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How to Recover Attorneys’ Fees in a Schedule A Trademark Case in the Northern District of Illinois

In recent years, a substantial number of “Schedule A” trademark infringement cases have been filed in the Northern District of Illinois. In such a case, the trademark owner may file a trademark infringement complaint against a number of defendants, with the complaint identifying the defendants as “The Individuals, Corporations, Limited Liability Companies, Partnerships and Unincorporated Associations Identified on Schedule A hereto.” [See, e.g., Opulent Complaint]

The trademark owner may file Schedule A separately from the complaint with a request to the Court that the schedule be placed under seal. Sometimes, trademark owners file the entire complaint under seal. After filing sealed pleadings that shield the defendants’ identities, the trademark owner may then file ex parte motions for temporary restraining orders (“TROs”) against the secretly-named defendants. Because the proceedings are ex parte, the alleged infringer is not given notice of the proceedings or an opportunity to appear. If the Court grants the TRO, the trademark owner may then present the TRO to online marketplaces with a demand that the marketplaces immediately stop selling the allegedly infringing goods. The result may be that an alleged infringer may find all of its activity frozen by the online marketplace, including a freeze on the alleged infringer’s cash held with the online marketplace. This may create cashflow problems for the alleged infringer and prevent the alleged infringer from making future sales. Because its identity is sealed by the court, an alleged infringer may first learn of the TRO after its accounts are frozen.

Schedule A cases appear to be concentrated in the Northern District of Illinois because judges in that district have been receptive to granting ex parte relief. See, A. Anteau, “The Northern District of Illinois v. the Internet: How Chicago Became the Center of Schedule A Trademark Infringement Litigation”; Law.Com, December 19, 2023. At least two judges in that district even provide templates for TROs, preliminary injunctions and default judgments in Schedule A cases. See Northern District of Illinois (uscourts.gov); Northern District of Illinois (uscourts.gov). The justification for the ex parte nature of these proceedings is that it, if notice was required, online counterfeiters (frequently from China) could hide their assets or move their counterfeit products to new sites as soon as an infringement case was filed.

Notwithstanding the foregoing, remedies and relief do exist if an entity is the subject of a wrongfully obtained ex parte TRO. Recently, Ya Ya Creations, a defendant in a Schedule A trademark case, obtained an attorneys’ fees award against a plaintiff that failed to conduct a proper investigation before naming two Ya Ya-affiliated entities as alleged infringers in a case filed in the Northern District of Illinois. [Award of Fees] The dispute began in August 2021, when the plaintiff filed a lawsuit against Ya Ya for trademark infringement and a variety of other causes of action in the Eastern District of Texas. The Texas court transferred the case to the Central District of California in April of 2022. Four months after the transfer, the plaintiff filed a very similar lawsuit against Ya Ya in the Middle District of Florida. On May 26, 2023, the Florida court transferred the case to the Central District of California, and then the CD California consolidated the cases due to the similarity of the facts and claims. On September 26, 2023, the plaintiff filed yet another lawsuit. This time, the plaintiff filed a Schedule A trademark infringement case against a number of defendants in the Northern District of Illinois. In the Schedule A case, the plaintiff named two entities affiliated with Ya Ya as alleged infringers.

Notwithstanding the litigation history between the parties, the plaintiff obtained an ex parte TRO against Ya Ya in the Northern District of Illinois. Ya Ya first learned about the TRO after the court issued it and after an online marketplace froze Ya Ya’s accounts.

Ya Ya’s first step in seeking redress was to file an emergency motion asking the court to dissolve the ex parte TRO. [Ya Ya Motion to Dissolve TRO] Ya Ya argued that, because the parties were actively litigating against each other in California, the plaintiff had no basis to seek ex parte relief against Ya Ya or its affiliated entities without notifying Ya Ya of the proceedings. Ya Ya also argued that the plaintiff’s ex parte TRO was a transparent attempt to gain a litigation advantage in the California cases to either leverage a settlement, force Ya Ya into a position where it could not even pay its lawyers to mount a defense, or force Ya Ya to file for bankruptcy. In response to Ya Ya’s motion to dismiss, the plaintiff agreed to dismiss all of its claims against the Ya Ya-affiliated entities.

Ya Ya’s next step was to file a motion for recovery of the attorneys’ fees it expended in the Northern District of Illinois proceedings. [Ya Ya Request for Reimbursement of Attorneys’ Fees]. In response, the plaintiff argued that it was not obligated to pay Ya Ya’s attorneys’ fees, because it did not know the entities it named in the Northern District of Illinois lawsuit were affiliated with Ya Ya. But the court rejected that argument. The court concluded that, pursuant to Federal Rule of Civil Procedure 11, a court may award attorneys’ fees incurred while defending an ex parte TRO when (1) the TRO caused “needless delay” and unnecessarily “increased the cost of litigation,” or (2) the TRO was obtained by pleadings that were not “well grounded in fact” or made after “reasonable inquiry.” The Court determined that plaintiff could have avoided increasing the costs of litigation if it had conducted a reasonable inquiry to determine if the two entities were affiliated with Ya Ya, but it failed to do so. As a result, the Court awarded Plaintiff to pay Ya-Ya almost $100,000 in attorneys’ fees.

Trademark litigators should be aware that judges in the Northern District of Illinois have been receptive to granting ex parte TROs in trademark cases. If you represent a client that is the subject of an improperly granted ex parte TRO, be prepared to move quickly to dissolve the TRO and consider whether you have a basis to move for an award of attorneys’ fees.

Eleventh Circuit Affirms Dismissal of FCRA Claims Since Alleged Inaccurate Information Was Not Objectively and Readily Verifiable

In Holden v. Holiday Inn Club Vacations Inc., No. 22-11014, No. 22-11734, 2024 WL 1759143 (11th Cir. 2024), which was a consolidated appeal, the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit” or “Court”) held that the purchasers of a timeshare did not have actionable FCRA claims since the alleged inaccurate information reported to one of the consumer reporting agencies (“CRAs”) was not objectively and readily verifiable. In doing so, the Eleventh Circuit affirmed two decisions issued by United States District Court for the Middle District of Florida (“District Court”) granting of summary judgment in favor of the timeshare company in the respective cases.

Summary of Facts and Background

Two consumers, Mark Mayer (“Mayer”) and Tanethia Holden (“Holden”), entered into two separate purchase agreements with Holiday Inn Club Vacations Incorporated (“Holiday”) to acquire timeshare interests in Cape Canaveral and Las Vegas, respectively. Holiday is a timeshare company that allows customers to purchase one or more of its vacation properties in weekly increments that can be used annually during the designated period. As part of the transaction, Holiday’s customers typically elect to finance their timeshare purchases through Holiday, which results in the execution of a promissory note and mortgage.

Mayer’s Purchase, Default, and Dispute

On September 15, 2014, Mayer entered into his purchase agreement with Holiday, which contained a title and closing provision stating the transaction would not close until Mayer made the first three monthly payments, and Holiday recorded a deed in Mayer’s name. The purchase agreement also included a purchaser’s default provision stating that upon Mayer’s default or breach of any of the terms or conditions of the agreement, all sums paid by Mayer would be retained by Holiday as liquidated damages and the parties to the purchase agreement would be relieved from all obligations thereunder. Further, the purchase agreement provided that any payments made under a related promissory note prior to the closing would be subject to the purchaser’s default provision. On the same day, Mayer executed a promissory note to finance his timeshare purchase, which was for a term of 120 months. On July 13, 2015, Holiday recorded a deed in Mayer’s name, and he proceeded to tender timely monthly payments until May 2017. As a result of Mayer’s failure to tender subsequent payments, Holiday reported Mayer’s delinquency to the CRA.

Approximately two years later, Mayer obtained a copy of his credit report and discovered Holiday had reported a past-due balance. Thereafter, Mayer sent multiple letters to the CRA disputing the debt, as he believed the purchase agreement was terminated under the purchaser’s default provision. Each dispute was communicated to Holiday, who in turn certified that the information was accurately reported. Mayer sued Holiday for an alleged violation of 15 U.S.C. § 1681s-2(b) of the FCRA based on the furnishing of inaccurate information and failure to “fully and properly re-investigate” the disputes. Holiday eventually moved for partial summary judgment, which the District Court granted. The District Court reasoned that the underlying issue of whether the default provision excused Mayer’s obligation to keep paying was a legal dispute rather than a factual inaccuracy and, in turn, made Mayer’s claim not actionable under the FCRA. Mayer timely appealed to the Eleventh Circuit.

Holden’s Purchase, Default, and Dispute

On June 25, 2016, Holden entered into her purchase agreement with Holiday, which contained a nearly identical title and closing provision to that of Mayer’s purchase agreement. Additionally, Holden’s purchase agreement incorporated a similar purchaser’s default provision. Similarly, Holden executed a promissory note to finance her timeshare purchase, which was for a term of 120 months, and entered into a mortgage to secure the payments under the note. After making her third payment, Holden defaulted and hired an attorney to cancel the purchase agreement pursuant to the closing and title provision and purchaser’s default provision. However, Holiday disputed the purchase agreement was canceled and, on June 19, 2017, recorded a timeshare deed in Holden’s name. More importantly, Holiday reported Holden’s delinquent debt to the CRA.

In response, Holden’s attorney sent three dispute letters to Holiday, which resulted in Holiday investigating the dispute and determining the reporting was accurate since Holden was still obligated under the note. Eventually, Holden sued Holiday for various violations of Florida State law and the FCRA. Holden claimed Holiday reported inaccurate information to the CRA, failed to conduct an appropriate investigation, and failed to correct the inaccuracies. The parties filed competing motions for partial summary judgment, which ended with the District Court granting Holiday’s motion and denying Holden’s motion. Specifically, the District Court held that Holden’s FCRA claim failed because contract disputes regarding whether Holden still owed the underlying debt are legal disputes and not factual inaccuracies. Holden timely appealed to the Eleventh Circuit.

The Fair Credit Reporting Act

As the Eleventh Circuit reiterated in Holden, when a furnisher is notified of a consumer’s dispute, the furnisher must undertake the following three actions: (1) conduct an investigation surrounding the disputed information; (2) review all relevant information provided by the CRA; and (3) report the results of the investigation to the CRA. When a furnisher determines an item of information disputed by a consumer is incomplete, inaccurate, or cannot be verified, the furnisher is required to modify, delete, or permanently block reporting of the disputed information. See 15 U.S.C. § 1681s-2(b)(1)(E). Additionally, any disputed information that a furnisher determines is inaccurate or incomplete must be reported to all other CRAs. See 15 U.S.C. § 1681s-2(b)(1)(D). Despite the foregoing, consumers have no private right of action against furnishers merely for reporting inaccurate information to the CRAs. The only private right of action a consumer may assert against a furnisher is for a violation of 15 U.S.C. § 1681s-2(b) for failure to conduct a reasonable investigation upon receiving notice of a dispute from a CRA. See 15 U.S.C. § 1681s-2(c)(1)).

To successfully prove an FCRA claim, the consumer must demonstrate the following: (1) the consumer identified inaccurate or incomplete information that the furnisher provided to the CRA; and (2) the ensuing investigation was unreasonable based on some facts the furnisher could have uncovered that establish the reported information was inaccurate or incomplete.

The Eleventh Circuit’s Decision

In affirming the District Court’s decisions granting summary judgment and dismissing the FCRA claims, the Eleventh Circuit clarified that whether the alleged inaccuracy was factual or legal was “beside the point. Instead, what matters is whether the alleged inaccuracy was objectively and readily verifiable.” Specifically, the Eleventh Circuit cited to Erickson v. First Advantage Background Servs. Corp., 981 F. 3d 1246, 1251-52 (11th Cir. 2020), which defined “accuracy” as “freedom from mistake or error.” The Eleventh Circuit continued by reiterating that “when evaluating whether a report is accurate under the [FCRA], we look to the objectively reasonable interpretations of the report.” As such, “a report must be factually incorrect, objectively likely to mislead its intended user, or both to violate the maximal accuracy standards of the [FCRA].”

Based on this standard, the Eleventh Circuit held that the alleged inaccurate information on which Mayer and Holden based their FCRA claims was not objectively and readily verifiable since the information stemmed from contractual disputes without simple answers. As such, the Eleventh Circuit found that Holiday took appropriate action upon receiving Mayer and Holden’s disputes by assessing the issues and determining whether the respective debts were due and/or collectible, which thereby satisfied its obligation under the FCRA. While Mayer and Holden argued to the contrary, the Eleventh Circuit held that the resolutions of these contract disputes were not straightforward applications of the law to facts. In support of its decision, the Eleventh Circuit cited to the fact that Florida State courts have reviewed similar timeshare purchase agreements and reached conflicting conclusions about whether the default provisions excused a consumer’s obligation to pay the underlying debt.

Conclusion

Holden is a limited victory for furnishers, as the Eleventh Circuit declined to impose a bright-line rule that only purely factual or transcription errors are actionable under the FCRA and held a court must determine whether the alleged inaccurate information is “objectively and readily verifiable.” Accordingly, there are situations when furnishers are required by the FCRA to accurately report information derived from the readily verifiable and straightforward application of the law to facts. One example of such a situation is misreporting the clear effect of a bankruptcy discharge order on certain types of debt. Thus, furnishers should revisit their investigation and verification procedures so they do not run afoul of the FCRA. Furnishers should also continue to monitor for developing case law as other circuit courts confront these issues.

A New Day for “Natural” Claims?

On May 2, the Second Circuit upheld summary judgment in favor of KIND in a nine year old lawsuit challenging “All Natural” claims. In Re KIND LLC, No. 22-2684-cv (2d Cir. May 2, 2024). Although only time will tell, this Circuit decision, in favor of the defense, may finally change plaintiffs’ appetite for “natural” cases.

Over the many years of litigation, the lawsuit consolidated several class action filings from New York, Florida, and California into a single, multi-district litigation with several, different lead plaintiffs. All plaintiffs alleged that “All Natural” claims for 39 KIND granola bars and other snacks were deceptive. Id. at 3. Plaintiff had alleged that the following ingredients rendered the KIND bars not natural: soy lecithin, soy protein isolate, citrus pectin, glucose syrup/”non-GMO” glucose, vegetable glycerine, palm kernel oil, canola oil, ascorbic acid, vitamin A acetate, d-alpha tocopheryl acetate/vitamin E, and annatto.

The Second Circuit found that, in such cases, the relevant state laws followed a “reasonable consumer standard” of deception. Id. at 10. Further, according to the Second Circuit, the “Ninth Circuit has helpfully explained” that the reasonable consumer standard requires “‘more than a mere possibility that the label might conceivably be misunderstood by some few consumers viewing it in an unreasonable manner.’” Id. (quoting McGinity v. Procter & Gamble Co., 69 F.4^th 1093, 1097 (9th Cir. 2023)). Rather, there must be “‘a probability that a significant portion of the general consuming public or of targeted consumers, acting reasonably in the circumstances, could be misled.’” Id. To defeat summary judgement, the plaintiffs would need to present admissible evidence showing how “All Natural” tends to mislead under this standard.

The Second Circuit agreed with the lower court that plaintiffs’ deposition testimony failed to provide such evidence where it failed to “establish an objective definition” representing reasonable consumer understanding of “All Natural.” Id. at 28. While one plaintiff believed the claim meant “not synthetic,” another thought it meant “made from whole grains, nuts, and fruit,” while yet another believed it meant “literally plucked from the ground.” Id. The court observed that plaintiffs “fail[ed] to explain how a trier of fact could apply these shifting definitions.” Id. The court next rejected as useful evidence a dictionary definition of “natural,” which stated, “existing or caused by nature; not made or caused by humankind.” Id. at 29. The court reasoned that the dictionary definition was “not useful when applied to a mass-produced snack bar wrapped in plastic” – something “clearly made by humans.” Id.

The court, finally, upheld the lower court’s decision to exclude two other pieces of evidence the plaintiffs offered. First, the Second Circuit agreed that a consumer survey was subject to exclusion where leading questions biased the results. Id. at 21-22. The Second Circuit also agreed that an expert report by a chemist lacked relevance where it assessed “typical” sourcing of ingredients, not necessarily how KIND’s ingredients were manufactured or sourced. Id. at 22-24.

For more news on Food Advertising Litigation, visit the NLR Biotech, Food, Drug section.

Bidding Farewell, For Now: Google’s Ad Auction Class Certification Victory

A federal judge in the Northern District of California delivered a blow to a potential class action lawsuit against Google over its ad auction practices. The lawsuit, which allegedly involved tens of millions of Google account holders, claimed Google’s practices in its real-time bidding (RTB) auctions violated users’ privacy rights. But U.S. District Judge Yvonne Gonzalez Rogers declined to certify the class of consumers, pointing to deficiencies in the plaintiffs’ proposed class definition.

According to plaintiffs, Google’s RTB auctions share highly specific personal information about individuals with auction participants, including device identifiers, location data, IP addresses, and unique demographic and biometric data, including age and gender. This, the plaintiffs argued, directly contradicted Google’s promises to protect users’ data. The plaintiffs therefore proposed a class definition that included all Google account holders subject to the company’s U.S. terms of service whose personal information was allegedly sold or shared by Google in its ad auctions after June 28, 2016.

But Google challenged this definition on the basis that it “embed[ded] the concept of personal information” and therefore subsumed a dispositive issue on the merits, i.e., whether Google actually shared account holders’ personal information. Google argued that the definition amounted to a fail-safe class since it would include even uninjured members. The Court agreed. As noted by Judge Gonzalez Rogers, Plaintiffs’ broad class definition included a significant number of potentially uninjured class members, thus warranting the denial of their certification motion.

Google further argued that merely striking the reference to “personal information,” as proposed by plaintiffs, would not fix this problem. While the Court acknowledged this point, it concluded that it did not yet have enough information to make that determination. Because the Court denied plaintiffs’ certification motion with leave to amend, it encouraged the parties to address these concerns in any subsequent rounds of briefing.

In addition, Judge Gonzalez raised that plaintiffs would need to demonstrate that the RTB data produced in the matter thus far was representative of the class as a whole. While the Court agreed with plaintiffs’ argument and supporting evidence that Google “share[d] so much information about named plaintiffs that its RTB data constitute[d] ‘personal information,” Judge Gonzalez was not persuaded by their assertion that the collected RTB data would necessarily also provide common evidence for the rest of the class. The Court thus determined that plaintiffs needed to affirmatively demonstrate through additional evidence that the RTB data was representative of all putative class members, and noted for Google that it could not refuse to provide such and assert that plaintiffs had not met their burden as a result.

This decision underscores the growing complexity of litigating privacy issues in the digital age, and previews new challenges plaintiffs may face in demonstrating commonality and typicality among a proposed class in privacy litigation. The decision is also instructive for modern companies that amass various kinds of data insofar as it demonstrates that seemingly harmless pieces of that data may, in the aggregate, still be traceable to specific persons and thus qualify as personally identifying information mandating compliance with the patchwork of privacy laws throughout the U.S.

A Paradigm Shift in Legal Practice: Enhancing Civil Litigation with Artificial Intelligence

A paradigm shift in legal practice is occurring now. The integration of artificial intelligence (AI) has emerged as a transformative force, particularly in civil litigation. No longer is AI the stuff of science fiction – it’s a real tangible power that is reshaping the manner in which the world functions and, along with it, the manner in which the lawyer practices. From complex document review processes to predicting case outcomes, AI technologies are revolutionizing the way legal professions approach and navigate litigation and redefining traditional legal practice.

Streamlining Document Discovery and Review

One of the most time-consuming tasks in civil litigation is discovery document analysis and review. Traditionally, legal teams spend countless hours sifting through documents to identify relevant evidence, often reviewing the same material multiple times, depending on the task at hand. However, AI-powered document review platforms can now significantly expedite this process. By leveraging natural language processing (NLP) and machine learning algorithms, there platforms can quickly analyze and categorize documents based on relevance, reducing the time and resources required for document review while ensuring thoroughness and accuracy. AI in the civil discovery process offers a multitude of benefits for the practitioner and cost saving advantages for the client, such as:

• Efficiency: AI powered document review significantly reduces required discovery, allowing legal teams to focus their efforts on higher value tasks and strategic analysis;

• Accuracy: By automating the initial document review process AI helps minimize potential human error and ensures a greater consistency and accuracy in identifying relevant documents and evidence;

• Cost-effectiveness: AI driven platforms offer a cost-effective alternative to traditional manual review methods, helping to lower overall litigation costs for clients

• Scalability: AI technology can easily scale to handle large volumes of data making it ideal for complex litigation cases with extensive document discovery requirements;

• Insight Generation: AI algorithms can uncover hidden patterns, trends, and relationships within the closed data bases that might not be apparent through manual review, providing valuable strategy and decision-making.

Predictive Analytics for Case Strategy

Predicting case outcomes is inherently challenging, often relying on legal expertise, jurisdictional experience of the lawyer and analysis of the claimed damage. However, AI-driven predictive analytics tools are changing the game by providing hyper-accurate data-driven insights into case strategies. By analyzing past case law, court rulings, and other relevant data points, these tools can forecast-model the likely outcome of a given case, allowing legal teams and clients to make more informed decisions regarding jurisdictionally specific settlement negotiations, trial strategy and resource allocation.

Enhanced Legal Research and Due Diligence

AI-powered legal research tools have become powerful tools for legal professionals involved in civil litigation. These tools utilize advanced algorithms to sift through vast repositories in a closed system of case law, statutes, regulations and legal precedent, delivering relevant information in a fraction of the time it would take through manual research methods. Additionally, AI can assist in due diligence processes by automatically flagging potential legal risks and identifying critical issues within contracts and other legal documents.

Improving case Management and Workflow Efficiency

Managing multiple cases simultaneously can be daunting for legal practitioners and could lead to inefficiencies and oversight. AI-driven case management systems offer a solution by providing centralized case-related information, deadlines and communications. These systems can automate routine tasks, such as scheduling document filing and client communication schedules, freeing up valuable time for attorneys to focus on legal substantive tasks and proactive case movement .

Ethical Considerations and Challenges

While the benefits of AI in civil litigation are undeniable, they also raise important ethical considerations and challenges. Issues such as data privacy, algorithmic bias, and the ethical use of AI in decision-making processes must be carefully addressed to ensure fairness and transparency in the legal system. Additionally, there is a growing need for ongoing education and training to equip legal professionals with the necessary skills to effectively leverage AI tools while maintain ethical standards and preserving the integrity of the legal profession.

Take Away

The integration of AI technologies in civil litigation represents a paradigm shift in legal practice, offering unprecedented opportunities to streamline processes, enhance decision-making and improve client satisfaction. By harnessing the power of AI-driven solutions, legal professionals can navigate complex civil disputes more efficiently and effectively, ultimately delivering better outcomes for clients and advancing the pursuit of just outcomes in our rapidly evolving legal landscape.

Ninth Circuit Rules Against Apache in Dispute Over Sacred “Oak Flat” Site

On March 1, the U.S. Court of Appeals for the Ninth Circuit sided with a lower court decision denying an Apache interest group’s motion for a preliminary injunction against the transfer of copper-rich federal land to private company Resolution Copper.

Oak Flat, a piece of land that the Ninth Circuit acknowledges is “a site of great spiritual value to the Western Apache Indians,” has been at the center of the dispute largely due to the significant copper ore deposits it sits on. Through the Land Transfer Act, Congress directed the federal government to transfer the land to Resolution Copper, which would then mine the ore. Apache Stronghold sued the government, seeking an injunction against the land transfer on the ground that the transfer would violate its members’ rights under the Free Exercise Clause of the First Amendment, the Religious Freedom Restoration Act (“RFRA”), and an 1852 treaty between the United States and the Apaches. The Ninth Circuit disagreed, holding that Apache Stronghold was unlikely to succeed on the merits on any of its three claims before the court.

First, the Ninth Circuit found that under the Supreme Court’s controlling decision in Lyng. There, the Supreme Court held that while the government’s actions with respect to “publicly owned land” would “interfere significantly with private persons’ ability to pursue spiritual fulfillment according to their religious beliefs,” it would also have no “tendency to coerce” them “into acting contrary to their religious beliefs.” The Ninth Circuit also found that the transfer of Oak Flat for mining operations did not discriminate against nor penalize Apache Stronghold’s members, nor deny them an “equal share of the rights, benefits, and privileges enjoyed by other citizens.”

Second, Apache Stronghold’s claim that the transfer of Oak Flat to Resolution Copper would violate RFRA failed for the same reasons because “what counts as ‘substantially burden[ing] a person’s exercise of religion’ must be understood as subsuming, rather than abrogating, the holding of Lyng.”

Finally, the court ruled that Apache Stronghold’s claim that the transfer of Oak Flat would violate an enforceable trust obligation created by the 1852 Treaty of Sante Fe because the government’s statutory obligation to transfer Oak Flat abrogated any treaty obligation.

The case demonstrates the difficulty Tribes have in stopping major development projects on federal land on religious grounds.

Fourth Circuit Reverses $1 Billion Award for Vicarious Liability Claim for More than 10,000 Works

On January 12, 2021, the U.S. District Court for the Eastern District of Virginia awarded a group of music recording companies (the plaintiffs) a $1 billion verdict against Cox Communications (Cox). The Virginia court’s ruling found that Cox, an internet service provider (ISP), was contributorily and vicariously liable for copyright infringement committed by certain subscribers on its networks. The plaintiffs alleged that the ISP allowed the unauthorized downloading and distribution of more than 10,000 copyrighted works by Cox subscribers who had already received three or more notices of infringement. The district court in Virginia established that the “takedown” notices sent by the plaintiffs provided Cox with the requisite knowledge of its subscribers’ repeated infringement to substantiate their claim that Cox was contributorily liable, suggesting that Cox had sufficient specific knowledge of infringement to have done something about it.

The plaintiffs’ notice to Cox identified the IP address of the subscriber, as well as the time of infringement and the identification of the infringed work, which the plaintiffs argued was sufficiently specific knowledge for Cox to be able to identify the subscriber and to exercise its policy by suspending or terminating the infringing subscriber. This case proceeded to trial on two theories of secondary liability – vicarious and contributory copyright infringement. The plaintiffs argued that Cox failed to act on these known repeat infringers, and the jury found Cox liable for willful contributory infringement and vicarious infringement, ordering Cox to pay more than $99,000 for each of the infringed-upon works. Cox appealed the jury verdict.

On appeal, before the U.S. Court of Appeals for the Fourth Circuit, Cox raised several questions of law concerning the secondary liability for copyright infringement, as well as what constitutes a derivative work in the Internet Age.

Vicarious Infringement
The Fourth Circuit’s analysis first considered whether the district court erred in denying plaintiffs’ vicarious infringement claim. “A defendant may be held vicariously liable for a third party’s copyright infringement [if the defendant] (1) profits directly from the infringement and (2) has a right and ability to supervise the direct infringer.” See Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 930 n.9 (2005) (internal citations omitted). The Fourth Circuit found that the plaintiffs failed to establish the first element as a matter of law and thus found that the plaintiffs failed to establish that Cox was vicariously liable.

In reaching this decision, the Fourth Circuit turned to the landmark decision in Shapiro, Bernstein & Co., 316 F.2d 304 (2d Cir. 1963), a case on vicarious liability for infringing copyrighted music recordings. In Shapiro, a department store was sued for the selling of “bootleg” records by a concessionaire operating in its stores. The store had the right to supervise the concessionaire and employees, demonstrating its control over the infringement. There, the store received a certain percentage of every record sale, “whether ‘bootleg’ or legitimate,” giving it “a more definite financial interest” in the infringing sales.” Thus, the Shapiro court found that the financial gains were clearly spelled out from the bootleg sales and acts of infringement in Shapiro.

Next, the Fourth Circuit recognized that courts have found that a defendant may possess a financial interest in a third party’s infringement of copyrighted music, even absent a strict correlation between each act of infringement and an added penny of profits. See Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996). In Fonovisa, the operator of a swap meet allowed vendors to sell infringing goods, and the operator collected “admission fees, concession stand sales, and parking fees” but no sales commission “from customers who want[ed] to buy the counterfeit recordings at bargain-basement prices.” The Fonovisa court found that the plaintiffs adequately showed a financial benefit from the swap meet owner and the sales of pirated recordings at the swap meet, which was a draw for customers. Thus, the infringing sales “enhance[d] the attractiveness of the venue of the potential customers, finding the swap meet operator had a financial interest in the infringement sufficient to state a claim for vicarious liability.”

The Fourth Circuit established that Shapiro and Fonovisa provided the steppingstones of the principles of copyright infringement to the internet and cyberspace and that Congress agreed that “receiving a one-time setup fee and flat periodic payment for service” from infringing and non-infringing users alike ordinarily “would not constitute a financial benefit directly attributable to the infringing activity.” Ellison v. Robertson, 357 F. 3d 1072, 1079 (9th Cir. 2004) (internal citations omitted). The Court also reviewed other court precedents, including A&M Records v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001), to show that increased pirated music drew in users as a direct financial interest for vicarious liability., but also notes that courts have found no evidence of a direct financial benefit between subscribers of American Online (AOL) and the availability of infringing content.’’ Ellison, 357 F.3d at 1079.

Against this backdrop, the Fourth Circuit held that to prove Cox was vicariously liable, the plaintiffs had to demonstrate that Cox profited from its subscribers’ infringing download and distribution of the plaintiffs’ copyrighted songs, which – given the evidence at trial – it did not. While the district court found it was enough that Cox repeatedly declined to cancel an ISP subscriber’s monthly subscription fee, the Fourth Circuit found this evidence to be insufficient. Instead, the Fourth Circuit found that the continued monthly payment fees for internet service, even by repeat infringers, was not a financial benefit flowing directly from the copyright infringement. Cox established that subscribers paid a flat fee even if all of its subscribers stopped infringing. Recognizing that an internet provider would necessarily lose money if it canceled subscriptions only demonstrates that service providers have a direct financial interest in providing subscribers with access to the internet only. Thus, the Fourth Circuit held that vicarious liability demands proof that the defendant profits directly from the acts of infringement for which it is being held accountable.

To rebut this, the plaintiffs claimed that the jury could infer that subscribers paid monthly membership fees based on the high volume of infringing content. The Fourth Circuit rejected this argument and found that the evidence was insufficient to prove that customers were drawn to Cox’s internet service or that they continued the service because they were specifically drawn to the opportunity to infringe the plaintiffs’ copyrights. The plaintiffs further asserted that subscribers were willing to pay more for the opportunity to infringe based on Cox’s tiered structure for internet access – but the plaintiffs fell short in proving this claim because no reasonable inference could be drawn that Cox subscribers paid more for faster internet to infringe on the copyrighted works. Ultimately, the Court found that the plaintiffs could not establish a causal connection between subscribers’ copyright infringement and Cox’s revenue for monthly subscriptions. Thus, the Fourth Circuit held that Cox was not liable for its subscribers’ copyright infringement and reversed the district court’s ruling on this theory. The court vacated the $1 billion damages award and remanded the case for a new trial on damages, holding that the jury’s finding of vicarious liability could have influenced its assessment of statutory damages.

Contributory Infringement
The Fourth Circuit then examined the remaining issue of contributory infringement. Under this theory, “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another is liable for the infringement, too.” Cox argued that the district court erred by taking away the factual determination from the jury that notices of past infringement established Cox’s knowledge that subscribers were substantially certain to infringe in the future. Cox had contracted with a third party to provide copyright violation notices to users and asserted that it used these notices as their safe harbor under the Digital Millennium Copyright Act to alert violators and to terminate access to users who were repeat infringers. Despite this, the Fourth Circuit ultimately agreed with the jury’s finding that Cox materially contributed to copyright infringement occurring on its network and that its conduct was culpable.

Therefore, a three-judge panel found that Cox was liable for willful copyright infringement but reversed the vicarious liability verdict and remanded a new trial on damages. The Fourth Circuit held that because Cox did not profit from its subscribers’ acts of infringement, a legal prerequisite for vicarious liability, Cox was not liable for damages under the vicarious liability theory.

The Impact
The Fourth Circuit’s decision recognizes a new dawn breaking in copyright law, one that requires a causal connection between profit and/or financial gain and a defendant’s acts of infringement to prove vicarious liability in a copyright infringement claim under the Copyright Act. The plaintiffs attempted to bridge the financial gap between acknowledging access to infringing content through a monthly internet subscription and high-volume infringing acts. However, the Fourth Circuit found that this leap in logic was a step too far and reversed the award for vicarious liability for lack of evidence to find this missing connection between Cox subscribers and infringing plaintiffs’ content.

While this may be one route the courts may consider to reduce music piracy damages, it remains to be seen whether other courts will take this approach to determining that profit is the key element supporting other vicarious liability claims in cyberspace.

The SEC Speaks–And Fails to Defend Mandatory Climate Disclosures

During the opening remarks of the two-day SEC Speaks Conference, Chairman Gensler failed to express any statement of support in connection with the SEC’s recently promulgated rule on mandatory climate disclosures. (Instead, his speech focused on a number of other topics, including clearinghouse rules and proposed regulations.) In contrast, Republican SEC Commissioner Uyeda devoted the entirety of his speech to offering critiques of the SEC’s newly enacted mandatory climate disclosure rule.

While most of Commissioner Uyeda’s criticisms had been previously voiced on other occasions, certain legal arguments achieved greater prominence in these remarks. In particular, Commissioner Uyeda emphasized the concept of materiality, noting that “[t]he significant changes in the final rule reflect a recognition that no disclosure rule that veers from materiality is likely to survive a court challenge,” and opining that “changes to selected portions of the rule text intended to mitigate legal risk do not necessarily convert a climate change activism rule to a material risk disclosure rule.” There was also a focus on procedural concerns, including a potential violation of the Administrative Procedure Act due to “the failure to repropose the rule” since “the changes were so significant,” and that “the fail[ure] to consider [the] rule’s economic consequences [renders] the adoption of the rule arbitrary and capricious.” Finally, Commissioner Uyeda compared the climate disclosure rule to the previously enacted conflict minerals rule (which was mandated by Congress), stating that “public companies and investors are stuck with a mandatory disclosure rule that deviates from financial materiality but fails to resolve the social purpose for which it was adopted.” Each of these arguments should be expected to feature in the upcoming litigation in the Eighth Circuit concerning the legality of the SEC’s climate disclosure rule.

Still, the failure by Chairman Gensler and his fellow Democratic Commissioners to offer a robust public defense of the climate disclosure rule may simply reflect a shifting of priorities now that the rule has been enacted. Notably, just a few days ago–on March 22, 2024–Chairman Gensler forcefully defended the SEC’s climate disclosure rule at a conference hosted by Columbia Law School, where his entire speech advocated the concept of mandatory disclosures and stated that the SEC’s climate disclosure rule “enhance[d] the consistency, comparability, and reliability of [climate-related] disclosures.” Moreover, it is altogether possible that a speech on the second day of the conference might offer a rejoinder to the varied critiques of the climate disclosure rule.

Unlike the conflict minerals rule, which was mandated by Congress, the Commission has acted on its own volition to adopt a climate disclosure rule that seeks to exert societal pressure on companies to change their behavior. It is the Commission that determined to delve into matters beyond its jurisdiction and expertise. In my view, this action deviates from the Commission’s mission and contravenes established law.

https://www.sec.gov/news/speech/uyeda-remarks-sec-speaks-040224

AI Got It Wrong, Doesn’t Mean We Are Right: Practical Considerations for the Use of Generative AI for Commercial Litigators

Picture this: You’ve just been retained by a new client who has been named as a defendant in a complex commercial litigation. While the client has solid grounds to be dismissed from the case at an early stage via a dispositive motion, the client is also facing cost constraints. This forces you to get creative when crafting a budget for your client’s defense. You remember the shiny new toy that is generative Artificial Intelligence (“AI”). You plan to use AI to help save costs on the initial research, and even potentially assist with brief writing. It seems you’ve found a practical solution to resolve all your client’s problems. Not so fast.

Seemingly overnight, the use of AI platforms has become the hottest thing going, including (potentially) for commercial litigators. However, like most rapidly rising technological trends, the associated pitfalls don’t fully bubble to the surface until after the public has an opportunity (or several) to put the technology to the test. Indeed, the use of AI platforms to streamline legal research and writing has already begun to show its warts. Of course, just last year, prime examples of the danger of relying too heavily on AI were exposed in highly publicized cases venued in the Southern District of New York. See e.g. Benajmin Weiser, Michael D. Cohen’s Lawyer Cited Cases That May Not Exist, Judge Says, NY Times (December 12, 2023); Sara Merken, New York Lawyers Sanctioned For Using Fake Chat GPT Case In Legal Brief, Reuters (June 26, 2023).

In order to ensure litigators are striking the appropriate balance between using technological assistance in producing legal work product, while continuing to adhere to the ethical duties and professional responsibility mandated by the legal profession, below are some immediate considerations any complex commercial litigator should abide by when venturing into the world of AI.

Confidentiality

As any experienced litigator will know, involving a third-party in the process of crafting of a client’s strategy and case theory—whether it be an expert, accountant, or investigator—inevitably raises the issue of protecting the client’s privileged, proprietary and confidential information. The same principle applies to the use of an AI platform. Indeed, when stripped of its bells and whistles, an AI platform could potentially be viewed as another consultant employed to provide work product that will assist in the overall representation of your client. Given this reality, it is imperative that any litigator who plans to use AI, also have a complete grasp of the security of that AI system to ensure the safety of their client’s privileged, proprietary and confidential information. A failure to do so may not only result in your client’s sensitive information being exposed to an unsecure, and potentially harmful, online network, but it can also result in a violation of the duty to make reasonable efforts to prevent the disclosure of or unauthorized access to your client’s sensitive information. Such a duty is routinely set forth in the applicable rules of professional conduct across the country.

Oversight

It goes without saying that a lawyer has a responsibility to ensure that he or she adheres to the duty of candor when making representations to the Court. As mentioned, violations of that duty have arisen based on statements that were included in legal briefs produced using AI platforms. While many lawyers would immediately rebuff the notion that they would fail to double-check the accuracy of a brief’s contents—even if generated using AI—before submitting it to the Court, this concept gets trickier when working on larger litigation teams. As a result, it is not only incumbent on those preparing the briefs to ensure that any information included in a submission that was created with the assistance of an AI platform is accurate, but also that the lawyers responsible for oversight of a litigation team are diligent in understanding when and to what extent AI is being used to aid the work of that lawyer’s subordinates. Similar to confidentiality considerations, many courts’ rules of professional conduct include rules related to senior lawyer responsibilities and oversight of subordinate lawyers. To appropriately abide by those rules, litigation team leaders should make it a point to discuss with their teams the appropriate use of AI at the outset of any matter, as well as to put in place any law firm, court, or client-specific safeguards or guidelines to avoid potential missteps.

Judicial Preferences

Finally, as the old saying goes: a good lawyer knows the law; a great lawyer knows the judge. Any savvy litigator knows that the first thing one should understand prior to litigating a case is whether the Court and the presiding Judge have put in place any standing orders or judicial preferences that may impact litigation strategy. As a result of the rise of use of AI in litigation, many Courts across the country have responded in turn by developing either standing orders, local rules, or related guidelines concerning the appropriate use of AI. See e.g., Standing Order Re: Artificial Intelligence (“AI”) in Cases Assigned to Judge Baylson (June 6, 2023 E.D.P.A.), Preliminary Guidelines on the Use of Artificial Intelligence by New Jersey Lawyers (January 25, 2024, N.J. Supreme Court). Litigators should follow suit and ensure they understand the full scope of how their Court, and more importantly, their assigned Judge, treat the issue of using AI to assist litigation strategy and development of work product.

Clueless in the Cubicle

The Journal’s recent piece about managing employees with misperceptions about their employment self-worth reminds us once again why honest and timely performance feedback makes good business sense. I have written before about the benefit of candid performance reviews, even at the risk of hurt feelings. I have also defended performance evaluations as an important tool to mitigate potential liability for employment claims. The Journal’s piece states that nearly four in 10 employees who received the lowest grades from their managers last year rated themselves as highly valued by the organization based on almost two million assessments. If true, that represents an astounding disconnect between performance-related perception and reality.

Theory is one thing. Managers who are adept at giving feedback is another. While businesses are rightly focused on running the organization’s business, training managers how to deliver quality feedback is often assigned a low priority. Adding to that deficiency is the often unmet need for managers with the right EQ to deliver feedback. But despite those challenges, which exist even for employees who relish feedback, there are some important guidelines for managing employees with an inflated sense of employment worth. Here are a few suggestions for delivering feedback for performance-deniers, who clearly require a more exacting approach.

First, performance discussions (especially about the areas in which the employee is falling short) must be done regularly and ongoing, and especially promptly after an error or mistake is committed. Performance deniers will use a one-time annual review (even if negative) to point out the obvious: if they are falling so short, the manager would not have waited so long to deliver that message (and which, in their view, adds to the review’s inherent unreliability).

Second, managers should not shy away from a denier’s tendency to fight the feedback (they disagree with it, it is wrong, it is fake). Rather, managers should use the denier’s dispute to double down on feedback: the employee’s inability to accept criticism, consider it, and even hear it, are all key parts of an employee’s commitment to the organization to grow and do better. Growth requires introspection. The refusal to engage in that process is itself a performance deficiency.

Third, managers should not permit performance conversations to become a discussion about victimization, unfair treatment or perceived persecution (all of which may end up becoming a legal claim). Performance deniers are adept at deflecting: one key deflection is to blame others and make the discussion about things entirely outside performance parameters. Managers need to be empowered to insist on returning the feedback conversation back to the key and only focus: what is the employee doing well and how can (and must) the employee improve?

Finally, organizations need to assess the impact performance deniers have on employee morale. While not all employees will share the same perception, most people are aware when others aren’t pulling their weight – especially when they are tasked to pick up the pieces. Those on the downhill slope of these assignments – often the best performers because of the natural inclination to step up – may not stick around. The slippery slope here is clear and cluelessness at work is not a great look for the business or the employee.

Tag: Litigation

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