Selling the Main Street Fairness Act: A Viable Solution to the Internet Sales Tax Problem

Congrats to Michael J. Payne, CPA of Arizona State University Sandra Day O’Connor College of Law   one of the winners of the 2011 Spring National Law Review Student Legal Writing Contest.  Michael’s topic addresses the tremendous struggle in the regulation of sales tax collection on interstate internet purchases.

  I.  Introduction

States have long faced issues related to collecting sales and use tax when the seller lives in another state. Initially, disputed transactions involved purchases from mail-order catalogs and telephone orders, but with the advent and explosion of the World Wide Web, states now face a tremendous struggle in the regulation of sales tax collection on interstate internet purchases.

Today, fierce debates between internet retailers, states, and consumers regarding sales taxes on internet purchases are commonplace, yet the key issues remain unresolved. Retailers purport to be exempt from state sales tax requirements when they do not have a physical presence in the state in which their customers reside; states argue sales taxes are due regardless of physical presence; and consumers just want to find the best deal when making purchases, which often means they seek out ways to avoid paying sales taxes altogether.

As a result of fast-moving technological advances and slow-moving legislative actions, a substantial gap has developed in nearly every state between sales tax revenue due and collected. A study from the University of Tennessee estimated that between 2007 and 2012, states will sustain over $52 billion in losses from uncollected taxes on e-commerce sales.1 In addition to enlarging state budget shortfalls, untaxed interstate sales create an unfair advantage to online sellers who are relieved from the onerous sales tax collection duties imposed on in-state and traditional brick-and-mortar sellers. Thus, online sellers can offer discounts on products purchased from out-of-state residents while still earning higher profits than their in-state competitors.

Two significant constitutional hurdles restrict state regulation of interstate sales taxation: the Commerce Clause and the Due Process Clause, with the former causing the majority of current problems. This article focuses primarily on resolving the Commerce Clause concerns and attempts to reconcile the interests of sellers, consumers, and states. It then proposes the adoption of a bill that was recently introduced in the House of Representatives: the Main Street Fairness Act.2

II.  Background

A.  The Mechanics of Internet Sales Taxation

A basic understanding of common Internet sales taxation is needed to grasp the ideas discussed in this article. As a general rule, purchasers of merchandise must pay a transaction tax to the state in which they reside, provided that state imposes a sales or use tax.3 When the retailer collects the tax on behalf of the consumer and remits it to the state, it is called a sales tax.When a retailer fails to collect a sales tax, the consumer is obligated to report her purchase to the state and pay an equivalent use tax. The process is simple when the seller is in the same state as the purchaser: the seller collects taxes on local sales and remits them to the state. The more complicated and increasingly more common scenario is when the seller operates from another state; this situation has been the topic of numerous cases, statutes, opinion columns, Internet blogs, and scholarly articles, including this one.

Although state taxation of internet sales is a modern issue, courts have long debated whether the Constitution’s Commerce Clause limits the ability of a state to apply its sales and use tax provisions to out-of-state retailers.4 This Part describes the most significant cases.

B.  National Bellas Hess, Inc. v. Department of Revenue of Illinois

In 1967, the Supreme Court considered whether a state could require a mail order company to collect and remit sales taxes on sales to residents of that state when that company had no physical presence in the state. In National Bellas Hess v. Department of Revenue of Illinois,5 the taxpayer was a mail order company incorporated in Delaware with its principal place of business in Missouri. It was licensed to do business only in those states. The taxpayer maintained no office or warehouse in Illinois, had no employees, agents, or salespeople there, and conducted no significant advertising there. Moreover, all contacts the company had with the residents of the state were through the mail or a common carrier. Illinois attempted to require the taxpayer to collect and remit sales and use taxes from Illinois residents who purchased the company’s goods by mail order.

The Court held that the Commerce Clause requires “some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax.” Mail order transactions alone do not create that minimum connection. The Court reasoned “[t]he very purpose of the Commerce Clause was to ensure a national economy free from . . . unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control.”6

C. Quill Corp. v. North Dakota

Twenty-five years after National Bellas Hess, the Court affirmed in part its prior decision when it faced a similar set of facts in Quill Corp. v. North Dakota.7 In Quill, North Dakota attempted to require the taxpayer, a Delaware corporation with no significant tangible property or employees in North Dakota, to collect and remit use taxes from sales to North Dakota customers. The taxpayer solicited business through catalogs and flyers and delivered all its merchandise by mail or common carrier from out-of-state locations. The State argued that its statute subjecting every retailer that solicits business in the state to the tax was constitutional when the retailer had “engage[d] in regular or systematic solicitation of a consumer market in th[e] state.”

The Court disagreed, recognizing two constitutional barriers to a state’s ability to force out-of-state retailers to collect and remit sales taxes: the Due Process Clause and the Commerce Clause. The Court distinguished the Due Process Clause from the Commerce Clause, explaining:

Although the “two claims are closely related,” the Clauses pose distinct limits on the taxing powers of the States. Accordingly, while a State may, consistent with the Due Process Clause, have the authority to tax a particular taxpayer, imposition of the tax may nonetheless violate the Commerce Clause. The two constitutional requirements differ fundamentally, in several ways. . . . [W]hile Congress has plenary power to regulate commerce among the States and thus may authorize state actions that burden interstate commerce, it does not similarly have the power to authorize violations of the Due Process Clause.8

The Court concluded that because Quill had purposefully directed its activities at North Dakota, it established minimum contacts with the State, and thus the Due Process Clause did not prohibit the State from imposing its use tax against Quill.

The Court next considered whether the state statute ran afoul of the Commerce Clause. It recognized Congress’ constitutional authority to “regulate Commerce with foreign Nations, and among the several States,”9 but also recognized that the “dormant” Commerce Clause10 reserves to Congress the exclusive power to regulate interstate commerce even when it has not spoken directly on a subject. The dormant Commerce Clause requires that the retailer have a “substantial nexus” with the state before the state can force the retailer to collect and remit sales taxes, which often translates into a bright line physical presence test.

The Court held that North Dakota did not have the power to impose sales taxes on Quill because Quill had no physical presence in the state. It also found that the state’s taxation would unduly burden interstate commerce, noting that “similar obligations might be imposed by the nation’s 6,000-plus taxing jurisdictions,” thus vastly increasing the complexity of sales tax compliance for interstate retailers.

D. Streamlined Sales and Use Tax Agreement

In the shadow of the Quill decision, a new and far-reaching mode of commerce arose: the World Wide Web. Many retailers no longer needed to send catalogs to solicit sales. Instead, they could simply set up websites, make them apparent to search engines, and wait for customers to come to them. The following chart illustrates the historic growth of the Internet:

Year Estimated Number of Websites Estimated Percentage of U.S. Households with Internet Access E-Commerce sales
1992 (Quill)

< 30

< 25%

n/a

2000 (SSUTA)

17,000,000

50%

$27.6 billion

2010

249,000,000

77%

$202.6 billion

The monumental growth in online sales has contributed to the two major problems currently associated with the taxation of remote sales: administrative burdens to sellers and lost revenues to states from general noncompliance. In 1999, state and local governments from twenty-six states responded to these by banding together and implementing a new sales tax system. The group’s goal was to create and implement a method to unify and simplify the collection and remittance of sales taxes across the country, an effort that culminated in the Streamlined Sales Tax Project.11

The Project works through two steps. First, states voluntarily join the Streamlined Sales Tax Agreement by adopting its provisions as state law and conforming to the tax administration procedures set for by the Agreement. Second, interstate retailers voluntarily register with the Project’s online system. Sellers only register once and are thenceforth obligated to collect and remit sales taxes to member states when they sell products to residents of those states.

The Agreement reduces the administrative burden of tax compliance by focusing on two main goals: uniformity and simplification. The Agreement promotes uniformity in multistate sales tax collection at five levels: terminology, tax bases, registration, sourcing, and reporting. It simplifies sales tax collection and reporting by focusing on four areas: limited tax rates, seller liability for incorrectly reported exemptions, simplified tax forms, and electronic tax remittances. Additionally, it provides for sales tax software that, if used, would provide immunity to users from audits and corresponding liability.

A. Congressional Efforts to Regulate Internet Sales Taxes

Although states have been very active recently in attempting to regulate sales tax collection for out-of-state retailers, the power to regulate taxation of interstate commerce ultimately lies in Congress’s hands, as established by the Commerce Clause and reiterated in Quill. Since Quill, Congress has attempted several times to pass legislation that would provide federal authorization for states to mandate sales tax collection from out-of-state retailers, thus allowing states to bypass the substantial nexus requirement imposed by Quill.12 However, each bill that has been proposed has expired without being voted on by the House or Senate.

B. Recent State Efforts to Bypass Quill’s Substantial Nexus Requirement

Dissatisfied with Congressional efforts (or lack thereof) to increase cooperation with sales tax laws, states have attempted in various ways to establish a substantial nexus between online retailers and their state and thereby satisfy the requirements of the Commerce Clause.

a.  Borders Online v. State Board of Equalization

In 2005, the California Court of Appeals held in Borders Online v. State Board of Equalization that Borders’ retail stores in the state acted as authorized representatives of the associated online store when those stores accepted refunds of personal property sold by the internet retailer, thus establishing a nexus sufficient for the imposition of sales and use taxes under the Commerce Clause.13

After Borders, remote sellers in California sought clarification on whether their particular fact situations produced sufficient nexus to subject them to California state and local taxation. Courts look at various factors to determine the level of nexus,14 and consider these factors concurrently. An increasingly relevant factor that courts have examined is the presence of a company’s affiliates in a state, or “attributional nexus.” Courts have long looked at attributional nexus as a way to satisfy the Commerce Clause requirements, although the issue has never been directly addressed by the United States Supreme Court.

b.  Amazon.com, LLC v. New York State Department of Taxation and Finance

Most recently, a New York trial court, later affirmed by the New York Appellate Division, weighed in on attributional nexus in Amazon.com, LLC v. New York State Department of Taxation and Finance.15 In 2008, New York attempted to curtail lost revenues from internet sales by amending the definition of “vendor” in its tax law, thus requiring each of Amazon’s Associates to collect sales taxes. Amazon then brought suit claiming that the Provision violated the Commerce Clause by imposing tax collection obligations on out-of-state entities that had no substantial nexus with the state. The court dismissed Amazon’s complaint for failure to state a cause of action, holding that the statute is not unconstitutional facially or as-applied. The court took a broad view of the substantial nexus requirement when it held that Amazon had created a substantial nexus with the State, even though Amazon had no offices, property, employees, or agents in the state. The court noted that physical presence “need not be substantial;” however, there must be “more than a slight presence.”

SinceAmazon, many New York retailers have terminated associations with in-state retailers and local affiliates to avoid being subject to sales tax collection. One website purports to list sellers that have removed New York affiliates after the passage of New York’s legislation, naming almost sixty remote sellers.16 The list includes some large companies such as Overstock, KB Toys, ShopNBC, CafePress, and Fingerhut. As a result, the statute may have actually hurt local retailers, the very group it was trying to protect by leveling the sales tax playing field.

c.  The Bordersand AmazonFallout

The Amazon ruling has influenced other states to pass similar legislation in attempts to collect their own “Amazon tax.” For instance, in 2009, Rhode Island passed a statute that requires online merchants generating more than $5,000 in sales through in-state affiliates to register and collect sales tax on all its taxable sales in Rhode Island.17 Like the New York law, Rhode Island’s statute requires that the seller enter an agreement with a Rhode Island resident before the seller would be subject to sales tax collection.

Following the lead of New York and Rhode Island, North Carolina passed a statute18 enacting its own Amazon tax with a $10,000 floor, explaining that the new law codifies the United States Supreme Court’s 1960 decision in Scripto v. Carson that a state “may require tax collection by a remote retailer that had contracts with ten independent contractors in the state who solicited orders for products on its own behalf.”19 North Carolina simultaneously modernized its previous terminology by replacing “mail order” with “remote sales.”20 Similar statutes were introduced in eleven other states.21

Colorado took its sales tax collection efforts a step further. In addition to enacting its own “Amazon tax,” Colorado’s H.B. 1193 (2010) would require sellers that do not collect sales taxes to send customers that purchase products online annual statements listing total purchases.22 Retailers would also send a copy of all purchases to Colorado’s Department of Revenue so that residents may be held accountable for unpaid use taxes.23 The bill would authorize Colorado’s Executive Director of the Department of Revenue to issue a subpoena to an out-of-state retailer if that retailer refuses to voluntarily furnish that information. However, this statute is the subject of a recent lawsuit brought by the Direct Marketing Association. A federal court for the District of Colorado recently granted DMA’s motion for preliminary injunction against Colorado, holding that its statute “discriminates patently against interstate commerce” and imposes undue burdens on retailers.24

Oklahoma took a different approach to regulating sales tax collection from out-of-state sellers.25 The Oklahoma law obligates certain remote sellers to post on their websites, catalogs, and invoices notice of consumers’ obligations to pay Oklahoma use tax on electronic and mail order purchases of tangible personal property.26 Oklahoma’s law has been criticized as superfluous in application to internet and mail order sellers that have physical presence in the State because current Oklahoma use tax statutes already impose the obligation on those sellers to collect use taxes. Furthermore, the law is criticized as unconstitutional when applied to out-of-state sellers that have no physical presence in the State, because Quill’s interpretation of the Commerce Clause would prohibit Oklahoma from enforcing tax collection responsibilities on a seller with no physical presence in the state.

d.    The Case for a Federal Solution

A uniform federal solution is superior to progressive state-by-state attempts to collect sales and use taxes for three reasons. First, states are tiptoeing on the edge of a river of constitutionally-protected consumer privacy matters. Second, strict enforcement of use tax laws at an individual level is hardly tenable given the historic lack of enforcement and the resulting lack of personal accountability. The proposed solutions impose real burdens on people and will discourage online purchases. Can you recall everything you have purchased online in the last year? In the last five years? You may have to if you are in a progressive sales tax collection state. It is much simpler and more intuitive for consumers to pay the tax up front as one swift transaction than to log their purchases, store the information, and file a use tax return with their payment at some later date. The increased hassles of recording each purchase could drive people back into brick-and-mortar stores, nullifying the efforts of Amazon and other remote sellers. For this reason, remote sellers should embrace the Main Street Fairness Act as a means to create certainty and consistency in the marketplace.

Finally, the trending methods of sales and use tax enforcement are completely inefficient. This is a situation in which it makes sense to take collective federal action rather than pursue state collection efforts at the individual taxpayer level. States would be forced to allocate substantial resources toward collection efforts while receiving no greater benefit than if the tax had been collected at the time of sale. With the Main Street Fairness Act, states would incur virtually no additional costs of expansion and would continue to use their existing collection methods. States are already entitled to collect these taxes whether in the form of sales or use taxes; why not utilize retailers with software and systems already in place?

The Center on Budget and Policy Priorities has argued that states’ implementation of the “Amazon law” could be an effective means to require sales tax collection from internet sellers that use affiliate programs.27 However, the Center observed, Amazon laws are only a partial solution to the broader sales tax problem. Not every internet retailer operates an affiliate program, so the Amazon law does nothing to spur collection efforts from the numerous vendors who advertise by other means. The Center concluded that a comprehensive solution will require a federal law empowering states and localities that have streamlined their sales tax collection efforts to require all large remote sellers to collect sales taxes. This would allow states to force collection on remote sellers regardless of whether the sellers have a physical presence in their customers’ states. Such a federal grant of commerce power is the precise objective of the Main Street Fairness Act of 2010.

III.  Main Street Fairness Act

The Main Street Fairness Act, sponsored by former Representative Bill Delahunt (D-MA), seeks to “promote simplification and fairness in the administration and collection of sales and use taxes.”28 It would do so by allowing states to force “remote sellers” (companies that sell products online, by mail order catalogs, cable TV shopping, telephone, etc.) to collect sales and use taxes from customers and remit them to states. States acting alone do not have the authority to require a seller with no physical presence in the state to collect taxes on sales to that state’s residents. However, Congress affirmatively possesses the authority to regulate commerce under the Commerce Clause of the Constitution of the United States and Congress may authorize state actions that burden interstate commerce. The Main Street Fairness Act would grant states explicit authority to burden interstate commerce by allowing states to mandate collection and remittance of taxes on remote sales to their residents.

Why should Congress give the Main Street Fairness Act a second glance when a form of the current bill has essentially been rejected every other year for the last seven years? This section will focus on three ways the Main Street Fairness Act would benefit interstate commerce: (1) it would provide states a tool to enforce active yet frequently disobeyed laws regarding sales and use tax reporting and payment; (2) it would level the playing field between Main Street and “e-street;” and (3) it would help to close the enormous budget gap that is growing daily as a result of the disparity between taxes due and taxes actually collected.

A. Enforce Current Laws

The Main Street Fairness Act would grant federal authority to states, thus allowing states to enforce sales and use tax laws that are currently in place but are often not obeyed. Sales or use taxes are legally due on internet sales if the item is otherwise taxable under state law. Generally, retailers collect taxes from customers on behalf of states for convenience. However, when a customer purchases a taxable item and the retailer fails to collect a sales tax, that customer is obligated to pay a use tax and file a use tax return with the state.

People often do not pay use taxes on internet purchases for two reasons. First and most commonly, the average consumer is unaware that a tax is due when she purchases a product from an online retailer such as Amazon or Overstock. In other cases, the consumer may be aware that a tax is due but fails to pay sales or use taxes because he believes the law is not enforced and he will not be caught. This is the more dangerous scenario because in knowingly failing to pay a tax that is legally due, the consumer crosses the line of intentional disregard and is more likely to violate that law again.

In an effort to both inform residents of their obligation to pay use taxes and to actually collect those taxes, many states have started to include a line on their income tax returns where taxpayers are supposed to calculate and declare unpaid taxes. For example, Michigan includes the following line on its individual income tax return: “Use Tax: Use tax due on internet, mail order or other out-of-state purchases,” then references a separate worksheet that is provided to help the taxpayer calculate use tax due.29

Some states have begun to enforce use tax compliance on an individual level, sending tax bills to consumers that had made taxable purchases but failed to pay a tax. Nebraska recently cracked down on a local March of Dimes chapter after the chapter purchased 4,000 t-shirts from an online vendor in Florida. Nebraska tracked purchases for the preceding five years and could collect an estimated $215,000 from the charity, or approximately thirteen percent of the donations. Other states are less stringent, allowing a de minimis exemption for individuals.30

Some states have attempted to enforce sales and use tax compliance by leveraging customers to act as whistleblowers when companies knowingly fail to collect those taxes.31 Under these false claim statutes, individual consumers may bring suits on behalf of the state against parties that knowingly violated sales tax laws. If successful, the whistleblower would be entitled to a portion of the state taxes collected.

While states have had some success tackling the noncompliance issue on their own through enacting Amazon laws or similar statutes, the federal government is the sole body that is constitutionally charged with regulating interstate commerce and therefore should provide states with a tool to help them enforce their laws and uniformly tax interstate commerce. If passed, the Main Street Fairness Act could effectively serve as that tool.

B.  Level the Playing Field

Perhaps the strongest policy reason for implementing a federal law to delegate Commerce power to states is the inherent unfairness that results from forcing some companies to charge their customers sales taxes while others do not have to charge any sales tax.

Two groups are hurt by current disparities in sales tax enforcement: local retailers and large companies with physical presence in many states. Small local retailers (mom and pop shops) are at a distinct disadvantage when their online competitors do not have to charge customers sales tax. Recent studies indicate that many consumers are beginning to follow a “just looking” trend whereby they test products in local stores by seeing, touching, and feeling them, then rush home to order the same products online where they can avoid paying sales taxes.32 According to one consumer behavior report, seventy-five percent of online consumers sought to purchase from merchants that did not charge sales tax and offered free shipping.33 The savings are even greater when buying in bulk, thus enticing large organizations to shift their purchasing patterns away from small local retailers to reduce costs in a bad economy.

Ironically, opponents of internet sales tax regulation argue that enforcing sales tax laws would do greater harm than good to small retailers.34 Such opponents reason that the last decade has provided an unprecedented opportunity for individuals to start small companies that leverage the Internet to grow quickly, thus spurring the economy and creating jobs.Less than one month after the Main Street Fairness Act was introduced, a group of U.S. Representatives introduced the “Supporting the Preservation of Internet Entrepreneurs and Small Businesses” resolution.35 The Preservation bill focuses on avoiding “any legislation that would grant State governments the authority to impose any new burdensome or unfair tax collecting requirements on small online businesses and entrepreneurs.” Representative Dan Lungren, sponsor of the Preservation bill, commented:

The most effective thing we can do to help our economy recover is to remove the roadblocks standing in the way of our nation’s job creators. At a time when we are trying to foster a sustained economic recovery, it doesn’t make sense to saddle entrepreneurs with tax requirements that stifle growth. The possibility of new taxes being levied on online retailers will have a negative impact on the online marketplace. We should send a clear message that Congress should not burden small businesses with unfair tax schemes.

The Preservation bill is constructed on two false premises. First, it presupposes that federal legislation granting states Congressional authority to collect sales taxes would impose a new tax. As discussed in the previous section of this article, sales and use taxes are already due in nearly every state on online purchases. A federal grant of authority would therefore not impose a new tax, but loosen the handcuffs Quill placed on states to enforce their own laws. Second, the Preservation bill is aimed at protecting small businesses and entrepreneurs. While noble in its purpose, the Preservation bill is simply unnecessary; the Main Street Fairness Act’s small seller exception would exempt from sales tax collection the very businesses the Preservation bill aspires to protect.

Another group that is damaged by the current system is large online retailers that have a physical presence in many states, such as Wal-Mart or Target. Most, if not all, online sales from these stores are subject to sales taxes because they have a physical presence in nearly every state. These companies put appropriate resources into ensuring that the taxes are properly collected and remitted. The inconsistency arises when comparing a company like Wal-Mart to a company like Amazon. Both are large companies that sell products to residents in every U.S. state and territory. However, Wal-Mart has stores in every state, while Amazon only has physical presence in a handful of states, thus creating a real disparity that needs to be addressed.

C.  Bridge the Budget Gap

It is no secret that states are struggling to find revenue sources while tax collections are down nationwide. Advocates of internet sales taxation correctly promote the Main Street Fairness Act as a way for states to raise revenue without imposing additional taxes. While allowing states to enforce sales tax collection on all of its residents’ purchases would not solve the current budget crisis, it would allow states to take a healthy step in the right direction.

IV,  Conclusion

Regardless of which political party is in the majority, the Main Street Fairness Act should be given consideration as a viable solution to the problems discussed above. Its passage would comport with the constitutional grant of authority over interstate commerce to Congress, while allowing states the freedom to choose whether to voluntarily join the Agreement. This system is ideal because states can preserve their independence by joining or leaving the Agreement at any time, while providing substantial benefits to out-of-state retailers by simplifying and unifying their reporting requirements. The Main Street Fairness Act is the bandwagon heading toward uniformity and fairness in sales tax collection. States just need to jump on.


[1] Donald Bruce, William F. Fox & LeAnn Luna, State and Local Government Sales Tax Revenue Losses from Electronic Commerce, U. Tenn. Center Bus. Econ. Res., Apr. 13, 2009, available at http://cber.utk.edu/ecomm/ecom0409.pdf.

[2] Main Street Fairness Act, H.R. 5660, 111th Cong. (2010).

[3] Five states do not currently impose a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Richard Stim, Sales Tax on the Internet, http://www.nolo.com/legal-encyclopedia/sales-tax-internet-29919.html.

[4] See, e.g., Quill Corp. v. North Dakota, 504 U.S. 298 (1992), National Bella Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967), Scripto, Inc. v. Carson, 362 U.S. 207 (1960).

[5] National Bella Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) at 756.

[6] National Bella Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) at 758–60. (internal citations omitted).

[7] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[8] Quill at 305 (internal citations omitted).

[9] U.S. Const. art I, § 8, cl. 3.

[10] The dormant Commerce Clause is a judicially-created doctrine that “rests entirely on the negative implications of the Commerce Clause of Art. I, § 8, cl. 3.” See Kathleen M. Sullivan, Gerald Gunther, Constitutional Law 174 (Thomson West 2007).

[11] Streamlined Sales Tax Governing Board, Registration Frequently Asked Questions, [hereinafter FAQs], http://www.streamlinedsalestax.org/index.php?page=faq.         …

[12] Streamlined Sales and Use Tax Act, S. 1736, H.R. 3184, 108th Cong. (2003); Sales Tax Fairness and Simplification Act, S. 2152, 109th Cong. (2005); Streamlined Sales Tax Simplification Act, S. 2153, 109th Cong. (2005); Sales Tax Fairness and Simplification Act, S. 34, H.R. 3396, 110th Cong. (2007).

[13] Borders Online v. State Board of Equalization, 129 Cal.App.4th 1179, 1189–92 (Cal. App. 2005).

[14] Id. at 664–666, (listing some of the factors courts have examined in searching for substantial nexus: business ownership structure, common logos and names, common merchandise, use of private or branded credit cards, links between affiliates’ websites, credit card reward programs, gift certificates and gift cards, trademarks, goodwill, and return policies).

[15] Amazon.com, LLC v. N.Y. State Dep’t of Tax’n & Fin., 877 N.Y.S.2d 842 (N.Y. Sup. Ct. 2009).

[16] Id.; NYaffiliates.com, Merchants Removing NY Affiliates, http://www.abestweb.com/forums/showthread.php?t=105869 (last visited Nov. 29, 2010).

[17] R.I. Gen. Laws -§ 44-18-15 (2009); see also State of Rhode Island and Providence Plantations Department of Revenue, Important Notice: Definition of Sales Tax “Retailer” Amended, available at http://www.tax.state.ri.us/notice/Retailer_definition_NoticeC.pdf.

[18] N.C Gen. Stat. § 105-164.8(b)(3) (2009).

[19] North Carolina Department of Revenue, Sales Tax Law Changes, Form E-505 (8-09), Part II: Other Legislative Changes, available at http://www.dornc.com/downloads/e505_8-09.pdf.

[20] N.C Gen. Stat. § 105-164.3(33c) (2009).

[21] Jennifer Heidt White, Safe Haven No More: How Online Affiliate Marketing Programs Can Minimize New State Sales Tax Liability, 5 Shidler J. L. Com. & Tech. 21 (2009), (listing the following states as having introduced versions of the affiliate tax: Connecticut, Maryland, Minnesota, Tennessee, California, Hawaii, Mississippi, New Mexico, Vermont, Virginia, and Illinois).

[22] H.B. 10-1193, 67th Gen. Assem., 2nd Reg. Sess. (Colo. 2010), available at http://www.leg.state.co.us/clics/clics2010a/csl.nsf/fsbillcont3/B30F5741….

[23] Id.                                                       

[24] Direct Marketing Ass’n v. Huber, Order Granting Motion for Preliminary Injunction, 2011 WL 250556, Civil No. 10-cv-01546-REB-CBS, (D.Colo. 2011).

[25] 2009 OK H.B. 2359, (Feb. 1, 2010) available at http://webserver1.lsb.state.ok.us/textofmeasures/textofmeasures.aspx.

[26] Edward A. Zelinsky, The Paradoxes of Oklahoma’s Amazon Statute: Weak Duties, Expansive Coverage, Often Superfluous, Constitutionally Infirm, Cardozo Sch. L., Inst. Advanced L. Stud., Working Paper No. 315, at 17 (Oct. 2010).

[27] Michael Mazerov, Center on Budget and Policy Priorities, New York’s “Amazon Law”: An Important Tool for Collecting Taxes Owed on Internet Purchases, 1, July 23, 2009, http://www.cbpp.org/files/7-23-09sfp.pdf.

[28] H.R. 5660 at 1.

[29] 2009 Michigan Individual Income Tax Return MI-1040, line 25, available at http://www.michigan.gov/documents/taxes/MI-1040_305378_7.pdf.

[30] Minnesota, for example, exempts individuals with total purchased under $770 from paying the use tax, which is equivalent to $50 of use tax liability. Four other states have similar exemptions for individuals. See Nina Manzi, Use Tax Collection on Income Tax Returns in Other States, Research Department, Minnesota House of Representatives, *2, June 2010, available at http://www.house.leg.state.mn.us/hrd/pubs/usetax.pdf.

[31] Leslie J. Carter, Blowing the Whistle on Avoiding Use Taxes in Online Purchases, 2008 U. Chi. Legal F. 453–54 (2008).

[32] Google Retail Advertising Blog, Trend to Watch: Research & Purchase Process is Multi-Channel, (March 3, 2010), http://googleretail.blogspot.com/2010/03/trend-to-watch-research-purchas….

[33] Sara Rodriguez, Economic Climate Shifts Consumers Online, PriceGrabber.com (March 25, 2009), https://mr.pricegrabber.com/Economic_Climate_Shifts_Consumers_Online_Mar….

[34] Congressman Daniel Lungren, Lundgren Introduces Resolution to Protect Small Businesses and Entrepreneurs from New Sales Taxes, Feb. 16, 2011, http://lungren.house.gov/index.cfm?sectionid=39&sectiontree=6,39&itemid=759.

[35] H.R. 1570, 111th Cong. (2010), available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills….

© Copyright 2011 Michael J. Payne, CPA

Standing and In Pari Delicto Issues Arising in Bankruptcy Cases

Congrats to Rui Li of the The University of Iowa College of Law -one of  winners of the Spring 2011 National Law Review Student Legal Writing Competition:   Rui’s topic addresses whether a bankruptcy trustee has standing to bring a suit on behalf of the debtor corporation against attorneys who allegedly helped that corporation’s management with the fraud.  

1.  Introduction

Corporate and managerial fraud is pervasive in today’s economic climate. When fraud leaves a company insolvent and forced to seek protection under the Bankruptcy Code, oftentimes bankruptcy trustees commence legal actions against attorneys to generate recoveries for the benefit of the debtor’s estate. A common scenario goes something like this: A company is in dire financial straits before the fraud or is created as a vehicle for the fraud. The defendant is the corporation’s attorney, who assists the corporation in the fraud. The attorney is hired to ensure the company’s compliance with existing law. The attorney does the bidding of the company’s management in pursuance of their fraud. After the company’s collapse, the bankruptcy trustee sues the attorney for fraud, aiding and abetting fraud and legal malpractice.

Drawing upon the equitable defense that bars recovery by a plaintiff bearing fault with the defendant for the alleged harm, common law principles of agency imputation, and the Constitutional requirement that a plaintiff has standing to sue, a defendant may move to dismiss the lawsuit on the grounds that the bankruptcy trustee lacks standing to sue.

This Note provides an analysis of the issue whether the bankruptcy trustee has standing to bring a suit on behalf of the debtor corporation against attorneys who allegedly helped that corporation’s management with the fraud.

2.  The In Pari Delicto Doctrine

a) Background

In pari delicto means “at equal fault.” It is a broadly recognized equitable principle and common law defense that prevents a plaintiff who has participated in wrongdoing from recovering damages resulting from the wrongdoing.[1] The policy behind this doctrine is to prevent one joint wrongdoer from suing another for damages that resulted from their shared wrongdoing.[2] Therefore, if a bankruptcy trustee brings a claim against an attorney on behalf of the corporation, and if the corporation is involved in the corporation’s wrongful conduct which serves as the basis for the claim, the in pari delicto may bar the claim.

The use of the doctrine against bankruptcy trustees emerged in the wave of corporate frauds in the last few decades. This novel application required the introduction of an important new element: agency law. Under agency principles, if the principal acted wrongfully through an agent in the scope of that agency relationship, then the wrongdoing of the agent is attributed to the principal.  Because the acts of corporate managers in the course of their employment are imputed to the corporation, and because a bankruptcy trustee “stands in the shoes” of a debtor corporation, the fraudulent acts of the debtor’s former managers will be imputed to the trustee—unless the trustee can show that management was acting entirely on its own interests and “totally abandoned” those of the corporation to break the chain of imputation.[3]

An analysis of the equitable defense in pari delicto at issue is separable from a standing analysis.[4] “Whether a party has standing to bring claims and whether a party’s claims are barred by an equitable defense are two separate questions, to be addressed on their own terms.”[5]

b)  The Second Circuit’s Approach

In Shearson Lehman Hutton Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991), the Second Circuit adopted the controversial approach of treating in pari delicto as a question of standing rather than an affirmative defense. Specifically, the standing analysis in the Second Circuit begins with the issue of whether the trustee can demonstrate that the third party professional injured the debtor in a manner distinct from injuries suffered by the debtor’s creditors.[6] In many jurisdictions, the question of the trustee’s standing ends here.[7] In Wagoner, the Second Circuit went further and added a second inquiry that incorporates the equitable defense ofin pari delicto.[8] By combining these two issues, the Wagoner rule blends the in pari delicto question into a rule of standing.

In Wagoner, the sole stockholder, director, and president of a corporation had used the proceeds of notes to finance fraudulent stock trading.[9] After the corporation became insolvent, the trustee brought claims against the defendant, an investment bank, for breach of fiduciary duty in allowing the company’s president to engage in inappropriate transactions.[10] The court held that because the president participated in the alleged misconduct, his misconduct must be imputed to the corporation and the bankruptcy trustee. This rationale derives from the agency principle that underlies the application of in pari delicto to corporate litigants: the misconduct of managers within the scope of their employment will normally be imputed to the corporation.[11] The court ruled that the trustee lacked standing to sue the investment bank for aiding and abetting the president’s alleged unlawful activity.[12] By adopting the Wagoner rule, the Second Circuit upped the ante by making an equitable defense a threshold question of standing at the motion-to-dismiss stage, rather than an affirmative defense better resolved on summary judgment or at trial.

c)  Approaches of Other Circuits

Although the Wagoner rule still prevails in the Second Circuit, a majority of other courts have declined to follow it, including the First, Third, Fifth, Eighth, Ninth and Eleventh Circuits. These circuits have “declined to conflate the constitutional standing doctrine with the in pari delicto defense.”[13] “Even if an in pari delictodefense appears on the face of the complaint, it does not deprive the trustee of constitutional standing to assert the claim, though the defense may be fatal to the claim.”[14]

The Eighth Circuit held that in pari delicto cannot be used at the dismissal stage.[15] On a motion to dismiss, the court is generally limited to considering the allegations in the complaint, which the court assumes to be true in ruling on the motion.[16] Because in pari delicto is an affirmative defense requiring proof of facts that the defendant asserts, it is usually not an appropriate ground for early dismissal.[17] An in pari delicto defense may be successfully asserted at the pleading stage only where “the facts establishing the defense are: (1) definitively ascertainable from the complaint and other allowable sources of information, and (2) sufficient to establish the affirmative defense with certitude.”[18] Thus, the in pari delicto defense is generally premature at this stage of the litigation, and the court must deny the motion to dismiss.

The existence of a possible defense does not affect the question of standing.[19]Standing is a constitutional question, and all a plaintiff must show is that they have suffered an injury that is fairly traceable to the defendant’s conduct and that the requested relief will likely redress the alleged injury.  In this matter, the First, Third, Fifth, Eighth, and Eleventh Circuits’ approach is more convincing. Those courts hold that whether a trustee has standing to bring a claim and whether the claim is barred by the equitable defense of in pari delicto are two separate questions and that the in pari delicto defense is appropriately set forth in responsive pleadings and the subject of motions for summary judgment and trial.

3.  Standing Issues The Trustees Face 

a)  Background

The next question is whether the bankruptcy trustee fulfills the constitutional requirement of standing. Article III specifies three constitutional requirements for standing. First, the plaintiff must allege that he has suffered or will imminently suffer an injury. Second, he must allege that the injury is traceable to the defendant’s conduct. Third, the plaintiff must show that a favorable federal court decision is likely to redress the injury.[20]

A critical issue in evaluating whether a trustee or receiver has standing to sue is whether the claim belongs to the corporate debtor entity or to the individual investors of the corporate debtor. The Supreme Court held in Caplin v. Marine Midland Grace Trust Coof New York, 406 U.S. 416, 433-34 (1972), that a bankruptcy trustee has standing to represent only the interests of the debtor corporation and does not have standing to pursue claims for damages against a third party on behalf of one creditor or a group of creditors. Although the line is not always clear between the debtor’s claims, which a trustee has statutory authority to assert, and claims of creditors, which Caplin bars the trustee from pursuing, the focus of the inquiry is on whether the trustee is seeking to redress injuries to the debtor that defendants’ alleged conduct caused.[21]

b)  The Shifting Focus of the Second Circuit

In Wagoner, the Second Circuit held that the corporation and the trustee did not have standing to bring a claim because a “claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors, not to the guilty corporation.”[22] The rationale for this rule is “though a class of creditors has suffered harm, the corporation itself has not.”[23] Without cognizable injury, the trustee representing the debtor corporation failed to meet the constitutional standing requirement.

Commentators have criticized the Wagoner rule that there is no separate injury to the corporation on several grounds. First, the court’s finding that a corporation is not harmed when its assets are squandered effectively ignores the existence of the corporation during the bankruptcy process.[24] Furthermore, the Wagonercourt seems to acknowledge the trustee’s right to sue the guilty managers for damages done to the corporation. Such a construction leads to the absurd result that when management and its accomplices defraud a corporation, management can be sued on behalf of the corporation for the harm caused to the corporation, but the accomplices cannot be sued on behalf of the corporation because the corporation was not harmed.[25] Recognizing the faults of this rule, the Second Circuit recognized that there was “at least a theoretical possibility of some independent financial injury to the debtors” as a result of the defendant’s aid in the fraud.[26] Nevertheless, the court denied the plaintiff’s standing, relying on the observation that any damage suffered by the debtor was passed on to the investors, and “there was likely to be little significant injury that accrues separately to the Debtors.”[27] In other words, most of the alleged injuries in Hirsch were suffered by third parties, not by the debtors themselves. The Second Circuit shifted the focus of the Wagoner rule from lack-of-separate-injury (the first inquiry of theWagoner rule) to the in pari delicto (the second inquiry) in Breeden v. Kirkpatrick & Lockhart LLP, 336 F.3d 94 (2d Cir. 2003). In that case, the court denied the trustee standing, holding that even if there was damage to the corporation, the trustee lacked standing because of the debtor’s collaboration with the corporate insiders.[28]

c)  Approaches of Other Circuits

In Lafferty, the creditors’ committee brought an action against the debtor’s officers, directors and outside professionals, alleging that through participation in a fraudulent Ponzi scheme, the defendants wrongfully prolonged the debtor’s life and incurred debt beyond the debtor’s ability to pay, ultimately forcing the debtor into bankruptcy.[29] The Lafferty court articulated different kinds of harms to the corporation: (1) fraudulent or wrongful prolongation of an insolvent corporation’s life, (2) prolongation that causes the corporation to incur more debt and become more insolvent, and (3) diminution of corporate value had prolongation not occurred.[30] Recognizing that conduct driving a corporation deeper into debt injures not only the corporate creditors, but the corporation itself, the Third Circuit held the committee had standing to sue the outsiders on behalf of the debtor.[31]The court also noted that although the Tenth and Sixth Circuits had applied the in pari delicto doctrine to bar claims of a bankruptcy trustee, those courts assumed that the bankruptcy trustee at least has standing to bring the claim.[32]

The Eighth Circuit held that a trustee who had alleged sufficient injury traceable to the actions of the defendants had standing to sue.[33] The court held that the defendant law firm and attorneys participated in stripping the corporation’s assets and that the injury was traceable to the activities of the lawyers who engineered the transaction to the detriment of their client.[34] In addition, the Eighth Circuit noted that the Third Circuit in Lafferty and the Ninth Circuit (in Smith v. Arthur Andersen LLP 421 F.3d at 1004) rejected the argument that a cause of action for harm to an insolvent corporation belongs to the creditors rather than the corporation. The Eighth Circuit adopted the rationale of Lafferty that simply because the creditors may be the beneficiary of recovery does not transform an action into a suit by the creditors.[35]

The Ninth Circuit found that the trustee had standing to pursue breach of contracts and duties against attorneys, auditors and investment bankers where, if defendants had not concealed the financial condition of debtor, the debtor might have filed for bankruptcy sooner and additional assets might not have been spent on a failing business.[36] “This allegedly wrongful expenditure of corporate assets qualifies as an injury to the firm which is sufficient to confer standing upon the Trustee.”[37] The court stated that “We rely only on the dissipation of assets in reaching the conclusion that the debtor was harmed.”[38] “A receiver has standing to bring a suit on behalf of the debtor corporation against third parties who allegedly helped that corporation’s management harm the corporation.”[39]

To sum up, when a director or officer enlists the help of attorneys to misstate the financial health of a company, it causes significant harm to a corporation. Harms include: (1) the fraudulent and concealed accrual of debt which can lessen the value of corporate property, (2) legal and administrative costs of bankruptcy, (3) operational limitations on profitability, (4) the undermining of business relationships, and (4) failed corporate confidence.

If court were to afford standing to trustee, third parties would be deterred from negligent, reckless, or other wrongful behavior. It will provide a means for increasing attorneys’ liability for the wrongs they commit. While limitless liability for attorneys is not the solution, increasing liability will require attorneys to answer in court when they fail to detect fraud or manipulation on the part of directors and officers that a reasonable attorney would discover.

4.  Conclusion

Attorneys are equipped with the tools to prevent fraud. An attorney may always report fraud to the appropriate authority or refuse to participate in the fraud. However, attorneys may not want to jeopardize important client relationships unless the consequence of inaction makes reporting more beneficial. Given the turmoil of the financial markets since 2008, increased liability for attorneys could help alleviate corporate fraud and bolster consumer confidence in this distressed market.

For the above reasons, the bankruptcy trustee has standing to bring a suit on behalf of the debtor corporation against attorneys who allegedly helped that corporation’s management with the fraud.

 


[1] Terlecky v. Hurd (In re Dublin Sec., Inc.), 133 F.3d 377, 380 (6th Cir.1997).

[2] In re Parmalat Sec. Litig., 383 F. Supp. 2d 587, 596 (S.D.N.Y. 2005).

[3] Wight v. Bank American Corp., 219 F.3d 79, 87 (2d Cir. 2000).

[4] See generally Jeffrey Davis, Ending the Nonsense: the In Pari Delicto Doctrine Has Nothing to Do with What is Section 541 Property of the Bankruptcy Estate, 21 Emory Bankr.Dev. J. 519 (2005); Gerald L. Baldwin, In Pari Delicto Should Not Bar a Trustee’s Recovery, 23-8 Am. Bankr.Inst. J. 8 (2004); Tanvir Alam, Fraudulent Advisors Exploit Confusion in The Bankruptcy Code: How In Pari Delicto Has Been Perverted To Prevent Recovery for Innocent Creditors, 77 Am. Bank. L.J. 305 (2003); Robert T. Kugler, The Role of Imputation and In Pari Delicto in Barring Claims Against Third Parties, 1 No. 14 Andrews Bankr.Litig. Rep. 13 (2004);Making Sense of the In Pari Delicto Defense: “Who’s Zoomin’ Who?” 23 No. 11 Bankr. Law Letter 1 (Nov.2003).

[5] Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co.,267 F.3d 340, 346-47 (3d Cir.2001).

[6] Wagoner, 944 F.2d at 118.

[7] R.F. Lafferty & Co., 267 F.3d at 340.

[8] Wagoner, 944 F.2d at 118.

[9] Id. at 116.

[10] Id. at 116-17.

[11] Wight, 219 F.3d at 86.

[12] Wagoner, 944 F.2d at 120.

[13] In re Senior Cottages of America LLC, 482 F.3d 997, 1003 (8th Cir. 2007) (collecting cases).

[14] Id. at 1004.

[15] Id. at 1002.

[16] Wilchombe v. Tee Vee Toons. Inc., 555 F.3d 949, 959 (11th Cir. 2009).

[17] Knauer v. Jonathon Roberts Financial Group, Inc., 348 F.3d 230, 237 n. 6 (7th Cir. 2003).

[18] Gray v. Evercore Restructuring, LLC, 544 F.3d 320, 325 (1st Cir. 2008).

[19] Novartis Seeds, Inc. v. Monsanto Co., 190 F.3d 868, 872 (8th Cir. 1999).

[20] Allen v. Wright, 468 U.S. 737, 756-58 (1984).

[21] Smith v. Arthur Andersen, LLP, 421 F.3d 989, 1002 (9th Cir. 2005).

[22] Wagoner, 944 F.2d at 120.

[23] Id.

[24] Jeffrey Davis, Ending the Nonsense: The In Pari Delicto Doctrine Has Nothing to Do with What Is § 541 Property of the Bankruptcy Estate, 21 Emory Bankr. Dev. J. 519, 525 (2005).

[25] Id. at 527.

[26] Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1087 (2d Cir. 1995).

[27] Id.

[28] Id. at 100.

[29] Lafferty Co., 267 F.3d at 348-49.

[30] Id.

[31] Id. at 354.

[32] Id. at 358.

[33] In re Senior Cottages Of America, LLC, 482 F.3d 997.

[34] Id.

[35] Id. at 1001.

[36] Smith v. Arthur Andersen, LLP, 421 F.3d at 1003 (9th Cir. 2005).

[37] Id.

[38] Id. at 1004.

[39] Id.

© Copyright 2011 Rui Li

 

“Innocent” Criminals: Criminal Copyright Infringement, Willfulness and Fair Use

The National Law Review would like to congratulate Charles Francis Scott of  Pace University School of Law  one of our Spring 2011 Student Legal Writing Contest Winners.  Charles’ topic is the “willfullness”  prong of criminal copyright infringement:    

I. INTRODUCTION

            On November 17, 2010, Gawker Media LLC published on its popular blog, Gawker, excerpts of Sarah Palin’s unreleased book America By Heart: Reflections on Family, Faith and Flag.[1]  In response to the release, Palin tweeted, “Isn’t that illegal?”[2]  Defending itself, Gawker mockingly wrote to Palin in a post titled Sarah Palin is Mad at Us for Leaking Pages From Her Book, telling her to “take a moment to familiarize yourself with the law.  . . . Or skip the totally boring reading and call one of your lawyers.  They’ll walk you through it” and attached pages on the copyright law’s fair use doctrine.[3]  After Gawker refused to remove the excerpts from its blog, Palin’s publisher, HarperCollins, filed suit against Gawker and obtained a preliminary injunction on November 20, 2010.[4]  By November 23, 2010, Gawker agreed to keep the material off its website for good and settled the suit with HarperCollins.[5]  Ignoring the underlying political and ideological tension between Gawker and Palin,[6] this incident highlights a very important issue: the complex and commonly misunderstood fair use doctrine. 

            The fair use doctrine has been a large source of legal uncertainty and, as a result, has led many civil copyright infringement suits to settle out of court.[7]  While it might be desirable that civil suits are settled out of court for judicial efficiency, the doctrine’s uncertainty poses a problem when fair use is used as an affirmative defense against criminal charges of copyright infringement under 17 U.S.C. § 506.[8]  In order to convict an individual of criminal infringement, the individual must have willfully infringed a copyright (1) for commercial or financial gain; (2) reproducing or distributing copies with a total retail value over $1000; or (3) making an unpublished work publicly available on a computer.[9]  The fair use doctrine states that there are certain uses, subject to a four factor balance test, where an individual can use or copy a copyrighted work without infringing.[10]  The fair use defense would then argue that either (1) the use was not infringing because it was a fair use; or (2) the individual did not willfully infringe because he or she believed the use was a fair use. 

            A problem arises when an individual believes in good faith his or her copying is a fair use but does not pass the factor test and is actually infringing.  Depending on the courts interpretation of “willfully,” this good faith, but mistaken belief, can be the difference between conviction and freedom.  As illustrated in the Gawker-Palin example, even sophisticated parties, who presumptively have personal legal counsel, misinterpret the bounds of the fair use doctrine.  If sophisticated individuals find difficulty in the nuances of the doctrine, what can be expected of the unsophisticated individual?  Since the mens rea of willfully is attached to a section 506(a) charge, barring a bad faith fair use defense, will a fair use defense always absolve a defendant?

            This article will look at the fair use doctrine as an affirmative defense against the criminal charge of copyright infringement under section 506(a) and whether it serves as a suitable defense within the statute, or whether the statute needs to be revised to avoid the problems created by the fair use doctrine.  Part II will give a brief background of section 506(a) for a charge of criminal copyright infringement and analyze the case law defining “willfulness” generally and its application to the mens rea of section 506(a).  Part III will review the fair use doctrine and the issues created when fair use is used as a defense.  Part IV will briefly examine certain policy considerations in relation to criminal copyright infringement.  Finally, this article will conclude that the fair use doctrine is too vague of a doctrine to be an effective defense and may reduce section 506(a) to a “toothless” statute.[11]  As a result, the statute should be amended by increasing the monetary criminal trigger from $1,000 to at least $25,000 and the term “willfully” needs to be defined in accordance with the majority view.

II.  § 506(a) BACKGROUND AND WILLFULNESS STANDARD

            Criminal copyright infringement is codified under 17 U.S.C. § 506(a) and the punishment guidelines is under 18 U.S.C. § 2319.[12]  Under section 506(a), criminal copyright infringement is anyone who willfully infringes a copyright (1) for commercial or financial gain; (2) reproducing or distributing copies with a total retail value over $1000; or (3) making an unpublished work publicly available on a computer if that person knew the work was intended for commercial distribution.[13]  To prove willful infringement, evidence of reproduction or distribution of a copyright work will not be sufficient.[14] The government has the burden to prove all four elements which are: (1) a valid copyright; (2) infringement of that copyright; (3) willfulness; and (4) one of the qualifying violations of section 506(a)(1)(A)-(C).[15]  The first two elements are the same that must be shown in a civil infringement case.[16]  The difference between civil and criminal infringement is the addition of the third and fourth element. 

            Unlike civil infringement, which is a strict liability offense, criminal infringement requires that the government prove the individual acted willfully.    However, the definition of “willfulness” has been left up to the courts’ interpretation since Congress failed to define it.[17]  Unfortunately, “willfulness” has long been a thorn in court’s side when used in the context of criminal law.[18]  It was not untilUnited States v. Moran[19]that the court was confronted with interpreting the vague term’s meaning under section 506(a).

            In Moran, Moran was a full-time police officer and owner of a “mom and pop” video rental store.[20]  Moran made a practice of purchasing legal videos, making a single duplicate of the original, renting the copy, and keeping the original to “insure” the video from theft or damage.[21]  Moran testified that he believed his actions were legal.[22]  He argued that “the word ‘willful’ implies the kind of specific intent . . . which is to say, a voluntary, intentional violation of a known legal duty.”[23]  The government argued that willful only meant “an intent to copy and not to infringe.”[24]  In coming to its decision, the court looked to a prior Supreme Court case dealing with the term “willfully” in a criminal statute.

            In Cheek v. United States,[25] Cheek was charged with willfully failing to file federal income taxes and willfully attempting to evade his taxes.[26]  Cheek claimed that he believed the tax code was unconstitutional and therefore believed he did not have to pay taxes.[27]  The court held that while the “general rule that ignorance of the law or a mistake of law is no defense to criminal prosecution,” an exception is made when the term “willfully” is used in complex criminal statutes.[28]  Due to the complexity of the tax code, “willfulness . . . simply means a voluntary, intentional violation of a known legal duty.”[29]  The government then has the burden to prove that the defendant knew of the duty and voluntarily and intentionally violated it.[30]  Therefore, “a good faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable.”[31]

       Using the reasoning of Cheek, the Moran court was persuaded that “willfully” carried the same meaning under 17 U.S.C. § 506(a) and was similarly exempt from the presumption that ignorance of the law or mistake of the law is no defense.[32]  Accordingly, the court held that Moran’s lack of sophistication, in addition to the totality of the circumstances, negated the willfulness requirement.[33] However, it should be noted, the lack of willfulness does not eliminate civil liability for copyright infringement.[34]

      The holding in Moran has since become the majority view, while the minority view interprets “willfully” as only the intent to copy.[35]  These two views are drastically different; from who carries the burden of proof to the consequence facing an individual who believed his use was protected by fair use.  Unlike the clear complexity of the tax code, the fair use doctrine appears straight-forward but is deceptively complex.[36]  Faced with this complexity, the statute should be amended to define “willfully” in accordance with the majority view and create consistency throughout the courts.

      The outcomes of a fair use balancing test can be unpredictable and creates uncertainty in its application.[37]  Applying the minor’s view, “innocent” infringers face the possibility of being labeled criminals.  By adopting the majority’s definition of “willfully”, prosecution will have the burden of showing that an individual has themens rea warranting criminal punishment.  Additionally, by codifying the majority’s definition, there will be minimal disruption to current law.

III.  FAIR USE

      Section 107 of the Copyright Act allows for the use of a copyrighted work for limited purposes such as “criticism, comment, news reporting, teaching . . ., scholarship, or research.”[38]  Whether that use is eligible for the fair use defense depends on the court’s evaluation of four factors set forth in section 107.[39]These four factors are: (1) the purpose and character of the use (i.e. whether such use is of a commercial nature or for nonprofit purposes); (2) the nature of the copyright (i.e. whether the work is fact based or creative); (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.[40]  While the courts have held that all the factors must be examined and weighed together, the fourth factor has been given the most weight.[41]

      This first factor of the fair use doctrine is usually split into two separate questions.  The first question asks whether the use is “transformative,” meaning, whether it “supersede[s] the objects’ of the original creation.”[42]  The second question asks whether the use is “commercial.”[43]  Since “transformative” and “commercial” are general terms and are susceptible to various interpretations, the first factor can be confusing.  In Sony Corp. of America v. Universal City Studios,[44]the court acknowledged that time-shifting[45] was an acceptable “private, noncommercial” transformative use “in the home”.[46]  However, when compared to BMG Music v. Gonzalez,[47]which held that Gonzalez’s music downloading on a try-before-you-buy basis was a commercial use, the line between commercial and noncommercial, especially for private, personal use, becomes hazy.  Both seem like private, noncommercial uses in the home for personal use, but Gonzalez’s actions supplant her actually purchasing music.[48]  This creates a fine distinction that the unsophisticated individual could misunderstand.  What exactly is commercial if personal use can be both commercial and noncommercial?  Is loading potentially infringing content on YouTube or a similar streaming website commercial if the user does not have a financial interest in the website?[49]

       If an individual posts a clip to his blog or YouTube of a scene from his favorite TV show, saying just that, he could believe he is protected by the fair use doctrine.  He believes the use is noncommercial because he’s not receiving any money from it and he is only using a small portion of the show.  He could believe that he’s making commentary on the piece by saying it is his favorite piece.  Finally, since he is not making any money from posting the video, he does not believe he has any effect on the copyrighted work’s market.  Within a 180 day period it is very possible that the video is viewed well over 100,000 times.  The $1000 or even the $2500 threshold under section 506(a) could easily be attained. 

     It is feasible that a court could find fair use under these facts or slightly different facts because of the variables of the balancing test.[50]  One commentator likened the fair use balancing test to “balancing a dinner plate on the pointy end of a nail.”[51]  Since each evaluation of fair use is fact specific, and all the factors vary in weight depending on those facts, the outcomes are sometimes unpredictable.  As such, the unpredictability of fair use seems to breed fertile ground for an individual to make a good faith mistake in evaluating his or her actions.

      Depending on the district an individual is in, and the interpretation of “willfulness” observed, this mistake can be the difference between walking away a free man or going away a felon.  If the court is within the majority, an individual can theoretically always negate “willfully,” absent evidence that the individual’s belief was not in good faith.  “If a person can claim ‘fair use’ and escape criminal penalties, then the law has no teeth since alleged infringers will invariably assert this defense.”[52]  Alternatively, if the court is within the minority, an individual will not be allowed a mistake defense and will only avoid conviction if the fair use analysis is successful.  These two outcomes are polar opposites; one is too lenient while the other is too severe. 

IV. POLICY CONSIDERATIONS

            Is the infringement of $1000 worth of copyrighted material worth labeling that individual a felon or criminal, even if he did not believe his actions were illegal?[53]  “Felon is a word that should be reserved for individuals committing crimes that damage a victim beyond repair through civil means.”[54] Civil remedies are more suitable in such a case. Incarceration for up to three years for the infringement of $2500 worth of copyrighted material[55] is excessive when civil remedies are available to recover those damages.  If the basis of enacting criminal laws are for “deterring future crimes, stigmatizing offenders, expressing community values, extracting retribution, reforming the offender, and so on,”[56]what are the “retributive function[s] . . . these statutes convey?”[57]  If the offender does not know his actions are illegal, the statute does not achieve these goals.  Furthermore, public opinion does not believe the punishment fits the crime in such low level infringement, as evidenced by the outcry over a Twilight fan’s arrest for taping a birthday party during a viewing of the film “New Moon.”[58]

            Additionally, the cost attributed to the enforcement and incarceration of such an offender is far too high.  Beyond the cost of prosecution, the costs of incarcerating the offender far exceeds the low infringing $2500 threshold.  Based on California’s 2008-2009 Annual Costs to Incarcerate an Inmate in Prison, the average cost per inmate per year is about $47,000.[59]  Theoretically, for a three year sentence, the government would be paying over $140,000 of taxpayer money to incarcerate a non-violent criminal for a $2500 infringement.  Additionally, the non-violent criminal would now be exposed to the dangers and violence inherent in prison.[60]

V. CONCLUSION

       While these low threshold cases with fair use issues are typically not prosecuted,[61]charges are still filed.[62]  The statute has the ability to make criminals out of people that do not know their actions are illegal or believe that they are legal.  By raising the threshold of section 506(a)(1)(B) to at least $25,000, the statute would be better able to avoid prosecution of “innocent” infringers.  The other subsections of 506 would still allow for punishment of individuals selling infringing materials for personal financial gain and individuals distributing unpublished material prior to commercial releases (i.e. leaking music albums, movies, or books).  With these two other options available, raising the threshold would not make prosecution any more difficult. 

      Finally, “willfully” needs to be defined in the statute in accordance with the majority view.  One action should not be more or less culpable depending on the circuit where it is committed.  By defining “willfully” in the statute, all circuits would be in conformity and there would be no discrepancies between courts. Furthermore, if the purpose of the criminal copyright infringement statute is to educate, prevent, and deter, the public needs to know what is and what is not criminal.  For that reason, the definition of “willfully” is necessary to educate and assist in deterring future criminal infringement.


[1]Maureen O’Conner, Sarah Palin’s New Book: Leaked Excerpts, Gawker, (Nov. 17, 2010, 1:50 PM), http://webcache.googleusercontent.com/search?q=cache:TxlEfXyJDUMJ:gawker….

[2]NY Judge Orders Gawker To Pull Palin Book Pages, Associated Press, (Nov. 20, 2010),http://www.google.com/hostednews/ap/article/ALeqM5giNUABDpwRGZATlokAAN5D….

[3]Id.

[4]Sarah Wheaton, Gawker Ordered to Remove Palin Book Excerpts, N.Y. Times, Nov. 20, 2010, 10:45 PM,http://mediadecoder.blogs.nytimes.com/2010/11/20/gawker-ordered-to-remov….

[5]Jeremy E. Peters & Julie Bosman, Palin’s Publisher and Gawker Settle Case, N.Y. Times, November 24, 2010,http://www.nytimes.com/2010/11/25/business/media/25gawker.html?src=busln.

[6]See generally Pareene, Palin: Scared of Asians?, Gawker, (Dec. 4, 2009, 1:39 PM), http://gawker.com/5419113/palin-scared-of-asians; Foster Kamer, Are Sarah and Todd Palin Getting A Divorce?, Gawker, (Aug. 1, 2009),http://gawker.com/5327957/are-sarah-and-todd-palin-getting-a-divorce; John Cook, Please Turn the Governor of Alaska’s Family Into A Television Program. Thank You., Gawker, (Mar. 12, 2009, 11:13 AM),http://gawker.com/5168742/please-turn-the-governor-of-alaskas-family-int….

[7]See generally Diane L. Kilpatrick-Lee, Criminal Copyright Law: Preventing A Clear Danger To The U.S. Economy Or Clearly Preventing The Original Purpose Of Copyright Law?, 14 U. Balt. Intell. Prop. L.J. 87 (2005); Anthony Falzone, Diddy Could Save Sampling, Slate, (Nov. 2, 2007, 7:16 AM),http://www.slate.com/toolbar.aspx?action=print&id=2177238.

[8]17 U.S.C. § 506 (2008).

[9]Id.

[10]17 U.S.C. § 107 (1992).

[11]See generally Ting Ting Wu, The New Criminal Copyright Sanctions: A Toothless Tiger?, 39 IDEA 527 (1999).

[12]18 U.S.C. § 2319 (2008).

[13]17 U.S.C. § 506(a)(1)-(2) (2008).

[14]Id.

[15]See Daniel Newman, Mangmang Cai & Rebecca Heugstenberg, Intellectual Property Crimes, 44 Am. Crim. L. Rev. 693, 717 (2007).

[16]See id. at 718.

[17]§ 506(a)(3).

[18]See Brian P. Heneghan, The Net Act, Fair Use, and Willfulness – Is Congress Making A Scarecrow of the Law?, 1 J. High Tech. L. 27, 34 (2002).  Judge Learned Hand stated that willfulness is “an awful word!  It is one of the most troublesome words that I know.  If I were to have the index purged, ‘willful’ [sic] would lead the rest in spite of its being at the end of the alphabet.” Id. at n64.

[19]757 F. Supp. 1046 (1991).

[20]Id. at 1047.

[21]Id. at 1047-48.

[22]Id. at 1048.

[23]Id.

[24]Id.

[25]498 U.S. 192 (1991).

[26]Id. at 194.

[27]Id. at 195-97.

[28]Id. at 199-200.

[29]Id. at 200.

[30]Id. at 201.

[31]United States v. Moran, 757 F. Supp. 1046, 1049 (1991).

[32]Id.

[33]Id. at 1052.

[34]Kilpatrick-Lee, supra note 7, at 106.

[35]Newman, supra note 14, at 721.

[36]Heneghan, supra note 17, at 35-36.

[37]See infra Part III.

[38]17 U.S.C. § 107 (2007).

[39]Id.

[40]Id. §§ 107(1)-(4).

[41]Campbell v. Acuff-Rose Music Inc., 510 U.S. 569, 578 (1994).

[42]Campbell, 510 U.S. at 584.

[43]17 U.S.C. § 107(1) (2007).  See also Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 562 (1985) (“every commercial use of copyrighted material is presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright”).

[44]See Sony Corp. of Am. v. Universal City Studios, 464 U.S. 417 (1984).

[45]Time shifting is the act of recording a TV show on a VHS tape for later private viewing.

[46]Id. at 442-43.

[47]430 F.3d 888 (7th Cir. 2005).

[48]Id. at 890.

[49]See generally Michael S. Sawyer, Copyright: Note: Filters, Fair use & Feedback: User-Generated Content Principles and the DMCA, 24 Berkeley Tech, L.J. 363 (2009); Edward Lee, Warming Up To User-Generated Content, 2008 U. Ill. L. Rev. 1459 (2008).

[50]See generally Jeremy Scott, “Leave Them Kids Alone” A Proposed Fair Use Defense For Noncommercial P2P Sharing of Copyrighted Music Files, 3 Fla. Int’l U. L. Rev. 235 (2007).

[51]See Eric Spiegelman, Sarah Palin and Gawker to Debate Freedom and the Constitution, The Awl, (Nov. 22, 2010), http://www.theawl.com/2010/11/sarah-palin-and-gawker-to-debate-freedom-a….

[52]Heneghan, supra note 17, at 36.

[53]17 U.S.C. § 506(a)(1)(B) (2008).

[54]Kilpatrick-Lee, supra note 7, at 117.

[55]18 U.S.C. § 2319(c)(2) (2008).

[56]Geraldine Scott Moohr, The Crime of Copyright Infringement: An Inquiry Based on Morality, Harm, and Criminal Theory, 83 B. U. L. Rev. 731, 748 (2003).

[57]Kilpatrick-Lee, supra note 7, at 118.

[58]The charges were dropped after holding the woman for two days.  SeeShanna Schwarze, ‘New Moon’ Taping May Put Woman In Prison, CNNEntertainment (Dec. 4, 2009, 6:28PM),http://www.cnn.com/2009/SHOWBIZ/Movies/12/04/new.moon.arrest/; Amanda Bell, Charges Against Accused ‘The Twilight Saga: New Moon’ ‘Pirate’ Dropped, examiner.com (Dec. 11, 2009, 4:36PM), http://www.examiner.com/twilight-in-national/charges-against-accused-the… Jacqueline D. Lipton, Coypright’s Twilight Zone: Digital Copyright Lessons From The Vampire Blogosphere, 70 Md. L. Rev. 1, 38-42 (2010).

[59]California’s Nonpartisan Fiscal and Policy Advisor, Legislative Analyst’s Office, California’s 2008-2009 Annual Costs to Incarcerate an Inmate in Prison(2009),http://www.lao.ca.gov/laoapp/laomenus/sections/crim_justice/6_cj_inmatec….

[60]See Heneghan, supra note 17, at 39-43.

[61]Computer Crime and Intellectual Property Section, U.S. Dep’t of Just., Prosecuting Intellectual Property Crimes Manuel 67-68 (2001).

[62]See supra note 57.

© 2011 Charles F. Scott

More Than Just An Algorithm: Reconciling The Necessity For Disaggregating The Business Method, With Bilski’s Abstract Test

The National Law Review would like to congratulate Andrew L. Schwartz of Hofstra Law School one of our Spring 2011 Student Legal Writing Contest Winners.  Andrew’s topic is the business method patent.  

INTRODUCTION

As the airplane’s utility spread to the public sector, the 1940’s witnessed the sky’s transformation into the new highway. Like any new frontier and innovation, there was a need for regulation and legal guidance. Fortunately, property law had covered the topic since the 18th century. Cuius est solum, eius est usque ad coelum et ad inferos, whoever owns the soil, it is theirs up to Heaven and down to Hell.[1]The Supreme Court however did not agree with such dated application.[2]The court reasoned that categorizing air travel with ground travel under current property law would be naive. The two categories possessed different interest and policy consideration. Unification of the two, under traditional property laws, would essentially defeat air travel’s value and purpose. Such application had “no place in the modern world”[3].  The court made it clear that new innovation required new regulation and new legal guidance. Instead of fitting innovation into the law, new laws are created to fit innovation.

To promote, and protect innovation, for years American inventors have relied on the system of intellectual property and the patent system. The patent system, a once humble and optimistic institution, has evolved far beyond its beginnings. When the last patent act was passed over a half a century ago, aspirations were high. The 1950’s saw an innovation boom that inspired some of the most integral foundations for modern technology.[4]  Proponents of the patent system promoted exposure and accessibility for innovation, while discouraging concealment and private use.[5] Assuming the excitement of the era, congress eagerly looked to protect “anything under the sun that is made by man”.[6] However with the eruption of financial and software innovation in recent years, one would be hard-pressed to find the 1950’s anything-and-everything sentiment in today’s patent office.

In the eyes of the patent office, financial and software innovation is commonly referred to as a business method.  Subject to 35 U.S.C §101 and classified under Class 705, a business method patent is “the generic class for apparatus and corresponding methods for performing data processing operations.”[7] Software is a set of logical instructions, intended for a computer, made to perform computations, comparisons and sequential steps in order to process and produce a desired output.[8]Financial innovation, centuries older than software, began as basic mathematical principles.[9] Contemporary financial innovation however, has grown to enormous complexities. Fashioned from a set of multifaceted mathematical algorithms, the innovations have become so advanced that it is near impossible to solve without the aid of a computer.[10] Essentially, in the law’s view, today’s financial innovation is software.[11]

The business method has conflated financial and software innovation under the association of complex algorithms. While under a legal lens software and financial algorithms are near inseparable, the makings and interests of their respective innovations are however quite different. For instance, a large internet corporation may attempt to patent an online shopping method for common consumers;[12] while a large financial firm may attempt to patent a system of asset pooling for large mutual funds.[13] From the components that build the algorithm, to the industries effected by the patents, it is difficult not to acknowledge the distinctions between the two scenarios. The current patent system however does not recognize such distinctions. In both scenarios the algorithms are to be evaluated as business method patents.

Because of the realistic distinctions between financial and software innovation, formulating a cohesive judicial policy for the business method would seem destitute. Patent litigation over the past forty years has been frustrated with judicial attempts to reconcile both financial and software innovations under the business method patent. The most recent efforts in the ongoing business method saga produced the Abstract test for patentability assessment. The Abstract test was created by the Supreme Court’s ruling Bilski v. Kappos.[14] While the test is still in its early stages of development, lower courts have been hard pressed to reconcile financial and software innovation under the business method using the Abstract test.[15]

History has produced an ambiguous interpretation of financial and software innovation that fails to fit the enthusiastic “anything under the sun” patent system of the 1950’s. It is clear that the development of financial and software innovation has outgrown the traditional business method classification. The business method has “no place in the modern world”[16] and needs categorical disaggregation among financial and software innovation. Disaggregation would not only better serve the time and principles that each innovation represents, but simplify the Abstract test while preserving its purpose.

This article will examine the necessity for the disaggregation of the business method.  The first section will evaluate the judicial history and evolution of the business method leading up to the Bilski decision. The second section will discuss the Bilski decision and the Abstract test. The third section will contemplate the current future of the Abstract tests. The last section of the article will discuss how the business method and the Abstract test can be clarified in disaggregating the business method into financial and software innovation.

I.  HISTORY: THE GUIDEPOSTS: 1972-2008

The history of contemporary algorithmic innovation began in the 1970’s when the Supreme Court twice considered business method patents. Both decisions held the innovations unpatenable.  The first decision, Gottschalk v. Benson, was decided in 1972.[17]The Supreme Court considered whether algorithmic based software for converting binary code was  patentable. In a six justice majority, the court held the method unpatenable, unless “in connection with a digital computer”, because it “would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself”.[18]The decision confirmed that algorithms, made akin to software by the court, standing alone, were unpatenable subject matter.  [19]

While algorithms alone were unpatenable, the question existed of whether bringing a physical component into the application would preclude a patentability.  Six years after Benson, the Supreme Court returned to the business method issue and addressed such question. InParker v. Flook, the Supreme Court considered whether an algorithmic based method for triggering an alarm system, used to signal irregular conditions in a catalytic conversion process, was patentable.[20]In a seven justice majority, the Court held the innovation unpatenable. Although the alarms inclusion meant the innovation wasn’t wholly algorithmically based, the majority realized the only novel element in Flook’s innovation was the algorithm itself.[21]  It would have appeared that the patent system’s hole had been filled. The courts would not be fooled by crafty lawyering and mirrors attempting to hide an algorithm amongst physical components. After Benson and Flook, it appeared software and algorithms, were to be treated like any other mathematical formula, unpatenable.

Hopes of patenting an algorithm under the business method reemerged only four years later in the Supreme Court case Diamond v. Diehr.[22]Once again an application was presented, part physical, part algorithm. The invention used the Arrhenius Equation to calculate the operation timing on a physical rubber press. As the rubber curing process stood well known in the industry, clearly the only new innovation in the patent application was the algorithm itself.[23]However, in a five justice majority, the application was deemed acceptable. Arguably marking the first time an application containing software was considered statutorily patentable. Although the rulings in Benson and Flook were not overruled by the Diehr decision, it appeared that the physical component ambiguities after Benson had not truly been resolved.

After Diehr, the patent system became a virtual wild west. Floods of “ridiculous and truly absurd” business method applicants were submitted to the patent office.[24]The era was epitomized with a 1994 application from the software titan IBM.[25]The invention set out a group algorithms loaded onto a physical readable storage device. The physical component that was able to pass muster under Benson and Flook, a floppy disk. The application’s approval gained such recognition that it was even endowed its own business method idiom, a Beauregard claim.[26]After dilution of the Flook’s unpatenable ruling, the despondent future of the business method patent herald through the financial and software communities.[27]

The circular timeline of judicial clarification surfaced once again in 1998 with the case of State Street v. Signature Financial Group.[28]The court found Signature Financial’s financial purposed algorithm, one that moved assets into mutual funds to take advantage of tax benefits, to be patentable.   The State Street holding marked two significant chapters in business method history. The first was the court’s explicit recognition of the business method patent.[29]The court found that such a category was no less patentable than any other subject matter under Section 101. State Street’s judicial endorsement of the business method patent, once again, propagated a flood of financial and software patent applications.[30]The second major significance of the State Street decision was in the court’s clarification of business method eligibility. The court held that the new test for eligibility was to be the Useful, Concrete and Tangible Result test.  Although the test could hardly be awarded a bright line denomination, it marked the first judicial canon to reconcile Benson, Flook and Diehr. However, despite the court’s best efforts, the test still granted several questionable patents approval, many lacking any hint of a physical component.[31]

II. CREATION OF THE ABSTRACT TEST: IN RE BILSKI & BILSKI V. KAPPOS

Ten years after the State Street decision, judicial clarification poignantly returned to the Federal Court of Appeals. Finding an opportunity to reevaluate its holding in State Street and its significances over the past ten years, the court, sitting en banc, adjudicated In Re Bilski.[32]The court’s holding not only rejected State Street’s Useful, Concrete and Tangible Result test that had reigned supreme for ten years, but went as far to replace it with a new test for business method eligibility. The new test, the Machine-or-Transformation test, held that a business method patent was patentable subject matter if it 1) was applied by use of a machine, or else 2) transforms an article from one thing or state to another. Was the court’s new test a judicial endorsement of the Beauregard claim, or was it carefully worded to avoid the question of patentability with an additional physical component?  It would have appeared that, once again, the courts had clarified one complication, while subsequently creating another.

The thematic clarification of business method decisions past came to one of its most pivotal moments in 2009 when the Supreme Court granted writ of certiorari for Bilski’s appeal.[33]From Silicon Valley to Wall Street, software and financial innovators alike held their breath awaiting the decision. Mounting rumors held that the court would possibly eliminate the business method patent altogether.[34]While some justices of the dissent agreed with the business method’s eradication, the majority felt otherwise.[35]Delivered by Justice Kennedy, the majority opined, that business methods are indeed patentable; Bilski’s application however was not.

Bilski had developed a hedging algorithm to eliminate volatility in consumer energy costs. Using the Monte Carlo method and historical weather data, energy prices would be hedged with weather futures to lock in a more stable and predictable energy bill. The algorithm’s complexities went far beyond any pen and paper, and the necessity for a computer was evident. Although there was an implied necessity for a physical component (a computer), the majority still found the algorithm unpatenable. The majority reasoned that Bilski’s innovation was an abstract idea. Reiterating established ‘precedent’, as if such a rule were ostensibly written and obvious already, the court reasoned that business method patents are limited by “laws of nature, physical phenomena, and abstract ideas”.[36]The Machine-or-Transformation test developed in In Re Bilski was no longer to be a determinative test in patentability, but rather a “useful and important clue” to the inclusive Abstract test.[37]  The court continued to disregard the continuance of  other tests that have marked business method history through the years, declaring that “nothing in today’s opinion should be read as endorsing the Federal Circuit’s past interpretations of § 101. See, e.g., State Street.”[38]And in one sentence ten years of State Street and its progeny were erased.

The Bilski Supreme Court failed to clarify a definition of their Abstract test, both in its criteria’s inclusions and omissions. The court rather left such task of interpretation to the lower courts in coming years, advising them on a case by case basis to return to the legal “guideposts”[39]of Benson, Flook, and Diehr. Justice Potter’s illustrious commentary rang ever present, “I can’t define it, but I know it when I see it”.[40] The business method was, once again, afflicted with yet another ambiguous interpretation.

III.  THE  CURRENT FUTURE OF THE BUSINESS METHOD

In patent applications to come, federal courts are left with the assignment of interpretation mandated by the powers above. Courts now sit in a post-Bilski era with the future of the business method patent in their discretion. While courts have taken time to acknowledge the inconclusiveness of the Bilski decision[41], others have used the opportunity to expand its meaning. In a recent decision by the Federal Court of Appeals, the eligibility of algorithms specifically was discussed.[42]Not surprisingly opting to use the ‘guidepost’ of Diehr, the court held that “algorithms and formulas, even though admittedly a significant part of the claimed combination, do not bring this invention even close to abstractness that would override the statutory categories and context”.[43]Even the most confident and charitable views of the Bilski decision and its progeny echo a notice of future complications, some which have already begun to surface. [44]

Verified by a circular history blemished with flaws, mistakes, and corrections, the current business method system’s stability is noticeably far from safe.  While financial and software innovation has slowly, over the years, conjoined in the eyes of the court under the business method, the culture and society of their respective subscribers is quickly diverging. Such policy considerations, which have all but been neglected in past business method decisions, must be recognized before history reprises itself.

In efforts of slowing the arbitrary attachment of physical components (Beauregard claims), the Supreme Court in Bilski retained the possibility that a purely intangible may gain patentability.[45]However, in a digital age, it is almost inherent that financial and software innovation will rely on a physical element, likely a computer. Even under the court’s pragmatic recognition of the times, Bilski’s Abstract test is still extremely comprehensive. Susceptible to a wide array of differing interpretations, in coming years the Abstract test is capable of rooting itself into case law far beyond its intended purpose, possibly precluding any software or financial innovation entirely. To better limit the scope to which the Abstract test reaches, its application should be tested to separate confines, software and financial innovation. The question ‘what is an abstract business method’ is extremely different than ‘what is abstract financial innovation’ and ‘what is abstract software innovation’. Because software and financial innovations are inherently different, from their components to the industries they affect, the Abstract test will take on different considerations when applied to each individually.

IV.  DISAGGREGATION: A SOLUTION

A.  FINANCIAL ABSTRACT TEST

The assertion that all mathematical formulas are made of components in existence, workings of nature that have yet to be discovered, is a naive assertion in light of contemporary financial innovation.[46]The quintessential example for the unpatentability of mathematical formulas is Einstein’s relativity formula.[47]Einstein did not invent the formula; he simply codified and arranged components of nature in an assignable formula. Mass, energy, and the speed of light all existed in nature eons before Einstein was even born. Although contemporary financial innovations are based in principles of mathematics, the components and interactions of the numbers in the algorithm can hardly be described as derivatives of nature.

Far from nature, financial innovations operate solely on man-made financial markets. The extent of financial innovation is limited to the markets and can only exclusively function on this man-made medium.[48]For example, Bilski’s use of weather futures in his algorithm would not have even been possible during the time of Diehr, Benson or Flook because weather futures existence has only been recognized on the market since 1996.[49]If the market or weather futures ceased to exist tomorrow, Einstein’s relativity formula would certainly still be comprehensible, Bilski’s algorithm would not.

Because market components and financial algorithms are not of nature, does not mean they cannot be natural relative to the market and its culture. Maintaining the ability to freely use the public utilities and its components has always been an essential consideration in patentability.[50]  This is where the Abstract test in financial innovation can differentiate itself from the Abstract test in software innovation. If a patent were to impede and dominate a natural market component from its intended purpose and use, then such patent would likely fail the Abstract test. The Supreme Court toiled with such reasoning but ultimately carried it in an unusual direction.

Bound to traditional business method policy considerations of both financial and software innovation, and unable to reflect financial market specifics, the Bilski court was forced to reason broadly. The court stated that Bilski sought to patent “the concept of hedging risk…hedging is a fundamental economic practice…allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea”.[51]  Application of the court’s wide comprehensive view on any patent will ultimately render it an abstract idea. Can a machine for bending metal be unpatenable because bending is fundamental physical practice?[52]Instead of looking to whether patenting Bilski’s algorithm would have created a monopoly over a natural market strategy, the court should have looked to whether patenting Bilski’s algorithm would have created a monopoly over a natural market component. If Bilski’s algorithm positioned itself to inhibit the public use of weather futures, then the Abstract test would have denied patentability. If Bilski’s algorithm used weather futures in such a way that was useful, novel and non-obvious, while still allowing for its natural use in the market, then the Abstract test would have allowed patentability. Reducing any algorithm to its most basic functions will appear as attempts at privatization of a public utility and fail the Abstract test. Only when the court is given range to apply the Abstract test to the specifics at hand (i.e. financial innovation specifically) can it properly operate.

With such ambiguous decisions as Bilski, financial innovation in private industry has been strained. Over the past years financial innovation has given rise to high frequency, black box and the white box trading.[53]All three concepts revolve around the use of an algorithms operating millisecond market transactions, consistently adjusting to market reactions. While the extent of high frequency trading is generally unknown, the same cannot be said for its presence.[54]Uncertainties in the patent system’s protection have driven financial innovators into hiding. For fear of competitor plagiarism, private firms using algorithms are seldom to share their innovations with the world.[55]Because of a lack of protection, the utility and public benefit of some of these innovations may never be known. Consider the Black-Scholes model, the base for many contemporary algorithms, and arguably one of the most provocative financial innovations of the past century.[56]Once used as a secret investing tool, the algorithm’s utility now goes far beyond the financial sector (ironically one alternative use is in patent valuation[57]). Failing to provide a stronger outline to patentable criteria will only push innovators further into hiding, inhibiting any progress in financial innovation.

The Abstract test applied separately to financial innovation would help facilitate reassurance in the patent system. The Abstract test for financial innovation would be tried against the interests of the market and private industry. Like any public domain, the market invites innovation as long as it does not inhibit the public’s use.[58]A patent application attempting to corner off a common public utility would be abstract. In the private industry’s interest, any application that would potentially destroy the opportunity for progress would be abstract. Evaluating abstractness in financial innovation separately would suit the patent system and innovation in a way the traditional business method system could not.

B.  SOFTWARE ABSTRACT TEST

The struggle between anti-software patent movements and patent proponents has grown significantly as more and more innovations stem from the digital age.[59]While the Bilski decision has almost solidified software as patentable, the Abstract test may serve as an elementary compromise when applied to software innovation separately.

Unlike its financial counterpart, software algorithms do not operate on a public medium such as the market. Software is bound to the rules and procedures of a given programming language. Languages are constantly being created, evolving and improving. The Java language, currently the most popular programming language, was only released in 1995 with its most recent release February 15th 2011.[60]Because the medium on which software innovation operates is moving at an enormously high rate (significantly more so than financial innovation) the innovation itself must move just as fast.

Like its financial counterpart, software also has its own natural components. The Abstract test applied to software would evaluate a patent and its implications under the software culture. If the patent would preclude a natural software component, the Abstract test would reject patentability. However, because of the speed of software evolution, what is regarded as innovation today may easily be common industry practice tomorrow. As patents protection lasts for twenty years, the test for abstractness must possess a sense of foresight. An overly lenient application of the Abstract test in software innovation would inhibit further innovation in later years rather than facilitate it. Consider a software’s spell checker component. The spell checker is only forty years old, but an almost natural component in any contemporary software algorithm.[61]Patenting such component would certainly be abstract and inhibit further innovation. Only when the use of the natural component in software innovation is useful, novel and non-obvious, with a tremendous amount of creativity, can the Abstract test allow patentability.[62]Because of the fluid environment that software innovation operates in, the threshold for abstractness would be significantly lower than financial innovation. This consideration only further proves the need for disaggregation.

Unlike financial innovation, software innovation is not as easily kept secret. The public market acts as a blanket for financial innovations used by traders, with a petty possibility of reverse engineering. The private software industry however, serves no protection to software innovation as it is much more readily reversed engineered and plagiarized. [63] This puts software innovators at a disadvantage, as hiding their innovation is not even an option. Without secrecy as an alternative, the patent system must work more readily to incentivize innovation without slowing it down. On the same token because software innovations are plainly exposed, it pushes innovators to persistently improve so that they may claim the alpha position amongst competitors.

CONCLUSION

While Bilski’s Abstract test is far from definitive criteria, it is th  e hand that has been dealt. Application of the Abstract test to software and financial innovations separately alleviates a large amount of ambiguity. Disaggregating the business method and applying the Abstract test separately allows for different considerations and thresholds for each innovation.  Attention to the components and the industry of the individual innovations restores the patent system to its intended purpose, which the traditional business method has failed to do. With such differences, aggregating software and financial innovation under the business method is impractical. The traditional business method truly has “no place in the modern world”.[64]


[1]John G. Sprankling, Owning the Center of the Earth, 55 UCLA L. Rev. 979, 980 (2008).

[2]United States v. Causby, 328 U.S. 256, 261, 66 S. Ct. 1062, 1065, 90 L. Ed. 1206 (1946).

[3]Id. at 261.

[4]Inventions include: 1951- VTR Video Tape Recorder, 1954-Solar Cell, 1955-Fiber Optics, 1959-Microchip. Cavendish, Marshall, Inventors and Inventions 372-73 (2nd ed. 2007).

[5]Edward C. Walterscheid, Within the Limits of the Constitutional Grant: Constitutional Limitations on the Patent Power, 9 J. Intell. Prop. L. 291, 300 (2002).

[6]The Supreme Court held that Congress chose very expansive language in the patent statute, 35 U.S.C. §101, such that “anything under the sun that is made by man” is patentable subject matter. Diamond v. Chakrabarty, 447 U.S. 303, 100 S. Ct. 2204, 65 L. Ed. 2d 144 (1980).

[7]35 U.S.C.A. § 101 (2010).

[8]Chittenden Trust Co. v. King, 143 Vt. 271, 272, 465 A.2d 1100, 1100 (1983).

[9]The first financial patent was issued on March 19, 1799, for a method for “Detecting Counterfeit Notes.” State Street: Business Method Patents Can They Be A Boardwalk Address?, 688 PLI/Pat 455 , 471 (2002).

[10]William Krause, Sweeping the E-Commerce Patent Minefield: The Need for A Workable Business Method Exception, 24 Seattle U. L. Rev. 79, 101 (2000).

[11]Id.

[12]Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d 1228 (W.D. Wash. 1999) vacated, 239 F.3d 1343 (Fed. Cir. 2001).

[13]State St. Bank & Trust Co. v. Signature Fin. Group, Inc, 149 F.3d 1368, 1373 (Fed. Cir. 1998) abrogated by In re Bilski, 545 F.3d 943 (Fed. Cir. 2008).

[14]Bilski v. Kappos, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (2010).

[15]“our focus on our muddy, conflicting, and overly formulaic rules.” Arlington Indus., Inc. v. Bridgeport Fittings, Inc., 2010-1025, 2011 WL 179768 (Fed. Cir. Jan. 20, 2011).[16]Causby, supra note 2.

[17]Gottschalk v. Benson, 409 U.S. 63, 93 S. Ct. 253, 34 L. Ed. 2d 273 (1972).

[18]Id. at 72.

[19]Id.

[20]Parker v. Flook, 437 U.S. 584, 98 S. Ct. 2522, 57 L. Ed. 2d 451 (1978).

[21]“Respondent’s application simply provides a new and presumably better method for calculating alarm limit.” Id. at 595.

[22]Diamond v. Diehr, 450 U.S. 175, 101 S. Ct. 1048, 67 L. Ed. 2d 155 (1981).

[23]“There is no suggestion that there is anything novel in the instrumentation of the mold, in actuating a timer when the press is closed, or in automatically opening the press when the computed time expires.” Id. at 209.

[24]In re Bilski, 545 F.3d 943, 1004 (Fed. Cir. 2008) aff’d but criticized sub nom. Bilski v. Kappos, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (U.S. 2010).

[25]In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995).

[26]Electronic and Software Patents: Crafting The Claims, 909 PLI/Pat 979, 909 PLI/Pat 979 , 1000 (2005).

[27]“it is clear after Flook that the board’s conclusion that patent protection is proscribed for all inventions “algorithmic in character” is overbroad and erroneous.” Application of Johnson, 589 F.2d 1070, 1075 (C.C.P.A. 1978).

[28]State St. Bank  supra note 13.

[29]Id.

[30]Stobbs, Gregory A., Business method patents 17,(2002).

[31]Amazon.com, Inc, supra note 12.

[32]In Re Bilski, supra note 24.

[33]Bilski, supra note 14.

[34]Ryan Paul, SCOTUS to hear Bilski case, may be huge for software patents,June 2, 2009, http://arstechnica.com/tech-policy/news/2009/06/scotus-to-hear-bilski-ma….

[35]Bilski, supra note 14.

[36]Id.  at 3321.

[37]Id.

[38]Id. at 3321.

[39]Id.

[40]Jacobellis v. State of Ohio, 378 U.S. 184, 196, 84 S. Ct. 1676, 1682, 12 L. Ed. 2d 793 (1964).

[41]Arlington Indus.,supra note 15.

[42]Research Corp. Technologies, Inc. v. Microsoft Corp., 627 F.3d 859, 864 (Fed. Cir. 2010).

[43]Id.

[44] “I come from the camp that anything is patentable if you put enough money behind it, but what you might just get at the end of the day is something that won’t hold up in court. Bilski is a great example that no one really understands where patent law should head or the basics of patent decisions.” Keyson, Lauren, NYTECH.org Ecamines Software and Financial Patents, Jan. 24, 2011, http://nyconvergence.com/2011/01/nytech-org-examines-software-and-financial-patents.html

[45]Bilski, supra note 14.

[46]Durham, Alan L., Patent Law Essentials: A Concise Guide¸24(2004).

[47] Diehr supra note 22.

[48]Smith, Mark B., A History Of The Global Stock Market: From Ancient Rome To Silicon Valley(2004).

[49]Jewson, Stephen, Brix, Anders, Weather Derivative Valuation: The Meteorological, Statistical, Financial And Mathematical Foundations(2005).

[50]“patents shall not remove knowledge from the public domain or restrict free access to knowledge already available to the public.” Efthimios Parasidis, A Uniform Framework for Patent Eligibility, 85 Tul. L. Rev. 323, 330 (2010).

[51]Bilski, supra note 14.

[52]U.S. Patent No. 4356716 (issued Nov.  2, 1982).

[53]Citadel Inv. Group, LLC v. Teza Technologies LLC, 398 Ill. App. 3d 724, 725, 924 N.E.2d 95, 97 (Ill. App. Ct. 2010) appeal denied, 236 Ill. 2d 551, 932 N.E.2d 1028 (2010).

[54]Jeremy Grant, ECB Warns of High Speed Trading Risks, Feb. 24, 2011, http://www.ft.com/cms/s/0/e23ddc24-4044-11e0-9140-00144feabdc0.html#axzz1EwJH4xaz.

[55]Goldman counsel asked to seal courtroom during disclosure of trading practices. United States v. Aleynikov, 737 F. Supp. 2d 173, 174 (S.D.N.Y. 2010).

[56]Geisst, Charles R,Encyclopedia Of American Business History (Vol. 2 2006).

[57]Berman, Bruce M., From ideas to assets: investing wisely in intellectual property 532 (2002).

[58]A Uniform Framework for Patent Eligibilitysupra note 48.

[59]Paul Krill, Red Hat, Google Challenge Software Patents, Feb. 3, 2011, http://www.networkworld.com/news/2011/020311-red-hat-google-challenge-software.html?hpg1=bn.

[60]TIOBE SOFTWARE, TIOBE Programming Community Index, Feb. 2011, http://www.tiobe.com/index.php/content/paperinfo/tpci/index.html.

[61]Reiffin v. Microsoft Corp., 158 F. Supp. 2d 1016, 1020 (N.D. Cal. 2001).

[62]McIntyre v. Double-A Music Corp., 179 F. Supp. 160, 161 (S.D. Cal. 1959).

[63]Davidson & Associates v. Jung, 422 F.3d 630, 639 (8th Cir. 2005)

[64]Causby, supra note 2.

© 2011, Andrew L. Schwartz

From Trips to ACTA: Establishing the Intent to Uphold Access to Medicine in the Face of Ambiguity

The National Law Review would like to congratulate Guadalupe A. Lopez  of the American University Washington College of Law  one of our Spring 2011 Student Legal Writing Contest Winners. Guadalupe writes about generic drugs and patents and the distribution of  pharmaceuticals  in developing countries:  

Introduction

The numbers speak for themselves. Each year, over 9.5 million people die due to infectious diseases for which there exists medication – most live in developing countries.i Currently, there are over 33 million people around the world living with HIV/AIDS,ii 70 percent of whom are in dire need of anti-retroviral medication but not receiving it.iii This has been attributed, in part, to the lack of affordable healthcare in developing countries, along with the high drug prices associated with monopolies provided by pharmaceutical patents.iv

Studies demonstrate that there is a significant change in the price of a drug once its patent expires, allowing its generic version to be legally manufactured and introduced into a given market.v The introduction of a generic drug often results in the reduction of prices anywhere between 22% and 88%, depending on the type of drug and the number of generic manufacturers producing it.vi In some instances, even the threat of introducing a generic drug into a market will be enough to significantly lower the price of its patented version.vii For this reason, it is in the best financial interest of pharmaceutical companies to acquire and maintain the highest levels of intellectual property rights (“IPR”) protection on their patents. In furtherance of that objective, pharmaceutical companies have actively engaged in campaigns, both domestically and around the world, aimed at preventing generic manufacturers from accessing global drug markets.viii Unfortunately, this comes at a high cost to patients who are in need of treatment and cannot afford the patented versions of these medicines. This paper will address this concern by explaining how the pursuit of high levels of IPR protection has exacerbated the inaccessibility of medication by keeping more affordable, generic drugs off the market.ix This has been largely possible due to a narrow application of the Trade Related Aspects of Intellectual Property Rights Agreement (“TRIPS Agreement”), as well as efforts to establish the highest possible levels of IPR protection, led mainly by industrialized nations.

The first section of this paper will provide an introduction to the TRIPS framework as well as a timeline of international events leading to the Doha Declaration on the TRIPS Agreement and Public Health (“Doha Declaration”). This was a declaration by all members of the TRIPS Agreement reaffirming their obligation to protect public health through the use of provisions referred to as “TRIPS flexibilities.” The second section explains that despite the Doha Declaration, certain TRIPS flexibilities have been undermined through the implementation of bilateral trade agreements with developing countries, and regulations within regional trading blocs providing vigorous protection of IPRs.x These trade agreements and regulations contain “TRIPS-Plus” provisions demanding higher levels of IPR protection than those required by the TRIPS Agreement itself.xi In essence, they have been seen as attempts to circumvent the obligations agreed to during the Doha Declaration, acknowledging that public health issues take precedent over IPRs. The third section of this paper introduces the Anti-Counterfeiting Trade Agreement (ACTA) recently negotiated by the world’s most industrialized nations, and presents the arguments raised in opposition to the accord. Many have argued that due to the special interests behind ACTA’s negotiating countries, this agreement will have a detrimental impact on developing countries, as they will be forced to adopt a framework of heightened IP standards to which they did not explicitly assent.xii The last section argues that despite the clear threats posed by ACTA, negotiating countries have expressed a clear intent to uphold access to medicine principles as asserted in the Doha Declaration. However, because many of the ACTA negotiations have been held behind closed doors, there is no record that reflects this intent outside of the public statements made by country representatives. The section proposes creating an unofficial drafting history for ACTA based on amendments made to various drafts of the text as well as public statements released by the parties. This drafting history will provide assistance when interpreting any ambiguity within ACTA that may be used to impede access to medicine or undermine any of the obligations made under the Doha Declaration.

I.  The implementation of TRIPS and the resulting need for the Doha Declaration on public health

A. The Development of the TRIPS Agreement

During the 1980s, a number of corporate actors mobilized together after realizing that they shared the common goal of increasing the protection of their intellectual property rights.xiii This alliance was comprised of trans-national corporations from a variety of sectors, among them agricultural chemical producers, software producers, entertainment providers, and brand-name pharmaceutical providers.xiv After successfully lobbying their interests at a domestic level, these actors began seeking a way to further expand the protection of their interests by pursuing higher levels of IPR protection outside the United States.xv They did so by creating a strategy to link IP with trade, two areas of law which until then, were vastly unrelated. In addition, this interest group also formed strong political ties within the U.S. and gained considerable support with the U.S. government, particularly the Office of the US Trade Representative.xvi Through transnational mobilization and aggressive lobbying of various governments, international organizations and private sectors, this coalition managed to include its newly formulated trade-based IP regime in the agenda for the GATT’s Uruguay Round of Multilateral Trade Negotiations (“Uruguay Round”) held in 1995.xvii

During the Uruguay Round, the United States persistently promoted the adoption of a new global intellectual property regime.xviii Some scholars have noted that many countries assented to the TRIPS Agreement in hopes that a multi-lateral rule based system would eliminate the US’ coercive economic policy.xix As a result, many developing countries were at a disadvantage during TRIPS Agreement negotiations due to the asymmetry in bargaining power vis-à-vis more industrialized countries. Furthermore, developing countries were at an additional disadvantage because their negotiators lacked the necessary training in the area of intellectual property essential to negotiating a new set of IP standards.xx Daniel Gervais explains that as a result, industrialized countries made very few concessions during the negotiations while developing countries were “forced to accept a package that they perhaps did not fully understand and yet, contained a set of foreign IP norms which they now had to implement.”xxi This Uruguay Round of negotiations resulted in what is known today as the Trade-Related Aspects of Intellectual Property Rights Agreement- adopted and put into force in 1994.xxii

The TRIPS Agreement was an effort to implement a global intellectual property rights regime and establish what industrialized countries believed should be the minimum levels of IPR protection required of all countries before acceding as members of the WTO.xxiii As a result, the TRIPS Agreement obligated developing nations to enforce levels of IPR protection similar to those adopted by highly industrialized nations, despite the lack of development in their own domestic IP laws.xxiv Included as part of the TRIPS Agreement were provisions requiring a 20-year term of protection for patented medication, which pharmaceutical companies argued were necessary to sustain innovation and fund research and development for future pharmaceutical products.xxv Along with these higher levels of protection, however, came huge impediments to the accessibility of essential medication in developing nations.

B.  Access to Medicine Consequences

The implementation of the TRIPS Agreement provided pharmaceutical companies with a legal and effective monopoly over their products due to the period of protection granted to their products before the introduction of any generic competitors.xxvi This meant that name-brand pharmaceutical companies were able to maintain high drug prices so long as they were still under the 20-year patent protecting their products. Within developing countries, however, this additional term of patent protection ultimately resulted in the overall reduction of affordable medicine.

This monopoly over medicines and prices proved to be devastating during the late 1990s when the HIV/AIDS epidemic was reaching its peak.xxvii It was at this point that developing countries realized the extent of the serious access to medicine implications that accompanied the adoption of the TRIPS Agreement. Developing countries, particularly South Africa, took initiatives to address the crisis by providing low-cost medication to its citizens and by issuing compulsory licenses for anti-retroviral HIV/AIDS medication.xxviii These efforts were met with fierce resistance from pharmaceutical companies and retaliation in the form of a lawsuit by the U.S. government.xxix The outcome was a wave of public outrage and widespread protests against the U.S. and pharmaceutical companies, largely led by developing countries, civil activists, and international organizations.xxx Due to mounting international pressure, the U.S. government eventually caved, withdrawing the lawsuit against South Africa as well as the trade sanctions previously implemented against it.xxxi At this point, it became clear that there was a much-needed reassessment of the objectives and interpretation of the TRIPS Agreement.

C. A Call for the Doha Declaration on the TRIPS Agreement and Public Health

In an effort to address the public health concerns resulting from the implementation of the TRIPS Agreement, the WTO introduced a “development round” in 2001 known as the Doha Declaration on the TRIPS Agreement and Public Health (“Doha Declaration”).xxxii During this round, members of the WTO unanimously recognized the need of developing countries to address serious public health issues such as HIV/AIDS, tuberculosis, malaria and other epidemics.xxxiii The Doha Declaration thus stands for the assertion that the TRIPS Agreement should not prevent any WTO member from taking measures to protect the health of its citizens. In doing so, the Declaration reaffirmed each member’s right to use the safeguards within the TRIPS Agreement without risking retaliation from other WTO members.xxxiv Specifically, the Doha Declaration reaffirmed a member’s right to parallel import medication under Article 6 of the TRIPS Agreement, and issue compulsory licenses under Article 31.xxxv

Parallel Imports

Article 6 of the TRIPS Agreement provides WTO members with the right to import patented drugs after they have been sold in other markets.xxxvi This provision essentially allows WTO members to import brand-name drugs from other countries where it is being sold at a lower retail price.xxxvii This means that once a brand-name drug is legally sold in one country, the patent holder “exhausts” his rights over the product, at which point the drug may be re-sold and exported to other countries.xxxviii This TRIPS flexibility thus provides developing countries the option to purchase medicine from foreign markets where it is being sold at a lower price than within its own domestic market. By taking advantage of this flexibility, developing countries with limited healthcare resources are able to import cheaper medicine, thereby increasing its affordability and overall access to its citizens.

Compulsory Licensing

Another safeguard reaffirmed during the Doha Declaration is a country’s right to issue compulsory licenses in cases of national emergencies, granted through Article 31 of the TRIPS Agreement.xxxix Article 31 allows a country to license the manufacturing of a generic drug while its brand-name version is still under patent without the express consent of the patent holder.xl Compulsory licenses have proven to be one of the most effective tools for providing life-saving drugs, such as anti-retroviral medication, to patients in developing countries, particularly within Africa.xli They have led to greater competition in the drug market by allowing generic drugs to compete with patented pharmaceutical products, driving down its overall cost.xlii This leads to more affordable prices for both citizens and governments providing healthcare services in the country where it is issued. The issuance of compulsory licenses have proved so effective in reducing drugs costs that even the mere threat of issuing one will often compel pharmaceutical companies to drastically reduce their prices in an effort to keep generic manufacturers off the market.xliii

The use of TRIPS flexibilities such as the two discussed above have been praised and strongly encouraged by non-profit organizations and civil society groups working to promote access to medicine in developing countries.xliv Despite the progress made, however, there is growing concern that these efforts have been undermined through pressure from bilateral and regional trade agreements, domestic legislation, and new forms of multilateral agreements such as ACTA.

II.  Circumventing the Doha Declaration Through TRIPS-Plus Agendas

The TRIPS Agreement succeeded in implementing a new global regime of heightened standards of intellectual property right protection. However, it also left room for countries to implement measures to protect the public health of its citizens through provisions known as “TRIPS flexibilities.”xlv Through TRIPS flexibilities, governments are free to address issues arising from the lack of innovation for diseases affecting their populations, coupled with high pharmaceutical prices and restrictions on availability.xlvi Despite these flexibilities though, recent free trade agreements (FTA) between developed and developing countries, particularly those with the US, have been criticized for restricting the adoption of these TRIPS flexibilities.xlvii By including “TRIPS-Plus” provisions into their FTAs, developed nations have narrowed the application of TRIPS flexibilities, thereby posing dangers to the production and availability of medicines in developing countries. More recently, regional trading blocs, such as the EU, have similarly begun to draw criticism due to the inclusion and strict enforcement of TRIPS-Plus measures within its borders.

A.  TRIPS-Plus Obligations in Free Trade Agreements

Since the Doha Declaration and the reinforcement of TRIPS flexibilities, several industrialized countries have continued to vigorously represent the commercial interest of pharmaceutical companies in trade negotiations with developing countries.xlviii By using access to their markets as a form of inducement, developed countries have been able to secure higher levels of IPR protection, known also as “TRIPS-Plus” measures, through trade agreements.xlix As reported by Oxfam International, some FTAs have contained TRIPS-Plus provisions providing for the following increased protection:

  • Expanded scope over pharmaceutical patents (covering new therapeutic uses of existing medicines and formulations);
  • Limitations on the grounds for issuing compulsory licenses to highly restrictive emergencies, government non-commercial use, and competition cases;
  • Barring parallel imports of patented medicines sold more cheaply elsewhere;
  • Extending patent monopolies for administrative delays by patent offices and drug regulatory authorities.l

In a report prepared for House Representative Henry Waxman in 2005, the Committee on Government Reform declared that “[C]ontrary to the Doha Declaration, U.S. trade negotiators have repeatedly used trade agreements to restrict the ability of developing nations to acquire medicines at affordable prices.”li Although Congress requires that the U.S. Trade Representative (“USTR”) comply with the Doha Declaration on Public Health, nearly every free trade agreement negotiated in the past decade by USTR has included TRIPS-Plus provisions significantly restricting the manufacturing of generic drugs.lii In addition, the USTR has previously announced its TRIPS-Plus agenda as well as a commitment to pursue levels of IPR protection in accordance with those of the pharmaceutical industry.liii Oxfam International asserts that this commitment to higher standards of IPR protection can be explained by the close relationship between the USTR and the pharmaceutical industry within the U.S.liv

Special 301 Watch List

One effective tool that the U.S. has used to enforce the TRIP-Plus provisions within its FTAs is the Special 301 Watch List (“Special 301”).lv The Special 301 is a report mandated by the U.S. Trade Act of 1974 through which the USTR assesses whether countries are complying with IPR standards contained in bilateral or multi-lateral agreements with the U.S.lvi If the USTR finds that a country is not in compliance with such standards, it sends a “warning” through the Special 301 Report threatening to impose trade sanctions pursuant to the U.S. Trade Act.lvii Oxfam International argues that the U.S. has used the Special 301 process to pressure countries into unilaterally implementing TRIPS-Plus provisions.lviii In addition, the Government Accountability Office has noted that while the overall number of countries listed on the Special 301 has decreased, the number of countries cited for pharmaceutical-related issues has increased.lix One example of this, sparking controversy among various members of Congress, was the placement of Thailand on the Special 301 Watch List for having issued a compulsory license for HIV/AIDS medication in 2006.lx

After this incident sparked international attention, however, Congress took it upon itself to adjust the USTR’s attitude on how it proceeded to negotiate bilateral trade agreements.lxi Since then, the USTR has made significant concessions by providing greater flexibility to provisions that at one point may have impeded access to medicine in developing countries.lxii These efforts have been reflected in amendments made to the US-Colombia and US-South Korea FTAs, making them more amenable to the adoption of TRIPS flexibilities.lxiii

B.  TRIPS-Plus Obligations in Regional Agreements:  The Case of EU Council Regulation 1383/2003

In addition to TRIPS-Plus obligations contained in FTAs, some industrialized nations have enacted far-reaching TRIPS-Plus measures as part of their domestic legislation. As noted by the International Centre for Trade and Sustainable Development (ICTSD), the European Union (EU) has been particularly active in vigorously enforcing “maximalistic” standards of IPRs within its own region.lxiv To illustrate, the EU implemented Council Regulation 1383/2003, which involves the searches, seizures, and destruction of goods suspected of infringing intellectual property rights by customs officials throughout its borders.lxv This regulation explicitly grants IP right holders the ability to prohibit the import or export of goods suspected of infringing patents, copyrights, and trademarks to and from the EU.lxvi Because this regulation is directed at all imports and exports, it has been greatly criticized by advocacy groups concerned with access to medicine due to its obstruction to the transit of pharmaceutical goods passing through EU territory.lxvii In doing so, EC 1383/2003 comes into conflict with Article V of the GATT, which establishes the principle of freedom of transit through the territory of each contracting party.lxviii The regulation also conflicts with the obligations to public health undertaken by all WTO members under the Doha Declaration.

In particular, the implementation of EC 1383/2003 has resulted in several detentions of shipments of generic medication that did not meet the heightened IP standards within the EU, but were otherwise legal in their importing and exporting countries.lxix This incident sparked widespread controversy as most of the shipments were traveling from India and destined to developing countries – such as Mexico, Brazil, Nigeria, Peru, Colombia and Ecuador – and only briefly traveling through the EU.lxx While most of the shipments were only temporarily seized, some of them were in fact destroyed for not complying with IPR standards within the EU, pursuant to EC 1383/2003.lxxi The EU defended its actions as an unfortunate result of the MEDI-FAKE initiative, which targets illegal counterfeit medicines entering the EU.lxxii Still, critics argue that these detentions, all involving generic medication, were neither incidental nor accidental, but were rather opportunistic acts of IPR holders in an effort to obstruct generic competition through false counterfeiting allegations.lxxiii Whichever may be the case, these incidents demonstrate EU officials generalized the use of the term “counterfeit,” thereby implicating other forms of IP infringements having nothing to do with counterfeiting (such as patent violations). The EU seizures have resulted in a great deal of debate over the consequences that EC 1383/2003 (and similar policy) has on freedom of transit principles and on the overall impeding effect it can have on access to medicine. This brings us to ACTA.

III.  The Anti-Counterfeiting Trade Agreement

The Anti-Counterfeiting Trade Agreement (“ACTA”) is a multilateral agreement currently being negotiated between the world’s most industrialized nations,lxxiv and aimed at combating counterfeit goods.lxxv It represents one of the most important attempts to negotiate a “North to North” agreement on issues of intellectual property rights protection after the TRIPS Agreement. For this reason, ACTA is seen by critics as an attempt to create a new template of TRIPS-plus protection outside any interference from developing countries, multilateral organizations, or civil society in general. Parties to these negotiations assert, however, that the objectives behind the implementation of ACTA are to “establish an international framework for participating governments to more effectively combat the proliferation of counterfeiting and piracy” and to “define effective procedures for enforcing existing intellectual property rights.”lxxvi

To many of its critics though, ACTA reflects a fairly clear intent to expand TRIPS standards and even remove some of its flexibilities.lxxvii In particular, ACTA has been criticized by civil society groups and developing countries for threatening the freedom of transit of generic medicines. India and China are some of ACTA’s most vocal opponents; they argue that such measures do not take into consideration the interests of developing countries or their commitments to the Doha Declaration on Public Health.lxxviii These countries also warn that ACTA would create trade restrictions for WTO members who are not negotiating parties of ACTA, yet who are still subjected to obligations beyond those required by the TRIPS Agreement.lxxix

The criticism over ACTA has not stopped there. Other institutions that have taken issue with ACTA have included the World Trade Organization and the World Intellectual Property Organization. These organizations argue that ACTA goes far beyond what was needed to combat counterfeiting and piracy, and in the process, is creating a new regime of IPR protection that will undermine multilateral institutions such as themselves by weakening their authority.lxxx

A.  Access to Medicine Threats Posed by ACTA

The most serious concern raised by access to medicine advocates is that like EC 1382/2003, ACTA will jeopardize shipments of affordable medicines in transit between developing countries, having a chilling effect on the trade of generic pharmaceuticals and on the TRIPS Agreement flexibilities.lxxxi This problem has been mostly raised with regard to proposed border measures granting customs officials the ability to restrict shipments being imported or exported from ACTA member countries. This measure has been highly criticized for essentially requiring customs officials to make highly specialized and technical determinations as to what amounts to patent infringements.lxxxii These complex adjudications, critics say, should follow after the presentation of highly specific facts related to patents, which may only be resolved by an appropriate panel or tribunal post hoc, not while the goods are in transit.lxxxiii

Under existing TRIPS provisions, border measures are to be taken only against suspected counterfeit, trademark, and copyright violations.lxxxiv Customs officials are allowed to take ex officio action against alleged infringers only after they have acquired prima facie evidence showing that an IP right has been infringed.lxxxv In addition, TRIPS requires those who requested the ex officio action to pay for any injury caused to suspected infringers as a result of a wrongful detention of goods.lxxxvi ACTA, on the other hand, permits such actions to be taken on the mere suspicion that the goods are infringing not only copyright and trademark, but also patent rights. Furthermore, ACTA indemnifies authorities from any injury caused by the wrongful detention of goods, which may last for up to a year under this new agreement.lxxxvii This creates incentives for right holders to abuse ACTA procedures and to initiate border investigations and seizures without having to prove, within any reasonable period of time, that the goods are in fact infringing. This leaves serious implications relating to the transit of shipments carrying generic medication.

In addition, provisions addressing penalties for ACTA violations vis-à-vis the penalties enforced under the TRIPS Agreement have similarly raised serious concerns.lxxxviii Under the TRIPS Agreement, any willful, commercial-scale counterfeiting is a criminal act sanctioned by national law enforcement.lxxxix In contrast, civil IP infringements under TRIPS, including violations of patent rights, consist of commercial disputes between legitimate entities and are compensable only through legal remedies.xc The reason for this distinction is that unlike counterfeiting, civil infringements of IPRs are not seen as attempts to defraud the public and are therefore not subject to the same criminal sanctions.xci While TRIPS has made it clear what types of infringements will result in criminal and civil liability, ACTA does not distinguish between the two.xcii This leaves the inference that because ACTA explicitly targets counterfeits, all infringements will be punishable as criminal violations.

Furthermore, various ACTA drafts have included provisions extending injunctions against third parties who have provided “intermediary services” that have facilitated the infringement involved.xciii While ACTA fails to define what an “intermediary party” is, those who would likely be affected under this provision include generic drug manufacturers, international shippers, and other key players involved in the international trade of medicines.xciv In turn, such injunctions could potentially “inhibit the supply and distribution systems and thereby deter generic entry, robust generic competition, and legitimate international trade of generic medicines of assured quality.”xcv Due to its failure to define “intermediary,” this provision may similarly jeopardize non-government organizations such as Medicins Sans Frontieres and UNITAID, who assist in funding the purchase of generic drugs destined for developing countries.xcvi

The unfortunate result of these ACTA provisions is that they have a potentially chilling effect on the production, trade, and ultimate distribution of generic drugs. Due to the risk of incurring not only civil, but criminal liability, many generic drug manufacturers and third-party carriers will potentially be deterred from producing and transporting medication because of the blurred distinctions between counterfeit and simple patent infringements.

B.  New IP Law-Making in the Process?

A number of scholars have argued that ACTA is an effort to seek an alternative forum that is more responsive to higher levels of IP protection.xcvii As part of this forum-shifting argument, Susan Sell notes that protectionists have previously shifted their agenda from the World Intellectual Property Organization (“WIPO”) to the World Trade Organization (through the TRIPS Agreement), to bilateral and regional trade agreements (such as those discussed above), and now to ACTA.xcviii Each time the chosen forum becomes more receptive to exceptions, likely due to pressure from civil society groups, the forum once again changes. Thus, ACTA is seen as the creation of an entirely new international institution for IP enforcement, establishing its own set of rules, standards, and methods of enforcement, notwithstanding those outlined in prior multilateral negotiations such as the TRIPS Agreement.

However, other scholars argue that ACTA is more than a mere effort aimed at shifting the forum of protection. Instead, they assert that such attempts reflect a broader notion of international IP law-making in the process.xcix This argument is based on the impact which bilateral trade agreements tend to have on a country’s position on IP standards during subsequent multilateral negotiations. These scholars argue that this is all part of a strategy to create an endless upward spiral of international IP obligations.c This movement, often referred to as the “global IP ratchet,” is only the first stage of a conscious effort on the part of IP interest groups to use bilateral agreements as vehicles to incorporate heightened IP standards into subsequent multilateral treaties, such as ACTA.ci Targeting countries on a one-on-one basis through bilateral agreements ensures that they are on-board with future stated agendas. Scholars argue that in the end, if enough of these bilateral agreements are negotiated, these higher IP standards will become the minimum standards from which future trade negotiations will proceed.cii As cited by Kimberlee Weatherall:

“Once a substantial portion of trading partners have agreed to observe the same standards as those enshrined in present U.S./EU legislation, there is no way back to a meaningful lessening of what appear as widely accepted rules, creating a spiral endlessly moving upwards.” ciii

That is to say, that all of this is not merely about shifting the forum away from the WTO, but rather, a part of an overall scheme to slowly, but certainly, increase global levels of protection for IP right holders. Weatherall suggests that bilateral agreements have ultimately served as the “stepping stones” for ACTA by setting minimum standards of IP protection among the parties involved, while creating leverage for certain countries at the negotiating table.civ As reflected by the leaked ACTA drafts, these higher levels of IP protection were, without a doubt, introduced during the various rounds of negotiation.cv

Along these lines, ACTA is seen as part of a larger “enforcement agenda” being pushed by special interest groups within highly industrialized nations. This enforcement agenda has been described as, “[A] continuous, wide-ranging effort by special-interest groups and lobbyists to secure favorable legislation and institutionalize practices that support their current business models, all under the claim of enforcing intellectual property rights.”cvi Ultimately, what emerges is “[A] web of numerous forums, regional, and bilateral agreements and unilateral institutions, all being captured to pursue a global TRIPS-plus agenda.”cvii The unfortunate consequence of this agenda is that because it caters to special interest groups, it fails to consider the disproportionate impact that these higher standards carry for developing countries lacking the resources and infrastructure to implement them. Nonetheless, many fear that such standards will soon become the norm as more and more countries continue to adopt them through efforts such as ACTA.cviii

IV.  ACTA’s Unofficial Drafting History: Establishing An Intent to Promote Access to Medicine

Despite the concerns stated above, recent leaked drafts of the text have indicated that ACTA has amended some of the measures that have been stirring controversy with access to medicine advocates.cix The two most significant of these are provisions on border measures and intermediary liability.cx According to the new draft, ACTA no longer requires countries to provide preemptive border measures for patents, meaning that if adopted, generic medicines will no longer be subject to border detentions for alleged patent violations.cxi In addition to this, ACTA parties have dropped the provision requiring intermediary liability for carriers of shipments of generic medication. The new draft reflects that the parties have made significant concessions in response to public health concerns, resulting in what some have referred to as “ACTA-Lite,” a watered down version of what ACTA was intended to be.cxii

Aside from demonstrating the tremendous impact that civil society groups can bring to the negotiating table, this move indicates that there is at least some commitment to preserve the safeguards and flexibilities established by the TRIPS Agreement. To demonstrate this commitment, many governments have released public statements ensuring that the passage of ACTA will not affect a country’s right to provide for the public health of its citizens.cxiii In a joint statement issued by the participating governments with respect to the potential obstruction to access to medication, the parties stated that, “ACTA will not hinder the cross-border transit of legitimate generic medicines,” while reaffirming that “patents will not be covered in the section on Border Measures.”cxiv

USTR officials released similar statements after certain members of Congress voiced concern over the ways in which ACTA would affect the availability of generic medicine. In a letter from Senator Ron Wyden to the USTR regarding ACTA’s impact, one of his main questions involved the ways in which ACTA would preserve the public health flexibilities under the TRIPS Agreement and the Doha Declaration.cxv In its response, the USTR stated that “ACTA is not intended to interfere with a signatory’s ability to respect its citizens’ fundamental rights and civil liberties, and will be consistent with the WTO TRIPS Agreement and will respect the Declaration on TRIPS and Public Health. (emphasis added).”cxvi From these comments, it would therefore appear that the overall purpose of ACTA is not to limit the transit, sale, or distribution of generic medicine. Nonetheless, while this intent has been reflected through a number of press releases, likely aimed at bolstering public support, there is no record of negotiation binding the parties to this intent.

The importance of legislative history within the context of multilateral negotiations is that it establishes the parties’ intent at the time of negotiation, giving the text meaning in light of potential ambiguity. However, in the case of ACTA, there is no such record of negotiations as these have been highly secretive and mostly held behind closed doors.cxvii As a result, the only evidence of the parties’ actual negotiating intent comes from inferences that have been drawn from the modifications made to several leaked versions of the agreement.cxviii This paper suggests that based on these modifications, there be an unofficial “drafting history” established, reflecting a principle of intent aimed at upholding access to medicine. This legislative history would be a compilation of the parties’ stated objectives to the press, civil society, members of Congress and Parliament, and other government officials regarding the purpose of ACTA. These statements should be analyzed with respect to the various proposals for modification made by each respective party, as reflected by the leaked versions of the agreement. Furthermore, such a drafting history will require close scrutiny of prior versions of the text in comparison with its final version (to be released in the following weeks) in order to determine whether the parties did in fact bind themselves to their publicly stated objectives. Such an analysis will also allow scholars to draw inferences from the various amendments proposed and those that were actually adopted, such as the changes to border measures discussed above. Functionally, this drafting history will serve to provide guidance to officials whenever there may be ambiguity in the text, by establishing a principle that such ambiguity shall be read in light of the parties’ intent to provide for the unrestricted transit of generic medication.

V. CONCLUSION

Due to legitimate concerns that ACTA may be creating a new institutional framework of IP standards, it is vital that parties clearly define the limits of this new agreement. As we have seen with the cases of EU detentions, there is a genuine fear that heightened IP standards may have serious restrictions on the transit and ultimate distribution of generic medication within developing countries. For this reason, there is a need to clearly and effectively communicate that parties do not intend for this to be the case with the implementation of ACTA. Through publicly released statements, leaked drafts, and new amendments made to the agreement, it appears that the parties to ACTA have made active efforts to communicate that they do not intend to impede the flow of generic medication. However, there is still a need to bind parties to this principle through a more formal manifestation of this commitment.

i Global Health Council, Impact of Infectious Diseases. Available from: http://www.globalhealth.org/infectious_diseases (citing World Health Organization, WHO Global Burden of Disease: 2004 Update).

ii World Health Organization, Global Summary of Aids Epidemic: 2009. Available from: http://www.who.int/hiv/data/2009_global_summary.png. 

iii Medicines Sans Frontiers, Running In Place: Too Many Patients Still in Urgent Need of HIV/AIDS Treatment, Briefing Document on HIV/AIDS. Available from: http://www.msfaccess.org/main/hiv-aids/introduction-to-hivaids/msf-and-hivaids.

iv See Generally, Bryan C. Mercurio, TRIPS, Patents, and Access to Life-Saving Drugs in the Developing World, Marquette Intellectual Property Law Review 211 (Summer 2004).

v Id.

vi Id.

vii Id.

viii Id.

ix Oxfam Briefing Paper, Patents versus Patients: Five Years after the Doha Declaration, Oxfam International (November 2006).

Id.

xi Id.

xii See Generally, Andrew Rens, Collateral Damage: The Impact of ACTA and the Enforcement Agenda on the World’s Poorest People. PIJIP Research Paper No. 2010-08, Program on Information Justice and Intellectual Property (2010).

xiii Susan Sell, Trips and the Access to Medicine Campaign, Wisconsin International Law Journal 481, 484 (2001-2002).

xiv Id.

xv Id.

xvi Id. at 485.

xvii Id. at 487, 488.

xviii Id. at 489.

xix Id. (noting that the US often used access to its large domestic market as a means to force other countries to adopt and enforce stricter intellectual property policies).

xx Daniel Gervais, Intellectual Property, Trade & Development: The State of Play, Fordham Law Review 505, 507 (2005).

xxi Id. at 509.

xxii Trade Related Aspects of Intellectual Property Rights Agreement (1994), available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

xxiii Bryan C. Mercurio, supra note 4, at 218.

xxiv Oxfam Briefing Paper, supra at note 9, at 5.

xxv Id.

xxvi Id.

xxvii Id.

xxviii Id. A compulsory license is a type of flexibility provided by the TRIPS Agreement, stating that countries may grant drug manufacturers the authorization to produce the generic version of a patented drug without the consent of the right holder in order to meet a public health emergency.

xxix Id.

xxx Bryan C. Mercurio, supra note 4, at 224.

xxxi Id.

xxxii Doha Declaration on the TRIPS Agreement and Public Health (2001), available at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm.

xxxiii Id.

xxxiv Rahul Rajkumar, The Central American Free Trade Agreement: An End Run Around the Doha Declaration on TRIPS and Public Health, Albany Law Journal of Science and Technology 433, 441 (2005) (citing Doha Declaration).

xxxv Id.

xxxvi Agreement on the Trade Related Aspects of Intellectual Property Rights (1995).

xxxvii Rahul Rajkumar, supra note 35, at 444.

xxxviii Id.

xxxix Agreement on the Trade Related Aspects of Intellectual Property Rights (1995).

xl Oxfam Briefing Paper, supra note 9, at 9.

xli Id.

xlii Id. at 10.

xliii Id. (explaining the case in Brazil in 2005 after it threatened to issue a compulsory license, causing a 46% discount in the price of Kaletra, an anti-retroviral AIDS drug).

xliv See e.g., Medicine Sans Frontieres, available at http://www.msf.org.

xlv See Generally Bryan C. Mercurio, supra note 4.

xlvi Sisule F. Musung et al., The Use of Flexibilities in TRIPS by Developing Countries : Can They Promote Access to Medicine?, Study 4C, Commission on Intellectual Property Rights, Innovation and Public Health (August 2005).

xlvii Id.

xlviii Oxfam Briefing Paper, supra note 9, at 13.

xlix Id. (citing as an example, the US-Jordan free trade agreement).

l Id. at 15.

li Report of Committee on Government Reform, Trade Agreements and Access toMedicine Under the Bush Administration (June 2005).

lii Jorn Sonderholm, Intellectual Property Rights and the TRIPS Agreement: An Overview of Ethical Problems and Some Proposed Solutions, Policy Research Working Paper No. 5228, World Bank Development Research Group (March 2010).

liii Oxfam Briefing Paper, supra note 9, at 13. (USTR declaring an internal reorganization plan to “better support vital US innovation, including those of the pharmaceutical industry”).

liv Id. (noting that there are currently 20 pharmaceutical-industry representatives on USTR advisory committees).

lv 19 U.S.C. § 2411 (1974).

lvi Id.

lvii Oxfam Briefing Paper, supra note 9, 1t 14. (noting that this applies despite the fact that countries may be in compliance with minimum IPR standards required by the TRIPS Agreement).

lviii Id. at 17.

lix Government Accountability Office Report, supra note 60.

lx Id.

lxi Id.

lxii Id. at 41. (noting that several pending free trade agreements have been amended and made more responsive to provisions outlining TRIPS flexibilities).

lxiii Id.

lxiv Xavier Seuba, Free Trade of Pharmaceutical Products: The Limits of Intellectual Property Enforcement at the Border, International Centre for Trade and Sustainable Development, Issue Paper No. 27, 9 (2010).

lxv Council of Regulation (EC) No. 1383/2003 of 22 July 2003.

lxvi Id.

lxvii Xavier Seuba, supra note 65.

lxviii General Agreement on Tariffs and Trade (1947).

lxix Xavier Seuba, supra note 65, at 2.

lxx Id. at 5.

lxxi Id.

lxxii Id.

lxxiii Id.

lxxiv Negotiating countries include the US, the EU, Japan, Mexico, Switzerland, Australia, NZ, South Korea, Morocco, Singapore, and Canada

lxxv United States Trade Representative, ACTA Fact Sheet (March 2010), available at http://www.ustr.gov/acta-fact-sheet-march-2010.

lxxvi Id.

lxxvii ICTSD, Animated TRIPS Council Meeting Tackles Public Health, ACTA, Biodiversity, Intellectual Property Programme, Vol. 14:22 (June 16, 2010).

lxxviii Id.

lxxix ICTSD, ACTA Faces Criticism at WTO and in the United States, Bridges Weekly Trade News Digest, at 8, Vol. 14:38 (Nov. 3, 2010).

lxxx Id.

lxxxi Peter Mayberduk, ACTA and Public Health, PIJIP Research Paper No. 2010-09, Program on Information Justice and Intellectual Property (2010).

lxxxii Id. at 2.

lxxxiii Id.

lxxxiv Id. (citing Trade Related Aspects of Intellectual Property Rights Agreement (1994)).

lxxxv Id. (citing TRIPS Article 48).

lxxxvi Id.

lxxxvii Peter Mayberduk, supra note 82, at 3.

lxxxviii Id. at 5.

lxxxix Id.

xc Id. (These remedies include monetary damages, injunctions, and declaratory relief).

xci Id.

xcii Id.

xciii Anti-Counterfeiting Trade Agreement (August 2010).

xciv Brook K. Baker, ACTA: Risks of Intermediary Liability for Access to Medicine, Program on Information Justice and Intellectual Property, PIJIP Research Paper No. 2010-01.

xcv Id.

xcvi Id.

xcvii See Generally, Peter K. Yu, Six Secret (and Now Open) Fears of ACTA (June 14, 2010). SMU Law Review, Vol. 64, 2011.

xcviii Susan K. Sell, The Global IP Upward Ratched, Anti-Counterfeiting and Piracy Enforcement Efforts: The State of Play, IQsensato Occasional Papers No. 1 (June 2008) (stating that, “As soon as one venue becomes less responsive to a high protectionist agenda, IP protectionists shift to another In search of a more hospitable venue.”). 

xcix Kimberlee Weatherall, ACTA as a New Knd of International IP Law-Making, PIJIP Paper No. 2010-12, Program on Information Justice and Intellectual Property (2010).

c Id.

ci Id. at 6. (noting that several of the countries participating in ACTA negotiations are parties to a U.S. free trade agreement (either active or pending Congressional approval) and that the negotiating position of these countries has been influenced by their respective FTA with the US).

cii Id.

ciii Id. at 9.

civ Id. at 6.

cv Anti-Counterfeiting Trade Agreement (August 2010).

cvi Peter Mayberduk, supra note 82 (arguing that the key players behind this agenda are multinational tobacco, pharmaceutical, film and record companies, noting that these are the primary lobbying bodies behind the advancement of ACTA).

cvii Andrew Rens, supra note 12.

cviii Id.

cix ICTSD, Watered-down ACTA Approaching Conclusion, Bridges Weekly Trade News Digest, Vol. 14:30 (September 8, 2010)

cx Anti-Counterfeiting Trade Agreement (October 2010).

cxi Id.

cxii ICTSD, Watered-down ACTA Approaching Conclusion, supra note 110.

cxiii ICTSD, Officials Seek to Ease Fears of Privacy Violations under ACTA, Bridges Weekly Trade News Digest, Vol. 14: 25 (July 7th 2010).

cxiv Id.

cxv Letter from Ron Wyden to USTR, January 6, 2010, available at http://www.ustr.gov/webfm_send/1701.

cxvi Response from USTR to letter from Senator Ron Wyden, January 28, 2010, available at http://www.ustr.gov/webfm_send/1700.

cxvii See generally, Over 75 Law Profs Call for Halt of ACTA, available at http://www.wcl.american.edu/pijip/go/blog-post/academic-sign-on-letter-to-obama-on-acta (accessed November 22, 2010).

cxviii See generally, ACTA- Text and Leaked Documents, PIJIP Database, available at https://sites.google.com/site/iipenforcement/acta (accessed November 22, 2010).

Guadalupe Lopez Copyright © 2011

Antitrust, Intellectual Property Rights, and the Online Music Industry: An Antitrust Analysis of Apple’s Combination of Services and Products

The National Law Review would like to congratulate Rui Li of the The University of Iowa College of Law one of our Spring 2011 Student Legal Writing Contest Winners.  Rui’s topic is An Antitrust Analysis of Apple’s Combination of Services and Products:       

I.  INTRODUCTION

For many music consumers, the ideal medium for music is digital. It offers many advantages over CDs, including easier distribution, decreased physical size, greater choice in the medium of sound reproduction, and the ability to include digital data such as artistic information and graphic artwork.i Online music stores offer more variety than consumers would get in a brick-and-mortar store, including reviews, recommendations, and other interactive features which increase the choices for consumers.ii The advantages of digital music, coupled with the efficiency of online purchasing, have helped online music stores such as Apple’s iTunes Store become the most prevalent form of commercial music distribution.iii However, online music piracy has been harming the music industry via lost CD sales even before commercial distribution of music over the Internet became prevalent. As online music firms attempt to tackle online music piracy, both antitrust enforcement agencies and private plaintiffs have raised concerns. Some of the solutions implemented by online music firms appear to promote competition by protecting intellectual property rights. However, others require closer scrutiny because some actions taken to protect these intellectual property rights have been, at times, abusive.

The tactics used by Apple to combat digital piracy have drawn legal scrutiny from a number of sources in recent years. In June 2006, the antitrust enforcement agencies of Norway, Sweden and Denmark filed a complaint against Apple regarding the restrictions it placed on iTunes audio downloads, an action that was later joined by Germany and France.iv On December 31, 2007, a group of plaintiffs brought an antitrust lawsuit against Apple in the United States District Court for the Northern District Court of California, charging Apple with maintaining an illegal monopoly on the digital music market.v On December 28, 2008, the court granted plaintiffs’ motion for class certification against Apple.vi On May 25, 2010, the New York Times reported that the United States Department of Justice was examining Apple’s tactics in the market for digital music.vii In light of this scrutiny, in 2009 Apple stopped selling music downloads with its proprietary digital rights management (“DRM”) restrictions, a technology that prevented audio downloads purchased through the iTunes Store from playing on portable media players other than Apple’s iPod.viii Given the dominant position of iTunes in online music distribution, the effect of Apple’s decision to remove DRM restrictions on the online music industry and the fight against online music piracy remains to be seen.ix

Apple’s digital music business has important ramifications for antitrust law that this Note explores. Part II of this Note examines Apple’s digital music business practices with particular emphasis on the manner in which Apple combines products and services. Part III engages in an antitrust analysis of four possible causes of action against Apple’s business conduct with an eye toward the market structure of the digital music industry. The Note concludes that Apple’s combination of products and services is procompetitive, and, in addition, offers a promising solution to digital music piracy.

II.  IPOD, ITUNES AND ITUNES STORE

In 2001, Apple introduced the iTunes music software application to help music consumers organize, browse, and play digital media. In 2003, Apple launched the iTunes Store which, in April 2008, became the number one music vendor in the United States.x On February 24, 2010, the Store had its 10 billionth song download and a music catalog of over 12 million songs.xi iTunes Store now accounts for seventy percent of the worldwide digital music download retail market.xii

Until January 2009, Apple restricted iTunes Store and iTunes Software to work only with its own portable media player, the iPod, a product that currently claims 70 percent of the portable media player market.xiii Apple restricted the iPod so it could only play files embedded with Apple’s own DRM downloads called “FairPlay”, and no one else’s. Likewise, files downloaded from the iTunes Store could only be played on an iPod. Apple maintained this closed system through regular updates and the threat of legal action. Most notably, in 2005, Apple forced RealNetworks to abandon its “Harmony” technology through software updates and the threat of patent infringement lawsuit.xiv Harmony allowed music downloads purchased through RealNetworks direct playback on iPod.

III.  ANTITRUST ANALYSIS WITH AN EYE TOWARD THE MARKET STRUCTURE OF THE MUSIC INDUSTRY

As a precursor to an analysis of Apple’s conduct from an antitrust perspective, an inquiry must be made into the market structure of the music industry.

A.  The Equilibrium Between Major Labels, Online Music Vendors, and Customers

The music market is highly concentrated, dominated by a small number of large firms (hereinafter “Major Labels”: Sony Music Entertainment, Universal Music Group, Warner Music Group, and EMI Music Group). Major Labels’ collective catalogs comprise about 85 percent of the distribution rights in the music industry.xv Each of these firms has exclusive control of a large and fungible catalog of intellectual property. In the past, Major Labels have taken advantage of their dominant position to extend market power into downstream distribution channels.xvi These practices have at times drawn the attention of antitrust enforcement agencies. In 2000, the Major Labels settled the Federal Trade Commission’s charge of restraining competition in the music market.xvii

The significant economies of scale achieved through the grouping of thousands of authors’ and composers’ copyrighted music products operate as a barrier for other firms to enter the music licensing market. This concentrated market structure lays the groundwork for a tacitly collusive environment in which Major Labels can achieve collusive results in the online music market through the non-collusive exercise of their power in the licensing market. Under this tacitly collusive structure, they may be able to reach a consensus about how to develop the online music market without explicitly agreeing with each other. If one of the Major Labels sets a high and relatively profitable licensing price, the rest of the Major Labels may follow the practice of the price-setting firm even though they do not formally communicate with each other.

The appearance of online music vendors poses a threat to this shared dominant market position. Scholars estimate that Major Labels would lose thirty to forty percent of their profit margins if online music vendors could freely compete with Major Labels.xviii To protect their advantage, it is in the Major Labels’ best interest to either deny market entry to online music vendors or bring them into the fold in an advantageous manner. Fortunately for the Major Labels, this is not much of a challenge because the barriers to entry are high and the products are fungible.xix In addition, copyright laws have given Major Labels influence over online music vendors.xx Major Labels can potentially use licensing practices to create prohibitive barriers to entry or to contractually bind online music vendors to the pricing structure of the CD market.xxi Because of this market structure, online music vendors stand little chance of success competing with the traditional distribution networks established by the Major Labels over the decades.xxii

A major, common priority of Major Labels is to gain control of the digital music distribution market. To achieve this goal, in descending order of preference, Major Labels have the potential strategies of: 1) attempting to terminate online music piracy through vigorous infringement suits or other form of antipiracy enforcement measures, 2) extracting shared monopoly profits from online sales at a rate higher than or equal to that from CD sales, or 3) expanding volume of online sales at lower profit levels by licensing online music at reasonable rates.xxiii An examination of the economic theories explaining the behaviors of oligopolies lends support to the prediction of strategies laid out above.xxiv The part that follows will compare the actual practices of Major labels to the behaviors predicted above.

Strategy No.1: Terminating online music piracy through vigorous infringement suits or other form of antipiracy enforcement measures. In 2003, the Recording Industry Association of America (RIAA), the representative of Major Labels, began attacking online music piracy by filing mass infringement suits. However, this approach, besides being expensive and time consuming, backfired.xxv It not only failed to win public sympathy for the music industry but also demonized the plaintiffs, the Recording Industry Association of America and the copyright holders they represented.xxvi In light of this, the RIAA announced in December 2008 that it was ending its mass infringement suits and attempting to cooperate with Internet Service Providers whereby Internet Service Providers will suspend or terminate Internet users’ service after repeated RIAA notices of alleged piracy.xxvii

Strategy No.2: Extracting shared monopoly profits from online sales at a rate higher than or equal to that from CD sales. In 2001, Major Labels pooled their catalogs into two non-overlapping online music vendors, MusicNet and Pressplay.xxviii They refused to license music for less than two dollars per song, and, in some cases, as much as three and a half dollars.xxix In addition, the music downloads are not transferable to CDs. In 2002, the Major Labels licensed Listen.com for a price of 99 cents per song, roughly the equivalent to the price of a CD.xxx Still, most of that music could not be burned to a CD.xxxi In March 2001, U.S. Department of Justice opened an investigation into alleged collusion in the online market.xxxii However, the DOJ later dropped the investigation in 2003 because “major labels licensed their music to a broader array of third-party music services that compete on price and features” and that unrelated firm Roxio’s acquisition of Pressplay diminished the possibility of collusion.xxxiii

Strategy No.3: Expanding volume of online sales at lower profit levels by licensing online music at reasonable rates. By the end of 2002, the Major Labels had licensed their catalogs to all major online music vendors which charged a nine to ten dollars per month subscription fee, plus 99 cents per burnable download.xxxiv

During this period Apple launched iTunes Store with a market model combining iTunes Store, iTunes Software, and iPod. The combination proved to be a huge success. Apple was thus able to dispense with subscription fees.xxxv In 2008, Apple became the number one music vendor.xxxvi The entrance of a radically efficient product model, the iTunes-iPod combination, coupled with the shared interest of Apple and Major Labels in eliminating online music piracy, promoted competition, lowered costs, improved services, and increased overall economic efficiency in the music industry.

The evolution of the online music market showed that even though Major Labels’ preference of options may partially be explained as legitimate attempts to eliminate online music piracy, they still had every incentive to thwart the development of the online music market despite the fact that customers preferred music downloads. Major Labels thought the rising of the online music market and the new business models for delivering music would deprive them of their control over the market. But when they realized they were not able to stop the development of online music distribution, they attempted to control the pace and the manner of development of online music.xxxvii

Apple’s business model combines pricing, ease of use, and technical prohibition in a way that significantly decreases the incentives for customers to choose pirated music. However, it remains to be seen whether the appearance of powerful market participant such as Apple will eventually create a more competitive environment, bring down the costs of online music, and terminate online music piracy. Therefore, the courts and the antitrust enforcement agencies should understand the equilibrium between the music industry’s interest in controlling mechanisms of distribution, the threat of online music piracy, online music vendors’ interest in lowering licensing costs, and the consumers’ interest in innovative and effective access to music. The courts could consider refraining from imposing direct legal action against online music vendors such as Apple. History has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology is a player piano, a copier, a tape recorder, a video recorder, a personal computer, or a MP3 player.

B.  The Alleged “Tying Arrangement” of iPod, iTunes Music Store, And iTunes Software

“Tying” occurs when a seller insists that the buyer take a second, or “tied”, product as a condition of obtaining the seller’s initial “tying” product.xxxviii Tying arrangements can be condemned either as contracts in restraint of trade under section 1 of the Sherman Act, or else under the more explicit provisions of section 3 of the Clayton Act.xxxix

Prior to January 2009, Apple had created something that resembles a tying arrangement by using its FairPlay technology to require owners of iPods to purchase digital music from the iTunes Store (users could still use music ripped from CDs or downloaded from unauthorized websites).

Tying is illegal per se when the defendant ties two separate products and has market power in the tying product.xl The “leverage” theory articulated by Justice Brandeis in Caprice was the only theory articulated by the Supreme Court supporting the per se approach. The theory understood tying arrangements as inherently anticompetitive because it permitted a monopoly firm to “leverage” its market power to a product market in which it lacked market power, increasing its monopoly profits.xli The leverage theory has largely been discredited by economists who argue that when the second product is imposed as a cost of using the first monopoly product, the monopolists are not necessarily better off because the elevated price of the tied product reduces the consumers’ willingness to pay for the tying product. It is now widely accepted most tying arrangements are procompetitive and efficient.xlii While the “leverage” theory of tying has been largely debunked, the market foreclosure theory continues to have relevance. It is now understood that tying arrangements are anticompetitive only in the rare cases that tying denies rivals access to markets.xliii However, economists have argued that this “access denial” or “entry barrier” theory is only marginally more plausible than the “leverage” theory.xliv

Courts have followed the lead of economists and become skeptical of antitrust claims based on tying theories. In the Microsoft case, the D.C. Circuit Court held that integration in the software industry involving computer operating systems promised significant efficiencies and that even relatively low-tech ties typically produce significant efficiencies by enabling firms to control the quality of collateral products.xlv The D.C. Circuit Court further concluded that the rule of reason should be applied to the Windows and Internet Explorer tie because a per se rule could act as an irrational restraint on efficiency and innovation, which often consists in combining features or functions that previously were separate.xlvi The court recognized the difficulty in distinguishing anticompetitive forced package sales from those that are efficient and effective. This is exactly the reason why a “rule of reason” analysis should be applied to all tying arrangements, the court explained.

In a “rule of reason” analysis, an antitrust enforcer proceeds by asking first whether the tying arrangement unreasonably excludes rivals.xlvii If the products are widely available separately, then there is no market foreclosure because widespread availability of alternatives indicates that no rival is foreclosed by the tie.xlviii Applying this analysis to the subject of this Note, Apple’s online music business, it is clear that alternatives to iTunes Music Store and iPod are widely available. Alternatives to iTunes Music Store include: RealNetworks, Wal-Mart, Amazon, Napster and Yahoo. In the portable media player market, alternatives to the iPod include: Microsoft, Sony, Creative, and SanDisk. Therefore, no rival is foreclosed by the tying from a properly defined market.

Courts should not substitute their own product designs for those generated by the market. Nevertheless, courts are often asked to determine whether a tying bundle is unreasonably anticompetitive. iTunes Music Store, the dominant online music vendor, needs to combat online music piracy and perform additional functions besides distributing music in order to develop the online music market. iTunes Music Store now offers customer support, a platform for customer reviews, Podcasts subscriptions, music and audio book previews, and iTunes U online service at no extra cost. A price-cutting online music vendor or online music piracy service might take advantage of the fact that Apple cannot charge separately for these services. The other vendors might charge a lower markup and refuse to provide essential services such as combating online music piracy and developing the online music market, knowing that the consumer will keep enjoying the free services provided by iTunes Store. Undoubtedly, iTunes Store cannot survive by only supplying uncompensated services that benefit other dealers. One strategy Apple can employ to minimize free riding is to tie iTunes and iPod to ensure a healthy supply of consumers who have subscribed to either iPod or iTunes.

While all these practices are readily defended as procompetitive, the defense is unnecessary in the first place when there is no injury to competition. The purchasers of iPod and iTunes bundle simply want a smaller product than the one that Apple is offering. But that desire does not harm competition. Apple’s bundle is simply the equivalent of the land developer who refuses to subdivide before selling. It is not the purpose of antitrust law to regulate the size of the products that Apple chooses to sell.

C.  Refusal To License FairPlay Patent

Apple used its FairPlay digital rights management system to require owners of iPods to purchase digital music from iTunes Store. Apple refused to license its patented FairPlay technology to other portable media player manufacturers such as Microsoft and declined to support alternative digital rights management systems such as RealNetworks’ Harmony technology that circumvented Apple’s FairPlay system. Generally, the owner of an intellectual property right does not have a duty to deal with a competitor, even if the owner refusing to deal is a monopolist, as long as there are valid business reasons for refusing to deal. In CUS, L.L.C. v. Xerox Corp., the Federal Circuit held that a “patent holder may enforce the statutory right to exclude others free from liability under the antitrust laws” in the “absence of an indication of illegal tying, fraud in the Patent and Trademark Office, or sham litigation.”xlix In addition, the patent statute contains no compulsory licensing provisions and even stipulates that there is no patent “misuse” when a patentee refuses to license its patent to competitors.l The provisions of 35 U.S.C. § 271 provide that “No patent owner shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having refused to license or use any rights to the patent.”li Although in Image Technical Services, Inc. v. Eastman Kodak Co.lii, the Ninth Circuit Court of Appeals affirmed a finding of antitrust violation where Kodak refused to sell patented products to competitors, it is now widely accepted that the Ninth Circuit Court of Appeals made a significant error. In that case, Kodak refused to license its patented parts to firms that wanted to compete with Kodak in the repair of Kodak photocopiers.liii The court determined that Kodak was unlawfully creating a second monopoly in service by refusing to sell the patented parts.liv The court based its decision on the theory that under the patent laws, a patent may legally create a monopoly in only one market.lv Kodak reflects an erroneous understanding of the nature and functions of a patent. Rather than market rights, patent claims create exclusive rights in technologies.lvi A compulsory licensing of intellectual property rights is only justified where a monopolist’s refusal to license is profitable only because it tends to extend or preserve a monopoly.lvii Apple’s refusal to license its FairPlay technology to any other online music vendor and MP3 manufacturer would easily pass this test because licensing FairPlay to a rival such as Microsoft or RealNetworks would deprive Apple of both online music and iPod sales and that is always an adequate business justification. A compulsory licensing of Apple’s FairPlay technology to competitors would effectively turn Apple into a public utility and places the court in the undesirable position of price regulator.

D.  Patent Misuse

Patent misuse refers to improper acts committed by a patent or other intellectual property rights holder.lviii In 1952 and again in 1988 Congress amended the Patent Act to bring the concept of misuse more closely in line with antitrust principles.lix Congress intended to put a stop to the expansionist applications of patent misuse doctrine to reach practices which were not anticompetitive under any definition.lx For example, in Brulotte v. Thys Co., 379 U.S. 29 (1964), the Supreme Court condemned a contract under the patent misuse doctrine demanding royalty payments after the patent expired, even though there was no showing of anticompetitive practices.lxi In response to the Court’s application of the patent misuse doctrine to reach practices which are irrelevant to the concerns of antitrust law, Congress limited the use of the doctrine by providing that a patent owner is not guilty of patent misuse if it refuses to license, requires licensees to purchase goods that would work effectively only with the patent, or ties different products in the absence of showing of market power in the primary product.lxii Therefore, whether Apple’s use of FairPlay technology is a patent misuse may not have independent relevance when Congress limited its scope to antitrust violations. Thus, there is no need to make an independent inquiry as to whether Apple’s use of FairPlay technology is a patent misuse.

E.  Product Design: Strategic Creation of Incompatibility

Apple engaged in strategic creation of incompatibility by designing an exclusive combination or system of iPod, iTunes Software, and iTunes Store. Generally speaking, antitrust courts are not competent to second-guess decisions about product design.lxiii In most circumstances, the conduct that creates excessive incompatibility is also self-deterring.lxiv The market provides strong discipline for firms that produce innovations that customers reject. This suggests that truly anticompetitive product redesigns are uncommon.lxv Therefore, Apple’s regular updates to iTunes Software and iPod, which add new features as well as maintain the closed system of iPod, iTunes software, and iTunes Store are presumably procompetitive. However, Microsoft showed that a product redesign is anticompetitive if the firm has very substantial market power and the redesign is sufficient to exclude complementary products from the market.lxvi Moreover, the firm must intend the injury caused by the selection of a particular technology.lxvii In addition, the injury must greatly outweigh the benefits that the redesign produces for consumers.lxviii As explained in Part B, Apple’s redesign serves the purpose of its unique product model. It provides consumers through various updates with new features such as visual music, podcasts, playback capacities, and seamless management of music. Unlike the case in Microsoft, there is integrative benefit from combining the iTunes and iPod.

IV.  CONCLUSION

Apple’s business practices of combining services and products have raised antitrust concerns. This Note analyzed Apple’s practices with an eye toward the realities of the music market. For courts and antitrust enforcement agencies to continue to serve as competition and innovation facilitators, they need to fully understand what the structure and the landscape of the music market are and how the entrance of a new and aggressive business model such as Apple’s exclusive system alters the competitive landscape of the music market. The most serious impact of a court’s finding of antitrust violation is not the large damages awarded to the plaintiffs. Rather, it is the loss of healthy competition and the innovative and effective access to copyrighted materials. An antitrust analysis of the possible causes of action against Apple shows that Apple’s conduct may not have harmed competition after all. If balancing is required to determine whether certain restraint is anticompetitive or not, antitrust should stand aside, trusting that the market rather than the government will strike the right balance.

i Brendan M. Schulman, The Song Heard ‘Round the world’: The Copyright Implications of MP3s and the Future of Digital Music, 12 HARV. J.L. & Tech. 589, 626-27 (1999).

ii Press Release, NDP Group, Amazon Ties Wal-Mart as Second-Ranked U.S. Music Retailer, Behind Industry-Leader iTunes, May 26, 2010, available at http://www.npd.com/press/releases/press_100526.html.

iii Press Release, Apple, Inc., iTunes Store Top Music Retailer in the U.S., Apr. 3, 2008, available at http://www.apple.com/pr/library/2008/04/03itunes.html.

iv Thomas Crampton, Apple Faces Fresh Legal Attacks in Europe, New York Times, June 6, 2006, available at http://www.nytimes.com/2006/06/09/technology/08cnd-apple.html.

v In re Apple iPod iTunes Antitrust Litig., C05-00037 JW, 2009 WL 249234 (N.D. Cal. Jan. 15, 2009).

vi Id.

vii Brad Stone, Apple Is Said To Face Inquiry About Online Music, New York Times (May 25, 2010), available at http://www.businessweek.com/news/2010-05-26/justice-department-said-to-s….

viii Press Release, Apple, Inc., Changes Coming To The iTunes Store (Jan. 6, 2009), available at http://www.apple.com/pr/libarary/2009/01/06itunes.html.

ix See NDP Group Press Release, supra note 2.

x See Apple Press Release, supra note 3.

xi Press Release, Apple, Inc., iTunes Store Tops 10 Billion Songs Sold (Feb. 25, 2010), available at http://www.apple.com/pr/library/2010/02/25itunes.html.

xii See NDP Group Press Release, supra note 2.

xiii Jessica Hodgson, Leap Year Trips Zune in Black Eye for Microsoft, WALL ST. J. (Jan. 2, 2009), at A9, available at http://online.wsj.com/article/SB123074469238845927.html.

xiv Real Reveals Real Apple Legal Threat, MACWORLD(Aug. 10, 2005), available at http://www.macworld.co.uk/news/index.cfm?Rss&NewsID =12310.

xv In re Time Warner et al., F.T.C. File No.971-0070 (2000) (Statement of Chairman Robert Pitofsky and Commissioners Shelia F. Anthony, Mozelle W. Thompson, Orson Swindle, and Thomas B. Leary), available at http://www.ftc.gov/opa/2000/05/cdpres.shtm.

xvi Greg Kot, Are We Finally Buying It?: New Model Will Change the Way Musicians Approach Craft, Chicago Tribune, May 11, 2003, § 7, at 1.

xvii See FTC Press Release, supra note 15.

xviii Matthew Fagin et al., Beyond Napster: Using Antitrust Law to Advance and Enhance Online Music Distribution, 8 B.U. J. Sci. & Tech. L. 451, 457 (2002).

xix Anthony Maul, Are the Major Labels Sandbagging Online Music? An Antitrust Analysis of Strategic Licensing Practices, 7 N.Y.U. J. Legis. & Pub. Pol’y 365, 373-75 (2004).

xx Id.

xxi Id.

xxii Id.

xxiii Id. at 373-74.

xxiv Herbert Hovenkamp et al., Antitrust Law, Policy and Procedure: Cases, Materials, Problems 290-96 (6th ed., 2009).

xxv Sarah McBride & Ethan Smith, Music Industry to Abandon Mass Suits, WALL ST. J. (Dec. 19, 2008), available at http://online.wsj.com/article/SB122966038836021137.html.

xxvi Id.

xxvii Id.

xxviii See Maul, supra note 19.

xxix Id.

xxx Id.

xxxi Id.

xxxii Id.

xxxiii Statement by Assistant Attorney General R. Hewitt Pate, Regarding the Closing of the Digital Music Investigation, (Dec. 23, 2003) available at http://www.usdoj.gov/atr/public/press_releases/2003/201946.htm.

xxxiv See Maul, supra note 19.

xxxv Id.

xxxvi See NDP Group Press Release, supra note 2.

xxxvii See Maul, supra note 19.

xxxviii N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6 (1958).

xxxix Id.

xl Id.

xli Cabrice Corp. v. American Patents Development Corp., 283 U.S. 27, 31-32 (1931).

xlii Herbert Hovenkamp, The Antitrust Enterprise: Principle and Execution 261 (1st ed., 2005).

xliii Id. at 263.

xliv Id.

xlv United States v. Microsoft Corp., 253 F.3d 34, 84-90 (D.C. Cir.), cert. denied, 534 U.S. 952 (2001).

xlvi Id.

xlvii Hovenkamp, supra note 42, at 265.

xlviii Id.

xlix CSU, L.L.C. v. Xerox Corp., 203 F.3d 1322, 1328 (Fed. Cir. 2000).

l Hovenkamp, supra note 42, at 265.

li 35 U.S.C § 271(d).

lii Eastman Kodak Co. v. Image Technical Servs., 125 F.3d 1195, 1196 (9th Cir. 1997), cert. denied, 523 U.S. 1094 (1998).

liii Id.

liv Id. at 1218-1219.

lv Id.

lvi Hovenkamp, supra note 42, at 269.

lvii Id. at 270.

lviii Id. at 272.

lix 35 U.S.C. § 271(d).

lx Hovenkamp, supra note 42, at 274.

lxi Brulotte v. Thys Co., 379 U.S. 29 (1964).

lxii 35 U.S.C. § 271(d).

lxiii Hovenkamp, supra note 4, at 274.

lxiv Id. at 275.

lxv Id.

lxvi See Microsoft, supra note 45.

lxvii Hovenkamp, supra note 42, at 276.

lxviii Id.

© Copyright 2011 Rui Li  

H.R. 848, The Performance Rights Act: The Recording Industry’s Saving Grace?

The National Law Review is proud to announce that Nyasha Shani Foy of  New York Law School   is one of our Student Legal Writing Contest Winners for March of 2011.  Nyasha’s article explains House Bill 848, the ‘Performance Rights Act,’ which proposes to expand copyright protection for sound recordings and require broadcast radio stations to pay performers for the use of their sound recordings

In February 2009, Representative John Conyer, Jr. (D-MI) introduced H.R. 848, the ‘Performance Rights Act,’ to Congress. This legislation proposes to expand copyright protection for sound recordings and require broadcast radio stations to pay performers for the use of their sound recordings. If passed, H.R. 848 would provide another source of revenue for copyright holders, musicians, and performers. This paper will analyze the major provisions in H.R. 848 and its potential effects on the broadcast radio and recorded music industries. 

State of the Music Recording Industry: Who Is To Blame?

The recorded music industry is in a state of emergency. The RIAA reports that record sales have steadily decreased for the past ten years.[i] The sale of physical records, has declined by approximately sixty (60) percent from 1999 to 2008.[ii] CD sales decreased nearly twenty-two (22) percent from 2008 to 2009 alone.[iii]

Industry analysts contend that this decline is directly linked to new music technology and the rise in piracy.[iv] Technology has enabled listeners to hear music without buying it and has shifted consumers away from the purchasing behavior that historically supported the recording industry.[v] The Internet, piracy, and the ability to acquire music-on demand has created a culture where listeners believe that music should be free.[vi] According to theInternational Federation of the Phonographic Industry (IFPI), a membership organization representing the worldwide recording industry,there are 29.8 million frequent users of file-sharing services in the top five EU markets alone.[vii]

Industry analysts also attribute changing consumer-purchasing habits to the decline in sales. Consumers have shifted from physical to digital sales. In 2009, more than one quarter of domestic record companies’ revenues came from digital channels.[viii] The a-la-carte download model, pioneered by iTunes, remains the largest revenue source in the online sector, with more than 100 million accounts across 23 countries.[ix] Recent reports suggest that while these downloads do generate revenue for the recording industry, the move to digital sales has not completely offset the revenues lost to piracy.[x]

The recording industry has struggled with identifying effective solutions that will offset the declining sales. The courts have provided assistance, as evidenced by the recent injunction on LimeWire.[xi] Similarly, Congress is doing their part to ensure the health of this industry going forward. In February 2009, Representative John Conyer, Jr. (D-MI) introduced H.R. 848, commonly known as the Performance Rights Act,[xii] which offers to provide another revenue stream for the recording industry.

Performance Right Act

The primary purpose of H.R. 848 is to “provide parity in radio performance rights under title 17, United States Code.”[xiii] Under current law, broadcast radio (analog, non-subscription AM and FM radio) is exempt from paying a performance license fee for sound recordings. The proposed billwould require broadcast radio stations to pay performance fees to copyright holders and would bring terrestrial radio into line with its digital counterparts.[xiv] The following provides a brief overview of the major provisions of H.R. 848:

H.R. 848 Section 2: Establishing Equitable Treatment for Terrestrial, Cable, Satellite, and Internet Services:

This section amends §§106 and 114 of the Title 17 and provides for:

  • A performance right applicable to radio transmissions generally and inclusion of terrestrial broadcasts in existing statutory license;
  • Reasonable rates and terms of royalty payments for transmissions; and
  • Procedures for determining reasonable terms and rates of royalty payments for a new type of service on which sound recordings are performed or those that will become operational.

H.R. 848 Section 3: Treatment for Minority, Female, Religious, Rural, Small, Noncommercial, Public Educational, and Community Stations and Certain Uses

Amends §114(f)(1) and provides for the following:

  • Each individual terrestrial broadcast station that has gross revenues in any calendar year of:
  • Less than $100,000 may elect to pay its over the air non-subscription broadcast transmission a royalty fee of $500 per year;
  • At least $100,000 but less than $500,000 may elect to pay for its over-the-air non-subscription broadcast transmission a royalty fee of $2,500 per year; and
  • $500,000, but less than $1,250,000 may elect to pay for its over-the-air non-subscription broadcast transmissions a royalty fee of $5,000 per year.
  • Each individual terrestrial broadcast station that had total gross revenues during the 4 full calendar quarters immediately preceding the date of enactment of the Performance Rights Act of:
  • Less than $5,000,000 shall not be required to pay a royalty during the three years immediately following the date of enactment of the Performing Rights Act; and
  • $5,000,000 or more shall not be required to pay during the one year immediately following the enactment of the Performance Rights Act.
  • Each public broadcasting entity as defined in §118(f) and has gross receipts in any calendar year of:
  • Less than $100,000 may elect to pay for its over-the-air non-subscription broadcast transmission a royalty fee of $500 per year; and
  • $100,000 or more may elect to pay for its over-the-air non-subscription broadcast transmission a royalty fee of $1,000 per year.

Section 4: Availability of Per Program License

Amends § 114(f)(1)(b) by providing a per program license option for terrestrial broadcast that make limited feature uses of sound recordings.

Section 5: No Harmful Effects on Songwriters

Amends § 114(i) and provides that:

  • License fees for public performance of sound recordings under § 106(6) shall not be cited, taken into account or used in any administrative, judicial or governmental forum or proceeding, to set or adjust the license fees payable to copyright owners of music works for the purpose of reducing or adversely affecting such license fees;
  • Nothing in this Act or the amendments made by the Act shall adversely affect the public performance rights of or royalties payable to songwriters or copyright owners of musical works; and
  • Notwithstanding the grant of a license under §106(6) to perform work publicly, a licensee of that sound recording may not publicly perform such sound recording unless a license has been granted for the public performance.

Section 6: Payment of Royalties

Amends § 114(g) and provides that:

  • Featured artists who perform on a sound recording will be entitled to payments from the copyright owner in accordance with the terms of the artist’s contract.
  • Copyright owners will be required to deposit 1% of the receipts from the license with the American Federation of Musicians and American Federation of Television and Radio Artists Intellectual Property Rights Distribution Fund for non-featured performers who have performed on sound recordings.
  • The Fund will be distributed as follows: 50% to non-featured musicians (whether or not members of American Federation of Musicians) and 50% to non-featured vocalists (whether or not members of American Federation of Television and Radio Artists); the fund may deduct reasonable costs related to making such distributions.
  • Amounts that are not paid by the date specified in such clause shall be subject to interest at the rate of 6% per annum for each day of nonpayment.
  • Sound recording copyright owner will be required to include with deposits, “subject to consent, if necessary,” the following information: identity of the artist; International Standard Recording Code; title of the sound recording; number of times the recording was transmitted; and total amount of receipts collected from that service.
  • To the extent that the license extends to a station’s non-subscription broadcast otherwise licensable under a statutory license, the station shall pay to the agent designated to distribute statutory license receipts 50% of the total royalties that the station is required to pay for such transmissions and payments shall be the sole payments to which featured and non-featured artists are entitled by virtue of such transmissions under the direct license with that station.

Section 7: No effect on Local Communities:

Adds an additional section to §114(f), which ensures that the payment of royalties will not affect the public interest obligations of a broadcaster to its local community.

Section 8: Preservation of Diversity

Amends §114(f) of Title 17 and requires that the Copyright Royalty Board, in making their determinations or adjustments to the rates and terms of royalty payments, consider “religious, minority-owned, female-owned, and noncommercial broadcasters;” “non-music programming;” and “religious, minority-owned, or female-owned royalty recipients”

The GAO Report on H.R. 848 and its Effects

Congress asked the United States Government Accountability Office (GAO) to analyze the potential effects of H.R. 848. The GAO reviewed 1) the current economic challenges facing the recording and broadcast radio industries; 2) the benefits both industries receive from their current relationship; 3) the potential effects of the proposed act on the broadcast radio industry; and 4) the potential effects of the proposed act on the recording industry.[xv]The GAO released two reports: a draft report in February 2010[xvi] and a final report in August 2010.[xvii]

The GAO reports that the broadcast radio and recording industries have maintained a mutually beneficial relationship. The broadcast radio industry benefits from using sound recordings to attract listeners, which in turn generates advertising revenue.[xviii] The recording industrybenefits from receiving airplay. Stakeholders from both industries agree that broadcast radio airplay facilitates the discovery of new music; increases exposure and raises awareness of sound recordings; and promotes music sales.[xix] However, the GAO found no consistent pattern between broadcast radio airplay and the cumulative number of digital single sales.

The GAO indicates that H.R. 848 would result in an overall gain for record companies, musicians, and performers.[xx]Several factors would influence potential revenues including: the individual or organizational role in the creation of a sound recording,the amount of airplay a sound recording receives, andtotal royalty payments paid by the broadcast radio industry.[xxi]Using a 2.35 percent royalty rate[xxii], the GAO estimated that fifty-six (56) percent of performers would receive $100 or less per year, and fewer than six (6) percent of performers would receive $10,000 or more per year in royalties from airplay in the Top 10 markets.[xxiii]

H.R. 848 has many supporters. To date, nearly 50 representatives in the House have signed their names in support. The bill is also backed by the United States Department of Commerce, which “has long endorsed amending the U.S. copyright law to provide for an exclusive right in the public performance of sound recordings.” The Department believes that this proposed legislation will “provid[e] fair compensation to America’s performers and record companies through a broad public performance right in sound recordings;” “provide a level playing field for all broadcasters to compete in the current environment;” and “provid[e] incentives for America’s performing artists and recording companies.”[xxiv] President Barack Obama also supports the bill.[xxv]

Proponents argue that adopting H.R. 848 would correct an imbalance in the current system. As Cameron Kerry, General Counsel for the Department of Commerce has pointed out, the United States is the only major industrialized country to have an exemption for over-the-air radio.[xxvi]Foreign musicians and performers receive a performance royalty when their music is broadcast on the radio.[xxvii] Many American artists are unable to collect the public performance money due from  foreign countries because of the lack of reciprocal protection under U.S. copyright law.[xxviii] As a result, substantial royalties for the public performance of U.S. sound recordings abroad are either not collected or not distributed to American performers and record companies. The U.S. Copyright Office estimated the amount of international performance royalties due in 2007 to be about $70 million dollars.[xxix] Adopting H.R. 848 would both protect our American copyrights in the international market by putting us on equal footing with our international counterparts, and add value to our American copyrights by providing a multi-million dollar annual revenue stream for copyright holders. Record industry stakeholders have suggested that the additional revenue could lead to more investment in the creation of music. Additional revenue for artists and musicians, especially session performers, would allow these groups to remain working in the music industry.[xxx]         

Not surprisingly the National Association of Broadcasters (NAB), a trade association representing radio and television broadcasters,does not support H.R. 848. They argue that this “new performance tax” would financially cripple local radio stations, stifle new artists trying to break into the recording business, and harm the listening public who rely on local radio.[xxxi] Others more see the bill as “an attempt by the record labels to get their own bailout courtesy of radio stations.”[xxxii] Opponents argue that H.R. 848 offers a zero-sum equation as a solution: the recording industry gains, while the broadcast industry loses.[xxxiii] Clearly, this result would be counterproductive to the overall system. Opponents of H.R. 848 also suggest that the new “tax” will largely benefit foreign record companies such as Universal (France), Sony (Japan), and EMI (UK).[xxxiv]

Broadcast radio industry stakeholders argue that they already provide revenue to copyright owners by purchasing licenses that allow radio stations to broadcast music. The cost for this license varies by station, however, the GAO estimates the industry pays approximately 3 percent of its annual revenues to the performance rights organizations (PROs) and SoundExchange.[xxxv] Adopting this legislation would add additional financial costs, in the form of royalty payments for the use of sound recordings,[xxxvi] and administrative costs, in complying with the reporting requirements.[xxxvii] The total additional annual costs to the industry could range from $258 million to $1.3 billion.[xxxviii]

The main concern regarding the adoption of H.R. 848 is that an additional license fee might cause some radio stations to shut down.[xxxix] A limited or narrow play-list would accordingly decrease the number of potential licenses the radio station would need to acquire and would ease the work needed to fulfill the reporting requirement. However, a narrow play-list could potentially alienate listeners by decreasing the variety of music offered, which could lead to fewer listeners and decreased advertising dollars. The GAO reports that the broadcast radio industry is already experiencing an 8 percent decline in advertising revenue from its peak of $18.1 billion.[xl] However, if a station uses a large music library, then the reporting would become more tedious. This result could likely lead to an increase in staffing costs and license fees, but could also likely ensure a broader listening audience and attract potential advertisers.[xli] A radio station would also have the option of switching to a non-music format or ceasing operation altogether to reduce the license fees, however, these options would not benefit the broadcast radio industry.[xlii]

The GAO offered both the draft and final report to Federal Communication Commission (FCC) and the U.S. Copyright Office for comments. The CopyrightOffice generally supports the proposed legislation. Speaking on behalf of the Copyright Office, Marybeth Peters, former Registrar of Copyrights, mentioned that the Office has established a long history of recommending extension of full performance rights to sound recordings, including recently voicing support for the Performance RightsAct in Congressionalhearings.[xliii] The FCC critiqued the GAO’s analysis on the effects of the broadcast radio industry.[xliv]

Another significant critique of H.R. 848 is that the legislation is short-cited in its scope in that it targets an increasingly less-influential industry. While broadcast radio remains the most common place to discover new music, this reliance has decreased with younger audiences, who increasingly rely on the Internet to learn about new music. A recent Arbitron research study reports that 52% of 12-34 year olds turn to Internet to learn about new music first.[xlv]The presence of other promotional outlets, such as music blog sites, puts a strain on an already complex relationship between the recording and broadcast industries.[xlvi] Although requiring performance fees for radio may create parity within our own laws and on an international scale, it is likely not the most effective means to achieve the overall goal of monetizing the recording industry. Using the underlying premise of monetizing uses of copyrighted material, Congress may be better suited to consider focusing on other businesses and industries that are tangentially related to the recording industry. For example, the IFPI reports that there has been last a sharp rise in non-peer-to-peer piracy, such as downloading from hosting sites, mobile piracy, stream ripping, instant message sharing, and downloading from forums and blogs.[xlvii] Urban music creators, in particular with its mixtape culture, often usurp radio’s ability to attract new listeners and break new music by releasing their new music thru music blogs. Instead of working to shut down these illegal music channels, Congress should draft legislation that monetizes these consumer habits. Perhaps, if music blogs, or the hosting sites that they use to share copyrighted works, were taxed in a similar fashion to what H.R. 848 proposes (however which greatly reduced fees), then the proposed legislation would have a greater effect.

Conclusion:

 While H.R. 848 may not provide the “perfect” solution, this legislation does demonstrate Congress’ dedication and commitment to intellectual property issues. Regardless of the outcome, this will remain to be an important piece of legislation for all intellectual property practitioners.


[i]See RIAA, 2008 Consumer Profile, http://76.74.24.142/CA052A55-9910-2DAC-925F-27663DCFFFF3.pdf(last visited Dec. 26, 2010).

[ii]See GAO, Preliminary Observations on the Potential Effects of the Proposed Performance Rights Act on the Recording and Broadcast Radio Industries, GAO-10-428R (Washington, D.C.: Feb. 26, 2010) at 7. Available at http://www.gao.gov/new.items/d10428r.pdf.

[iii]See, RIAA, 2009 Year-End Shipment Statistics, http://76.74.24.142/A200B8A7-6BBF-EF15-3038-582014919F78.pdf (last visited Dec. 30, 2010).

[iv]See Growing Threat From Illegal Web Downloads,December 18, 2009, http://www.bpi.co.uk/press-area/news-amp3b-press-release/article/growing…); IFPI Digital Music Report 2010, January 21, 2010, http://www.ifpi.org/content/library/DMR2010.pdf at 6 (last visited Dec. 28, 2010).

[v]GAO-10-428R at 8.

[vi]SeeGAO-10-428R at 7; IFPI Digital Music Report 2010 at 23 (“We live in a world where 1€ is considered extravagant for a music download, but a couple of euro is considered reasonable for a Starbucks coffee.”).

[vii]IFPI Digital Music Report 2010 at18.

[viii]See IFPI Digital Music Report 2010 at 3.

[ix]SeeIFPI Digital Music Report 2010 at 4.

[x]Eric Pfanner, Music Industry Counts the Cost of Piracy, N.Y. Times, January 21, 2010. Available at http://www.nytimes.com/2010/01/22/business/global/22music.html (last visited Dec. 29, 2010).

[xi]See http://www.scribd.com/doc/40191948/Injunction-Lw; The Song Is Over, Portfolio, Oct. 27, 2010, http://www.portfolio.com/views/blogs/daily-brief/2010/10/27/judge-kimba-wood-orders-limewire-to-shutdown(last visited December 29, 2010).

[xii]The Senate has also proposed a similar bill, S. 379, 111th Cong. (2009), sponsored by Senator Patrick Leahy. This bill can be found at: http://thomas.loc.gov/cgi-bin/query/z?c111:S.379. While the House and Senate bills differ in detail, both bills include a statutory royalty with a tiered structure.

[xiii]H.R. 848, 111th Cong. (2009). Full text of this bill can be found at: http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.848.

[xiv]The Digital Performance Right in Sound Recordings Act of 1995 (17 U.S.C. §§ 106, 114-115; Pub. L. No. 104-39, 109 Stat. 336)created an exclusive public performance right for copyright owners of sound recordings for certain performances made by satellite and cable digital subscription services, but exempted broadcast radio. http://en.wikipedia.org/wiki/Digital_Performance_Right_in_Sound_Recordin….

[xv]See GAO-10-428R at 2.

[xvi]See GAO-10-428R (Washington, D.C.: Feb. 26, 2010).

[xvii]See GAO, The Proposed Performance Rights Act Would Result in Additional Costs for Broadcast Radio  Stations and Additional Revenue for Record Companies, Musicians, and Performers, GAO-10-826, (Washington, D.C.: Aug 4, 2010). Available at http://www.gao.gov/new.items/d10826.pdf.  

[xviii]See GAO-10-826 at 12.

[xix]Id.at 12-15.

[xx]SeeGAO-10-428R at 4.

[xxi]SeeGAO-10-826 at 27-28.

[xxii]SeeGAO-10-826 at 4. (The GOA used royalty rates considered in previous rate-setting decisions—2.35, 7.25, and 13 percent).

[xxiii]SeeGAO-10-826 at 28-29; Id.at 2, fn. 4.(“While the proposed statutory license requires direct payment to musicians and performers, agreements between record companies and artists could take into consideration this additional source of revenue. Record companies and others in the recording industry have signed a Memorandum of Understanding agreeing that those signing the memorandum will not attempt to recover any performance royalties from the musicians or performers.”).

[xxiv]Available at http://www.scribd.com/doc/29299229/Commerce-Department-Letter-on-Perform… (last visited on Dec. 27, 2010).

[xxv]See Nate Anderson, Obama admin: time to make radio pay for its music, http://arstechnica.com/tech-policy/news/2010/04/obama-admin-make-radio-p… (last visited Dec. 28, 2010).

[xxvi]Id.; Fair or Not “The Performance Rights Act” will affect more than Artists’ Royalties, Oct. 24, 2010, http://musicindustryreport.org/?p=27721 (last visited Dec. 27, 2010)(Currently, China, Iran, and North Korea are the only foreign countries that do not provide a fair performance right on radio.).

[xxvii]See GAO-10-428R at 14.

[xxviii]Available at http://www.scribd.com/doc/29299229/Commerce-Department-Letter-on-Performance-Rights-Act(last visited on Dec. 27, 2010).

[xxix]See GAO-10-826 at30. The GAO report, however, did not factor into its calculations royalties that may due to foreign artist, which could negative the overall sum collected domestically.

[xxx]GAO-10-428R at 15.

[xxxi]Anderson, Obama admin: time to make radio pay for its music http://arstechnica.com/tech-policy/news/2010/04/obama-admin-make-radio-p…. (last visited Dec. 27, 2010).

[xxxii]Mike Masnick, How The Recording Industry Changes Its Own Story, Jun 16, 2009,http://www.techdirt.com/articles/20090614/2223175228.shtml (last visited Dec. 28, 2010); Masnick, Bailing Out The RIAA?, May 14, 2009,http://www.techdirt.com/articles/20090514/0218574881.shtml (last visited Dec. 29, 2010).

[xxxiii] Matthew Lasar, Performance Rights Act might shut down some radio stations

http://arstechnica.com/tech-policy/news/2010/06/gao-report-performance-r… (last visited Dec. 29, 2010).

[xxxiv]Anderson, Obama admin: time to make radio pay for its music http://arstechnica.com/tech-policy/news/2010/04/obama-admin-make-radio-p…. (last visited Dec. 27, 2010).

[xxxv]GAO-10-826 at 14; Donald Passman, All You Need To Know About The Music Industry, Seventh Edition, Free Press (New York 2009) at 234-236.

[xxxvi]See H.R. 848 Section 3: Treatment for Minority, Female, Religious, Rural, Small, Noncommercial, Public Educational, and Community Stations and Certain Uses.

[xxxvii]See Section 6: Payment of Royalties.

[xxxviii]GAO-10-826.

[xxxix]Lasar, Performance Rights Act might shut down some radio stations

http://arstechnica.com/tech-policy/news/2010/06/gao-report-performance-r…. (last visited Dec. 29, 2010).

[xl]GAO-10-826 at 8.

[xli]Amos Biegun, Fair Or Not, The Performance Rights Act Will Affect More Than Artists’ Royalties, Oct. 24, 2010, http://www.musicdish.com/mag/?id=12773 (last visited Dec. 27, 2010).

[xlii]GAO-10-428R at 12.

[xliii]Comments From The Copyright Office On GAO-10-428R (GAO-10-707SP), an E-supplement to GAO-10-428R, April 16, 2010. Available at http://www.rbr.com/radio/24888.html (last visited Dec. 30, 2010).

[xliv]GAO, The Proposed Performance Rights Act Would Result in Additional Costs for Broadcast Radio  Stations and Additional Revenue for Record Companies, Musicians, and Performers, GAO-10-826,  Appendix V: Comments from the Federal Communications Commission, page 56-57 (July 21, 2010).

[xlv]The Infinite Dial 2010: Digital Platforms and the Future of Radio at 15-16.  Available at

http://www.arbitron.com/downloads/infinite_dial_presentation_2010_reva.pdf (last visited Dec. 29, 2010).

[xlvi]GAO-10-826 at 11-20.

[xlvii]IFPI Digital Music Report 2010 at 19. 

© Copyright 2011 Nyasha S. Foy

Notions of the Transformative in Law and the Visual Arts

The National Law Review is proud to announce that Aimée Scala of Brooklyn Law School  is one of our Student Legal Writing Contest Winners for March of 2011.  Aimee’s article focuses on what constitutes a “transformative” work for purposes of fair use under copyright law

In January 2011, artist Shepard Fairey and the Associated Press reached a settlement out of court regarding Fairey’s ubiquitous Hope poster (now in the collection of the National Portrait Gallery in Washington, D.C.), created and used during Barack Obama’s presidential campaign. Fairey’s image was based on a photograph of Obama, then an Illinois senator, taken by photographer Manny Garcia for the Associated Press. The A.P. accused him of copyright infringement because of the substantial similarity between the two images. In response, Fairey brought suit seeking a declaration that his use of the photograph was not infringement, but instead a fair use of the copyrighted image, a statutory exception to the exclusive grants given to authors and creators under federal copyright law. Because the parties settled their dispute, the merits of Fairey’s fair use claim were not addressed. Some commentators, however, have argued that the case would have turned primarily on whether Fairey’s use of the photograph was “transformative.” Though this case made headlines, another fair use case, one whose holding has far-reaching implications for artists and others that rely on the doctrine, fell largely under the radar of popular media.

The case of Gaylord v. United Statesi addressed and refined some of the blurry borders surrounding the fair use doctrine, particularly what constitutes a “transformative” work for purposes of fair use. Because the judicial determination of whether use of a copyrighted work in another work is “fair” requires balancing both law and fact, predicting the outcome in a specific set of circumstances is difficult, if not outright impossible. Indeed, the fair use doctrine has been described as “the most troublesome in the whole law of copyright.”ii Accordingly, artists who incorporate copyrighted material into their works often don’t know until a suit arises whether their use will be labeled infringement or protected artistic expression. The uncertainty surrounding the doctrine necessarily increases the risk of using any copyrighted material and artists are beginning to express concern. In Gaylord, the Center for Internet & Society filed an amicus brief on behalf of the Warhol Foundation, the Warhol Museum, Barbara Kruger, Thomas Lawson, Jonathan Monk, Allan Ruppersberg, and eleven law professors urging the court to affirm the lower court’s finding of fair use and reject the standard for “transformative” that it subsequently adopted.

The case involved the Korean War Memorial in Washington DC, in particular a sculpture by artist Frank Gaylord known as The Column, consisting of nineteen stainless steel statues of foot soldiers in staggered formation. Dedicated in 1995, the Memorial was commissioned and funded by the United States and constructed by Cooper-Leckey Architects. Shortly thereafter, amateur photographer and military officer John Alli photographed the monument as a retirement gift for his father, a Korean War veteran. Alli took hundreds of photographs of the sculpture using different angles, lighting, shutter speeds, varying both the time of the year and time of day. The photograph he ultimately chose for his father, which he titled Real Life, captured the monument at dawn during a snowstorm

Alli explained at trial that the he felt the subdued early morning light and falling snow evoked a surreal sensation, drawing the viewer into the photograph and communicating the harsh, freezing conditions soldiers in the Korean conflict were forced to endure. Before Alli began selling prints of his photograph, he reached out to Cooper-Leckey for permission. Though Cooper-Leckey granted a license in exchange for royalties, Gaylord sued him in 2006. Alli settled the dispute by agreeing to give Gaylord 10% of any net sales.

 The photograph was selected in 2002 by the United States Postal Service for use on a stamp to commemorate the Korean War. The Postal Service contacted Alli for the image, and he sold it to them for $1500. Alli suggested that the Postal Service contact both Cooper-Leckey and Gaylord for permission, but they did not contact anyone about licensing. They altered Real Life so as to make it monochromatic and grey, and sold the stamps until 2005 when they decided to retire it.

 In 2006 Gaylord sued the United States for copyright infringement in Federal Claims Court. The court found the United States’ use of the copyrighted material in the stamp qualified as fair use, and Gaylord appealed. The Court of Appeals for the Federal Circuit reversed and remanded the case for an assessment of damages.

 The decision largely turned on whether the Postal Service’s use of the copyrighted sculpture in the stamp was “transformative.” Fair use is determined by balancing four non-exclusive factors that are weighed together with an eye towards the fundamental purposes of copyright.iii The first factor, the purpose and character of the use,iv asks, among other things, whether the second work is “transformative.”vIf it is indeed found to be a transformation of the copyrighted material, the factor will weigh in favor of a finding of fair use.

By ultimately concluding that the Postal Service’s use of Alli’s image of The Column was not fair use, the Court of Appeals narrowed what constitutes a transformative work in the fair use context. The court explained that the use was not transformative because “the stamp did not use The Column as part of a commentary or criticism.”vi This understanding of the meaning of “transformative” poses severe limits on what may now be considered fair use of copyrighted materials. Unlike the Court of Appeals for the Second Circuit in Blanch v. Koonswhich explained that a subsequent work could use copyrighted works as “raw materials” to further creative or communicative objectives and still be considered transformative,vii the Federal Circuit—by narrowing transformative to include only comment or criticism of the copyrighted work—dismisses wholesale a broad range of established artistic practices and ignores the constitutional mandate that grounds U.S. copyright law, namely that exclusive intellectual property rights be granted to authors and inventors for limited times “to promote the progress of science and the useful arts.”viii The intent behind the intellectual property clause is to benefit society and encourage a flourishing of artistic practice by creating incentives. The holding of Gaylord may strangle creative energy and stifle previously protected artistic expression with the ominous threat of legal repercussions while rejecting important and established artistic practices

The idea that by changing context one can radically change the meaning of an object is a well-established notion in modern and contemporary art. Indeed, one landmark work that aptly illustrates the point is Marcel Duchamp’s 1917 workFountain. Probably his most famous readymade, replicas of Fountain (the original was lost) are housed in museum collections the world over. Fountain consists only of a found object the artist installed with no changes apart from his scrawling of “R. Mutt” onto the side. As Duchamp biographer and art critic Calvin Tomkins notes, “it does not take much stretching of the imagination to see in the upside-down urinal’s gently flowing curves the veiled head of a classic Renaissance madonna or a seated Buddha or, perhaps more to the point, one of Brâncuşi’s polished erotic forms.”ix Once the object was placed in an art exhibition, it ceased to be a functional item and was transformed into an object of beauty.

Further, appropriation art, a movement that gained popular ground in the late 1970s, makes broad uses of found images (or photographs of them). Sometimes incorporating images wholesale with little or no alteration, this type of practice again emphasizes that changing the context of an image, from being seen on a billboard to the wall of a gallery, is transformative because the image becomes a work of art. Artist Richard Prince’s work Spiritual America, 1983, appropriated a photograph of a young Brooke Shields, originally the work of commercial photographer Gary Gross, while the work’s title is borrowed from a 1923 photograph by Alfred Stieglitz. The subject of a retrospective at the Guggenheim Museum in 2007, Richard Prince’s influence on art history is undisputed. Unfortunately, because this work and others like it do not explicitly comment on or criticize the incorporated copyrighted material, they could very well be considered infringing under the standard the Federal Circuit has adopted.

Renowned jurist Oliver Wendell Holmes Jr. once stated that:

“[i]t would be a dangerous undertaking for persons trained only to the law to constitute themselves final judges of the worth of pictorial illustrations.”x

Though oft-quoted, his candid and self-aware remark seems to have lost its footing within contemporary copyright jurisprudence. As the boundaries of the copyright “monopoly” continuously expand like a snowball rolling down a mountain, a broad conception of fair use becomes increasingly important to promoting artistic expression. Our contemporary jurists should take heed of Holmes’s remarks as well as consider the constitutional principles on which copyright law is grounded—not exclusively to protect authors and creators, but instead to provide an incentive for individuals to make creative works for the benefit the public.

 This delicate balance requires an interpretation of fair use that allows artists to feel free to “quote” from other works, and it requires judges to acknowledge that perhaps it is the place of art historians, viewers, or artists themselves, to determine whether the intent behind work is transformative. Indeed, art history has long recognized that changing the context of a work changes its meaning: something largely worthless, once altered to become an art object, becomes invaluable. Though no explicit comment or criticism is made about the original work, a new work is created whose transformative nature has been acknowledged by art historians for almost a century. Courts must recognize that people draw creative inspiration from the world around them to make new works that benefit our society, and that world includes other people’s creative endeavors.

i 595 F.3d 1364 (Fed. Cir. 2010).

ii Dellar v. Samuel Goldwyn, Inc., 104 F.2d 661,662 (2nd Cir. 1939).

iii Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 577-78 (1994).

iv 17 U.S.C. § 107 (1) (2006).

v Campbell 510 U.S. at 578-79.

vi Gaylord 595 F.3d at 1373 (Fed. Cir. 2010).

vii Blanch v. Koons 467 F.3d 244, 253 (2nd Cir. 2006) (internal quotation marks and citations omitted).

viii U.S. Const., Art. I, § 8, cl. 8.

ix Calvin Tompkins, Duchamp: A Biography (New York: Henry Holt, 1998). 186

x Bleistein v. Donaldson Lithographing Co. 188 U.S. 239, 251 (1903).

Aimée Scala © Copyright 2011

Defining “Journalist”: Whether and How A Federal Reporter’s Shield Law Should Apply to Bloggers

The National Law Review is proud to announce that  Laura Katherine Layton of  Georgetown University Law Center is one of our Student Legal Writing Contest Winners for March of 2011. Laura’s article focuses on whether there should be a federal reporter’s shield law and whether it should apply to bloggers.

In 2005, New York Times reporter Judith Miller garnered national attention for her refusal to disclose the identity of her source outing Valerie Plame Wilson as an operative of the Central Intelligence Agency. The D.C. Circuit rejected Miller’s claim that the identity of the source was protected by a reporter’s privilege. Her refusal to comply with a grand jury subpoena meant she was in contempt of court, and she spent eighty-five days in jail as a result.[1]

While Miller’s case reignited the public debate of the merits of a reporter’s privilege, the current issue for state and federal courts is defining the scope of the reporter’s shield law. Generally, areporter’s shield law is a “statutory privilege which allows a news gatherer to decline to reveal sources of information”[2] and newsgathering materials. Like the attorney/client and doctor/patient privileges, the reporter’s privilege attempts to foster the flow of information into public discussion.  The aim of the reporter’s privilege is to “increase the flow of information in circumstances in which society wishes to encourage open communication.”[3] The rationale for allowing nondisclosure about a reporter’s confidential source is based on the idea that forcing a reporter to reveal his source will cause  sources to communicate less openly with reporters as a result of  “fear of exposure” and will simultaneously cause “editors and critics to write with more restrained pens” due to “fear of accountability.”[4] The Second Circuit characterized the purpose of shield laws as the “public interest in the maintenance of a vigorous, aggressive and independent press capable of participating in robust, unfettered debate over controversial matters…”[5] To date, thirty-six states and the District of Columbia have enacted reporter shield laws codifying a reporter’s privilege,[6] though the scope of protection varies by state.  Congress has considered adopting a federal shield statute many times in the last forty years but has yet to pass the legislation.[7] Though in Branzburg v. Hayes the Supreme Court refused to recognize a special First Amendment privilege for journalists not to reveal their sources in the grand jury context,[8] it remains unclear whether a reporter’s privilege exists in criminal and civil proceedings.

Most states define the shield law protection by referring to a reporter or traditional news gatherer based on employment with an established media entity.[9] Currently, many courts are grappling with the scope of reporter’s shield laws due to the difficulty of defining who qualifies as a reporter, which is because of the changing nature of journalism—including the rise of internet publication of news by citizen journalists. There is a growing concern on how to define “journalist” so that current, unemployed, or freelance journalists are covered by the shield laws while “pajama-clad bloggers” are not entitled to invoke such a privilege.[10] There must be some limitation on the scope of the privilege; a shield law cannot apply to anyone with the ability to publish a blog on the internet.  As renowned media attorney Floyd Abrams stated, “If everybody’s entitled to the privilege, nobody will get it.”[11] Congress should pass a shield law granting a qualified privilege to persons who gather and disseminate information to the public with a true intent to do so at the outset of the newsgathering process.

If Congress were to draft a federal shield law, the main issue would be centered on how to define journalists. Implicit in that debate would be whether to include bloggers as persons covered by the privilege. Part I examines how state statutes have traditionally defined the privilege and how state courts have determined its scope. Part II analyzes the changing nature of journalism. Part III discusses the arguments in favor of and against including bloggers as journalists for shield law purposes, concluding that bloggers should qualify for protection. Part IV recommends how to appropriately tailor the privilege for citizen journalists publishing online. Part V weighs the costs and benefits of enacting a federal reporter’s shield law. Part VI recommends that Congress adopt a two-part test for a federal shield law for reporters that includes nontraditional journalists.

I.  Defining “Journalist”: Who is covered by Reporter’s Shield Laws

The struggle to define exactly who should be covered by reporter’s shield laws is not new.  Since state shield laws have existed since 1896, few shield laws explicitly include electronic news media. Courts have extended the scope of shield laws beyond only covering reporters working at newspapers to people working in magazines, radio, and television. Because many antiquated state shield laws define the privilege by medium, courts have decided whether publishing electronically meets the statutory definition. For example, California courts had to decide whether a website that conveyed confidential information about new Apple products was protected from divulging its sources by the shield law, which is codified in the state constitution.[12] The appellate court held the online publication constituted a “periodical publication” entitled to protection of the shield law because it published regularly.[13] States have amended their shield laws for advancing technologies of radio, television, and now the internet. Because the medium of communication is constantly changing, the medium of communication should not determine the scope of the privilege.

Instead of defining who qualifies to invoke the reporter’s privilege based upon a particular medium, some states embrace a definition of reporter based on the function of journalism. While some state statutes only provide the reporter’s privilege to persons employed by an established media entity, other states apply to any “person who is or has been directly engaged in the gathering, procuring, compiling, editing, or publishing of information for the purpose of transmission, dissemination, or publication to the public.”[14] State legislatures have rightly extended the privilege to all persons who gather and disseminate news to the public rather than limiting protection to only professional journalists.

Some courts have also embraced an intent standard based upon the function of journalism. In von Bulow, the Second Circuit held the privilege only protected a person who has the intent to disseminate the information to the public at the inception of the newsgathering process.[15] In this case, Andrea Reynolds invoked the reporter’s shield law to cover an unpublished manuscript of a book based on the notes she took as a paralegal to Claus von Bulow, who was charged with murdering his wife. The court rejected the claim that Reynolds’ manuscript and notes were privileged since she had not indicia of a freelance author and did not demonstrate that her intent to use the materials to disseminate the information to the public existed at the beginning of the newsgathering process.[16] The court emphasized a person invoking a journalist’s privileged need not be “associated with the institutionalized press because the ‘informative function asserted by representatives of the organized press is also performed by lecturers, political pollsters, novelists, academic researchers, and dramatists.’”[17] The privilege can be invoked by a novice, according to the Second Circuit; it is not limited to those who have a history of journalism, although “prior experience as a professional journalist may be persuasive evidence of present intent to gather for the purpose of dissemination.”[18]

Other courts have adopted the intent-based test when deciding whether a person protected by a journalist’s privilege. The First Circuit and the Ninth Circuit applied the von Bulow intent test when extending the privilege to a professor[19] and to a non-fiction writer of investigative books. [20] In determining whether the persons invoking the privilege were covered, both circuits analogized the function of an academic or of an author to the reporter’s role—the ultimate purposes are to aid investigative newsgathering. According to the Ninth Circuit: “[t]he journalist’s privilege is designed to protect investigative reporting, regardless of the medium used to report the news to the public. Investigative book authors, like more conventional reporters, have historically played a vital role in bringing to light ‘newsworthy’ facts on topical and controversial matters of great public importance.”[21] Basing its decision on the intent-based inquiry, the First Circuit extended the privilege to academic researchers because they “too are information gatherers and disseminators. Just as a journalist, stripped of sources, would write fewer, less incisive articles, an academician, stripped of sources, would be able to provide fewer, less cogent analyses.”[22]

State courts have also wrestled with whether a reporter’s privilege covers non-traditional journalists, including freelance writers,[23] authors,[24] documentary filmmakers,[25] academics,[26] and independent research consultants.[27] Hawaii is the only state to specifically include whether bloggers are protected by its shield law if certain conditions are met: “Non-traditional news gatherers, e.g., bloggers, are protected if (1) the individual invoking the privilege regularly participates in reporting or publishing news of significant public interest, (2) the person holds a position similar to a traditional journalist or newscaster, and (3) the public interest is served by extending the protection of the statute.” [28]

II.  Defining “Journalist”: The Changing Nature of Journalism

The Supreme’s Courts rejection of the press as the “fourth estate” of government in Branzburg was “remarkably (although unintentionally) prescient. As means of communication become more interactive and accessible to the public the ‘press’ of the twenty-first century is rapidly becoming more difficult to define.”[29] Because of the advent and ubiquity of the Internet, more people are able to contribute to the public discourse. The number of people contributing their ideas and opinions on the Internet has grown exponentially, including the number of blogs and blog-readers. There were over 34.5 million blogs at last count.[30]

While blogs blur the line between online diaries and news reporting, the influence of blogs on the mainstream media and the public dialogue cannot be overemphasized. Matt Drudge, the author of the Drudge Report, is but one example of a person setting the trend of breaking news by blogging.  He does not consider himself a journalist, but his website was the first to break the story of President Clinton’s affair with Monica Lewinsky. His blog also was the first to report that presidential candidate Bob Dole chose Jack Kemp as his running mate in the 1996 election, as well as that CBS fired Connie Chung. Other examples of blogs leading the national discussion include: bloggers recognized Senator Trent Lott’s controversial comments at Strom Thurmond’s one-hundredth birthday celebration, which led Lott’s resignation as Senate Majority Leader; bloggers revealed Dan Rather’s documents about President George W. Bush’s National Guard service were forged;  bloggers uncovered James Frey fictionalized portions of his memoir and also exposed the contents of inappropriate emails sent to House pages by Representative Mark Foley.[31]

Moreover, mainstream media outlets are embracing the changing nature of technology by incorporating the citizen journalism into reporting. Many mainstream media companies support blogs, and many reporters have their own blogs.[32] Most every news website encourages readers to leave comments online, and many mainstream media websites provide links to surveys and responses as well.[33] News organizations encourage members of the public to contribute content for publication by sharing photographs and stories of current events.  CNN promotes citizen journalism by asking viewers to submit pictures and videos of catastrophic weather events such as Hurricane Dennis.[34] Most recently, CNN encouraged people in Egypt to report on the uprisings in the country using Twitter, photographs, or videos.  CNN.com also created iReport, a section of its website “where people take part in the news with CNN. Your voice, together with other iReporters, helps shape how and what CNN covers every day.”[35]When one enters the site, the disclaimer pop-up on the browser declares: “So you know: iReport is the way people like you report the news. The stories in this section are not edited, fact-checked or screened before they post. Only ones marked ‘CNN iReport’ have been vetted by CNN.” [36] As part of a conscious effort to increase its circulation numbers by capitalizing on the popularity of blogs, Gannett, which owns over eighty newspapers around the United States, announced in November 2006 it was preparing to use non-journalists to develop content for its publications.[37]

The nature journalism is evolving; in fact, the notion of an institutional press is diminishing, if not vanishing. The inclusion of citizens as reporters of the news changes the role the mainstream media plays in our democracy.

III.  Should Bloggers Be Included as Journalists?

The purpose of a reporter’s shield law indicates that citizen journalists should be able to invoke the privilege. By allowing bloggers who disseminate information to the public to invoke a privilege to keep sources confidential, the purpose of the privilege is served: “to encourage sources to come forward with information for public debate while, at the same time, preventing both professional and non-profession journalists from becoming agents of the government, criminal defendants, or civil litigants.”[38] The purpose of the First Amendment, and thus journalists, is to enhance democracy through open, free debate. Citizen journalists who publish their content for the general public should qualify for the privilege. Because bloggers serve the essential purpose of disseminating news to the public, Mr. Abrams thinks many should be able to invoke privilege of traditional publishers:“I think a blogger…is not less deserving than a journalist who may communicate with a smaller audience through a small-town newspaper.”[39] According to the media attorney, “There should be protection so long as information was obtained for the purpose of dissemination to the public at large in some sort of analogous way to what journalists do.”[40]

In addition, Supreme Court precedent suggests bloggers should qualify for the privilege. Though at the time of Branzburg the Internet did not exist, the Court stated freedom of the press is “not confined to newspapers and periodicals” or “the large metropolitan publisher” but “necessarily embraces pamphlets and leaflets” and “every sort of publication which affords a vehicle of information and opinion.”[41] Indeed, the Court expressed a special concern for the “lonely pamphleteer who uses carbon paper or a mimeograph…”[42] Today’s version of the lonely pamphleteer is the “pajama-clad” blogger expressing his ideas and opinions in an online publication.

Some people argue that bloggers do not actually engage in journalism, but they are the next extension of the expanding categories of non-traditional journalists. State and federal courts have already found that the journalist’s shield law covers student journalists, professors, authors, and freelancers because these professions perform essentially the function as reporters: to gather and disseminate information to the public. Additionally, freedom of the press “is a right which belongs to the public; it is not the private preserve of those possess the implements of publishing.”[43] Moreover, claiming bloggers should not be able to invoke the privilege because they are “not trained,” do not “work as journalists full-time,” and/or are not “sufficiently dedicated to contributing to the public debate,” seems like a empty criticism at a time when “mainstream media organizations have substantially eroded their own credibility” with scandals such as Jayson Blair’s fabrication of sources and Dan Rather’s report based on inaccurate records. [44]

Many people criticize blogs as “opinion without expertise, without resources, without reporting.”[45] Blogs are often criticized as unreliable since bloggers, unlike journalists, do not have to submit their work to editors for approval before publication.  David Shaw, of the Los Angeles Times, complained “[m]any bloggers…don’t seem to worry much about being accurate. Or fair. They just want to get their opinions—and their ‘scoops’—out there as fast as they pop into their brains.”[46] Other critics carp that it is difficult for readers to differentiate between accurate and inaccurate blogs.[47]

Advocates of citizen journalism respond that many bloggers have incentives to report accurately, and mistakes are corrected as soon as they are posted.[48] Bloggers, like journalists, are liable for defamation; the threat of litigation “has a civilizing influence on the Internet communications by improving the quality of the discourse.”[49] In addition, blogs have the advantage of mustering the knowledge of millions of people, drawing upon the “wisdom of the crowds.” [50] Blogs certainly do not have a “monopoly on error”[51] as demonstrated by defamation suits filed against mainstream media companies.  Bloggers, like journalists, are concerned about their reputations with their readers. When interviewed by the Wall Street Journal, blogger Jeff Jarvis said, “[w]hen I make a mistake, people jump on me like white blood cells on a germ. If I don’t correct it, my reputation’s going to suffer.”[52] Additionally, conditioning the protection of a reporter’s shield on the accuracy of the individual claiming the privilege would be contrary to First Amendment principles espoused in New York Times v. Sullivan as “accuracy is relevant only in defamation actions, and even then there is no strict liability for falsehoods.” [53] Requiring accuracy would be “particularly troubling in the context of blogging, where the benefits of the medium do not come from complete accuracy of each posting but rather in its interactive nature with readers and critics.”[54]

Furthermore, blogs are not the only publications that are regarded with differing levels of trust; mainstream media outlets are subject to the same criticism.[55] Many critics object that major media entities are “too close to the corporations and politicians they cover to be trusted as watchdogs.”[56] Ironically, it may be that the escalation in the number and popularity of blogs is due to the public’s lack of confidence in mainstream journalism.[57] While the USA Today may be a more trusted source than the National Enquirer, reporters working for either publication “equally claim the title of ‘journalist.’”[58] Courts have refused “to segregate the media into tiers based on perceived quality or trustworthiness”[59] and should continue to do so when analyzing whether the reporter’s privilege applies to citizen journalists. The O’Grady court recognized the danger of a court evaluating the quality of journalism and thus “decline[d] the implicit invitation to embroil ourselves in questions of what constitutes ‘legitimate journalis[m]. The shield law is intended to protect the gathering and dissemination of news.”[60] Because the court could “think of no workable test or principle that would distinguish ‘legitimate’ from ‘illegitimate’ news,” it rejected “[a]ny attempt by courts to draw such a distinction” and warned that an attempt to draw such a distinction “would imperil a fundamental purpose of the First Amendment, which is to identify the best, most important, and most valuable ideas not by any sociological or economic formula, rule of law, or process of government, but through the rough and tumble competition of the memetic marketplace.”[61]

In its discussion of journalism, the California court also denied limiting the privilege to publications on matters of public concern. Though some have proposed a reporter’s privilege be available only to persons who publish information involving matters of public concern, the “administrative and theoretical difficulties”[62]of this approach are overwhelming. In the context of defamation law, the Supreme Court spent over fifteen years endeavoring to make a legal distinction based on “whether the content is a matter of public concern or newsworthy.”[63] According to Justice Douglas, “‘[P]ublic affairs’ includes a great deal more than merely political affairs. Matters of science, economics, business, art, literature, etc., are all matters of interest to the general public. Indeed, any matter of sufficient general interest to prompt media coverage may be said to be a public affair.”[64]It is imprudent to adopt an amorphous standard to limit the scope of a reporter’s privilege since it has been unworkable in the defamation context.

IV.  Defining “Journalist”: How to Include Bloggers in a Federal Shield Law

Since it is “neither possible nor prudent to limit a reporter’s privilege to professional journalists,”[65] a qualified privilege should be available to persons who disseminate information to the public with a real intent to do so at the inception of the newsgathering process.  Bloggers should be protected by reporter’s shield laws based on the function of journalism. Courts should examine the evidence of a blogger’s intent to publish in the same fact-specific manner as the court in von Bulow when it found no indicia that Andrea Reynolds was a freelance author.

In the 2009 version of a federal shield law, the Senate rightly defined “covered person” as a person

(i) with the primary intent to investigate events and procure material in order to disseminate to the public news or information…or other matters of public interest, [who] regularly gathers, prepares, …writes, edits, reports or publishes on such matters…

(ii) has such intent at the inception of the process of gathering the news or information sought; and

(iii) obtains the news or information sought in order to disseminate the news or information by [any] means…[66]

The “intent to disseminate” test is grounded in the rationale of the privilege— “to provide protection for the unfettered dissemination of information to the public.”[67] Those who contribute to the public discourse should be able to avail the privilege. However, one weakness of the standard is that it “focuses on the intent of the reporter at the time it was received.” [68] Most veteran reporters in the nation would “admit that many of their stories come to them when they are not even looking for them…Reporters often have no idea at the time they are collecting information whether they will in fact share that information with the public.”[69] Using the intent test alone, it is unclear whether a “reporter who has a friendly conversation with an acquaintance and then later decides to pursue a story based on what she learned in that conversation”[70] would be protected by the privilege. Although intended to disqualify a savvy person who “conveniently” characterizes herself as a journalist in order to invoke the privilege,  the von Bulow intent test could also have the “effect of denying the privilege to even the most established and dedicated full-time journalists.”[71]

This is why the federal statute should include a two-part test for the definition of a journalist: the traditional definition and the function test.[72] The first definition of a journalist should be the traditional definition that includes an association with a media entity, which would avoid the aforementioned problem of professional journalists possibly not being able to invoke the privilege. The second definition of journalist should be the intent-based test based on the function of journalism, which would cover bloggers and other non-traditional journalists. The test would be a fact-based inquiry like the close examination of Reynolds’s intent to publish in von Bulow. This tough standard would ensure limitations on the privilege rather than extending it to anyone with a computer and an Internet connection.

The qualified privilege could be overcome by showing three elements: “(1) the desired information is critical to the maintenance of a party’s claim, defense, or proof of an issue; (2) the information sought cannot be obtained by alternative means; and (3) there is a compelling interest in the information that outweighs the public’s interest in the free flow of information.”[73] The Senate essentially created the same parameters for a qualified privilege in its proposed legislation in 2009.[74] A qualified privilege would “soften the blow of an expansive definition of those persons and entities entitled to invoke it.”[75]

The federal reporter’s shield law should also include narrow exceptions to the privilege for “circumstances in which countervailing societal interests outweigh any societal interest in preserving the privilege.” This includes circumstances when a subpoena is “directed to someone who witnessed or participated in a criminal or tortious activity (exclud[ing] ‘leaks’ of classified or national security information).” [76] Another exception would include times when a “direct and imminent threat to national security warrants compelling testimony”[77] or when “reasonably certain death or substantial bodily harm” may occur.[78] These three basic exceptions were also outlined in the Senate’s most recent attempt to pass a federal reporter shield law.[79]

Most courts have held that journalists who participate in a crime are barred from invoking the privilege.[80] Accordingly, this exception does not harm the underlying purpose of the privilege since there is “no value in encouraging sources to commit crimes in front of journalists.”[81] Leaking classified information should not fall under the crime exception since “leaks of government information, whether classified or not, have become an essential means by which the public learns about government activities.” [82] Since current protection is inadequate for whistleblowers, and “as a result, leaking information to the press is often the only realistic means of shedding light on questionable or illegal government practices,”[83] a privilege protecting whistleblowers encourages such persons to come forward serves the public interest. Prosecuting those who leak national security or other classified information is not hindered by a reporter shield law.[84]

Though most fears that a federal shield law would undermine national security are misplaced, there should be an exception to the privilege “if the reporter’s testimony would help prevent a direct and imminent threat to national security.” [85] The Supreme Court recognized an exception  for “imminent threat” to national security in the Pentagon Papers case, which concluded that the “presumption against prior restraints could not be overridden absent an immediate and serious threat to national security.” [86] This is a reasonable standard that should apply to the reporter’s privilege.

Finally, an exception for preventing “death or bodily harm to another human being applies to other testimonial privileges, including the attorney-client privilege.”[87] It is prudent to extend this exception to the reporter’s privilege “because in such cases the public’s interest in the information far outweighs the public’s interest in encouraging anonymous sources from coming forward.”[88]

V.  The Costs and Benefits of a Federal Reporter Shield Law

The most significant cost of any privilege is that it deprives courts of evidence. Critics claim that a privilege closes the courts for individuals harmed as a result of the free press, that a shield creates an exception to courts as a place to redress injury.[89] However, defamatory statements are actionable regardless of the enactment of a shield law.  There is no privilege if the media caused the damage.[90]Moreover, some states “explicitly reject the privilege when a media entity is a party to the litigation, a situation that typically occurs in defamation cases,” while others supply the media with some “protection by requiring a plaintiff to demonstrate that the information is important for her case and that she has attempted to obtain the information through other means.”[91]

According to opponents of the privilege, it benefits the media; enacting a federal shield law would lead to accountability problems if reporters are not forced to reveal anonymous sources.[92] The purpose of the privilege is to help the free flow of information to the public rather than aid the press. The privilege benefits the public and whistleblowers and does not hinder law enforcement. In fact, adopting a reporter’s privilege is viewed “as a necessary component of a larger criminal law reform, based on the hope that with this new protection reporters would be more willing to publish stories revealing criminal activity. The states’ enthusiasm for shield laws suggests that such laws enhance rather than detract from the ability of law enforcement to fight crime.” [93] Not having a federal privilege actually hinders attorneys general. Federal and state privileges should mirror each other since reporters do not know where a subpoena will come from. A federal reporter shield law creates certainty for reporters and attorneys. [94]Thirty-five states with shield laws submitted an amici curiae brief to the Supreme Court of the United States arguing for a grant of certiorari in Judith Miller’s case because the lack of a federal  privilege undermines the judicial and legislative determinations of forty-nine states and the District of Columbia.[95]

The irony of not enacting a federal shield law in an age of Wikileaks means that websites such as Wikileaks are more likely to receive information and documents than a reporter, who would verify the information, edit statements, and redact necessary portions. Without a reporter’s shield law, it is likely that sources will go to Wikileaks, which sends information directly to the public and is not subject to professional ethics. Wikileaks is empowered if reporters are not allowed to protect their sources. [96]

VI.  Conclusion

A federal shield law for reporters and citizen journalists would benefit the public by protecting whistleblowers and encouraging anonymous sources to reveal information to responsible disseminators of the news. Because the purpose of the privilege is to help the flow of information to the public, Congress should pass a federal shield reporter’s shield law that protects traditional and citizen journalists. The privilege should not simply cover members of the traditional press, for “[t]he First Amendment does not guarantee the press a constitutional right… not available to the public generally.”[97] Congress should combine the traditional definition of a reporter associated with a media entity with an intent-based inquiry based on the function of journalism to create a federal reporter’s shield law to enhance the First Amendment and encourage the free flow of information in our democracy.


[1] See In re Grand Jury Subpoena, Judith Miller, 397 F.3d 964, 976-980 (D.C. Cir. 2005); Key Players in the CIA Leak Investigation, http://www.washingtonpost.com/wp-srv/politics/special/plame/Plame_KeyPla…

[2]81 Am. Jur. 2d Witnesses § 526 (2010).

[3] Mary-Rose Papandrea, Citizen Journalism and the Reporter’s Privilege, 91 Minn. L. Rev. 515, 535-36 (2007) (discussing the purpose of the privilege).

[4] Branzburg v. Hayes, 408 U.S. 665, 721 (1972) (Douglas, J., dissenting).

[5] von Bulow v. von Bulow, 811 F.2d 136, 144 (2d Cir. 1987).

[6] David Kohler & Lee Levine, Media and the Law 529 (Matthew Bender 2009).

[7] See, e.g.,Free Flow of Information Act of 2009, S.448, 111th Cong. § 1-11 (2009); Free Flow of Information Act of 2007, S.2035, 110th Cong. § 1-8 (2007).

[8] Branzburg, 408 U.S. at 682.

[9] See, e.g., Ala. Code § 12-21-142 ; 10 Del.C. § 4320 (4).

[10] See In re Grand Jury Subpoena, Judith Miller, 397 F.3d  at  976-980 (Sentelle, J., concurring) (noting the difficulties of determining who qualifies as a reporter and expressing concern about “whether the stereotypical ‘blogger’ sitting in his pajamas at his personal computer posting on the World Wide Web” would be entitled to invoke the privilege).

[11] Floyd Abrams Explains Why He Should Lose, http://www.pajamasmedia.com/instapundit-archive/archives/019677.php

[12] Cal. Const. art. I, § 2(b).

[13] O’Grady v. Superior Court, 44 Cal.Rptr.3d 72 (Cal. Ct. App. 2006).

[14] Minn. Stat. § 595.023 (2004).

[15] von Bulow, 811 F.2d  at 143.

[16] Id. at 145.

[17] Id. at 145 (quoting Branzburg v. Hayes, 408 U.S. 665, 705 (1972)).

[18] Id. at 144.

[19] Cusumano v. Microsoft Corp., 162 F.3d 708, 714 (1st Cir. 1998).

[20] Shoen v. Shoen, 5 F.3d 1289, 1293 (9th Cir. 1993).

[21] Id. at 1293.

[22] Cusumano, 162 F.3d at 714.

[23] See People v. Von Villas, 13 Cal. Rptr. 2d 62, 78-79 (Cal. Ct. App. 1992) (holding California privilege applied to freelance author ).

[24] See e.g., Shoen, 5 F. 3d at 1290-91.

[25] See Silkwood v. Kerr-McGee Corp., 563 F.2d 433, 436-37 (10th Cir. 1977) (holding privilege applied to documentary filmmaker whose “mission…was to carry out investigative reporting for use in the preparation of a documentary film”).

[26] See Cusumano, 162 F.3d at 714.

[27] See Summit Tech., Inc. v. Healthcare Capital Group, Inc., 141 F.R.D. 381, 384 (D. Mass. 1992)(holding independent research consultant was “engaged in the dissemination of investigative information to the investing business community” on “matters of public concern,” and was therefore “entitled to raise the claim of privilege”).

[28] See Privilege Compendium, http://www.rcfp.org/privilege/index.php?op=browse&state=HI

[29] Papandrea, supra note 3, at 523.

[30] Id.

[31] See id.

[32] See e.g, Ezra Klein’s blog, Economic Policy, and Lots of It, http://voices.washingtonpost.com/ezra-klein/.

[33] See e.g., http://www.nytimes.com/; http://www.washingtonpost.com/.

[34] See cnn.com/.

[35] http://ireport.cnn.com/.

[36] See id.

[37] See Papandrea, supra note 3, at 532.

[38] Id. at 585.

[39] Floyd Abrams, supra note 13.

[40] Id.

[41] Branzburg, 408 U.S. at 704.

[42] Id.

[43] State v. Buchanan, 436 P.2d 729, 731(Or. 1967).

[44] Papandrea, supra note 3, at 573-74.

[45] See id., at 528.

[46] Id.

[47] Id.

[48] See id.

[49] Id.at 530.

[50] See Papandrea, supra note 3, at 529.

[51] See id. at 530.

[52] See id. at 529.

[53] Id., at 576.

[54] Id.

[55] Id.at 530.

[56] See Papandrea, supra note 3,at 524.

[57] Id.

[58] Id.at 530.

[59] Id.

[60] O’Grady, 44 Cal.Rptr.3d at 97.

[61] Id.

[62] Papandrea, supra note 3, at 578.

[63] Id.

[64] Gertz v. Robert Welch, 418 U.S. 323, 357 (1974) Douglas, J. dissenting).

[65] Papandrea, supra note 3, at 520.

[66] Free Flow of Information Act of 2009, supra note 7.

[67] Papandrea, supra note 3, at 572.

[68] Id.

[69] Id.

[70] Id.

[71] Id.at 573.

[72] Interview with Kurt Wimmer, partner, Covington & Burling, in Washington, D.C. (Dec.17, 2010).

[73]Papandrea, supra note 3,  at 584.

[74] See Free Flow of Information Act of 2009, supra note 7.

[75] Papandrea, supra note 3, at 585.

[76] Id.

[77] Id.at 520-21.

[78] Id. at 588.

[79] See Free Flow of Information Act of 2009, supra note 7.

[80] Papandrea, supra note 3, at 587.

[81] Id.

[82] Id. at 588.

[83] Id.

[84] See id.

[85] Id.at 588-89.

[86] Papandrea, supra note 3, at 589.

[87] Id.

[88] Id.at 589-90.

[89] Interview with Mark Grannis, managing partner, Wiltshire & Grannis, in Washington, D.C. (Dec. 8, 2010).

[90] Interview with Kurt Wimmer, supra note 79.

[91] Papandrea, supra note 3, at 548.

[92] Interview with Mark Grannis, supra note 96.

[93] Papandrea, supra note 3, at 535.

[94] Interview with Kurt Wimmer, supra note 79.

[95] Brief of the States of Oklahoma, et al. as Amici Curiae in Support of the Petitions for Writs of Certiorari, Cooper v. United States, 545 U.S. 1150 (2005), denying cert. to In re Grand Jury Subpoena, Judith Miller, 397 F.3d 964 (D.C. Cir. 2005).

[96]Interview with Kurt Wimmer, supra note 79.

[97] Branzburg, 408 U.S. at  684.

© Copyright 2011 Laura Katherine Layton

The "Initial Interest Confusion" Test – Analysis and Proposal for a Sensible Formulation for Use on the Internet

The National Law Review is proud to announce that Jaclyn Coronado Sitjar of Saint Louis University School of Law is one of our Student Legal Writing Contest Winners for March of 2011. Jaclyn’s article focuses on the element of likelihood of consumer confusion which is the crux of many trademark infringement claims.

Introduction

The Internet facilitates online commerce and provides a wealth of information to consumers by allowing users to search for a product or brand and to receive results, suggestions, and advertisements.  Internet consumers using search engines are familiar with search-based advertising, where advertisements appear next to search results.  Google provides an advertising service, AdWords.[i]AdWords allows advertisers to bid on search terms, called keywords, and then Google links those keywords to the advertiser’s advertisements or hyperlinks.[ii]When an Internet consumer searches for the keyword the advertiser purchased, the sponsored link or advertisement is triggered and appears either above or to the right of the organic search results.[iii] Other search engines including Netscape and Excite use programs similar to Google AdWords to allow advertisers to either bid for or purchase specific search terms.[iv]

During the first half of 2010, U.S. Internet advertising revenue broke a new half-year record with U.S. Internet advertisers spending $12.1 billion.[v] The average American spends more than sixty hours a month online and 55% of American adults use the Internet daily.[vi] With increasing Internet advertising and use, the possibility of consumer confusion exists on the Internet.  Advertisers can buy keywords related to their line of business, which may include buying a competitor’s trademark.  For example, if Advertiser A buys Competitor B’s trademark as a keyword, then an Internet search for Competitor B’s product will trigger Advertiser A’s ads in a list of sponsored links along the search results.  This example presents a possibility of consumer confusion on the Internet.[vii] One way to alleviate Internet consumer confusion is through the court’s regulation of trademarks in metatags, domain names, and keyword-sponsored advertising and the adoption of the initial interest doctrine.[viii]

I.  Background Information

The Lanham Act of 1946 federally regulates trademarks by creating a registration system for marks used in U.S. commerce and providing causes of action for the infringement of both registered and unregistered marks.[ix] Under the Lanham Act, a trademark is “any word, name, symbol, or device, or any combination thereof . . . to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods.”[x]Trademark law serves two primary purposes:  (1) to protect the trademark owner’s private interests of the resources and efforts invested into establishing trademarks and (2) to protect the public by reducing the likelihood of consumer confusion by prohibiting misleading trademark practices.[xi]

Section 43 of the Lanham Act defines trademark infringement of unregistered trademarks, which is a cause of action allowing trademark owners the right to bring a civil suit against anyone who “uses” another’s trademark “in commerce” when such use is likely to confuse or deceive consumers in advertising or promotion.[xii] Section 32 of the Lanham Act is the provision for trademark infringement of a registered trademark.[xiii] Although the Lanham Act provides for protection against infringement of both registered and unregistered marks, courts and litigants tend to look to Section 43, which also protects unfair methods of competition, e.g. false designation of origin, sponsorship, or approval.[xiv] Courts interpret both Section 32 and Section 43 to require a plaintiff to establish three elements for a successful trademark infringement action.[xv] First, the plaintiff shows a valid trademark entitled to protection under the Lanham Act.[xvi] Second, the plaintiff shows the defendant used the plaintiff’s mark or a similar mark in commerce.[xvii] Third, the plaintiff must prove the defendant’s use will create a likelihood of confusion.[xviii]

A.  Use in Commerce

At issue in many online trademark infringement cases is the second element of the infringement analysis, use in commerce.[xix] The Lanham Act defines “use in commerce” as the bona fide use of a mark either on goods or services.[xx] In the offline context, selling a product with another’s trademark affixed to the carton is an example of sufficient use in commerce.[xxi] In the online context without tangible products to affix trademarks to, courts have had to determine Internet-specific issues such as whether domain names including competitor trademarks or using metatags of a competitor’s trademark constitute sufficient use in commerce.[xxii]With the rise in search-based advertising,[xxiii] the most recent issue with online use in commerce is buying and selling trademarks as keywords.  In Rescuecom Corp v. Google Inc., the Second Circuit Court of Appeals recently ruled that buying another’s trademark through Google’s advertising service AdWords constitutes use in commerce.[xxiv] Rescuecom aligned the Second Circuit with the majority of other circuits finding that a defendant’s use of plaintiff’s trademarks to trigger keyword advertising is sufficient use in commerce.[xxv]

B.  Likelihood of Confusion

The final element, likelihood of consumer confusion, forms the crux of most trademark infringement claims.[xxvi] Courts employ a multifactor test to determine the likelihood of confusion by applying a version of the eight factors established by the Ninth Circuit in AMF, Inc. v. Sleekcraft Boats:

(1) similarity of the conflicting marks; (2) proximity of the two companies’ products or services; (3) strength of the plaintiff’s mark; (4) marketing channels used by the two companies; (5) degree of care likely to be exercised by purchasers in selecting goods; (6) defendant’s intent when selecting the mark; (7) evidence of actual consumer confusion; and (8) likelihood of expansion of product lines.[xxvii]

The multifactor test is flexible and other circuits may apply fewer or more factors.[xxviii] Whatever factors a court employs, the ultimate test focuses on whether defendant’s use is likely to confuse or deceive customers into thinking there is some sponsorship between the trademark owner and the infringing mark.[xxix]

Usually courts determine likelihood of confusion at the time the consumer makes the purchase.  However, sometimes circumstances arise where the consumer is actually confused before making the purchase.  For example, an Internet consumer may only be confused into visiting a website, not into actually purchasing a product.  A consumer could click on an ad triggered by a keyword containing the competitor’s trademark.  Since the traditional likelihood of confusion standard does not translate well to such keyword cases, some courts have turned to initial interest confusion.

II.  Initial Interest Confusion

A.  Introduction to Initial Interest Confusion

Initial interest confusion is the temporary, pre-sale confusion that occurs when a consumer is drawn to a product believing it to be affiliated with another company because the product somehow evokes that company’s trademark.[xxx] Initial interest confusion is a judicially created doctrine applied where a product generates initial customer interest by using another’s trademark, even if the customer never actually buys the infringing product.[xxxi] Courts applying initial interest confusion can hold defendants liable based on an unfair “bait-and-switch theory” for practices that “affect the buying decisions of consumers in the market for the goods, effectively allowing the competitor to get its foot in the door by confusing consumers.”[xxxii]

The Second Circuit first developed initial interest confusion in 1975 in Grotrian v. Steinway & Sons after finding the traditional likelihood of confusion analysis insufficient to hold the culpable defendants liable.[xxxiii] In Grotrian, a German corporation sold pianos under the trade name “Grotrian-Steinweg” which competed with the well-known piano manufacturer Steinway & Sons.[xxxiv] The district court applied the traditional likelihood of confusion test with special focus on the “degree of likely consumer care” factor.[xxxv] Although expensive piano consumers have a high sophistication level, this sophistication did not eliminate the possibility of consumer confusion between the similar marks.[xxxvi] The court coined the initial interest confusion theory by noting that a potential Steinway buyer might initially be misled to the less expensive Grotrian-Steinweg, which injures Steinway.[xxxvii] The issue was “not the possibility that a purchaser would buy a Grotrian-Steinweg thinking it was actually a Steinway, but rather that, by virtue of “initial confusion,” the “‘Grotrian-Steinweg’ name … would attract potential customers based on the reputation built up by Steinway in this country for many years.”[xxxviii] The consumer’s confusion occurred before the purchase when a consumer would initially afford Grotrian-Steinweg pianos positive credibility because of the consumer’s mental association with the Steinway & Sons mark, regardless of whether the consumer actually purchased a Grotrian-Steinweg piano or not.[xxxix] Therefore, the Second Circuit found the absence of point-of-sale confusion was irrelevant because harm resulted from the initial interest confusion.[xl]

The Second Circuit used the same rationale twelve years later in Mobil Oil Corp. v. Pegasus Petroleum Corp., holding defendant’s “Pegasus Petroleum” name for an oil trading company infringed on plaintiff’s trademarked flying horse logo.[xli] There was a likelihood of confusion “not in the fact that a third party would do business with Pegasus Petroleum believing it was related to Mobil, but rather in the likelihood that Pegasus Petroleum would gain crucial credibility during the initial phases of a deal.”[xlii]

Since Grotrian and Mobil, other circuits have applied initial interest confusion to trademark infringement cases.[xliii] With the rise of the Internet, courts also apply initial interest confusion in the online context.[xliv] The landmark case on online initial interest confusion is Brookfield Communications, Inc. v. West Coast Entertainment Corp.[xlv] Plaintiff Brookfield Communications offered an Internet software database of the entertainment industry using the trademark “MovieBuff.”[xlvi] Brookfield claimed trademark infringement against defendant West Coast’s use of the domain name “moviebuff.com” and the term “MovieBuff’ in metatags for its own entertainment industry database.[xlvii] Metatags are lines of code in a website’s Hyper Text Mark-Up Language (HTML) invisible to the internet user that older search engine technologies used to compile and order search results lists.[xlviii] The Ninth Circuit held for Brookfield, finding initial interest confusion is likely to result from West Coast Entertainment’s metatag use.[xlix]Internet users searching for Brookfield’s MovieBuff product may discover West Coast’s website and, finding a free database similar to Brookfield’s product, the user may “simply decide to utilize West Coast’s offerings instead.”[l] This is actionable initial interest confusion “in the sense that, by using ‘moviebuff.com’ or ‘MovieBuff’ to divert people looking for ‘MovieBuff’ to its website, West Coast improperly benefits from the goodwill that Brookfield developed in its mark.”[li]

B.  Criticism and Proposal for Courts Applying Initial Interest Confusion

Brookfieldwas a controversial decision that has been criticized by scholars and judges.[lii] In reaching its conclusion, the Ninth Circuit did not employ the eight-factor Sleekcraft test.[liii] Instead, the court stated “the traditional eight-factor test is not well-suited for analyzing the metatags issue,” then considered only whether the metatags caused initial interest confusion.[liv] This departure from the likelihood of confusion test sparked criticism over whether initial interest confusion is a viable theory to find trademark infringement liability.[lv]

Another criticism is that unlike the earlier offline cases ofGrotrian and Mobilinvolving both the presence of confusion and the misappropriation of goodwill in famous marks[lvi]Brookfield found initial interest confusion merely on the potential that West Coast might receive some benefit from Brookfield’s mark.[lvii]Another common criticism of initial interest confusion is there is no real economic justification for its application, especially online where there is only a de minimiscost to consumers to click back and forth between websites.[lviii] However, because the internet affords a plethora of advertising techniques ranging from metatags to keyword advertising, the online consumer may actually be confused more often than the offline consumer.[lix] Furthermore, Rescuecom shows that with courts in agreement that using trademarks in these contexts is actionable trademark use, infringement claims will survive summary judgment, urging some standard of uniformity among courts applying initial interest confusion.[lx]

In response to this criticism, the Second, Third, Sixth, Seventh, Ninth and Tenth Circuits have recognized online initial interest confusion.[lxi] Just as courts apply different variations of the likelihood of consumer confusion tests,[lxii] courts are also applying different variations of initial interest confusion analysis.[lxiii] Circuit courts and district courts within these circuits are even applying different variations of initial interest confusion.[lxiv] This paper organizes the conundrum of initial interest confusion by three different approaches used by the courts:  (1) Engaging in the entire traditional likelihood of confusion analysis and then considering initial interest confusion as a separate factor, (2) Only considering initial interest confusion or giving undue weight to diversion, and (3) Analyzing initial interest confusion within the “evidence of actual confusion” factor or “customer care” factor.

1.  Courts analyzing initial interest confusion separately before or after the traditional likelihood of confusion test

Courts in the Second, Third, Sixth and Ninth Circuits analyze initial interest confusion separately from the traditional likelihood of confusion analysis.[lxv] These courts either assess initial interest confusion before or after the traditional likelihood of confusion factors.  In the Second Circuit, Savin Corp. v. The Savin Group involved a domain name dispute.[lxvi] The Polaroid factors are the eight factors that the Second Circuit applies to determine whether there is a likelihood of confusion in a trademark infringement case.[lxvii] The Savin court considered initial interest confusion separately after the Polaroid analysis because it “does not fall neatly under any of the Polaroid factors.”[lxviii] The Savin court relied on precedent in Bihari v. Gross, which required a showing of intentional deception before finding initial interest confusion.[lxix] Because the plaintiff had failed to raise a triable issue of fact on either a likelihood of confusion or intentional deception, the Second Circuit affirmed the district court’s summary judgment to the defendant.[lxx]

In Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., the Third Circuit assesses all ten Lapp factors and then analyzes initial interest confusion.[lxxi] The Lapp factors are the Third Circuit’s ten factors used to determine likelihood of confusion in trademark infringement cases.[lxxii] Furthermore, all Lapp factors should be considered whether a plaintiff alleges initial interest confusion, point-of-sale confusion, or both.[lxxiii] Two district courts in the Third Circuit addressed initial interest confusion in keyword advertising cases with the District Court of New Jersey following Checkpoint and the Eastern District of Pennsylvania deviating from Checkpoint.[lxxiv] The District Court of New Jersey in 800-Jr Cigar, Inc. v. Goto.com, Inc. followed Checkpoint by applying all ten Lapp factors and then engaged in a more comprehensive initial interest confusion analysis.  [lxxv] The court looked at (1) product relatedness, (2) the level of care exercised by consumers in making purchasing decisions, (3) the sophistication of the purchaser/consumer; and (4) the intent of the alleged infringer in adopting the mark.[lxxvi] The court ultimately found genuine issues of material fact in four of the ten Lapp factors and the impact, if any, of initial interest confusion and denied both parties’ motions for summary judgment.[lxxvii]

Conversely, the court for the Eastern District of Pennsylvania in the Third Circuit declined to extend initial interest confusion in keyword advertising in JG Wentworth v. Settlement Funding LLC.[lxxviii] JG Wentworth alleged Settlement Funding LLC’s purchase of the keyword “JG Wentworth” from Google AdWords for sponsored link advertisements and using JG Wentworth’s trademarks as metatags in Settlement Funding LLC’s websites caused initial interest confusion.[lxxix] Instead of applying the Lapp factors, the court hastily decided there was no likelihood of confusion and no trademark infringement because Settlement Funding LLC’s website link was “separate and distinct” from JG Wentworth’s website link, therefore eliminating potential consumers from the “opportunity to confuse defendant’s services, goods, advertisements, links or websites for those of JG Wentworth’s.”[lxxx]

Since Brookfield, the Ninth Circuit has encountered a variety of cases alleging initial interest confusion on the Internet.[lxxxi] In the Internet context, the Ninth Circuit has applied its Sleekcraft factors before addressing initial interest confusion in trademark infringement cases involving a domain name, keyword advertising, and most recently with Google’s AdWords program.[lxxxii] However, the Ninth Circuit has also held that in the Internet context, the three most importantSleekcraft factors are (1) the similarity of the marks, (2) the relatedness of the goods or services, and (3) the parties’ simultaneous use of the Web as a marketing channel.[lxxxiii] These three factors have been dubbed the “controlling troika” or the “internet trinity.”[lxxxiv] When the Internet trinity factors suggest likely confusion, the other factors must “weigh strongly” against a likelihood of confusion to avoid finding infringement.[lxxxv]

For example, in Interstellar Starship Services, Ltd. v. Epix, Inc., the plaintiff alleged that the defendant’s domain name caused a likelihood of initial interest confusion.[lxxxvi] The Ninth Circuit affirmed the district court’s holding of no likelihood of initial interest confusion, explicitly stating that the district court correctly applied all Sleekcraft factors instead of just the internet trinity factors.[lxxxvii] However, courts have interpreted Interstellar to engage in a type of burden-shifting analysis between the internet trinity factors and the rest of theSleekcraft factors.[lxxxviii] After finding the internet trinity factors favor a plaintiff, the burden shifts to the defendant to prove the remaining factors “weigh strongly against a likelihood of confusion.”[lxxxix] This was seen in Perfumebay.com Inc. v. eBay Inc. with Perfumebay.com seeking declaratory judgment that its various forms of the mark “Perfumebay” did not infringe eBay’s trademark.[xc] The Ninth Circuit affirmed the district court’s holding that a likelihood of consumer confusion and initial interest confusion existed.[xci] There was a likelihood of consumer confusion because the trinity factors (strong similarity between the marks “Perfumebay” and “eBay,” both parties used the internet as a marketing channel, and both parties sold similar products) weighed strongly in eBay’s favor and the plaintiff could not outweigh this showing with any of the other Sleekcraftfactors.[xcii]

The Sixth Circuit, like the Ninth Circuit, applies the Internet trinity factors and the other remaining five factors from its traditional likelihood of confusion test.[xciii] InPaccar Inc. v. TeleScan Technologies, L.L.C., the trucking company Paccar claimed trademark infringement against TeleScan Technologies, the owner of a used truck locator website, based on Paccar’s trademarks in its domain names and meta tags.[xciv] After the district court granted a preliminary injunction against the defendants, Sixth Circuit affirmed the preliminary injunction due to Paccar’s demonstration of “a likelihood of confusion and, thus, a strong likelihood of success on the merits of its trademark infringement claim.”[xcv] Central to its holding, the court relied on the internet factors of mark similarity, relatedness of goods or services, simultaneous use of the Internet as a marketing channel, without relying much on the other likelihood of confusion factors.[xcvi]

2.  Courts analyzing only initial interest confusion or giving undue weight to diversion

Some courts found a likelihood of confusion because of initial interest confusion without engaging in the traditional multi-factor analysis or give undue weight to diversion in finding a likelihood of ocnfusion exists.[xcvii] At least one district court is not applying any of the factors tests and instead is relying solely on the initial interest doctrine.[xcviii] In Morningware, Inc. v. Hearthware Home Products, Inc., the court for the Northern District of Illinois found the plaintiff had sufficiently alleged evidence of initial interest confusion to deny the defendant’s Rule 12(b)(6) Motion to Dismiss.[xcix] The defendant had purchased plaintiff’s trademark and variations of plaintiff’s trademark as a keyword from Google’s AdWords program.[c] In finding a likelihood of confusion, the Morningware court relied on a previous Seventh Circuit ruling in Promatek Indus., Ltd. v. Equitrac Corp.[ci]

Promatek involved analogous facts to Morningware, finding a likelihood of confusion when the defendant used the plaintiff’s trademarks in the defendant’s website metatags.[cii] In Promatek, the Seventh Circuit recognized that initial interest confusion can arise even if consumers who are misled to a website are only briefly confused.[ciii] Under Promatek, “What is important is not the duration of the confusion, it is the misappropriation of Promatek’s goodwill.”[civ] InMorningware, “Hearthware’s advertisement does not mention Hearthware and the consumer who views the Hearthware advertisement searched for the term ‘Morningware,’ the advertisement could mislead consumer to believe that the link is associated with Hearthware.”[cv] Following Promatek, Morningware had sufficiently alleged initial interest confusion.[cvi] In reaching this conclusion, the court did not engage in any likelihood of confusion analysis.  The court cited seven factors to assess for the likelihood of consumer confusion, but then spent the rest of the likelihood of confusion discussion only on Promatek.[cvii]

The Tenth Circuit in Australian Gold, Inc. v. Hatfield is an example of a court giving undue weight to diversion.[cviii] Defendant Hatfield sold plaintiff Australian Gold’s (“AG”) tanning products over the internet without AG’s authorization.[cix] Hatfield used AG’s trademarks in website metatags and paid a search engine for search result priority.[cx] The Tenth Circuit affirmed the district court’s finding Hatfield liable for trademark infringement for using AG’s trademark within Hatfield’s metatags.[cxi] The court found that the defendant’s intent in using the marks, similarity of products and manner of marketing, the degree of care consumers were likely to exercise, and mark strength all weighed in plaintiff’s favor.[cxii] However, the court went a step further and found that diversion was inherently damaging even though the plaintiffs did not offer any evidence of actual confusion.[cxiii] The court found that “the original diversion of the prospective customer’s interest to a source that he or she erroneously believes is authorized” is a harm caused by initial interest confusion.[cxiv]

Additionally, the court’s treatment of Hatfield’s website disclaimers bolstered the court’s belief that diversion is inherently damaging.  Hatfield’s disclaimers disavowed any connection with plaintiffs and clarified the true source of the website.[cxv] Adhering to its belief that damage had already been done once consumers were diverted to defendant’s websites, the court found defendant’s disclaimers to be irrelevant.[cxvi] The purpose of Hatfield’s disclaimers were to clear up any consumer confusion, but the court found the damage from the original diversion was sufficiently actionable.  Australian Gold suggests that diversion is inherently damaging and even absent a defendant’s use of disclaimers or plaintiff’s evidence of actual confusion, the Tenth Circuit will still find actionable trademark infringement based on initial interest confusion.[cxvii]

3.  Courts analyzing initial interest confusion within the “evidence of confusion” or “customer care” factor of the traditional likelihood of confusion test

The last formulation is courts analyzing initial interest confusion within the “evidence of confusion” factor or the “customer care” factor.  Including this analysis as part of the traditional likelihood of confusion factors adheres to the Lanham Act standard for trademark infringement, “likely to cause confusion.”[cxviii] Subsuming initial interest confusion within the complete factors test also reconciles criticism that initial interest confusion is inappropriately expanding trademark infringement to include diversion.[cxix]

The Fifth Circuit applied initial interest confusion in the “evidence of actual confusion” factor based on witness testimony in Elvis Presley Enterprises, Inc. v. Capece.[cxx] Elvis Presley Enterprises (“EPE”) claimed trademark infringement against Capece for using the service mark “The Velvet Elvis” for his nightclub and for using Elvis Presley’s image and likeness in advertising and promoting.[cxxi] Within its seven-factor analysis, the court discussed initial interest confusion within evidence of actual confusion because customers were lured into “The Velvet Elvis” thinking it was associated with the “Elvis Presley” trademark name.[cxxii] The court reasoned there was initial interest confusion even if the customers realized there was no association with “The Velvet Elvis” and “Elvis Presley” upon entering the nightclub.[cxxiii] According to the court, “Despite the confusion being dissipated, this initial-interest confusion is beneficial to the Defendants because it brings patrons in the door; indeed, it brought at least one of EPE’s witnesses into the bar.  Once in the door, the confusion has succeeded because some patrons may stay, despite realizing that the bar has no relationship with EPE.”[cxxiv] The court found this initial interest confusion coupled with actual confusion from Capece’s advertising practices weighed “evidence of actual confusion” in EPE’s favor.[cxxv] Although the Fifth Circuit has not ruled specifically on initial interest confusion and keyword advertising cases, one scholar hypothesizes that based on Elvis Presley Enterprises, Inc., the Fifth Circuit may apply initial interest confusion because a sponsored link advertisement luring online customers into a website based on the use of a trademark is analogous to the luring rationale between “The Velvet Elvis” and “Elvis Presley.”[cxxvi]

As Elvis Presley Enterprises, Inc. found a likelihood of confusion based on both actual confusion and initial interest confusion,[cxxvii] courts have also reached similar conclusions even in the absence of actual confusion.[cxxviii] The Sixth Circuit has even gone so far to state that, “evidence of initial-interest confusion comes into the eight factor Frisch test as a substitute for evidence of actual confusion.”[cxxix] The court for the Southern District of Ohio adopted this approach in Tdata Inc. v. Aircraft Technical Publishers.[cxxx] In Tdata Inc., the plaintiff alleged that the defendant’s website metatags containing plaintiff’s trademarks constituted trademark infringement.[cxxxi] Before applying the eight factor Frischtest, the court decided to apply initial interest confusion, reasoning that, “use of the company’s mark in metatags constitutes infringing use of the mark to pull consumers to Tdata’s website and the products it features, even if the consumers later realize the confusion.”[cxxxii] Instead of just stopping there and concluding a likelihood of confusion, the court went through the eight factor Frisch test.[cxxxiii] The previous finding of initial interest confusion was substituted into the “actual confusion” factor, even without evidence of actual confusion.[cxxxiv] Tdata Inc.exemplifies the benefit of applying all of the factors instead of prematurely resting solely on initial interest confusion.  This case also shows that absent actual confusion, a court can properly assess the other factors and find a likelihood of confusion.[cxxxv]

The Second Circuit and the Seventh Circuit have also incorporated initial interest into the “consumer care” factor.[cxxxvi] In Mobil, the Second Circuit affirmed the district court’s finding of initial confusion based on “the probability that potential purchasers would be misled into an initial interest in Pegasus Petroleum.”[cxxxvii] In Promatek, the Seventh Circuit placed importance on consumer care, explicitly stating, “The degree of care exercised by consumers could lead to initial interest confusion,” before finding a likelihood of confusion existed.[cxxxviii]

A recent example of courts including initial interest analysis into the factors test isBabyage.com, Inc. v. Leachco, Inc. from the District Court of the Middle District of Pennsylvania.[cxxxix] BabyAge.com’s baby product website includes “featured brand” manufacturers, including Leachco.[cxl] The “featured brand” webpage displayed Leachco’s trademark and included a section entitled “Pregnancy Pillows.”[cxli] The webpage also contained hyperlinks that would take the viewer to webpages containing non-Leachco products.[cxlii] Leachco argued under a “bait and switch theory” that “prospective customers are ‘baited’ by Leachco’s brand into visiting the Leachco “featured brand” webpage on the Baby-Age Website, baited into pursuing a Leachco pregnancy pillow, and then “switched” to non-Leachco pregnancy pillows by the hyperlinks.[cxliii] The court applied theLapp factors and analyzed initial interest confusion within both the customer care and the actual confusion factors.[cxliv] Under customer care, the court found that low price alone was insufficient to make an appropriate conclusion on the level of customer care.[cxlv] Under actual confusion, Leachco sought more information on point of sale and internet traffic that may be probative of initial interest confusion.[cxlvi] The court ultimately denied Leachco’s motion for summary judgment because more development was needed for the customer care and actual confusion factors.[cxlvii]

III.  Criticism of Tests 1 and 2 and Proposal for Courts to Adopt Test 3

A.  Criticism of Tests 1 and 2

The strongest argument against Test 1, courts analyzing initial interest confusion separately before or after the traditional likelihood of confusion, is that this approach is inefficient and more time-consuming.  Instead, courts should include the initial interest analysis within one of the factors as proposed in Part III(B).  Separating the initial interest analysis from the likelihood of confusion factors is also problematic because it could run the risk of turning into the formulation in Part II(B)(2), just applying the initial interest analysis.

Analyzing initial interest confusion as a separate doctrine without engaging in the traditional likelihood of confusion test in Test 2 is problematic because it acts as a shortcut to finding trademark infringement.[cxlviii] Completely discarding the multi-factor test makes it easier for a plaintiff to prove trademark infringement if only initial interest confusion is needed.[cxlix] Lowering the bar for plaintiffs to bring trademark infringement would not only strain the judicial system with increased cases, but would also adversely harm consumers and defendant trademark owners.  If trademark owners were more susceptible to trademark infringement cases, they would have to reallocate resources to defend themselves in court.  Instead of using resources to improve product quality and create new products, trademark owners would have to resources to defend trademark infringement suits, thereby depriving consumers.

Finding a likelihood of confusion solely on initial interest confusion in the Internet is dangerous and threatens to undermine the purposes of trademark law.  For example, a plaintiff could allege initial interest confusion based on diversion resulting from a defendant’s use of the plaintiff’s trademark in keyword advertising or metatags.  Suppose plaintiff and defendant compete in completely unrelated markets, have dissimilar marks, and both have high levels of consumer sophistication.  Under a traditional likelihood of confusion test, it is unlikely a court would find a likelihood of confusion under these circumstances.  However, a court choosing to solely apply initial interest confusion could focus on the defendant’s use of the plaintiff’s mark to divert consumers and find a likelihood of initial interest confusion.  Although no cases have gone to this extreme of finding initial interest confusion, some courts are inappropriately expanding the scope of initial interest confusion by giving undue weight to the misappropriation of goodwill.[cl]

Another statutory argument against courts just using initial interest confusion is this formulation conflates the trademark infringement test by using misappropriation of goodwill to satisfy both threshold use and likelihood of confusion.[cli] Such a construction is doctrinally inappropriate because likelihood of confusion, not the misappropriation of goodwill, is the “hallmark” of analyzing trademark infringement.[clii] Conflating the trademark infringement test would make it much easier for plaintiffs to bring trademark infringement cases, which would negatively affect the trademark owners who would have to expend time and resources to defend these cases.

The greatest danger of applying solely initial interest confusion is that this approach disregards the Lanham Act.  The Lanham Act does not expressly state that trademark infringement is actionable based on initial interest confusion.  Instead, the only analysis within the Lanham Act is the likelihood of confusion test, so therefore the likelihood of confusion doctrine should be the only analysis applied to trademark infringement claims.[cliii] One scholar likened initial interest confusion on the Internet to judicial activism.[cliv] The argument was that since the Lanham Act does not include pre-sale confusion as actionable trademark infringement, courts could erroneously extend initial interest confusion to cover consumers searching on the Internet who become initially confused and interested in a competitor’s product.[clv] Without the traditional likelihood of confusion factors test, courts could just apply initial interest confusion to almost any alleged defendant’s use of a sponsored link advertisement, which would frustrate consumers’ intent and interest.[clvi]

As this section demonstrates, courts should not base a finding of consumer confusion solely on initial interest confusion because this formulation contravenes the trademark goals of protecting the trademark owner’s interests and benefiting consumers.

B.  Proposal for Test 3

The District Court of the Middle District of Pennsylvania in Babyage.com, Inc.demonstrates a trend in the right direction of courts applying initial interest confusion within the factors test.  For the reasons stated above, courts should continue to apply the traditional likelihood of confusion factors and incorporate initial interest confusion within either the “evidence of actual confusion” or “customer care” factors.  Analyzing initial interest confusion within the likelihood of confusion test has already garnered support from some courts and scholars and the remaining courts should follow.[clvii]

This approach is preferable for three reasons:  (1) Maintaining the Lanham Act standard for finding a likelihood of confusion instead of giving undue weight to diversion, (2) Serving trademark goals of protecting trademark owner’s interests and benefit consumers, and (3) Incorporating the factors into the traditional likelihood of confusion test is efficient and easily applicable.

Firstly, analyzing initial interest confusion within the factors test maintains the Lanham Act standard because the court will still engage in the likelihood of confusion analysis without the risk of using initial interest as a shortcut to find trademark infringement.  Courts should still retain the power to decide whether or not some factors should be given more weight than others depending on the particular facts.  Secondly, this approach will satisfy the trademark goals because it will keep the focus on consumer confusion instead of consumer diversion.  Lastly, incorporating the factors is a timely solution for courts that are already familiar with their respective likelihood of confusion tests.  This approach is not drastically different nor does it change the standard, so judges can easily transition into analyzing initial interest confusion within one of their pre-existing factors during the routine likelihood of confusion test.

IV.  Conclusion

Post-Rescuecom recognition that use of another’s trademark to trigger keyword advertising is actionable trademark use will allow more Internet trademark infringement claims to pass summary judgment.[clviii] In response, courts need a streamlined test for how to apply initial interest confusion in the Internet.  Among the confusing variations of the initial interest confusion doctrine, courts should incorporate the initial interest confusion analysis within the “evidence of actual confusion” factor or the “customer care” factor and continue to apply the traditional likelihood of confusion factors test.  This formulation of the initial interest confusion doctrine will promote trademark law’s dual purpose of protecting trademark owners’ interest in the mark and protecting consumers.


[i][i]1.1 Overview of AdWords – AdWords Help,http://adwords.google.com/support/aw/bin/static.py?hl=en&guide=23611&pag…(last visited Oct. 3. 2010).

[ii]Id.

[iii]Id.

[iv][iv]See, e.g. Playboy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020, 1022-23 (9th Cir. 2004) (involving Netscape and Excite); Gov’t Employees Ins. Co. v. Google, Inc., 330 F.Supp.2d 700, 701-02 (E.D. Va. 2004) (involving Overture Services, Inc.).

[v]Search Ad Revenues Strong in Record-Breaking Half Year, IAB Reports #SEWatch, http://blog.searchenginewatch.com/101013-130544 (last visited Oct. 31, 2010).

[vi]How The World Spends Its Time Online – VisualEconomics.com,http://www.visualeconomics.com/how-the-world-spends-its-time-online_2010…(last visited Oct. 3, 2010).

[vii]See Brookfield Commc’ns, Inc. v. West Coast Entm’t Corp., 174 F.3d 1036 (9th Cir. 1999).

[viii]See, e.g., Rescuecom Corp. v. Google Inc., 562 F.3d 123, 127-31 (2d Cir. 2009) (involving keyword-based advertising); PACCAR Inc. v. TeleScan Techs., L.L.C., 319 F.3d 243, 247-48 (6th Cir. 2003) (involving both unlawful domain name and metatag use).

[ix]15 U.S.C. §§ 1051, 1051-1072, 1091-1096, 1111-1127 (2009).

[x]Id. at §1125.

[xi]See also Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763, 782 at n.15 (Scalia, J., concurring) (quoting S. Rep. No. 1333, 79th Cong., 2d Sess., 3, 4 (1946)); See Graeme B. Dinwoodie & Mark D. Janis, Trademarks and Unfair Competition:  Law and Policy 15 (2d ed. 2007) (introducing the “two primary justifications … traditionally … offered in support of trademark protection”).

[xii]15 U.S.C. § 1125.

[xiii]15 U.S.C. § 1114(1).

[xiv]15 U.S.C. § 1125.

[xv]DeCosta v. Viacom Int’l, Inc., 981 F.2d 602, 605 (1st Cir. 1992); Checkpoint Sys., Inc. v. Check Point Software Tech., Inc., 269 F.3d 270, 279 (3d Cir. 2001).

[xvi]Id.

[xvii]Id.

[xviii]Id.

[xix]See Brookfield Commc’ns, Inc., 174 F.3d 1036 (using competitor’s mark as a metatag is actionable trademark use); Merck & Co., Inc. v. Mediplan Health Consulting, Inc., 425 F. Supp. 2d 402 (S.D.N.Y. 2006) (using plaintiff’s trademark for keyword advertising on Google’s AdWords is not actionable trademark use).

[xx]15 U.S.C. §1127.

[xxi]Mark Bartholomew, Article, Making a Mark in the Internet Economy:  A Trademark Analysis of Search Engine Advertising, 58 Okla. L. Rev. 179, 187 (2005).

[xxii]PACCAR Inc. v. TeleScan Techs., L.L.C., 319 F.3d 243, 247-48 (6th Cir. 2003).

[xxiii]See supra note 5 (Search advertising is the largest form of online advertising, accounting for 47% of first-half spending at $5.7 billion in 2010, an increase of 11.6% compared to the first half of 2009 at$5.1 billion).

[xxiv]Rescuecom Corp. v. Google Inc., 562 F.3d 123, 129 (2d Cir. 2009).

[xxv] Seee.g., N. Am. Med. Corp. v. Axiom Worldwide, Inc.,522 F.3d 1211, 1220 (11th Cir. 2008) (“[A]xiom’s use of NAM’s trademarks as meta tags constitutes a ‘use in commerce…”); Google Inc. v. Am. Blind & Wallpaper, No. C 03-5340 JF (RS), 2007 WL 1159950, at *6 (N.D. Cal. Apr. 18, 2007) (“[T]he sale of trademarked terms in the AdWords program is a use in commerce for the purposes of the Lanham Act.”); Boston Duck Tours, LP v. Super Duck Tours, LLC, 527 F. Supp. 2d 205, 207 (D. Mass. 2007) (“Because sponsored linking necessarily entails the ‘use’ of the plaintiff’s mark as part of a mechanism of advertising, it is ‘use’ for Lanham Act purposes.”); Edina Realty Inc. v. TheMLSOnline.com, No. 04-4371JRTFLN, 2006 WL 737064, at *3 (D. Minn. Mar. 20, 2006) (“Based on the plain meaning of the Lanham Act, the purchase of search terms is a use in commerce.”); J.G. Wentworth, S.S.C. LP v. Settlement Funding LLC, No. 06-0597, 2007 WL 30115, at *6 (E.D. Pa. 2007); (“By establishing an opportunity to reach consumers via alleged purchase and/or use of a protected trademark, defendant has crossed the line from internal use to use in commerce under the Lanham Act.”).

[xxvi]See, e.g. Allard Enters. v. Advanced Programming Res., Inc., 146 F.3d 350, 355 (6th Cir. 1998) (internal quotations omitted) (describing the likelihood of confusion as the “touchstone of liability”); Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 23:1 (4th ed. 2009) (noting that “the test of likelihood of confusion is the touchstone of trademark infringement”).

[xxvii]AMF Inc. v. Sleekcraft Boats, 599 F.2d 341, 346 (9th Cir. 1979).

[xxviii]Interpace Corp. v. Lapp, Inc., 721 F.2d 460, 463 (3d Cir. 1983) employing theLapp factors:  (1) degree of similarity between owner’s mark and alleged infringing mark; (2) strength of owner’s mark; (3) price of goods and other factors indicative of the care and attention expected of consumers when making a purchase; (4) the length of time the defendant has used the mark without evidence of actual confusion; (5) the intent of the defendant in adopting the mark; (6) the evidence of actual confusion; (7) whether the goods are marketed through the same channels of trade and advertised through the same media; (8) the extent to which the targets of the parties’ sales efforts are the same; (9) the relationship of the goods in the minds of consumers because of the similarity of functions; and (10) other facts suggesting that the consuming public might expect the prior owner to manufacture a product in the defendant’s market or that he is likely to expand into that market.

[xxix]McCarthy, supra 26, at 23-29.

[xxx]See, e.g., Eli Lilly & Co. v. Natural Answers, Inc., 233 F.3d 456, 464 (7th Cir. 2000) (“Such confusion, which is actionable under the Lanham Act, occurs when a consumer is lured to a product by its similarity to a known mark, even though the consumer realizes the true identity and origin of the product before consummating a purchase.”); Playboy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020, 1025 (9th Cir. 2004) (“Initial interest confusion is customer confusion that creates initial interest in a competitor’s product.  Although dispelled before an actual sale occurs, initial interest confusion impermissibly capitalizes on the goodwill associated with a mark and is therefore an actionable trademark infringement.”).

[xxxi]McCarthy, supra 26, at 23-28.

[xxxii]Dorr-Oliver, Inc. v. Fluid-Quip, Inc., 94 F.3d 376, 382 (7th Cir. 1996).

[xxxiii]Grotrian, Helfferich, Schulz, Th. Steinweg Nachf. v. Steinway & Sons (Grotrian II), 523 F.2d 1331, 1342 (2d Cir. 1975).

[xxxiv]Id. at 1333-34.

[xxxv]Id. at 716-17.

[xxxvi]Id. at 717.

[xxxvii]Id.

[xxxviii]Grotrian II, 523 F.2d 1331 at 1342.

[xxxix]Id.

[xl]Id.

[xli]Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254 (2d Cir. 1987).

[xlii]Id. at 259.

[xliii]See Elvis Presley Enters, Inc. v. Capece, 141 F.3d 188, 203 (5thCir. 1998) (applying initial interest confusion to the name of a night club); Dorr-Oliver, Inc. v. Fluid-Quip, Inc., 94 F.3d 376, 382-83 (7th Cir. 1996) (applying initial interest confusion to trade dress infringement).

[xliv]See Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 812-13, (7th Cir. 2002) (applying initial interest confusion to metatags); Perfumebay.com Inc. v. eBay Inc., 506 F.3d 1165, 1176 (9th Cir. 2007) (applying initial interest confusion comparing two websites); PACCAR Inc., 319 F.3d at 253-54 (applying initial interest to domain name and meta tags); Gov’t Employees Ins. Co. v. Google, Inc., No. 1:04CV507, 2005 WL 1903128 at *4, (E.D. Va. Aug. 8, 2005). (recognizing initial interest confusion as a viable theory for keyed advertising).

[xlv]Brookfield Commc’ns, Inc. v. West Coast Entm’t Corp., 174 F.3d 1036 (9th Cir. 1999).

[xlvi]Id. at 1042.

[xlvii]Id. at 1041-43.

[xlviii]See Ira S. Nathenson, Note, Internet Infoglut and Invisible Ink:  Spamdexing Search Engines with Metatags, 12 Harv. J. Law & Tech. 43, 62-63 (1998).

[xlix]Brookfield, 174 F.3d at 1062.

[l]Id.

[li]Id.

[lii]See J.G. Wentworth, S.S.C. LP v. Settlement Funding LLC, No. 06-0597, 2007 WL 30115 at *7 (E.D. Pa. 2007) (After discussing Brookfield, Judge J. O’Neill of the Eastern District of Pennsylvania states, “I respectfully disagree with the Ninth Circuit’s conclusion in Brookfield,” and refuses to apply initial interest confusion),and Bryce J. Maynard, Note, The Initial Interest Confusion Doctrine and Trademark Infringement on the Internet, 57 Wash. & Lee L. Rev. 1303, 1336-43 (2000) (Brookfield (1) does not protect consumer interests because Ninth Circuit failed to understand search engine mechanics and (2) does not protect trademark owners interests because initial interest confusion does not work when companies are not direct competitors).

[liii]Brookfield, 174 F.3d 1036 at 1062.

[liv]Id. at 1062 n. 24.

[lv]See Niki R. Woods, Note, Initial Interest Confusion in Metatag Cases:  The Move from Confusion to Diversion, 22 Berkeley Tech. L.J. 393 (2007) (arguing against broad application of initial interest confusion in the Internet).

[lvi]Grotrian, Helfferich, Schulz, Th. Steinweg Nachf. v. Steinway & Sons (Grotrian II), 523 F.2d 1331, 1340 (2d Cir. 1975) and Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254 at 259 (2d Cir. 1987).

[lvii]Brookfield, 174 F.3d at 1062.

[lviii]Zachary J. Zweihorn, Note, Searching for Confusion:  The Initial Interest Confusion Doctrine and Its Misapplication to Search Engine Sponsored Links, 91 Cornell L. Rev. 1343, 1355-56 (2006) (“Because any time wasted would be de minimis, users interested in Brookfield’s product would be unlikely to feel that they had wasted so much time by clicking a link that seeking out the correct Web site would unacceptably raise their search costs.”).

[lix]See Note, Confusion in Cyberspace:  Defending and Recalibrating the Initial Interest Confusion Doctrine, 117 Harv. L. Rev. 2387 (2004) (arguing that initial interest should apply in the Internet because under a cost-benefit analysis, the big cost of decrease in producers’ incentives to conduct business online and to provide consumers with high-quality online services does not outweigh the benefit to producers of cheap advertising from online trademark use).

[lx]Rachel R. Friedman, Note, No Confusion Here:  Proposing a New Paradigm for the Litigation of Keyword Advertising Trademark Infringement Cases, 12 Vand. J. Ent. & Tech. L. 355, 379 (2010).

[lxi]PACCAR Inc. v. TeleScan Techs., L.L.C., 319 F.3d 243, 255-58 (6th Cir. 2003); Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 812-13, (7th Cir. 2002); Brookfield Commc’ns, Inc. v. West Coast Entm’t Corp., 174 F.3d 1036, 1062 (9th Cir. 1999); Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1239-40 (10th Cir. 2006); Savin Corp. v. The Savin Group, 391 F.3d 439, 462 (2d Cir. 2004); 800-Jr Cigar, Inc. v. Goto.Com, Inc., 437 F.Supp.2d 273, 290 (D. New Jersey 2006).

[lxii]See supra note 28.

[lxiii]See discussion infra Parts II.B.1, II.B.2, II.B.3.

[lxiv]CompareHasbro, Inc. v. Clue Computing, Inc., 231 F.3d 1, 2 (1st Cir. 2000) (refusing to apply initial interest confusion) with Perfumebay.com Inc. v. eBay Inc., 506 F.3d 1165, 1176 (9th Cir. 2007) (applying initial interest confusion); CompareMorningware, Inc. v. Hearthware Home Products, Inc., 673 F.Supp.2d 630, 636-38 (N.D. Il. 2009) (no likelihood of confusion factor analysis) with Trans Union LLC v. Credit Research, Inc., 142 F.Supp.2d 1029, 1043-44 (N.D. Il. 2001) (analyzing initial interest confusion within “evidence of actual confusion” factor).

[lxv]Savin Corp. v. The Savin Group, 391 F.3d 439, 462 (2d Cir. 2004); Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270, 297-98 (3d Cir. 2001); Interstellar Starship Servs., Ltd. v. Epix, Inc., 304 F.3d 936, 945 (9th Cir. 2002).

[lxvi]Savin Corp., 319 F.3d 439 at 446.

[lxvii]Id. at 456.

[lxviii]Savin Corp. v. The Savin Group, No. 02 Civ.9377 SAS, 2003 WL 22451731 at *12 (S.D.N.Y. Oct. 24, 2003).

[lxix]Id. at *12, *13.

[lxx]Savin Corp. v. The Savin Group, 391 F.3d 439, 462 (2d Cir. 2004).

[lxxi]Checkpoint Systems, Inc. v. Check Point Software Technologies, Inc., 269 F.3d 270, 297-98 (3d Cir. 2001).

[lxxii]Id. at 280.

[lxxiii]Id.at 297.

[lxxiv]800-Jr Cigar, Inc. v. Goto.com, Inc., 437 F.Supp.2d 273, 290 (D. N.J. 2006); JG Wentworth v. Settlement Funding LLC, No. 06-0597, 2007 WL 30115 at *7 (E.D. Pa. Jan. 4, 2007).

[lxxv]800-JR Cigar, Inc., 437 F.Supp.2d at 290.

[lxxvi]Id.

[lxxvii]Id. at 292.

[lxxviii]JG Wentworth, No. 06-0597, 2007 WL 30115, at *7.

[lxxix]Id. at *2.

[lxxx]Id. at *8.

[lxxxi]Perfumebay.com Inc. v. eBay Inc., 506 F.3d 1165, 1176 (9th Cir. 2007); Interstellar Starship Servs., Ltd. v. Epix, Inc., 304 F.3d 936, 942-46 (9th Cir. 2002); Storus Corp. v. Aroa Marketing, Inc., No. C-06-2454 MMC, 2008 WL 449835 at *4-5 (N.D. Cal. 2008); Google Inc. v. Am. Blind & Wallpaper, No. C 03-5340 JF (RS), 2007 WL 1159950 at *9-10 (N.D. Cal. 2007); Soilworks, LLC v. Midwest Industrial Supply, Inc., 575 F.Supp.2d 1118, 1130-33 (D. Ariz. 2008).

[lxxxii]Perfumebay.com Inc., 506 F.3d 1165 (9th Cir. 2007) (keyword advertising);Interstellar Starship Servs., Ltd., 304 F.3d 936 (9th Cir. 2002) (domain name);Storus Corp., No. C-06-2454 MMC, 2008 WL 449835 (N.D. Cal. 2008) (Google AdWords); Google Inc., No. C 03-5340 JF (RS), 2007 WL 1159950 (Google AdWords).

[lxxxiii]GoTo.com v. Walt Disney Co., 202 F.3d 1199, 1204 (9th Cir. 2000).

[lxxxiv]Id. at 1207.

[lxxxv]Brookfield Commc’ns, Inc. v. West Coast Entm’t Corp., 174 F.3d 1036, 1058 (9th Cir. 1999).

[lxxxvi]Interstellar Starship Servs., Ltd., 304 F.3d at 938.

[lxxxvii]Id. at 942-43.

[lxxxviii]Perfumebay.com Inc v. eBay Inc., 506 F.3d 1165, 1173-74 (9th Cir. 2007); Storus Corp. v. Aroa Marketing, Inc., No. C05-2454 MMC, 2008 WL 449835 at *5 (N.D. Cal. 2008).

[lxxxix]Perfumebay.com Inc., 506 F.3d at 1174-75.

[xc]Id. at 1168.

[xci]Id. at 1176.

[xcii]Id.

[xciii]Paccar Inc. v. TeleScan Technologies, L.L.C., 319 F.3d 243, 255-258 (6th Cir. 2003).

[xciv]Id. at 248-49.

[xcv]Id. at 248-49, 255, 258.

[xcvi]Id. at 255.

[xcvii]Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1239-40 (10th Cir. 2006); Morningware, Inc.v. Hearthware Home Products, Inc., 673 F. Supp.2d 630, 636-38 (N.D. Ill. 2009); Gov’t Employees Ins. Co., No. 1:04CV507, 2005 WL 1903128 at *4 (E.D. Va. Aug. 8, 2005).

[xcviii]Morningware, 673 F.Supp.2d 630.

[xcix]Id. at 636-38.

[c]Id. at 633.

[ci]Id. at 636-7.

[cii]Promatek Industries, Ltd. v. Equitrac Corp., 300 F.3d 808, 812-13 (7th Cir. 2002).

[ciii]Id.

[civ]Id. at 813.

[cv]Morningware, Inc. v. Hearthware Home Products, Inc., 673 F.Supp.2d 630, 638 (N.D. Ill. 2009).

[cvi]Id.

[cvii]Id. at 636-38.

[cviii]Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1239-40 (10th Cir. 2006) (Although the Tenth Circuit seems to base its decision on the fact that diversion is inherently damaging, it was also affirming the district court’s analysis under a six-prong factor test for likelihood of confusion, so it is not a complete departure from the likelihood of confusion test. In fact, the court briefly analyzed the factors and then discussed the inherently damaging effect of diversion after stating the plaintiffs did not offer any direct evidence of actual confusion. This suggests that the court did not even need initial interest confusion to find a likelihood of confusion and that stating diversion as inherently damaging was just a broad application of initial interest confusion.).

[cix]Id. at 1232.

[cx]Id. at 1233.

[cxi]Id.

[cxii]Id. at 1239-40.

[cxiii]Id. at 1239.

[cxiv]Id.

[cxv]Id. at 1240.

[cxvi]Id.

[cxvii]Woods, supra note 55, at 406-7.

[cxviii]15 U.S.C. § 1125.

[cxix]Woods, supra note 55, at 411-13 (arguing that courts are broadening the scope of initial interest by (1) giving goodwill too much importance in protecting trademarks’ goodwill rather than looking for confusion and (2) allowing misappropriation of goodwill to constitute use).

[cxx]Elvis Presley Enters., Inc. v. Capece, 141 F.3d 188, 203-4 (5th Cir. 1998).

[cxxi]Id. at 191, 193.

[cxxii]Id. at 204.

[cxxiii]Id.

[cxxiv]Id.

[cxxv]Id.

[cxxvi]Patrick Ryan Barry, Comment, The Lanham Act’s Applicability to the Internet and Keyword Advertising:  Likelihood of Confusion v. Initial Interest Confusion, 47 Duq. L. Rev. 355, 366 (2009) (“If the court would find that a sponsored link advertisement lured an online customer into a website based on the use of a trademarked name, that court might be inclined to rule that there was initial interest confusion and trademark infringement even if the customer knew the true source of the website and its products before making a purchase.”).

[cxxvii]Elvis Presley Enters., Inc. v. Capece, 141 F.3d 188, 204 (5th Cir. 1998).

[cxxviii]Trans Union LLC v. Credit Research, Inc., 142 F. Supp.2d 1029, 1043-44 (N.D. Ill. 2001); Tdata Inc. v. Aircraft Technical Publishers, 411 F.Supp.2d 901, 908 (S.D. Oh. 2006).

[cxxix]Gibson Guitar Corp. v. Paul Reed Smith Guitars, LP, 423 F.3d 539, 550 (6th Cir. 2005).

[cxxx]Tdata Inc., 411 F.Supp.2d at 908 (“[T]he initial interest confusion doctrine is applicable as but one part of a relevant eight-factor inquiry.”).

[cxxxi]Id. at 904.

[cxxxii]Id. at 907.

[cxxxiii]Id. at 908-12.

[cxxxiv]Id. at 909.

[cxxxv]Id. at 908-12.

[cxxxvi]Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 812 (7th Cir. 2002); Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254, 260 (2d Cir. 1987).

[cxxxvii]Mobil Oil Corp., 818 F.2d 254 at 260.

[cxxxviii]Id. at 812-14.

[cxxxix]BabyAge.com, Inc. v. Leachco, Inc., No. 3:08-cv-1600, 2009 WL 82552 at *8-12 (M.D. Pa. Jan. 12, 2009).

[cxl]Id.

[cxli]Id.

[cxlii]Id. at *6.

[cxliii]Id.

[cxliv]Id. at *10.

[cxlv]Id.

[cxlvi]Id.

[cxlvii]Id. at *12-13.

[cxlviii]Woods, supra note 55, at 405-6.

[cxlix]Id.

[cl]Australian Gold, Inc. v. Hatfield, 436 F.3d 1228, 1239 (10th Cir. 2006); Promatek Indus., Ltd. v. Equitrac Corp., 300 F.3d 808, 812-13 (7th Cir. 2002); See alsoWoods, supra note lxxiii at 411-12 (arguing against broadening initial interest confusion to protect trademarks’ goodwill rather than looking for confusion).

[cli]Woods, supra note 55, at 412.

[clii]Lamparello v. Falwell, 420 F.3d 309, 314 (4th Cir. 2005).

[cliii]15 U.S.C. § 1125.

[cliv]Barry, supra note 126, at 370.

[clv]Id.

[clvi]Id. at 371.

[clvii]See infra part II.B.3; see also Gregory R. Shoemaker, Comment, Don’t Blame Google:  Allowing Trademark Infringement Actions Against Competitors Who Purchase Sponsored Links on Internet Search Engines Under the Initial Interest Confusion Doctrine, 58 Cath. U. L. Rev. 535, 564 (2009).

[clviii]See Note, supra note 59.

Jaclyn Sitjar © Copyright 2011