominant undertakings in all sectors".

House Democrats Signal End of FTAs

7/2. Trade promotion authority (TPA) expired on Saturday, June 30, 2007. TPA enabled the President, and his trade representatives, to negotiate trade agreements that the Congress could approve or reject, but not amend. In addition, House Democratic leaders issued a joint statement on July 2, 2007, indicating that the House is unlike to approve free trade agreements (FTAs) with Korea or other nations.

The President, through the Office of the U.S. Trade Representative (OUSTR), concluded the U.S. Korea FTA in April. See, story titled "US and Korea Announce FTA" in TLJ Daily E-Mail Alert No. 1,559, April 2, 2007. See also, text of the agreement and sections regarding telecommunications [17 pages in PDF], electronic commerce [4 pages in PDF], intellectual property rights [35 pages in PDF]

The Congress has not approved this FTA. On July 2, 2007, House Democratic leaders announced their opposition.

USTR Susan Schwab, and Korea's Trade Minister Kim Hyun-chong signed the FTA in a Capitol Hill ceremony on June 30. However, this signing may prove to be a ceremony without consequence. Protectionist House Democrats oppose the FTA. Democrats control the House.

Rep. Nancy Pelosi (D-CA), the Speaker of the House, Rep. Steny Hoyer (D-MD), the Majority Leader, Rep. Charles Rangel (D-NY), Chairman of the House Ways and Means Committee, and Rep. Sander Levin (D-MI), Chairman of the Subcommittee on Trade, announced in a joint statement on July 2 that "we cannot support the KFTA".

Schwab wrote in statement that the FTA "has strong provisions that will expand market access and investment opportunities in a number of service sectors, including telecommunications and e-commerce.  The agreement will also expand market opportunities for U.S. audio-visual products.  It also provides high standards for protection and enforcement of intellectual property rights, including trademarks, copyrights and patents, consistent with U.S. standards."

President Bush praised the U.S. Korea FTA in a statement released on June 30, 2007. He wrote that this FTA, if approved, "will generate export opportunities for U.S. farmers, ranchers, manufacturers, and service suppliers, promote economic growth and the creation of better paying jobs in the United States, and help American consumers save money while offering them greater choices. The Agreement will also further enhance the strong United States-Korea partnership, which has served as a force for stability and prosperity in Asia. I call on Congress to ratify this landmark Agreement, to the considerable benefit of the American people."

With respect to the U.S. Peru FTA, the House Democratic leaders' statement expresses no support, or commitment to bring the FTA to the floor for a vote. Rather, it states that members of Congress will travel to Peru to "confer". (The Constitution provides that the President "shall have Power ... to make Treaties ...")

The House Democratic leaders' statement adds an additional requirement that is not an attribute of the usual process by which nations enter into FTAs. The statement asserts that Peru must first enact legislation implementing any agreement before the House approves or implements any agreement that it reaches with Peru.

With respect to the Columbia FTA, the House Democratic leaders' statement announces that "we cannot support the Colombia FTA".

Condoleezza Rice praised TPA and the pending FTAs in a release on June 29, 2007. She stated that these FTAs, "none of which would be possible without TPA", will "promote democracy", in addition to providing economic benefits.

Rice also said that without TPA, "countries will be less willing to enter into serious trade discussions with the United States. Indeed, the last time TPA lapsed (1995 - 2001), America sat on the sidelines as 190 regional trade agreements were negotiated without us. While global networks of power and influence advanced, our economic interests were stymied. To maintain America's global economic leadership and advance our nation's broader foreign policy goals, I call on Congress to immediately renew Trade Promotion Authority." (Parentheses in original.)

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7/2. The Copyright Office (CO) announced in a release that "Response to our electronic Copyright Office eCO beta test announcement has been overwhelming, and we easily reached our target quota of potential beta testers. Consequently we are no longer accepting requests to participate in the beta test."

Pascal Lamy7/2. On July 2, 2007, Pascal Lamy (at right), Director General of the World Trade Organization (WTO) gave a speech regarding Doha round negotiations, in Geneva, Switzerland, in which he stated that "What remains to be done is small compared to all the proposals already on the table", and that "we need key progress in agriculture subsidies and tariffs on agriculture and industrial tariffs now". He continued that "Indeed, today reaching agreement on subsidies depends on additional concessions from the US equivalent to less than a week's worth of transatlantic trade. It depends on an additional handful of percentage reduction in the highest agriculture tariffs by the EU and Japan. It depends on an additional handful of percentage reduction in the highest industrial tariffs by emerging economies such as Brasil or India. All this to be done, not by tomorrow, but over a transition period of several years to leave space for a smooth adjustment."

7/2. President Bush signed HR 1830 [LOC | WW], an act that extends the Andean Trade Preference Act (ATPA) through February 29, 2008. It expired on June 30, 2007. See, White House release and statement of Susan Schwab.

7/2. The Office of the U.S. Trade Representative (OUSTR) announced that USTR Susan Schwab met with Australian Minister for Trade Warren Truss. The USTR's release states that the two discussed the U.S. Australia FTA, which has been in effect since 2005.

Go to News from June 26-30, 2007.