Its been a long time coming, but a change gon’ come.

The “next great copyright act” is the change that Register of Copyrights, Maria Pallante, is calling on Congress to make (perhaps taking a cue from our neighbors up north, eh?) Among the list of changes called for by the Register is reformation in the music marketplace.

It would be difficult to ignore the effect that the current copyright system and new technology has had on the music industry over the past few years. Digital music exploitation (including online downloading and streaming) is quickly becoming the dominant revenue generator for the industry, but this has come at a cost. Pandora and the like, the radio broadcast and the recording industries continue to fight Congress and each other over the music licensing and statutory royalty system, an issue heavily influenced by a rise in new music business models. The first sale doctrine, with respect to digital sales, is another battlefield, as well as the evergreen music piracy issue. Whatever your personal preference or stance, the law is definitely “showing the strain of its age.”

With such a wide range of issues, what should the next great copyright act do to fix the music marketplace? To start, we need to identify what isn’t working- check. Next, we need to develop a game plan to address those issues. I would like to offer my suggestions for the game plan…

Start with the Statute

As every first year law school student knows, analysis of a legal issue always begins with the actual text of the statute. Here, should be no different. In determining the scope of the reform, my first suggestion would be to start with the framework of the U.S. Copyright law, specifically, Section 101 (Definitions) and Section 106 (Exclusive rights in copyrighted works).

Section 101 provides the definitions for certain key terms included in the Copyright Act. Even former Register Marybeth Peters would have to admit that this Section could use a tune-up. For example, I would be hard pressed to find a non-lawyer who has heard of a phonorecord or one who could explain the concept of a digital phonorecord delivery (despite their vast iTunes collection).

My suggestion for Section 101 is two-fold: 1) Update Section 101 to include all key terms in the Copyright Act (for example, adding digital phonorecord delivery to Section 101, where it is not currently listed, or a statutory definition of streaming); and 2) Revise the language in Section 101 to reflect modern colloquial language (for example, replacing phonorecord, with a less legalese-sounding word). This reform, although simple, would benefit the public and music industry participants in better understanding the substantive areas of the statute.

Section 106 provides the five exclusive rights implicated in the music marketplace: the right to reproduce (106(1)); the right to create derivative works (remixes) (106(2)); the right to distribute (106(3)); the right to publicly perform (106(4)); and the right to perform by digital audio transmission (106(6)).  The rise of the digital music era has introduced new exploitation of these rights not originally contemplated by the framers of the copyright law. Today, download stores, music streaming services, Internet radio, and subscription services are all an integral part of the recorded music market. Additionally the globalization of the music licensing marketplace continues to influence the use of these rights. Yet, the courts and legislature are still adapting to these changes, playing catch up in attempt to protect the copyright owners and innovators.

A review of each exclusive right within the context of music exploitation would be instructive to understanding the gaps and holes that have been poked into each right by new technology and consumer habits. The public performance right, in particular, will require special attention to address streaming and sound recording protection. Starting with the framework of the current copyright law would afford Congress, the Copyright Office and related parties the opportunity to strengthen the foundation of the framework, before tackling the more esoteric sum of its parts.

DATA DATA DATA

As one intellectual property attorney noted, “the problem with copyright legislation is that it is always interest-driven.” In shaping the next great copyright act, Congress and the Copyright Office should seek to avoid overly biased-rhetoric from industry participants in lieu of using available data to justify future changes to copyright law.

One advantage of living in the digital age is availability and access to information. Industry trade organizations and annual reports, such as the IFPI Digital Music Report and the Nielson Company & Billboard Music Industry Report have provided a substantive glimpse on the industry-at-large, while companies such Apple, Spotify, and Pandora continue to maintain statistics on user consumption habits and content fees. Using this information could help to avoid making arbitrary decisions about the shape and scope of the new law by instead relying on big data.

The Copyright Office could also benefit from this data and technology by developing interactive teaching tools and educational resources for public, such as the Music Collaboration Rights Advisor system, a legal expert system developed by NeotaLogic and myself, to inform the public about potential new changes.

Policy Considerations:

I think that it is also important to come to an understanding on some general principles for the “next great copyright act.” For example, who are we building this new copyright act for and why? The future, of course, and the future is digital. But how has technology shaped or re-shaped the principle values of our copyright system?

The Copyright Clause calls on us “to promote the progress of arts” and as the Register recently noted, this means maintaining copyright law for the benefit of “serving the public interest.” The balance is that the law must also protect the economic interests of the creators. The Copyright Clause affords protection to these individuals by providing them with a limited exclusive right to use their creative creations. The purpose of this is to encourage investment and provide an incentive to continue the production of the arts and sciences. So, when we speak of copyright reform what we really mean to say is ‘the protection of the economic and revenue stream for copyright owners and other interested parties.’ Thus, a new law must continue to contemplate flexibility between these interests, enough to encourage and support innovation and competition among the services and products offered to the public, but also, to some extent, to protect the bottom line. Most importantly, the “next great copyright act” must mend the bridges between copyright-counter culture, the copyleft movement, and Congress.

Buyer beware! No, not really.  But maybe…

On March 19^th, the Supreme Court decided in Kirtsaeng v. John Wiley & Sons, Inc. that the first sale doctrine of the U.S. Copyright Act applies to copies of a copyrighted work made abroad, so long as the copies are made in accordance with the Copyright Act. In its 6-3 decision, the Supreme Court made it clear that the Copyright Act is not here to protect your price discrimination business models or your bottom line.

In this case, Kirtsaeng, a foreign math student, re-sold copies of foreign edition English language textbooks, first purchased at Thai shops where they sold for lower prices, and retained the profit from the U.S. sales. Textbook publisher John Wiley & Sons, Inc. sued Kirtsaeng for copyright infringement, claiming that Kirtsaeng’s unauthorized importation of its books and later resale amounted to infringement of Wiley’s exclusive right to distribute.

The question before the Court was whether the first sale doctrine applied to protect the purchaser of a foreign-manufactured copy made with the copyright owner’s permission.  At issue were two provisions of the Copyright Act: Section 109, the first sale doctrine, which provides the owner of a copy of a copyrighted work that is “lawfully made under this title” with the right to resell or dispose of that copy after a lawful sale; and Section 602(a), the importation provision, which prohibits importing a copy into the United States without the copyright owner’s permission. These two provisions are linked by Section 106(3), the exclusive right to distribute; the first sale doctrine is an exception to the exclusive right, and Section 602 outlines a violation of the exclusive right.

Both the District Court and Second Circuit held that the first sale doctrine did not apply to goods or copies of American copyrighted works manufactured abroad.  However, the Supreme Court, relying on plain English, precedent, and common law found that the first sale doctrine imposes no geographical limitation on the words “lawfully made under this title,” thus the first sale doctrine would apply to foreign-manufactured copyrighted works as long as their manufacture met the requirements of U.S. Copyright law. In the Court’s words, “’lawfully made’ suggests an effort to distinguish copies that were lawfully made from those that were not, and ‘under this title’ sets forth the standard of lawfulness, being that US Copyright Act.“

The Supreme Court’s decision left many music industry insiders divided, with the National Association of Recording Merchandisers (NARM) claiming victory, leaving the RIAA, along with MPAA, to take the stance that the Court’s decision will hinder American business.

Unpack the Court’s reasoning and you’ll find that the real issue in Kirtsaeng is the protection of the economic exploitation of the copyright. The Court is clearly divided over how far the Copyright Act should go to protect the bottom line. The majority made it clear that it found no precedent to suggest a legal preference for a copyright statute interpretation that provides for market divisions. The majority acknowledged that publishers may find it difficult to engage in price discrimination—charging different prices for the same work in different geographic markets—but that the limited exclusive right provided in the Copyright Clause of the Constitution neither suggests the inclusion of an exclusive right to divide markets nor an exclusive right to charge different purchasers different prices for the same work to maximize gain. On the other hand, in the dissent, Justice Ginsburg believes that Congress intended to grant copyright owners permission to segment international markets by enacting Section 602(a)(1).

The effect of this decision will likely have real impact on the manner in which copyrighted works are licensed for domestic and global use.  There is a concern from copyright owners that grey market importation could continue to undermine legitimate publishing businesses and that this decision could allow, if not encourage, the scenario presented in this case to become a legitimate business model—purchasing works in less expensive foreign locales and reselling them domestically, so as to undercut the costs of the domestic versions, while providing the purchaser with a potential profit.

The burden of this opinion will fall upon transactional attorneys, who will need to draft new language to better protect the copyrights in these works. Here, the Court implicitly found that the language currently used by Wiley was not sufficient enough to protect Wiley’s books from the first-sale doctrine exhaustion (“Copyright © 2008 John Wiley & Sons (Asia) Pte Ltd[.] All rights reserved. This book is authorized for sale in Europe, Asia, Africa, and the Middle East only and may be not exported out of these territories. Exportation from or importation of this book to another region without the Publisher’s authorization is illegal and is a violation of the Publisher’s rights. The Publisher may take legal action to enforce its rights. .). This change could be as simple or as complex as copyrighting the foreign language versions of works under foreign copyright law, instead of under U.S. Copyright law; but in the least, requires a better understanding of international copyright law protection, as well as an increased call for harmonization and globalization of international copyright law.

It should also be noted that Kirtsaeng is the second recent case to test the boundaries and applicability of the first sale doctrine; in Capital v. ReDigi, the Southern District of New York court is deciding the issue of whether an online marketplace for pre-owned digital music can re-sell a digital music file after a lawful purchase. Both the Kirtsaeng and ReDigi cases serve as a reminder of the challenges that the current patchwork of copyright law faces in dealing with the trade customs and social norms in today’s marketplace—an issue that Maria Pallante, Register of Copyrights, recently acknowledged.

In the past few years, however, a similar strategy has developed worldwide in the field of copyright, as a way to exploit modern technology and take advantage of our modern culture of illegal downloading.  These people, dubbed as “Copyright Trolls,” have commonly used a technique of mass litigations to try to coerce individuals into cash settlements.  Often the companies initiating these lawsuits are not the original copyright owners, and instead buy up copyrights for the sole purpose of locating infringers and enforcing the rights.

Background and General Strategy Employed

A German IT company called GuardaLey developed technology capable of capturing IP addresses based on real time monitoring of torrent and peer-to-peer software.  GuardaLey, who utilized this technology in Germany, shared their technology with the U.S. company, U.S. Copyright Group (“USCG”), which is run by the law firm Dunlap, Grubb & Weaver.

Taking advantage of GuardaLey’s technology, USCG began filing mass lawsuits against “John Doe” Defendants based on the IP addresses of individuals gathered from the IP monitoring software.  Later, with litigation in place, USCG would subpoena the various Internet Service providers (“ISPs”) for their records pertaining to the identity of the John Does.

Upon uncovering identifying information of an individual, USCG would then send out thousands of nearly identical demand letters threatening litigation unless a prompt payment for a specified amount (typically $1,500 – $2,500) was sent to USCG to serve as a settlement.

In these instances of mass demand letters being sent out, litigation is seldom actually pursued, if at all.  More often than not, the individuals targeted will either pay to settle, ignore the demand, or more recently, hire a lawyer and attempt to fight it.  As far as the USCG and similar companies are concerned, if a person does not pay, the company will move on to the next person.  This method of operation is purely designed for attaining a settlement.

Companies Participating in this Practice

There are several companies utilizing this tactic, such as the U.S. Copyright Group in the film industry, Malibu Media in the porn industry, and Righthaven in the news media industry.  Many of these companies are either backed or led by lawyers and law firms who use the companies to buy up rights in varying sectors for the sole purpose of enforcing alleged infringements.  Righthaven’s behavior was a clear example of this practice, wherein they purchased the copyright of news articles in bulk and proceeded to send out demand letters to website owners who were using the articles.

Most recently, a group who called themselves the Internet Copyright Law Enforcement Agency (“ICLEA”) set out on a shameless Copyright Trolling expedition by not only using the basic scheme outlined above, but also by ramping up their settlement letters to include language of pending criminal charges (not just the civil charges commonly included).

ICLEA claimed the copyright in sound recordings was being infringed, specifically through the use of torrents to download mp3s.  The unique aspect of the ICLEA demand letters was their ability to send notices directly to alleged infringers based on IP addresses, without having to first subpoena an ISP.  This means that ICLEA directly linked the allegedly infringing IP addresses to personal information without first obtaining the information from an ISP.  It is unclear at this point exactly how they obtained the information.

As of February 22^nd of this year, it appears that the ICLEA website has been shutdown after being exposed for their practices, but the manner in which they chose to attack individuals is rather alarming.  In addition to utilizing a name suggestive of a Federal Government agency, claiming a partnership with law enforcement, and renting a virtual office space in Washington D.C., by threatening criminal conviction and using extreme coercion in their letters, the ICLEA have seemed to cross the line of extra-legality on which these copyright infringement tactics often border.

Impact on the Music Industry

With the advent of modern technology and peer-to-peer file sharing, the music industry has seen waves of copyright enforcement movements, most notably the campaigns spearheaded by the Recording Industry Association of America (“RIAA”).  Despite suing well over 20,000 people, the RIAA’s efforts have had little to no effect on slowing infringement through peer-to-peer software.  Now, after years of litigation and heavy criticism, the RIAA has to slowly begun to abandon their mass litigation practices.

Even though the RIAA has utilized mass litigations and sent out countless settlement letters to infringers, they did have one fact on their side – they generally had legitimate claims and goals in enforcing copyrights and curbing infringing behavior.

Copyright Trolls, on the other hand, have a goal which is purely monetary and founded on questionable grounds.  Where the RIAA has been unsuccessful, these companies have stepped in to utilize proven methods of enforcement in a deceptive manner to essentially create an alternative revenue stream.  With the music industry taking one of the biggest hits as a result of peer-to-peer software usage, it would not be surprising to see more and more companies enforcing rights this way.

Defending Against the Claims

Throughout the years, as awareness of these Copyright Trolls has developed, groups such as the ACLU and EFF have staunchly defended these allegations and suits on several grounds, including non-infringement, fair-use, abuse of process, copyright misuse, defamation, extortion, mail and wire fraud, and other claims.

In addition to those defenses, one major issue brought up in several cases is how ineffectual linking IP addresses to the ISP subscribers based on IP monitoring software can be as an evidentiary basis.  While the monitoring software identifies an IP address, it does not prove actual infringement by a specific individual, and often an innocent individual may easily be caught in a widely-cast net.  As a result, many claims of infringement are often tenuous in proving that the actual ISP subscriber was the infringer in question.

Slowly, over time, many advocate groups and lawyers defending against these claims have developed traction in preventing these lawsuits from attacking unsuspecting individuals, but the battles in the courts continue.  The evolution of Copyright Trolling has now led to a progressively blurring line between legitimate copyright enforcement and indiscriminate litigious “shakedown” tactics.

The Wiz? Virgin Records? Tower Records? Where do we go to browse used CDs today (with the exception of a slight few “mom and pop” shops that stood strong against the reign of an emerging Internet, thankfully)? Music aficionados alike, can universally relate to the exhilarating feeling of walking into a music store with $20 in hand, and leaving with 4 CDs, tangible, in good condition, and bargained for. Rare finds were like gold mines for a young jazz collector, like myself, but where do I go now for such obscurities?

At the turn of the 20th century, we witnessed the evolution of Napster (an MP3 file sharing site), but like everything else, that too, came to an end. We lived through sites such as Kazaa, Limewire, and BitTorrent, enabling us to readily share and download an entire music library to call our own, in seconds (or minutes for those of us who were relegated to dial-up). Many, fearful of the potential legal consequences, avoided using such sites and in 2001, were given the option of paying for our music via iTunes (for nominal costs, such as $1 for one song or $10 for an album).

The idea behind the “first sale” doctrine (arising out of §109 of the Copyright Act) is a simple one – once one has acquired a lawfully-made book, CD, or DVD, one can then lend, resell, or give it away without having to get permission from the copyright holder. This doctrine makes used book stores, libraries, and the like, legal. Obvious enough, right? Not quite.

At the end of last year, Capitol Records LLC took on ReDigi, a startup company whose software allows users to resell their own legally purchased music (from iTunes) to other users of the site. Upon the sale, ReDigi’s software then scans the seller’s hard drive and removes the file from it (in order to prevent fraudulent multiple sales of the same file). Some of us never thought we’d see the day (or at least this soon) when we would be able to express our traditional rights of reselling music we no longer want, digitally. After all, we bought it and should have that power!

Capitol is of the position that the “first sale” doctrine should not apply to digital files, as there is no guarantee that the original file has been deleted on resale. Realistically, however, we live in a world of loop-holes, so ultimately, we are confronted with weighing the costs and benefits between the possible duplication of a file on one’s computer, and the denial of rights of those who have spent their hard-earned money on music (and are essentially forced into keeping that music). It seems that Capitol Records may have bigger fish to fry. Are they to ignore the offender who legally buys their new/used CD in a store, burns it on their hard drive, and then resells it? Is it then ok simply because it is tangible? Would it be more acceptable if one looking to sell their legally bought digital files burned them on a CD, and in turn sold them at a garage sale? On eBay?

We already have had to succumb to the fact that we are almost wholly confined to the vehicle of the Internet to purchase our music, and have lost the unique experience of walking into a music store (the ambiance and smell of which are still so fresh in my memory) and browsing through genres for that gold mine of an album.

This case will have deep consequences on the industry and on our rights as we know them. Interestingly enough, according to the research firm Strategy Analytics, US digital music sales are set to surpass CD and vinyl sales for the first time ever this year. If the Court rules in favor of Capitol, we may be stuck with our digital music (and book and movie) purchases forever; a sad commentary on the industry, disallowing itself to move forward with technology.

Our generation has survived the demise of the physical music store and witnessed, acquiesced to, and then embraced the emergence of online music sharing. At the very least, we should, as paying customers, be permitted to keep our rights of reselling those tracks we no longer want – something we have always been able to do in those stores we so dearly miss.

DMN, a blog that details the happenings of the music and tech industry, was subpoenaed as part of ongoing litigation between Universal Music Group (“UMG”) and Escape in UMG v. Escape Media.  UMG claims that Escape, a host of a music-streaming site, engaged in copyright infringement.  Their claim relies partly on an anonymous comment posted on DMN’s website last October.  This comment, purportedly made by an Escape employee, “described institutionalized instructions for copyright infringement” at the company.  If proved true, this claim could negate Escape’s ability to claim protection under the DMCA’s “safe harbor.”

In response to the subpoena, DMN has received the support of Paul Alan Levy.  Mr. Levy is an attorney with the Public Citizen Litigation Group (“PCLG”).  The PCLG is a public interest law firm that is a division of the consumer advocacy organization Public Citizen.  Mr. Levy will now act as the lead litigator on this case.  DMN relies on Mr. Levy’s experience litigating cases concerning the identification of anonymous Internet speakers, most notably, his amicus curiae brief in Dendrite v. Doe.

In a recent blog post, Mr. Levy argued that Escape Media’s basis for a subpoena was “transparently spurious” and enforcement of the subpoena would contravene both the First Amendment and California’s Shield Law for three reasons:

1. Anonymous posts are not admissible evidence in the underlying UMG lawsuit so proving the falsity of the anonymous post would not aid Escape’s defense against UMG.

2. Since Paul Resnikoff, DMN’s founder, is “famous for responding to his commenter’s posts and [using] their comments as a basis for stories”, he would not fall outside the scope of California Shield Law’s (“CSL”) protection.  The CSL is “intended to protect a journalist from forced disclosure of anonymous sources accessed while compiling a story” but does not extend to anonymous comments posted subsequent to the publication of the story.  Here, the ongoing interaction with commenters is consistent with them being “sources” in the usual sense of the term under the CSL.

3. Most importantly, DMN claims that Escape’s demands are moot because DMN’s servers only retain IP addresses related to commenters for a limited period of time.  Since the disclosure requests were made well after that limited term, the evidence has most likely been overwritten.

Despite these strong arguments, Escape believes they can find traces of evidence and wants forensic experts to have access to DMN’s servers.  After Mr. Levy submitted an affidavit highlighting the First Amendment and CSL defenses, Escape submitted anaffidavit showing that the anonymous post contained false statements.  This was cause for concern for Superior Court Judge Richard Stone.  He ordered the identity produced, but stayed the identification order pending appellate review.  DMN was cautioned to preserve any identifying information in the meantime.

Addressing DMN’s protests over costs, Judge Stone required Escape to cover the financial costs of “preserving” the desired information.   Escape’s other legal woes, coupled with the substantial cost of preserving the website proved “enormously expensive.” Escape moved to reduce the breadth of their search and limit the method of preservation to “virtual machine images.”  This method is more straightforward and cost-effective than maintaining the website’s operations while freezing blocks of data on the underlying server.

While this ruling does not establish precedent requiring bloggers to foot the bill for data preservation in third-party litigation, it creates a murky scenario where bloggers can be held liable for anonymous comments posted on their site.  If Paul Resnikoff didn’t make it a habit of engaging with commenters, the CSL might not have protected him.  The cost of complying with Escape’s original requests would be substantial and the interference with business could cripple many startup blogs not fortunate enough to have Public Citizen in their corner.

We await the Court’s determination of the appeal and whether DMN will have to turn over their records to Escape.  Stay tuned for further developments in this legal saga.

On June 13, 2012 the nonprofit Internet Corporation for Assigned Names  and Numbers (ICANN) announced those companies whose bids have been accepted to become the exclusive registry service for “.music” generic top-level domain names (gTLD). Some of the top candidates included internet stalworths like Google (Charleston Road Registry) and Amazon (Valideus); alongside music industry-endorsed candidates like DotMusic, whom received support from international government bodies and distributors like TuneCore and The Orchard, and .music LLC (Far Further, Inc.), whom received support from the Recording Industry of America (RIAA), artist-support groups like A2IM and rights collection agencies like Sound Exchange and BMI. With applicants willing to pay an application fee of $185,000 for the chance to control not only whom obtains band site names, but genre names with the .music suffix, the potential value could be astronomical.

One of the benefits of the new gTLD program proffered by ICANN is what it calls the “Trademark Clearinghouse.” Under this program ICANN will enter into a contract with separate entities to act as central repositories for information pertaining to trademark holder’s rights. These entities will provide the primary functions of (1) trademark authentication and validation and (2) maintenance of a database for new gTLD registries in regards to pre-lunch “sunrise” (those marks registered before June 26, 2008) or trademark claims services. The incorporation of the “Trademark Clearinghouse” concept into its program could possibly suggest that ICANN may not be looking for the chosen registry to provide excessive policing and may prefer to award the .music gTLD control to a well established internet champion like Google or Amazon in hopes of maintaining commercial success, as opposed to a music industry-related organization who may have greater experience in rights associated with their products, but are still having difficulty adapting to a digital marketplace.

While DotMusic lists one of its main goals as to “Enhance safeguards … to protect intellectual property, prevent trademark infringement, eliminate piracy, cybersquatting, and other malicious content,” a goal purportedly echoed by Far Further; one of the main differences is Far Further’s requirement of registration with an established rights agency in order to obtain a .music address. While such an arrangement would seemingly provide added protection and cash flow through rights agencies, both groups seem to be suggesting an attempt to add a layer of continued piracy protection beyond that initial protection purportedly encompassed by ICANN’s “Trademark Clearinghouse” concept. It would seem that if ICANN is looking for additional layers of protection the registration procedures already in place and the artist relationships established by Far Further may work better. One problem which may arise is that even if ICANN and the chosen gTLD registry controller can sufficiently police the .music gTLD this would seemingly still not significantly effect .com share services. As the takedown of Megaupload is something that the RIAA has championed as a major success, the fact that it took international cooperation may suggest that with the support of international governments DotMusic may have greater success in policing the .music gTLD.

Formal objections to applications can be filed for seven months and comments to be considered by the evaluation panel may be made for sixty days; both from the June 13th announcement date. Until the objection period is over and ICANN thoroughly evaluates the candidates, the world must continue to wait for what may or may not be a new force of protection and revenue for both artists and the music industry.

for the concert were already on sale, less than an hour after Ticketmaster opened for sale and priced at up to 200% of the face value.

Look, I respect a good hustle as much as the next person. But, as a music fan, I am frustrated and annoyed by this scenario: so-called savvy entrepreneurs purchasing tickets from the official ticket vendors, then re-selling the tickets with the appropriate price mark-up (which sounds eerily similar to the cybersquatters from the early 2000).The purpose of Stubhub is “provide fans a safe, convenient place to get tickets . . . .and an easy way to sell their tickets when they can’t go (to the event). Stubhub was not meant to serve as a de facto gray market for scalpers—yet in my situation, and in countless others, that is precisely what it is used to do.

While technology and innovative new business models continue to provide opportunities for connecting fans to music, the question becomes: how can we ensure that these new tools are used in a way to promote fairness? What are our “code of ethics” or best practices with respect to the Internet? Where do we draw the line between capitalism and theft? Who will be responsible for ensuring “fairness” in the internet marketplace? Who will protect the innocents?

I have been thinking about these questions in several contexts over the past few months, most significantly with respect to former Megaupload users. The Electronic Frontier Foundation (EFF) is representing customers who stored legitimate, non-infringing content on the cloud-storage service, but were left with no access to their data after the Department of Justice shut Megaupload down in January. On its face, their stories are not much different from mine: individuals using technology for its intended purpose, only to be penalized for the actions of those who do not.  Thus far, the solution has been to rely on the law to protect and punish, but even that does not seem to provide an effective solution because when Congress attempts to protect, we cry foul.

So what are we to do?  Ideally, I think the only way curb this “bad behavior” is to hold ourselves and each other accountable. But in order to do that, we need to find a common understanding of what is “right” and “wrong.” It occurs to me that there remains a fundamental misunderstanding of what the Internet is or should be, how it should be used and for what purpose. Most importantly, our moral and economic compass remains in flux. If left unaddressed, this misunderstanding or failure of the meeting of minds will continue to manifest itself  and reflect in disagreements on the appropriate action to take. Laws are simply a consensus of social rules with actionable consequences. So before we can take any action we need to take a hard look at what’s going on and see if we can’t pull out some general  consensus on how we feel about it.

(And I’m off my soapbox.)

We’ve been able to pay to digitally download sound recordings through legitimate services for over a decade now, and these services have grown pretty rapidly in terms of both scale and profitability. So much so, that iTunes (so far the most successful of the digital distribution platforms) has sold more than 10 billion songs since its inception, and has passed on over $12 billion in revenues to record labels. That’s an enormous amount of money.

Because of the scale, profitability, and rapid growth of this method of distribution, you’d expect that many of the legal issues surrounding artist compensation and royalties for digitally distributed sound files would have been hammered out by now. As it happens, though, a recent class action suit filed by Rob Zombie, David Coverdale, Dave Mason, and the estate of Rick James against Universal Music Group indicates that there’s still the potential for major upheaval when it comes to apportioning royalties. These all-star plaintiffs allege in James v. UMG Recordings that UMG has run a “scheme” to improperly withhold royalties from artists by defining digitally distributed sound recordings as “sales” and not “licenses.”

In record contracts, UMG and other labels set aside different royalty percentages for the “sale” of music versus the “licensing” of music. For a “sale,” artists are typically paid between 10 and 20 percent of revenues, reflecting the costs associated with manufacturing, shipping, and selling physical copies of recorded media at retail locations. However, for “licensing” a track, the royalty rates are far more favorable to the artists, as there are fewer costs associated with the profitable exploitation of the work through licensing; typically the label only has to negotiate a few terms with the licensee, and then sits back and collects the royalties that roll in. As a result, an artist’s percentage of revenues typically runs closer to 50 percent for revenues earned through the “licensing” of recordings.

This means a lot of money rides on whether or not a particular use of a sound recording is defined as a “sale” or a “license.” This is especially a problem in the case of older artists whose record contracts were drafted without specific provisions covering digital distribution royalties. As the more cynical among us would expect, current industry practice has record labels defining the revenues from digital distribution platforms in these cases to be “sales,” allowing the labels to collect the lions’ share of royalties for this new (and very profitable) market. The plaintiffs allege that the digital distribution of their sound recordings via digital music services like iTunes, and through “mastertones” (cell phone ringtones, etc.) is actually done through “licenses”, and not “sales,” and that as a result the labels have been underpaying them.

This claim relies heavily on the Ninth Circuit’s decision in F.B.T. Productions, LLC v. Aftermath Records, and the Supreme Court’s refusal to grant certiorari on that case last March. We wrote on this case last year here, but here’s an abridged version of the important particulars: In September 2010, the Ninth Circuit decided in F.B.T. Productions that agreements that allowed “distributors, cellular phone carriers, and other third-parties to. . .  produce and sell permanent downloads and mastertones [of sound recordings] in exchange for periodic payments based on volume of downloads, without any transfer in title of. . . copyrights to recordings were ‘licenses.’” In this way, the Ninth Circuit indicated that distribution of physical products were “sales” of copies (with the associated costs for “packaging” and “shipping” and “breakage”), while any digital downloads, cell phone ringtones or waiting tones, or other similar services were to be construed as “licenses.”

This ruling also makes sense with how we “buy” content online in other areas. Certain online content distributors (such as Steam, which distributes video games, and Amazon’s Kindle eBook store) note in their terms of use that you are only paying for a “license” to download and use a file, not for actual ownership of a copy of the file. In fact, in some cases these “licensors” have rescinded the license, as happened when Amazon (somewhat ironically) removed George Orwell’s 1984 from its store and all of it’s customers associated Kindle devices.

UMG and other labels are obviously not thrilled with the result of F.B.T. Productions, as they had previously defined these uses as “sales” and collected their 80-90% royalties on everything from sound recording downloads through iTunes and Rhapsody to Verizon, Sprint, AT&T, and T-Mobile ringtones. . . uses that now, under F.B.T. Productions, might be considered to be licenses. If James v. UMG Recordings succeeds, not only will labels make less money off of future digital distributions, but they might well owe a lot of artists a substantial amount of back royalties.

In this way, compared to F.B.T. Productions, the James v. UMG Recordings suit is the real game-changer. The scope of its claims and the sheer number of artists involved in the proposed class mean there is potentially a HUGE amount of money involved. In F.B.T Productions, the amount in question was somewhere between $17-20 million. Conservative calculations put together by the Future of Music Coalition indicate that, if F.B.T. Productions were to apply to all eligible contracts, labels could owe artists as much as $2.15 billion in royalties from iTunes sales alone!

For their part, the labels are claiming that the decision in F.B.T. Productions is a unique situation, as in that case the language in question was part of a unique contract, rather than the standard form contracts employed by the bigger labels. The plaintiffs in James are essentially looking to determine whether or not F.B.T. Productions applies to the standard form contracts that are used by labels in the vast majority of cases.

The artists who stand to gain the most from this suit are those older “catalog artists” whose music sells consistently and whose contracts were drafted before these digital distribution mechanisms became popular. Most modern artists include provisions in their contracts that expressly deal with digital distribution methods. However, for those artists that are affected, this is huge news; many of them are living on a fixed income, and would benefit immensely from the new income rates yet might not be able to bring suit on their own.

The plaintiffs know this, and by filing the suit as a class action, they are acting as representatives for the interests of artists who may not be able to afford to bring suit to recover their royalties owed under F.B.T. Productions on their own. Plus, by suing as a class action, they are able to bring a lot more money into play, both in terms of their own ability to pay legal costs (helping them survive the long pretrial battle) and also maximizing the amount of potential money available for a judgment or settlement.

As a result, this case is big news in the music industry. If the plaintiffs are able to force a favorable outcome (either by settlement or, less likely, through litigation) it could provoke a rash of similar suits against other labels, resulting in a fairly substantial redistribution of wealth in the industry. The really interesting part is that, with the current battered state of record labels, this “redistribution” of royalties could be disastrous, especially with copyright termination issues right around the corner!

As a final point, it is interesting to note that in James, in F.B.T. Productions, and in the course of day-to-day business, the labels are absolutely adamant that digital distribution results in sales and not licenses. But, at the same time, EMI is claiming in a suit against ReDigi (a site that allows users to sell “used” MP3s) that digitally distributed sound recordings are NOT sales but licenses, so as to prevent the site from raising the first-sale doctrine as a defense to EMI’s suit. We wrote about the ReDigi suit here, if you’re interested.

We’ll see if they’re allowed to have it both ways.

Todd McFarlane and Neil Gaiman finally ended their decade-long ordeal. Todd McFarlane, the creator of Spawn and collaborator Neil Gaiman had been disputing copyright ownership over a few characters from the Spawn drama.  Spawn was a graphic novel series created in 1992 and centered on Al Simmons, a dead soldier who makes a pact with Satan in an attempt to reunite with his wife.

After ten years of litigation, a Wisconsin federal judge confirmed a settlement between the parties. The settlement declared Neil Gaiman the copyright co-owner of five comic book issues in dispute.  (Two Spawn book issues: #9, #26, and the first three Angela issues.)  The judge relied on evidence that when Todd McFarlane left Marvel to start his own studio, Image, it was “[f]ounded on the principle of creators’ rights rather than the work-for-hire system at Marvel.”  While at Image, McFarlane and Gaiman entered into an oral agreement for Gaiman’s work on Spawn.  Gaiman produced Spawn issue #9, which introduced new key characters including Angela and Medieval Spawn.  Gaiman claimed that he was asked to write a spin-off mini-series for Angela after the success of Spawn #9.  He also declared that a partial script he created was published in Spawn #26.  He also maintains that McFarlane attempted to circumvent their deal by recreating the disputed characters under different names.

Some faxes are the remaining shreds of written evidence supporting this claim.  According to Gaiman, they agreed to trade the rights to these new characters in exchange for the rights to Miracleman, a character created by Gaiman but owned by McFarlane through auction.  While the transfer was inked to for performance on July 31^st of 1997, court records show that McFarlane filed for trademark applications and an “intent to use” Miracleman just three months later.  This prompted the lawsuit filed in 2002 that has just come to an end after a decade.

Looking back, there was a jury trial, two major decisions at the federal court level and an unsuccessful appeal to the 7th Circuit.  At trial, a jury found Gaiman to be a co-creator of the disputed.  Now, the parties have agreed to enter a final judgment in favor of Gaiman declaring him joint fifty-percent owner of the copyrights in Spawn # 9 & 26, and Angela # 1-3.  The parties have also agreed to dismiss all other pending claims and bear their own attorney’s fees and costs.

The second case will sound eerily familiar.  Robert Kirkman, the creator of The Walking Dead, is being sued by his childhood friend and collaborator Tony Moore. It is still unclear whether this marks the beginning of a long and drawn out dispute or if Robert Kirkman and Tony Moore will use superhero powers to look into the future and realize they should settle.

The Walking Dead is premised on a police officer attempting to protect his family in a post-apocalyptic world overrun by deadly walking corpses.  Less than ten years after its creation, it has been converted into a golden-globe nominated television series.  It’s mid-season premiere four days ago broke basic cable records with 8.1 million total viewers.  Despite this success, Tony Moore had a bad taste in his mouth.  His suit claims that he has not received his share of the newfound success and that Kirkman “duped” him into assigning his rights away to the lucrative franchise.

In 2003, Moore and Kirkman co-created the series while working at Image.  Moore served as the artist for issues #1-6.  In 2005, Moore claims that Kirkman notified him of a potentially big TV deal.  Apparently, the deal required Moore to assign his rights to Kirkman; Moore agreed.  Now, Moore claims he was fraudulently induced and that he has been denied access to profit statements for The Walking Dead.  Kirkman claims that the Moore suit is “frivolous” and that both parties had proper legal representation when the deals were made.  He also alleges that Moore continues to receive payment for the work he performed on the first six issues.

Both these cases involve onetime friends turned foes.  More importantly, they both lacked a meeting of the minds.  As authors assert greater equity in contractual relationships, it becomes vital to lay down the rights and expectations of both parties in advance.  A prior relationship with a business partner is no excuse for the lack of documentation.  Otherwise, the cases we reviewed could become your future.

It is difficult to determine how this will play out.  One thing is certain; Kirkman is not giving in without a fight.  He plans to dispute this claim vigorously and will seek attorney’s fees in a counter claim.

Let’s start by taking a look at Grooveshark. Universal Music Group (UMG) filed a complaint in Manhattan District Court on November 18, 2011 against Escape Media and five of its executives alleging that Grooveshark engaged in a plethora of infringing conduct. According to the complaint, “Escape publically touts the fact that it has a catalog of 15 million sound recordings… by top commercial artists such as Bob Marley, Elton John, Jay-Z, the Black Eyed Peas, and Lady Gaga.”

According to UMG, “Escape does not have a license or other authorization [for the use of] the vast majority of the sound recordings contained on the site.” Most problematically for Grooveshark is the fact that allegedly, senior officers “personally uploaded thousands of infringing files and have instructed their employees to do the same.” Now here’s the interesting part – the 45 page complaint cites as an exhibit an anonymous blog post from digitalmusicnews.com that if true, is indicative of some of the most unscrupulous behavior I’ve ever heard of: that Grooveshark employees are assigned a weekly quota of songs to upload as well as incentives for surpassing it.  I just have one question for Escape/Grooveshark: What were you thinking?! If these allegations turn out to be true, their “its better to ask for forgiveness than permission” mantra will surely be frowned upon by the court.

Now, Megaupload. Ah, where to begin? In case you haven’t heard by now, the Department of Justice (DOJ) seized the Megaupload domain and about $50 million in assets, dubbing the two corporations and seven individuals charged in the indictment part of a “Mega Conspiracy.” The Mega Conspiracy – Megaupload Limited and Vestor Limited, along with Finn Batato, Julius Bencko, Sven Echternach, Mathias Ortmann, Andrus Nomm, and Bram van der Kolk – was charged by the DOJ with engaging in a racketeering conspiracy, conspiring to commit copyright infringement, conspiring to commit money laundering, and two counts of criminal copyright infringement. Oh, sweet vindication. All I can say is that it’s about time these people get what they deserve (if the allegations are true, of course). It’s been ridiculously cumbersome for copyright owners to tread in the waters of user generated content safe harbors provided by the Digital Millennium Copyright Act (DMCA). Even now its bitter sweet because the damage has been done: The DOJ estimated that the Mega Conspiracy has reaped benefits in excess of $175 million from their criminal activity while causing more than a half a billion dollars in losses to copyright owners.

The system is broken! Isn’t it time to revaluate our treatment of copyrights when it takes this level of infringement to result in indictments and actionable lawsuits? I’m just going to say it – I think the DMCA (while entirely well-intentioned) has crippled copyright owners. Granted, part of the claims against Megaupload includes ignoring DMCA takedown notices, but should it really take infringement on scales as large as this to get noticed? I’m not suggesting that we should be targeting consumers/end-users of copyrighted content for streaming a few songs, or even downloading a few albums. In fact, I think that will just add to the problem. And I, too, believe that SOPA/PIPA is overbroad. But we need a SOPA/PIPA – one that is responsibly drafted – to cure the problem of widespread infringement and mass of unauthorized dissemination of copyrighted works.