April 2009

From the editors of Wolters Kluwer Law & Business, this update describes important developments from CCH and Aspen Publishers intellectual property and computer law publications.

If you have any comments or suggestions concerning the information provided or the format used, we'd like to hear from you. Please send your comments to john.arden@wolterskluwer.com.

COPYRIGHTS

New York “Hot News” Claim Not Preempted by Copyright Act
The Associated Press (AP) could proceed with a claim of misappropriation of "hot news” against a Florida online news service that allegedly unlawfully copied and altered the text of stories licensed to AP's subscribers, the federal district court in New York City held. An action for misappropriation of "hot news" was still recognized under New York law and, contrary to the online service's contention, the "hot news" claim was not preempted by federal copyright law. The online service erroneously argued that the issue had to be considered under the law of Florida, which it contended had rejected the “hot news” cause of action. However, the law of the jurisdiction having the greatest interest in the litigation governed the claim. AP was headquartered in New York, suffered economic loss in New York, and was the owner of the misappropriated "hot news.”

In the Second Circuit, a valid, non-preempted claim for misappropriation arises when: (i) a plaintiff generates or gathers information at a cost; (ii) the information is sensitive; (iii) use of the information constitutes free riding on another's efforts; (iv) there is direct competition with a product or service; and (v) the ability to free-ride on the efforts of others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened. The online news service set forth no persuasive reason why the Second Circuit's preemption analysis should be rejected or overruled. Accordingly, the online service's motion to dismiss the misappropriation claim was denied (Associated Press v. AHN Media Corp., SDNY, CCH Copyright Law Decisions ¶29,711; CCH Computer Case ¶49,692).

Dismissal from Action Did Not Make Defendant a Prevailing Party
A computer user's dismissal from a copyright infringement action did not make her a prevailing party, the U.S. Court of Appeals in San Francisco ruled. Therefore, she was not entitled to attorneys' fees and costs. Accordingly, a district court's denial of her motion for fees and costs was affirmed.

A party is a “prevailing party” for purposes of attorney's fees only when the party obtains judicial relief "creating a material alteration of the legal relationship" of the litigants. Dismissal without prejudice does not constitute a material alteration in litigants' legal relationship because it leaves the plaintiff able to re-file his claims. Even though the statute of limitations had expired for the claims against the computer user, leaving the appellees without the ability to re-file their claims, she was still not a prevailing party because no statute of limitations determination was requested or made by the district court (Interscope Records v. Leadbetter, 9thCir, CCH Copyright Law Decision ¶29,717).

Destruction of Material Evidence Leads to Sanctions
Sanctions were imposed against a Bulletin Board Systems (BBS) provider for failing to preserve requested discovery material that would have provided evidence of wide-scale infringement of record companies' copyrighted sound recordings. The BBS, which hosted hundreds of music piracy newsgroups, provided its subscribers access to the newsgroups containing vast amounts of infringing digital music files. Even though the BBS had notice to preserve requested usage data and music files, it acted in bad faith and deliberately destroyed the material evidence, according to the federal district court in New York City. The BBS acted with sufficient culpability to warrant the imposition of sanctions.

The record companies were entitled to attorneys' fees and costs incurred in investigating and determining whether the (BBS) had destroyed the evidence. The assessment of fees and costs was deferred until completion of the case (Arista Records LLC v. Usenet.com, SDNY, CCH Copyright Law Decisions ¶29,712; CCH Computer Cases ¶49,673).

TRADEMARKS

Online Resale of Expired Cosmetics Could Infringe “Mary Kay” Mark
Cosmetics manufacturer and wholesale distributor Mary Kay, Inc. could proceed with trademark infringement claims against a former independent sales representative for using the “Mary Kay” mark in connection with web-based resales of Mary Kay-branded products, the federal district court in Dallas has ruled. The website seller was attempting to sell off a backlog of inventory via an eBay store and a website. The seller failed to establish that her sales were protected, as a matter of law, by the "first sale" and "nominative fair use" doctrines.

The first sale doctrine provides that a resale of genuine goods bearing a true mark does not give rise to liability for trademark infringement, even if the sale is not authorized by the mark owner. However, if the resold goods are materially different from a mark owner’s authorized goods, the first sale defense does not apply. In this case, the seller admitted that approximately 75 percent of the products she sold were expired. A genuine issue of fact existed as to whether the expired products were prevalent enough to affect the Mary Kay name.

With regard to the nominative fair use defense, a genuine issue of material fact existed as to whether the seller’s keyword-triggered advertising copy implied an affiliation between the parties. Although the seller’s use of keyword advertising did not, by itself, suggest a connection between the parties, the phrase "Mary Kay Sale 50% Off" could imply that the ad came from Mary Kay itself or from an entity that had Mary Kay's approval. There was also a factual issue regarding whether the seller's website itself suggested affiliation or endorsement by Mary Kay, according to the court (Mary Kay, Inc. v. Weber, NDTex, CCH Trademark Law Guide ¶61,380).

Labor Union Did Not Infringe, Dilute Uniform Supplier’s Mark
A labor union did not infringe or dilute a uniform supplier's CINTAS trademark by using the mark on websites targeting the supplier's employees and customers as part of an organizing campaign, the federal district court in New York City has decided. The union's "Cintas Exposed" site (www.cintasexposed.org), aimed at the supplier's customers, contained informational postings critical of the supplier, as well as forms allowing customers to generate complaint letters and order cancellations. The union's site at www.uniformjustice.org was targeted at the supplier's employees and contained criticism of the company's labor practices.

The union did not use the CINTAS mark as a source identifier, but rather to criticize the supplier's corporate practices, the court said. Although the commentary on the websites could be considered disparaging toward the supplier, it was not likely to cause consumer confusion as to who provided CINTAS branded goods and services. No consumer looking for a uniform company's website would mistakenly visit "cintasexposed.org" or any of the union's affiliated websites. Furthermore, the websites contained prominent disclaimers, which, along with the sites' content, made it clear that the sites were criticism sites not connected to the supplier.

The supplier's dilution claim failed because the union did not use the CINTAS mark commercially. Although the "Cintas Exposed" site contained a link to the union's home page, which in turn linked to its online store, where the union sold t-shirts and other items, this linkage was too attenuated to constitute commercial use of the mark, in the court's view. In addition, the union's attempt to obtain union dues and pension contributions from the supplier's workers by persuading them to join the union was too independent from the mark usage to constitute an attempt to profit (CINTAS Corp. v. UNITE Here, SDNY, CCH Trademark Law Guide ¶61,391).

COMPUTER AND INTERNET LAW

Betting Exchange Site Cleared of Illegal Gambling Charges
The operator of "Betcha.com," a person-to-person betting website, did not violate Washington law by engaging in prohibited gambling or bookmaking, according to a Washington appeals court. Betcha.com described itself as "the world's first honor-based betting exchange." Users paid Betcha.com transaction fees to offer or accept betting propositions from other users. Prospective bettors had to register and agree to the website's terms of service, which explained that bets placed on the website were "non-binding" and that payment on wins was not guaranteed. Similar to the eBay model, Betcha.com users were assigned an "honor rating" based on feedback they received from other users following a betting transaction.

Under the plain language of the Washington State Gambling Act, Betcha.com's activities did not constitute "gambling." Betcha.com users did not have an understanding that winners would be paid. Accordingly, there was nothing risked, which is the essence of both the common law and statutory definition of "gambling," the court explained. In addition, the statute's definition of "bookmaking" was ambiguous, according to the court. The phrase "accepting bets" reasonably could be read to mean that one can accept a bet (vis-à-vis offer and acceptance) as a player or stakeholder who takes a position in the bet. So interpreted, Betcha.com's activities were not "bookkeeping" because the website did not accept bets as a player or stakeholder; it merely listed (i.e. received and posted) bets. Ambiguities in criminal statutes must be construed against the state and in favor of the accused. The court reversed the trial court's ruling in favor of the state and ordered it to enter judgment in favor of Betcha.com (Internet Community & Entertainment Corp. v. Washington, WashCtApp, CCH Computer Cases ¶49,685).

Attorney-Client Privilege Lost by Accessing E-Mails at Work
E-mail correspondence between a woman and her lawyer was not protected by the attorney-client privilege because the woman waived the privilege when she accessed her personal e-mail account at work, a New Jersey trial court has ruled. The woman sought to prevent her former employer from using the e-mails in a wrongful discharge action she filed against it. The e-mails were stored in the woman's password-protected personal web-based Yahoo! e-mail account. A forensic recovery exam on the hard drive of the computer formerly used by the woman uncovered the e-mails as temporary Internet files. The woman contended that she had a reasonable expectation of privacy in her personal, password protected, web-based e-mail account, even if it was accessed using her employee's computer during business hours.

Attorney-client communication is presumed privileged. However, if the communication is made with knowledge that a third party is present, or could be privy to the information, the privilege is waived. The employer's electronic communication policy warned employees that any and all "internet use and communication" conducted on the employer's computer was not private to the employee and that "e-mail and voice mail messages, internet use and communication and computer files are considered part of the company's business and client records." By using her employer's computer and servers to access her personal e-mail account with full knowledge of her employer's electronic communications policy, the woman waived her attorney-client privilege and any expectation of privacy in her e-mail correspondence (Stengart v. Loving Care Agency, Inc., NJSuperCt, CCH Computer Cases ¶49,697).

Defendant Must Unencrypt Hard Drive Seized by Government
A grand jury subpoena directing a defendant to produce the contents of an encrypted hard drive in unencrypted form did not violate the defendant's Fifth Amendment's right against self-incrimination, the federal district court in Burlington, Vermont has ruled. The defendant was arrested and his laptop seized when a border inspection agent found several videos and images appearing to be illegal child pornography. The images were stored on the computer's "Z," drive, which was protected by encryption algorithms requiring password access. The defendant had voluntarily unencrypted the Z drive for inspection by the border agent, but refused to do so after his arrest.

The court held that compelling the defendant to produce an unencrypted version of his laptop's Z drive did not constitute "compelled testimonial communication" protected by the Fifth Amendment. The act of producing documents in response to a subpoena may communicate incriminating facts only in two situations: (1) if the existence and location of the subpoenaed papers are unknown to the government; or (2) where production would implicitly authenticate the documents. Authentication was not at issue.

Second Circuit precedent does not require that the government know of the incriminatory contents of the files; it requires only that the government demonstrate "with reasonable particularity that it knows of the existence and location of subpoenaed documents," the court explained. In this case, the government knew of the existence and location of the Z drive and its files. The act of requiring the defendant's to provide access to the unencrypted Z drive would add little or nothing to the government's information about the existence and location of incriminating material, the court concluded (In re Grand Jury Subpoena to Sebastien Boucher, DVT, CCH Computer Cases ¶49,688).

Hot Topics of the Month

Senate Judiciary Committee Approves Patent Reform Bill
The Senate Judiciary Committee voted on April 2 19-4 to report S. 515, the Patent Reform Act of 2009. The legislation was introduced in March by Judiciary Committee Chairman Patrick Leahy (D-VT) and the committee’s former chairman, Sen. Orin Hatch (R-Utah).

Patent reform stalled in the last congress in part because of disagreement over how to assess damages for infringement. Under current law, infringement damages may encompass the entire market value of the product. An amendment to the bill would establish a greater role for the judge to identify appropriate legal standards and relevant facts for the jury to consider when assessing damages. Conforming to the standard adopted by the Federal Circuit, the bill would make treble damages for willful infringement more difficult to obtain. The legislation would discourage forum shopping.

Following the Committee vote, Chairman Leahy praised the work of several Committee members in striking an agreement on the bipartisan legislation. “Patent reform is an important way that this Committee can contribute to restoring our economic engine and supporting economic recovery,” Sen. Leahy noted.

Bill to Reshape U.S. Cybersecurity Introduced in Senate
On April 1, Senators John D. Rockefeller IV, Chairman (R-WV) of the Senate Committee on Commerce, Science, and Transportation, and Senator Olympia Snowe (R-ME) introduced comprehensive cybersecurity legislation to address the nation’s vulnerability to cyber crime, global cyber espionage, and cyber attacks that could potentially cripple the United States’ critical infrastructure.

The legislation seeks to protect private sector critical infrastructure–banking, utilities, air/rail/auto traffic control, and telecommunications. “Our enemies are real, they are sophisticated, they are determined and they will not rest,” said Chairman Rockefeller.

The legislation would establish an Office of the National Cybersecurity Advisor within the Executive Office of the President. The Advisor would serve as the lead official on all cyber matters, coordinating with the intelligence community and civilian agencies. The Cybersecuirty Advisor would be given “the authority to disconnect a Federal or critical infrastructure network from the Internet if they are found to be at risk of cyber attack.”

The proposal also would establish a clearing house to manage and share data between the government and private sector critical infrastructure operators; create a public-private cybersecurity advisory panel to report to the president; and require the development and implementation of a professional licensing and certification program for cybersecurity professionals.

Wolters Kluwer Law & Business Publications

New Patent Law Library
Wolters Kluwer Law & Business has launched a new electronic Patent Law Library covering all areas of domestic and international patent law practice—including prosecution, litigation, and licensing.

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