3rd Circuit Breaks New Ground on Copyright Misuse

August 26, 2003. The U.S. Court of Appeals (3rdCir) issued its opinion [23 pages in PDF] in Video Pipeline v. Buena Vista Home Entertainment, affirming the District Court's preliminary injunction of Video Pipeline's online distribution of short clip previews of Disney movies, and rejecting Video Pipeline's affirmative defenses of fair use and copyright misuse. However, while the Appeals Court ultimately held that the copyright misuse defense fails in this case, it made new law by extending its applicability.

The dispute in the case involves Video Pipeline's internet publication of approximately two minute long "clip previews" of Disney movies, made by Video Pipeline. These clip reviews are different from the approximately two minute long "movie trailers", made by Disney, and published in Disney web sites, and licensed to other web site operators.

The defense of copyright misuse was raised in this case because Disney licensed its movie trailers subject to license terms that prohibit the licensees from using the movie trailers in a way that is "derogatory to or critical of the entertainment industry or of" Disney. That is, Disney uses the exclusive rights conferred upon it by the Copyright Act, not only to obtain a return for its creative efforts (which is consistent with the purposes of copyright protection), but also to suppress criticism (which is contrary to the purposes of copyright protection).

This ruling is pregnant with possible applications to copyright in digital works.

See also, related story titled "3rd Circuit Addresses Fair Use and Copyright Misuse" in TLJ Daily E-Mail Alert No. 727, August 27, 2003, which focuses on the Court's discussion of the fair use defense.

History of the Doctrine of Misuse. The doctrine of misuse was first developed in patent law, which shares a common purpose with copyright law -- providing an economic incentive for creativity, and investment in creative activity, by extending to authors and inventors the right to obtain monopoly rents, for a limited time, on the sale, licensing or use their creative works or inventions.

The Supreme Court held that there is a defense of patent misuse to prevent the holders of patents from using the authority extended to them under the Patent Act to prevent competition in products that are not protected by patent. See, Morton Salt Co. v. Suppiger Co., 314 U.S. 488 (1942).

Similarly, in Brulotte v. Thys Co., 379 U.S. 29 (1964), the Supreme Court held that a patent holder's attempt to collect royalties beyond the term of the patent constitutes misuse of the patent

Hence, the doctrine of patent misuse is similar to, but not identical to competition, or antitrust, analysis. It has also been criticized. See, for example, June 17, 2002 opinion [PDF] of the U.S. Court of Appeals (7thCir) in Scheiber v. Dolby Laboratories, and story titled "7th Circuit Criticizes But Follows Brulotte" in TLJ Daily E-Mail Alert No. 453, June 8, 2002. Judge Richard Posner wrote the opinion.

More recently, the doctrine of misuse has been extended from patent law to copyright law. The leading cases are Lasercomb America v. Reynolds, 911 F.2d 970 (4thCir 1990); Practice Management Information Corp. v. AMA, Alcatel U.S.A., Inc. v. DGI Technologies, Inc., 166 F.3d 772 (5thCir 1999), and DSC Communications Corp. v. DGI Technologies, 81 F.3d 597 (5thCir 1996). Some of these cases involved software licensing practices.

In Lasercomb the Court found copyright misuse where the holder of a copyright in computer software used a license agreement that barred licensees from using ideas contained in its software to write their own software. In Alcatel the Court found copyright misuse where the holder of a copyright in software licensed its use on the condition that the licensee also use it only in conjunction with the copyright holder's hardware. The DSC case involved development of a competing microprocessor card.

While these cases have extended the doctrine of misuse to copyright, and have applied it in the context of computer software and hardware, these cases still basically apply a variety of competition analysis to find misuse.

What is new in Video Pipeline case (other than that the 3rd Circuit had not previously recognized the defense of copyright misuse) is that the analysis is not based on an analysis that is similar to competition or antitrust analysis. Specifically, it is based on suppression of criticism. But more generally, it is based on the notion that copyrights should not be enforceable where the enforcement undermines the Constitutional purpose of copyright protection -- "to promote the Progress of Science and useful Arts".

Holding in Video Pipeline. The Court noted that misuse "exists where the patent or copyright holder has engaged in some form of anti-competitive behavior." But, it went on to state that "More on point, however, is the underlying policy rationale for the misuse doctrine set out in the Constitution's Copyright and Patent Clause ... Put simply, our Constitution emphasizes the purpose and value of copyrights and patents. Harm caused by their misuse undermines their usefulness."

The Court reasoned that the underlying Constitutional purpose can be undermined, not only by anticompetitive licensing terms, but also by attempts to restrict criticism.

With respect to competition, the Court wrote that "Anti-competitive licensing agreements may conflict with the purpose behind a copyright's protection by depriving the public of the would-be competitor's creativity."

With respect to suppression of criticism, the Court wrote that "A copyright holder's attempt to restrict expression that is critical of it (or of its copyrighted good, or the industry in which it operates, etc.) may, in context, subvert -- as do anti-competitive restrictions -- a copyright's policy goal to encourage the creation and dissemination to the public of creative activity."

The Court also made some other significant statements about the defense of misuse. It wrote that "Misuse is not cause to invalidate the copyright or patent, but instead ``precludes its enforcement during the period of misuse." (Citing Practice Management.) Moreover, the Court wrote that "To defend on misuse grounds, the alleged infringer need not be subject to the purported misuse."

However, having made these broad statements about copyright misuse, the Court nevertheless held that the defense is inapplicable in this case. For example, it wrote that "There is no evidence that the public will find it any more difficult to obtain criticism of Disney and its interests, or even that the public is considerably less likely to come across this criticism, if it is not displayed on the same site as the trailers."

And hence, it held that "while we extend the patent misuse doctrine to copyright, and recognize that it might operate beyond its traditional anti-competition context, we hold it inapplicable here. On this record Disney's licensing agreements do not interfere significantly with copyright policy ..."

Holding in Ty v. Publications International. There is another another recent case on point -- another Posner opinion. The discussion of copyright misuse in this case is all dicta, but it contains some original analysis of misuse.

In this case, Judge Posner offered a lengthy analysis of the purposes and economics of copyright protection. And in doing so, he hinted that copyright misuse might endanger copyrights. However, he did not decide this case based on this issue.

The U.S. Court of Appeals (7thCir) issued its opinion in Ty v. Publications International on May 30, 2002. There was then a petition for writ of certiorari, on other grounds, to the Supreme Court, which was denied. The Appeals Court merely overturned a summary judgment in which the District Court had rejected a fair use defense, and remanded to the District Court with further guidance, and instructions that the issue of fair use go to a jury.

The plaintiff in the District Court is Ty Inc., the manufacturer of Beanie Babies. These are toys made by putting bean pellets inside of bags, that are designed to resemble animals. Ty holds copyrights to these as "sculptural works". Publications International, Ltd. (PIL) publishes books, including For the Love of Beanie Babies and Beanie Babies Collector's Guide, which contain pictures of Beanie Babies, and text. That is, PIL took and published pictures (derivative works) of Ty's Beanie Babies (copyrighted works). However, these pictures were part of a guide to Beanie Babies marketed to collectors. Hence, PIL asserts that use of the pictures constitutes fair use. Ty differs. Unlike some other Beanie Baby book publishers, PIL has no license from Ty.

Ty filed a complaint in U.S. District Court (NDIll) against PIL alleging copyright and trademark infringement. PIL conceded that the Beanie Babies are copyrighted, and that its books are derivative works, but asserted the affirmative defense of fair use. The District Court ruled on summary judgment that the copying was not fair use, and granted Ty an injunction on the copyright claim. The Appeals Court reversed and remanded.

Judge Posner also hinted at misuse arising out of copyright licensing practices and litigation strategies intended to suppress critical reviews of its products -- a purpose that is contrary to the underlying purposes of copyright protection.

This is the gyst of his argument. Ty makes a product for kids. It sets production levels and low prices at levels that do not result in a clearing of the market. Hence, there is excess demand at Ty's price and quantity of production. This, among other things, creates a secondary market for the product. This secondary market, in turn, creates advertising for the product, and increases future demand.

However, for there to be an effective secondary market, there must be literature on the product, including collectors' guides. Posner then reasoned: "Granted, there is some question how, if Beanie Babies collectors' guides are indeed a complement to Beanie Babies (and they are), and Ty has a monopoly of Beanie Babies (and it does), Ty can get a second monopoly profit by taking over the guides market. The higher the price it charges for guides, the lower will be the demand for such guides and hence for collecting Beanie Babies and so the less effective will Ty's strategy of marketing Beanie Babies as collectibles be. This is the sort of question that has engendered skepticism among economists about the antitrust rule against tie-in agreements. But there is an answer here: Ty wants to suppress criticism of its product in these guides."

Posner also wrote that "ownership of a copyright does not confer a legal right to control public evaluation of the copyrighted work."

He also noted that "Some of the text" in PIL's guide "is quite critical, for example accusing Ty of frequent trademark
infringements. Ty doesn't like criticism, and so the copyright licenses that it grants to those publishers whom it is willing to allow to publish Beanie Baby collectors' guides reserve to it the right to veto any text in the publishers' guides. It also forbids its licensees to reveal that they are licensees of Ty. Its standard licensing agreement requires the licensee to print on the title page and back cover of its publication the following misleading statement: ``This publication is not sponsored or endorsed by, or otherwise affiliated with Ty Inc. All Copyrights and Trademarks of Ty Inc. are used by permission. All rights reserved."

However, he left it at that. He wrapped up this line of analysis with the statement, "We need not consider whether such a misleading statement might constitute copyright misuse, endangering Ty's copyrights."

Thus, like Judge Ambro in Video Products, Judge Posner in Ty is taking the doctrine of copyright misuse away from its roots in competition law, and grounding it in the notion that the use of copyright protection for purposes that are contrary to the underlying purposes of the Constitutional mandate, such as suppressing criticism, is misuse.

Other Possible Applications of the Copyright Misuse. In addition to the situations in the Video Product and Ty cases, one could conceive of other areas where the Video Pipeline holding might be applied.

One is the online publication by critics of unpublished records of companies, organizations and political figures. Employees, shareholders, and other potential critics of companies, organizations, and public and political figures sometimes obtain copies of documents from their employers, companies or others, and publish them in web sites.

Recently, plaintiffs have had considerable success in enjoining the publication of such documents under copyright law. That is, they assert copyright in works, which they have not published, and which they have no intention of publishing. In this situation there is no lost revenue or profits to the copyright holder from diminished sales or licensing of the copyrighted works. Moreover, in cases of public concern, the effect of an injunction is to decrease criticism and public discourse on matters of public interest. That is, the underlying purpose of copyright protection is not furthered by some such injunctions; it is undermined.

A second area where the doctrine of copyright misuse, as described in Video Pipeline, might be applied, is assertion of the Digital Millennium Copright Act (DMCA) to obtain quasi patent rights. That is, traditionally a copyright owner's main remedy has been for violation of his exclusive rights of copyright, as provided in 17 U.S.C. 106 -- that is, an action for infringement.

Now, the DMCA, at 17 U.S.C. 1201, provides, for example, that "No person shall circumvent a technological measure that effectively controls access to a work protected under this title." It further provides at  1201(a)(2) that "No person shall manufacture, import, offer to the public, provide, or otherwise traffic in any technology, product, service, device, component, or part thereof, that (A) is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to a work protected under this title; (B) has only limited commercially significant purpose or use other than to circumvent a technological measure that effectively controls access to a work protected under this title; or (C) is marketed by that person or another acting in concert with that person with that person's knowledge for use in circumventing a technological measure that effectively controls access to a work protected under this title."

This provides the copyright holder with a remedy for circumventing copy protection technology. That is, the copyright holder (who may have invented nothing) could sue an equipment manufacturer or software developer (who may hold patents) seeking an injunction under the anti-circumvention provisions of the DMCA. However, the right to sue is also a right not to sue, or to negotiate terms under which one will forebear from bringing suit. Hence, by leveraging the DMCA, a copyright holder might exclude someone from using an invention, obtain payments for its use, or impose terms on the maker of the invention. But, the copyright holder invented nothing. The patent holder did. Yet, a skillful leveraging of the DMCA might have the effect of transferring the capture of some of the monopoly rents of the patent from the patent inventor to the copyright holder. And this, arguably, may subvert the underlying purpose of the patent and copyright clause of the Constitution.

And of course, if the copyright holder leverages the DMCA to impose anti competitive licensing terms on the patent holder, then this too, arguably could subvert the underlying purpose of copyright law, and constitute copyright misuse.

See also, story titled "Professor Advocates Application of Doctrine of Misuse to Anti Circumvention Rights" in TLJ Daily E-Mail Alert No. 404, April 5, 2002.

A third area where one might seek to apply the holding of Video Pipeline is the use of the DMCA to prevent circumvention of technological measures that control access to copyrighted works, where the copyrighted works are employed to prevent interoperability of equipment, and the copyright holder is seeking to protect its revenues from the sale of its interoperable equipment, rather than protect is revenue from the sale of the copyrighted software.

In this scenario, the copyrighted work would be a short software program, that prevents replacement parts and supplies that are not manufactured by the copyright holder from interoperating with the equipment in which the software program is embedded.

Yet another area might be assertion of the anti-circumvention provisions of the DMCA against persons who have circumvented technological measures that control access to copyrighted works solely to excerpt short portions for the purpose of commentary and criticism.