Intellectual Property Law and Policy - Volume 11 9781472565297, 9781841139968

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Foreword This volume is an edited version of the formal presentations and colloquies from the Fordham University School of Law Sixteenth Annual Conference on Intellectual Property Law and Policy held at Fordham, March 27th and 28th, 2008. Starting with last year’s volume, we have resumed the practice of our first nine years of publishing the conference proceedings. We expect to publish the proceedings from the tenth through the fourteenth conferences to make the printed record complete. In light of the eminence of conference participants, the importance of the subject matter, and astonishing candor of the exchanges, we hope and expect that the ideas and analyses presented in this volume will make a valuable contribution to worldwide discussions of intellectual property law and policy. The entire series provides an exceptional record of the development of this vital area; pinpointing the issues, ideas, and personalities behind new legal and policy initiatives. For both practitioners and scholars, we have strived to make the conference and these volumes an accessible, comprehensive, and unbiased forum for the best thinking and analysis in this important and often contentious area. Hugh C. Hansen Editor

Acknowledgments Many people and organizations have helped make the Conference and this volume possible. First and foremost are our conference sponsors. The support of thirty-five organizations, listed at the beginning of this volume, has been crucial to the conference’s success and continued existence. We have benefited as much from their active interest in, and profound knowledge of intellectual property law, as from their generosity. In this regard, we wish to thank in particular Brad Smith, Microsoft Senior Vice President, General Counsel, Corporate Secretary, Legal and Corporate Affairs, for his personal and professional support, as well as the Microsoft Corporation itself, which has provided very generous support for the conference and for the publication of this volume. We are also grateful to the many representatives of our sponsors, as well as friends of the conference, who participated in the numerous group teleconferences and individual telephone calls that helped us determine which topics would be of most interest and relevance as we put together the program. Of course, any conference is only as good as its faculty. Our distinguished speakers were from the private sector, government and academia; from across town and across the globe, in fact numbering 157 from 31 countries, and 6 continents. They are truly the crème de la crème. They came together in a lively, collegial spirit to offer presentations, discussion and commentary of the highest caliber. Also, as will be apparent to even the most casual reader of this volume, those attending the conference asked some of the most incisive questions, and made some of the most telling observations. I have often said that we could switch the speakers and the audience without any diminution in the quality of the proceedings. William M. Treanor, Dean of the Fordham University School of Law, has from the very start of his nine-year tenure given the conference and intellectual property law at Fordham his full support, for which we are very grateful. Alice Wong, Associate Director of our Office of Public Programs, was instrumental in every step of the long arduous task from August through March of organizing this conference which, with its three concurrent sessions, is equivalent to a five-day conference. Also, David Quiles and the staff of the Public Programs office worked tirelessly for the weeks immediately before the conference and nonstop for the two days of the conference to efficiently manage the herculean tasks involved in administering the conference. In this regard, members of Fordham’s Intellectual Property, Media and Entertainment Law Journal provided indispensable support throughout the two days of the conference, spearheaded by Anthony Rizzo and Erich Carey. Jason Lunardi, a Fordham Law graduate and current Fellow at our Fordham Intellectual Property Law Institute, oversaw all of the footnoting and technical editing for this volume, and guided the book through to publication. His meticulous attention to detail and exceptional organizational focus kept this immense project on course. Assisting Jason was a diligent team of research assistants: Anthony Rizzo, Sarah Floyd, Louise Cherkis, and Ndidi Igboeli, who provided expert review of the manuscript including very valuable bluebooking. They were able to locate even the most obscure citations and correct the array of errors that always creep into the citations of every manuscript. Sandra Sherman, Assistant Director of the Fordham Intellectual Property Law Institute, along with Sharon Hammer, President of Verbatim Transceedings, Inc., assembled all of this volume’s material and were vital in organizing the substantial task of collecting author revisions. Their ability to track down a missing presentation or a stray but crucial submission is

viii ACKNOWLEDGEMENTS extraordinary, and often saved the day when we had nowhere else to turn. Sharon also managed the recording and transcription of the conference sessions. The accuracy and attention to detail of Verbatim’s transcription and manuscript services are second to none. Finally, we are very pleased with our association with our publishing partner, Hart Publishing of Oxford, England. Richard Hart and his colleagues have done a wonderful job in putting this volume together. In particular, Richard and Rachel have been very professional, agreeable, patient and supportive in a way that I do not think any other publisher could be, or even would want to be. Hart Publishing is in a class by itself. H.C.H.

List of Sponsors Berwin Leighton Paisner Clarke, Modet & Co. Cleary, Gottlieb, Steen & Hamilton LLP Cooper & Dunham LLP Covington & Burling LLP Darby & Darby P.C. Entertainment Software Association Fitzpatrick, Cella, Harper & Scinto Freshfields Bruckhaus Deringer Frommer Lawrence & Haug LLP FTI Consulting Gómez-Acebo & Pombo, Abogados, S.L. Greenberg Traurig LLP Howrey LLP Jones Day Kenyon & Kenyon LLP McDermott, Will & Emery LLP Microsoft Corporation Milbank, Tweed, Hadley & McCloy LLP Mitchell, Silberberg & Knupp LLP Morgan & Finnegan, LLP Morgan, Lewis & Bockius LLP Nokia Corporation Paul, Weiss, Rifkind, Wharton & Garrison LLP Qualcomm Incorporated Ropes & Gray LLP Smith, Strong & Schlesinger LLP Thomson CompuMark Time Warner Inc. Transperfect Vossius & Partner Weil, Gotshal & Manges LLP White & Case LLP Winston & Strawn LLP

FORDHAM UNIVERSITY SCHOOL OF LAW FIFTEENTH ANNUAL CONFERENCE INTERNATIONAL INTELLECTUAL PROPERTY LAW & POLICY New York, March 27–28, 2008

WELCOMING REMARKS PROF. HUGH C. HANSEN DEAN WILLIAM TREANOR

Fordham University School of Law PROF. HANSEN: Welcome. This is the Sixteenth Annual Fordham Intellectual Property Law and Policy Conference. I am very happy that you have all come. We have a fantastic program today and tomorrow with great speakers and interesting issues. We encourage audience participation and questions. Time for discussion has been set aside in all of the concurrent sessions. Please feel free to ask questions or make comments.

In Memoriam Rt. Hon. Lord Justice Nicholas Pumfrey PROF. HANSEN: Starting off, I would like to just spend a few minutes talking about Nicholas Pumfrey, whom many of you knew. Nicholas died, age 56, after a stroke on Christmas Eve. For everyone who knew him, this is a major and sad loss. Nicholas was an outstanding person, friendly and a lot of fun. He went to Oxford for both law and physics. He had just been appointed the Court of Appeal and had an exciting appellate career ahead of him. He had been the youngest person appointed to the Court of Chancery, the trial court in the United Kingdom, where he was a highly-respected patent court judge. He was also was the youngest person appointed to the Court of Appeal. Nicholas was a tremendous friend of the Fordham Conference. He loved participating. What he liked the most, he said, was that for the first time since he had been a barrister, he was forced “to get up on my hind legs and defend myself.” He would have been here this year. We dearly miss him. Now we will have brief remarks from one of his judicial colleagues from the Continent, Judge Robert van Peursem of the District Court, The Hague, in The Netherlands. JUDGE VAN PEURSEM: Thank you, Hugh. I had known Nicholas actually only for four years. Yet I considered him a close professional friend. He made you feel like that. Obviously, he was one of the giants in the patent world, which he loved so much. In one of the court transcripts in a parallel case I once read, after the Q.C.s had started with their vigorous cross-examination, he said to the Oxford professors who were examined there, “Welcome to the wonderful world of patents, gentlemen.” I forgot what it was about really, but that’s typical of him. We had frequent talks and email contacts in parallel cases. I think that is a public secret. Kirin-Amgen was discussed at length between Lord Hoffmann and Peter Meier-Beck at that stage. And there are numerous more examples. Fairly recently, we discussed a parallel case which he had done first. I won’t tell you which patent it was, but he said to me, “This one won this year’s prize of the worst patent I’ve ever seen.” That’s one of his famous one-liners. The best ones I can’t repeat here, I’m afraid. Also, we had talks about conferences, who would attend and who would try to make what point. He really was keen on going to one but at a certain moment he said to me, “Sorry, can’t make it. Got to tend to the bees.” And off he went on his BMW motorbike to the south of France, to Provence, where he had a cottage and where he made his own honey. That’s also Nicholas – priorities first. As you probably know, among judges there is always a certain uneasiness between the lower courts and the courts of appeal. Nicholas was a trial judge for a number of years, and being one myself, I jokingly asked him after went onto the Court of Appeal and just two days before he died, “How’s life in semi-retirement.” His dry answer was, “Well, it’s only ten years before a full pension for me and fourteen years for obligatory retirement.” He so much welcomed his second life as an appellate judge. His first judgment that was handed down in that capacity shows what might have come. But it didn’t. As a judge and a friend, he is dearly missed.

xvi IN MEMORIAM: SIR NICHOLAS PUMFREY PROF. HANSEN: Thank you very much, Robert. We are going to include in the published volume of these proceedings the remembrances of Nicholas by Christopher Floyd, Robin Jacob and David Neuberger.

Nicholas Pumfrey — A Patent Lawyer’s Appreciation Christopher Floyd1 Sir Nicholas Pumfrey, who died at the end of 2007, had just been sworn in as a Lord Justice of Appeal in Ordinary — a member of the civil division of the Court of Appeal in England and Wales. In 1997, at the age of 46, he had been appointed a judge in the Chancery Division of the High Court, and a nominated judge of the Patents Court, in 1997. When appointed to the Court of Appeal he had therefore just completed 10 years of service as a trial judge, and was still young enough to be considered for further promotion to the House of Lords. Although Pumfrey was first and foremost a specialist in patent and other intellectual property matters, judges of the Chancery Division have to turn their hands to a wide variety of more general property and business related cases. Not all of Pumfrey’s contribution is therefore to be found in the pages of the Reports of Patent Cases or Fleet Street Reports, where IP cases are customarily reported. Pumfrey was called upon to take his share of the general business of the Chancery Division — deciding many important cases about land law, insurance, company law, insolvency and pensions. He also regularly presided in the “interim applications” court — a court in which no application may take more than two hours, and in which the judge may be called upon to decide or otherwise dispose of dozens of short applications in the course of one day. He proved himself well able to master this aspect of the work of a judge, as well as more substantial forays into areas where his background provided only the most general of preparations. However it was in the field of IP that Pumfrey made his greatest contribution. Quite apart from his role as a judge, he gave very freely of his time to lecture on IP subjects both in the U.K. and abroad. He was also the first judge from the U.K. to be made a member of the Enlarged Board of Appeal of the European Patent Office. When I was asked to contribute this short review of Nicholas Pumfrey’s contribution to IP law I found it difficult to pinpoint a particular case or set of cases on substantive law. That is not at all surprising. The principal role of the trial judge is to find the relevant facts and then to apply the law as interpreted by the higher courts to those facts. Many of his decisions are lengthy analyses of the relevant evidence, stating and applying settled principles of law. A trial judge will not often have to make fresh tracks in the law — at least not in the absence of at least some guidance from higher courts. This has particularly been the case since the first appointment of a specialist IP judge to the Court of Appeal, and judges with IP experience to the highest court, the House of Lords.2 The scope for a trial judge single-handedly to mould the law is limited. Pumfrey’s ten years as a trial judge can be seen as his preparation to take on the more influential role in the appellate courts. He did not see his function to be that of law maker. Nevertheless, the Patents Court that he left behind was improved in many ways by his decisions. Browsing through a stock that I have of the transcripts of his judgments, I was reminded of the themes of his time as a judge. In the remainder of this article I will discuss those that I which I came across in this process. A judge of the Patents Court, Royal Courts of Justice, London. Firstly Aldous LJ, then Jacob LJ appointed to the Court of Appeal. Law Lords Hoffmann, Neuberger and Walker all have experience of patent cases as trial judges. 1 2

xviii IN MEMORIAM: SIR NICHOLAS PUMFREY The Technology Behind Patent Cases During his tenure as a trial judge Pumfrey had his fair share, some would say more than his fair share, of very heavy, highly technical patent cases. His background in physics made him well suited deal with the upsurge in litigation about computers, electronics, telecommunications technology, and in particular mobile phones. Although the big cases in these areas tended to come his way, he was perfectly willing to tackle cases out of his technical field of specialisation. Whatever the technical area he viewed it as his first task fully to understand the underlying technology. Pumfrey’s judgments invariably contained masterly summaries of the background technology. This was not driven simply by his interest in such matters He rightly considered that his most important function was to understand the technology and explain it in his judgment in the clearest possible terms. The availability of expert witnesses, who make reports to the court and are cross-examined orally (and are sometimes appointed as court experts) provides the trial judge with a unique opportunity to achieve an understanding of the technology. He understood that if the trial judge did not take advantage of the assistance available to him, the chances of the case being decided on the correct technical basis in the appellate courts were small. He would frequently interrupt a cross examination by saying “Hang on a minute, I need to get this right so I can explain it to the Court of Appeal.” In consequence, Pumfrey J was demanding of the experts who appeared in front of him. A low point was the expert in R.I.M v. Inpro,3 the first Blackberry telephone case. The expert had suggested in a witness statement that he had taught and researched computer science. He had not. What was more, when he went into the witness box he behaved as no witness, let alone an expert, should. Pumfrey found him “a remarkably obstructive witness”. He said: I was persuaded on at least two occasions to intervene, not for the purpose of elucidating answers or to obtain information, but to attempt to break into a refusal to answer a question.

The witness was “simply an unsatisfactory expert.” But there was no vindictiveness behind his finding — rather it was a sense of profound regret. Pumfrey’s real concern was that he was thereby deprived of a reasonable view based on a through knowledge of the case that was contrary to that being advanced by the expert for the other side. Pumfrey’s ability to deal with these very highly complex cases gained him both national and international respect. His influence on patent litigation remains visible in a number of other ways. Disclosure One firm belief that one can see throughout his decisions was that a patent action ought to be capable of being decided within the four corners of the patent specification itself, and by reference to the prior art and the expert evidence. To say that he was not a fan of extensive documentary disclosure would be to understate his position. In Nichia v. Argos4 he decided, almost as a matter of principle, that documentary disclosure of the historical record of the way in which the inventors had arrived at the invention did not need to be given. In refusing permission to the appeal to the court of appeal he said “I have waited nine years actually to do this.”

3 4

[2006] EWHC 70 (Pat). Reference in the Court of Appeal: [2007] EWCA Civ 741.

IN MEMORIAM: SIR NICHOLAS PUMFREY

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It had indeed been a consistent theme of his. In an earlier case he had said: I have a rooted objection to permitting wide-ranging disclosure to be requested for the purpose of providing the sort of secondary indications described [in Molnlycke] as material which must be kept in its place, unless I have on the evidence a real apprehension that the documents may be of assistance. The evidence is actually to the contrary.5

His views in Nichia gained the support of Jacob LJ, who recognised that the time taken up by the disclosure and subsequent scrutiny of documents of this nature was one of the major causes of the high cost of patent litigation. But he did not gain the support of the other two members of the Court of Appeal, who thought that a more case sensitive approach to disclosure was appropriate. Many of his early decisions reveal this firm belief in the wastefulness of disclosure. Another case he may have had in mind in refusing the disclosure in Nichia might have been Norton Healthcare Limited v. Minnesota Mining.6 In that case, the patentees had discovered that those attacking the patent had themselves applied for patents which had been abandoned before they had been published. Every advocate loves such material: according to this theory there is no greater tribute to inventiveness than that which comes out of the mouth of the other side’s patent attorney. The patentee sought disclosure of the application on the grounds that it would be likely to comment on the prior art and also to show that the defendants themselves thought the subject matter of the patent to be inventive. Pumfrey thought material of this nature to be “secondary evidence” in line with the decision of the Court of Appeal in Molnlycke v. Procter & Gamble.7 His remarks are revealing about his attitude to this type of material, and indeed to self-serving statement in patents in general. He pointed out that patents were: not merely records of work done. They are legal documents, and it must be realised that they are also exercises in advocacy aimed at the patent examiner. An applicant for a patent does not necessarily believe that the subject matter of his patent is inventive: he may be intent on making life difficult for his competitors whether or not his patent is valid. He may apply for patents as a matter of policy if he is proposing to commercialise a new product. Accordingly if the court is to take care to attribute the correct weight to statements contained in, and inferences drawn from, a patent specification, it must investigate the state of the knowledge of both the patent department and of the relevant workers at the material date; it must be satisfied that the workers did not have other knowledge irrelevant to the investigation; and all these tasks must be undertaken so as correctly to obtain a merely secondary indication of the obviousness or otherwise.

He concluded: Experience has shown that investigation of secondary indications of obviousness and non-obviousness can wholly overshadow the assessment of the primary issues.

Procedural Fairness Whilst it was difficult to persuade Pumfrey J to make an order for disclosure, it would be wrong to suggest that he did not have a firm belief in procedural fairness. He was never impressed by the advocate’s “rabbit from the hat” — the document which the expert as not had an opportunity of considering, sprung on the expert and the court in cross-examination. Under Pumfrey’s direction a practice grew up of indicating to the expert in advance any new documents which he is to be asked about, such as previous statements of the expert himself, or other published materials. 5 6 7

Sandisk Corp. v. Koninklijke Philps Elecs., [2006] EWHC 2692. [1999] FSR 636. [1994] RPC 49.

xx IN MEMORIAM: SIR NICHOLAS PUMFREY In one of his last judgments8 he proposed taking this procedure a step further, by suggesting that experts should be given notice of the points on which they would be tackled in cross examination: ... there may be something to be said for dealing with the expert evidence at trial in a manner slightly different from that to which we are accustomed. I was struck in this case by the strain placed on the cross-examiner and on the witness, and I suspect that had I been more enterprising in the management of the case, I would have tried to ensure that the experts were aware of the main points that would be raised in cross-examination, notwithstanding that they had read each other’s reports and should therefore have been aware of the main differences between them.

The self-deprecating style in which this departure is presented is an indication of a genuinely modest man. The same underlying belief in procedural fairness led him to treat computer calculations performed for the purposes of litigation in the same way as other experiments. That meant that the opposing party should be given proper notice and full detail of the way in which the analysis was performed. He did not like the idea that any aspect of the underlying thought processes should be hidden from view: In Consafe v. Emtunga (8th September 1998) he said: Finite element analysis is not a procedure which always gives the same result. This is why Consafe asked Dr Billington to verify their results. It depends among other things on the selection by the analyst of the appropriate mesh of elements and the material properties which he attributes to each of those elements. It therefore involves an exercise of judgment, and if it is to be relied on in litigation adequate notice should be given to enable the party on the other side to assess the analysis and either criticise it or accept it. A finite element analysis is, in my view, an experiment ...

Again, in a trade mark case, Decon v. Fred Baker9 he came to a conclusion which did not reflect a case that had been argued by either party. This became clear in the course of writing his judgment. So he notified the parties, sent them a provisional draft of his judgment, and gave them the opportunity to make further submissions. His sense of fairness pervaded everything he did. Finally the same objective is visible in his decision to order disclosure of “work-up experiments” which lie behind an experiment in its final form as presented to the court by a notice of experiments. Particularly where a party is seeking to prove anticipation by inevitable result, it is often material to know how many false starts were necessary before the “inevitable” experiment achieved success. In principle, at least at the time at which they are performed, these experiments are the subject of legal professional privilege. In a case concerning this type of experiment,10 Pumfrey J held, by analogy with cases on partial disclosure of privileged material, that where the purpose of an experiment is to show anticipation by inevitable result, any legal professional privilege otherwise attaching to documents relating to workup experiments for the experiment in the notice of experiments has been waived by the service of the notice of experiments. Patent Claim Amendment Pumfrey was also one of the first to recognise that the old English rules about the amendment of patents did not sit easily with the corresponding practice of the European Patent Office. In that Office, when a patent is under opposition, amendments to the claims can be obtained without a Nokia Corp. v. InterDigital Tech. Corp., [2007] EWHC 3077 (Pat). [2001] RPC 17. 10 Mayne Pharma v. Debiopahrm, [2006] EWHC 164 (Pat). 8 9

IN MEMORIAM: SIR NICHOLAS PUMFREY

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detailed consideration of the patentee’s conduct in having originally obtained wider and invalid claims. Aldous J had held that the principles applied by the courts before the Patents Act 1977 continued to apply, despite the now concurrent jurisdiction in matters of amendment with the EPO. Pumfrey, along with other first instance judges at the time, thought that to cling to these old principles was no longer appropriate: see Boston Scientific Limited v. Palmaz.11 It struck him as absurd that a patent could be successfully amended in the EPO in circumstances where the same patent in proceedings in England could not. In those circumstances the English rules of amendment were akin to additional grounds of invalidity, nowhere provided in the EPC. The mini-rebellion by the trial judges was short lived. The Court of Appeal, in an interlocutory judgment in Kimberley Clark v. Procter & Gamble,12 held that the 1977 Act had not introduced any change in the law. The old rules about the restrictive discretion on amendment continued to apply. It is significant that when the case came before Pumfrey J as the trial judge, the discretionary objections to amendments (which were also being sought in the EPO) were all rejected: Judgment 21 July 2000. It was not until much later that the legislature intervened and provided by section 2(5) of the Patents Act 2004: (5) In considering whether or not to allow an amendment proposed under this section, the court or the comptroller shall have regard to any relevant principles applicable under the European Patent Convention.

Legislation was therefore ultimately needed to achieve what Pumfrey J and the other trial judges had been prepared to do from the outset. Declarations of Inessentiality In the second half of his career as a patents judge, Pumfrey was the judge in charge of a number of complex cases about mobile telephony. The companies involved in the operation of mobile telephony standards have a system under which they undertake to grant licences on patents which are “essential” to the standard. The royalty they receive in return can depend on the number of declared essential patents which they own. Whether the patents are truly essential to the standard is often, therefore, a subject of dispute. In order to unlock these disputes a number of actions in the U.K. have sought declarations about “essentiality.” The jurisdictional basis for these declarations was the subject of repeated assault. But Pumfrey J, backed up by the Court of Appeal, considered declarations of this kind had the potential to fulfil a business need and were therefore a legitimate use of the court’s resources. He heard evidence about what the impact of a decision by a single judge in one country would be on negotiations for pooled patent rights in respect of a number of countries. With characteristic precision he asked whether the declaration sought would be of practical utility or whether “it would be the legal equivalent of shouting in an empty room.” One of his last acts as a first instance Judge was to grant declarations of this nature: see Nokia v. Intedigital Corp.13 The overall utility of this type of litigation can be seen from the fact that a previous action for similar declaratory relief was brought the other way: by Nokia Corporation against InterDigital for declarations of inessentiality in relation to 29 of InterDigital’s patents. By the time the parties came to face up to the issues and exchange written evidence the 29 patents originally said by InterDigital to be essential had reduced to 7. Of those 7 Interdigital chose 11 12 13

[1999] RPC 47. [2000] RPC 11. [2007] EWHC 3077 (Pat).

xxii IN MEMORIAM: SIR NICHOLAS PUMFREY not to advance a case in relation to 3. That left 4, two of which were a parent and divisional, meaning that only three specifications had to be considered at trial. Computer Programs It is no secret that Nicholas Pumfrey had a particular interest in computers. Whilst still at the Bar, he was instructed by the Comptroller of Patents in Gale’s Application14 one of the first cases on the “computer program as such” exclusion in the Patents Act 1977. In the ensuing years, the exclusion has proved difficult to interpret, and even when interpreted, has proved difficult to apply in practice. Pumfrey’s judgments in this area, such as Shopalotto.com’s Application [2006] RPC 293 were amongst those that shed light on this somewhat intractable area. In that case he said: There has been a tendency, especially in the earlier decisions of the Technical Boards of Appeal, to consider that the exclusions have in common a lack of ‘technical effect.’ While this may be true of many members of the list, it is not necessarily the case. A programmed computer provides an obvious example. Suppose a program written for a computer that enables an existing computer to process data in a new way and so produce a beneficial effect, such as increased speed, or more rapid display of information, or a new type of display of information. It is difficult to say that these are not technical effects, and, indeed, that the programmed computer, itself a machine that ex hypothesi has never existed before, is itself a technical article and so in principle the subject of patent protection. The real question is whether this is a relevant technical effect, or, more crudely, whether there is enough technical effect: is there a technical effect over and above that to be expected from the mere loading of a program into a computer? From this sort of consideration there has developed an approach that I consider to be well established on the authorities, which is to take the claimed programmed computer, and ask what it contributes to the art over and above the fact that it covers a programmed computer. If there is a contribution outside the list of excluded matter, then the invention is patentable, but if the only contribution to the art lies in excluded subject matter, it is not patentable.

As Lewison J said about that passage in Autonomy Corporation’s Application:15 The clarity of analysis demonstrates what a loss to the law has been caused by his premature death.

I could not agree more. The loss to the profession of IP law in the U.K. and internationally has been immense.

14 15

[1991] RPC 305. [2008] EWHC 146 (Pat).

In Memoriam: Nicholas Pumfrey 22nd May 1951 – 24th December 2007 The Rt. Hon. Sir Robin Jacob1 “The Honey Judge” is what the wife of one of my colleagues called Nicholas. That was not merely because he kept bees at his beloved house, surrounded by lavender fields, in the Haute Provence. Indeed he did keep bees and at some point usually just before Christmas he was apt to appear in your room grinning and bearing a giant pot of honey in a plastic bag. But the name “honey judge” was more appropriate than just because of that — it correctly summarised what he was — a really, really sweet man. It is an inevitable feature of life that people die. But it is ever so hard when it happens to one so young, so full of life, so life-enhancing. Even though it is now nearly a year since he died, people keep saying to me they feel the same way as I do about his death — that they go on missing him very badly. I still cannot bear to take the name “Pumfrey” off one of the quick-dial buttons on my phone. I still miss those phone calls at about 9.30: “Good morning. Here is your wake-up call” was how he often started these. The conversation was 95% gossip and 5% law. But that 5% was serious — though never solemn. If we disagreed about a point, Nicholas would say: “Now look here …” and proceed to expose any weakness I had. Of course after I had gone to the Court of Appeal we could not talk about any pending appeal — though I would get told why I was wrong in those rare cases (I can only think of one) where I was party to reversing him. Nor could we talk about cases pending before him in case they came my way later. But that left plenty to discuss —whatever the problem which he or I had had. Nicholas’ funeral service took place in the ancient Temple Church — the place was crowded out — how many is anyone’s guess but it can’t have been much less than 1,000. He himself had no religion — many of our jokes were about it. Nicholas had just come to the Court of Appeal before he died. His breathtaking knowledge of so many areas of the law beyond intellectual property itself was about to be deployed in judgments which would have been wise, readable and humane. Many are losers by his death — his friends, his colleagues, both intellectual property law and the law in general, and not just in my country but well beyond. The Fordham conference itself will be the poorer — many at it will miss that great shock of white hair, the incisive comments and that enormous grin.

1

A judge of the Court of Appeal of England and Wales.

In Memoriam: Nicholas Pumfrey Lord Neuberger Two days before he died, Nicholas Pumfrey dropped in on us in Dorset, on his way back to London. He’d been delivering Christmas presents. It was typical Nick. Punctilious and generous: those who deserved presents got them. Traditional and endearing: as always, the presents were book tokens and gift vouchers. Last-minute and thorough: personal delivery as he’d missed the post. As usual, his conversation was wide-ranging. He knew a lot about most things, and quite a bit about everything else, and, in a benign rather bashful way, he liked showing off. He was a master of the one-liner. After leaving a fraught meeting with civil servants, he remarked to another Judge: “We certainly put some sand in their gearbox”. Another time, after he’d read two of my judgments, he said: “The inscription on your tombstone should read: ‘nineteenthly … .’” Nick was greatly liked and respected by other Judges. Having the room under his in that judicial high-rise gulag, the Thomas More Building, was my luckiest break as a Chancery Judge. I visited him daily. I always left his room (which was untidy and strewn with motorbike leathers) happier and better informed. Frequently some other Judge would also be there — like me, picking his brains and having a chat. As a new boy in intellectual property, I benefited enormously from countless hours of patient, clear, and often funny, explanations of technical and legal principles. He must have been a brilliant pupil-master. Nick’s judgments were always excellent. As Robin Jacob wrote, he stood out for his fairness common sense and wisdom, his command of the law, and his grasp of technical issues. In his short time in the Court of Appeal, Nick had already proved an outstanding colleague and appellate judge. His universal popularity and esteem with colleagues was also marked by his selection as chairman of important committees of the Middle Temple, an institution to which he was devoted. They included the catering committee — appropriately for someone who so appreciated good food and drink. An engaging mixture of genial and private, conventional and radical, self-doubting and confident, courteous and blunt, Nick was wonderful company, a life-enhancer. My family always enjoyed his visits to Dorset, and friends would ask when Nick was coming down, so they could invite him over. Lex and Carolyn Dowie — Nick was their best man — found the same in Northumberland. A favourite with the young, he was avuncular while retaining his child’s sense of joy and wonder. Janet, his sparky usher, and Richard Trout, his excellent clerk, and Bob Glen, his previous clerk, were devoted to him. Nick was also a caring son. I recall him cancelling dinner to visit his mother in Bath, by motorbike of course, as her dog had eaten the Christmas card list. Nick was also very much his own man and a creature of habit. Every day, he bought the Guardian and Le Monde, though they often both went unread. The house in Provence never had a caretaker, despite his friends’ pleadings. Even after he’d had to drive straight back from London after realising that a window had been left open. And even after the woodpeckers had destroyed the shutters for the fourth time. He knew what he wanted, just as he knew what was right. His humanity and his moral sense were not based on religion, although he had an intellectual interest in Anglican liturgy and music. Indeed, intellectual curiosity was a major feature of his

xxvi IN MEMORIAM: SIR NICHOLAS PUMFREY life. So was his respect for his late father, not uncommonly beginning a sentence “Father used to say ... .” Like many others here, I loved Nick and will miss him hugely: he’s irreplaceable. His large, slightly lumbering, figure, with its beaming face and shock of white hair, was such a familiar reassuring and uplifting sight, that it’s impossible, as well as heartbreaking, to believe that we will never see him again. His death is also an enormous loss to English law and to IP worldwide. The remarkable turnout today, with so many friends and colleagues from Europe and the U.S., as well as from all over the U.K., speaks for itself.

CHAPTER I

Corporations & IP in a Challenging World Part A: General Counsels’ Roundtable: A View from the Top Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Panelists PAUL T. CAPPUCCIO

MICHAEL FRICKLAS

Executive Vice President & General Counsel, Time Warner (New York)

Executive Vice President, General Counsel & Secretary, Viacom, Inc. (New York)

RICHARD COTTON

LAWRENCE A. JACOBS

Executive Vice President & General Counsel, NBC Universal (New York)

Senior Executive Vice President & Group General Counsel, News Corp. (New York)

BRAD SMITH

Senior Vice President, General Counsel, Corporate Secretary, Legal & Corporate Affairs, Microsoft Corp. (Redmond, WA)

PROF. HANSEN: This is the first time in 16 years that we have had a General Counsels’ Roundtable at this Conference. We have had academics, practitioners, judges, other people in governments, but not many general counsel and never in their own session. Moreover, to start this off we have a high-powered and important group of general counsel. Brad Smith from Microsoft, put the panel together. Thank you very much, Brad. Our panelists are: Lon Jacobs, Senior Executive Vice President and Group General Counsel of News Corp.; Rick Cotton, Executive Vice President and General Counsel of NBC Universal; Mike Fricklas, Executive Vice President, General Counsel, and Secretary of Viacom; Paul Cappuccio, Executive Vice President and General Counsel of Time Warner; and Brad Smith, Senior Vice President, General Counsel, and Corporate Secretary, Legal and Corporate Affairs, of Microsoft.

2 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD So what do we want to know about and from people whom most people never run into? For instance, I have only met one general counsel before this, Brad Smith. MR. SMITH: That was before I was General Counsel, actually. PROF. HANSEN: So what are they like? What makes them tick? How do they go about their jobs? What do they think are the important global issues? What do they think are the important domestic issues? How do they get the factual and legal input to be able to make the IP related decisions for their companies? Starting off, I want to ask each what he thinks are the most important technological, economic, and social trends that affect his business, and what does he think their impact will be in the future? MR. JACOBS: I will start off by saying that I think everyone would agree that the most critical issue for us in IP is piracy. It all comes back to piracy. So we support strong enforcement efforts both in the United States and internationally. That is something that is very important to us. But we also believe that it is incumbent on the media companies to continually explore new business models. It is not enough to simply try to block piracy wherever it exists. You need to come up with new business models that are compelling to the consumer and that meet the evolving needs of the consumer. One size no longer fits all. So we’ve launched Hulu, which is promising. We’ve got “DVD Plus,” which allows a person to buy a DVD and have an additional download to their iTunes or to their PC. So, really, our focus is on not just piracy but coming up with a business model that relates to today’s consumer needs. PROF. HANSEN: Thank you. Rick Cotton? MR. COTTON: I would echo what Lon said. From NBC Universal’s point of view I would put two categories on the table — digital technology and digital distribution capabilities — and then make a comment about IP enforcement in terms of its current challenges. Digital technology has created huge opportunities, and the dark side has created huge challenges in terms of piracy. Our philosophy has been that unless you have a legitimate alternative for consumers, where they can access what they want and when they want it at a price that they are willing to pay, trying just to be in the prohibition business is never going to work. So I think what Lon said is exactly right, which is going down both paths. The legal issues on each side are challenging, in terms of working with businesses where it is not just the opportunity to do things new but it is the need to do it, because the old business models no longer work in the digital world. Therefore, almost every business line is seeking out new ways to operate. In terms of IP enforcement, broadly speaking, I believe that the enforcement capabilities that exist in the United States and everyplace else are totally inadequate in terms of the current world that we face. That is true in terms of physical-goods counterfeiting and it is true in terms of the digital world. The enormous challenge is, in part, in the rules, but even more in terms of the way enforcement works. In terms of the way we think about it, I would just put two things on the table. There is a public policy element to it, in terms of what law enforcement does. There is a whole other challenge at least as important, in terms of how the infrastructure sectors that are the distribution sectors operate. Until we really bring those sectors to the table in terms of working cooperatively to prevent the use of their infrastructure, whether that is physical infrastructure in terms of transportation of goods or whether it is digital infrastructure ― such as ISPs, usergenerated content (UGC) sites, university IT systems, home networking capabilities — until we bring those sectors into a posture where they are willing to work to prevent the use of their

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 3

infrastructure to distribute pirated digital content or counterfeit physical goods, we are not going to make serious progress. PROF. HANSEN: Thank you. Mike Fricklas? MR. FRICKLAS: As you have already heard from my colleagues on piracy, I don’t want to dwell too much on that issue, so I am going to focus on some other aspects of the issue. The world is changing very, very rapidly in our businesses. Traditional media companies have relied on a certain degree of certainty in how the distribution is going to lay out what the periods of time are going to be and what the economics are for various forms of distribution, whether it is a movie theater or a television distributor or a cable operator and the like. That level of certainty has enabled us to raise capital to deliver to consumers very expensive products, whether they are television shows, motion pictures, and various other kinds of experiences. We are now undergoing a period of unprecedented change, and there is very little to suggest that that period of change will moderate. That means that we are entering periods that are increasingly uncertain, that are increasingly risky. It has raised the cost of capital, if you will, to be in the content business. Our companies’ key strengths are about creating creative products, about reaching consumers in various kinds of ways with experiences that they enjoy. It is about telling stories in ways that people can relate to. We are taking that experience to creating games and reaching them on all the new devices, whether they are Internet experiences, cell phone experiences, social media, all the various things that are happening out there. Using these new technologies in ways to create new consumer experiences is a huge opportunity for us. We see that as playing to our key strengths. We now have new ways to reach consumers, and we are very good at giving consumers what they want when we reach them. I see that as the biggest change. The threats that folks are talking about in terms of piracy, in terms of various forms of intervening in the value chain, if you will, between the consumer and the provider to get a bigger share of the dollar in the middle is the biggest trend that is affecting us. In other words, we are seeing big aggregators start to build up. People are coming up in the middle now and saying that all the value of the value chain is somewhere in the middle. They are aggregating advertising dollars from lots of different places and selling them in big bundles. They are aggregating various ways to reach consumers, what people refer to as “eyeballs,” and aggregating those eyeballs in ways that they intermediate themselves between the people who are actually creating the content and the end consumer. Those trends are moving quickly and changing rapidly. Understanding those and figuring out what the consequences are for producers and consumers is probably the biggest challenge for us. PROF. HANSEN: Thank you. Paul? MR. CAPPUCCIO: It is getting to covering a little bit the same ground as you get to the end of the panel. Brad will, hopefully, have a different perspective. I see two big challenges. I do not view them as challenges; I view them as opportunities — and thank God they are there, because if not, we would have to grow our business simply by making more and better movies. The first one is: How do you get consumers your content in the way they want it, when they want it, where they want it, so they can watch it on the device they want to watch it on, when they want to watch it, and how they want to watch it? That is our job. That is what we are paid to do. It is not something that we should be afraid of. We should thank God for it, because that is going to be a good thing for us in the long run.

4 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD I always laugh, thinking that these companies were all here suing Sony Betamax back years and years ago,1 worried that the VCR tape was going to ruin their business, and then for the next twenty years lived off the home rental and sales profits of tapes. So it is a challenge. Piracy needs to be dealt with, and we do that. But our job is to get the best content in the world out to people so they can watch it however they want to watch it, not simply in the traditional television linear format. We work on that every day. I think it is a great opportunity for us. The second thing is we need to continue to find ways to allow people to create their own content and to interact with others and to share that, whether that is something as simple as MySpace or Facebook ― and now I get to say Bebo — or that could even someday mean things like have your own endings to movies, and indeed have your own movies. It is our job to find ways to allow consumers to be interactive in content creation, to create their own what we call “member-created content,” and then — here’s the hard part — to find an effective way to monetize that and to bring advertisers together with these people who are doing it, to put their products in front of them. MR. SMITH: Just to complement what other people have said, I would probably say that there are two overriding trends that are defining this decade, certainly for software, and perhaps for some other digital-based parts of the economy. The first is the movement of services to the Internet so that we have more content-based services, more business-based services, and more interaction of every kind. This is being supported by the movement of advertising online, in what I think will eventually become over a long period of time the movement of almost all advertising online. I think online advertising will probably play about the same kind of role in the first half of this century that oil played in the first half of the last century, in terms of really fueling so much economic activity, growth, and change. That unleashes a whole lot of different business model possibilities. The second overriding trend is globalization. It is easy to look out at the world today and talk about the rise of Asia. It is just stunning to see how the Asian economies have grown. But it is not confined to Asia. We see enormous growth in Latin America. We see even quite considerable growth beginning to accelerate when it comes to computing on a continent like Africa. I think it is fascinating to ask yourself: at the end of this decade, which country will have the third largest software economy in the world? The first will still be the United States. The second will still be Japan. But the third, interestingly enough, won’t be China, it won’t be Germany, it won’t be the United Kingdom, and it won’t be France. It will almost certainly be Russia. Russia is, I think, a great example of what is happening in a lot of places around the world. It helps to have oil that’s $100 a barrel; that helps fuel a lot of infrastructure growth that then leads to other things. But as much as anything else, it’s a reflection of how broad the sweep of globalization has become. PROF. HANSEN: Well, if you are talking about globalization, what about business climates for doing your types of business? Do you think that between Asia, Europe, the United States, they are dramatically different and you have to have different strategies to deal with it, or is it basically the same? What is your view for an IP-based industry of the business and legal climates just in those three places, Asia, Europe, and the United States? Any thoughts? MR. JACOBS: I think that the climate is best in the United States for a number of reasons. I think that Europe is slowly catching up, and I think they will get there; they are trending in the right direction. 1

Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984) (Sony Betamax).

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 5

Asia is a much more difficult nut to crack for a number of reasons, and not just for IP business, but because of the way they do business there. You have field-programmable gate array (FPGA) concerns. You have foreign ownership concerns. It is a real challenge. In China, particularly, we have made great strides and now piracy is down to only 90 percent. I think Europe will quickly catch up to the United States. I think Asia will be a challenge for quite some time. PROF. HANSEN: Brad? MR. SMITH: I think in the short run there are a lot of challenges in Asia. But if you look at the trends from a long-term perspective, I think the picture is quite different. If you think back to the first Fordham Conference, it was just after the GATT Uruguay Round2 was completed. That Round was a negotiation in which the Europeans and the United States were really partners in getting that done. There was tension on issues like intellectual property, at least behind the scenes, with Japan. China wasn’t even yet in the GATT or the World Trade Organization (WTO). If I look ahead fifteen years from now, I am extremely optimistic about Asia. I think ultimately a country’s approach to intellectual property laws is based on the level of confidence it has in the creativity of its own sectors. China is producing four times as many engineers every year as the United States. They have more opportunities in China than ever before. This is true across Asia. I just think from a long-term perspective it is not difficult to see where that is going. I am much more pessimistic about Europe, especially in the information technology sector. Fifteen years ago, we could have looked across Europe and in every country we saw a strong IT champion — Olivetti in Italy, Bull in France, ICL in the United Kingdom. Today you have to go to Finland, where Nokia does extremely well. SAP and Siemens are important in Germany. But Europe doesn’t have the IT leaders that North America and Asia have. I think when it comes to striking the balance between intellectual property and other disciplines, you see that increasingly reflected in the attitudes of policymakers. The United States has been more stable. The real question fifteen years from now is whether the United States is going to have more in common with Asia or more in common with Europe. PROF. HANSEN: Is the reason that Europe is so far behind is not because of the lack of native talent, but because of the economic infrastrucutre, where entrepreneurship is difficult, start-ups are difficult? Brad, what is the reason why Europe has fallen behind in the IP and IT fields now? MR. SMITH: I would start with the situation in engineering and academia. In software at least, great innovation often has its roots in great universities. Europe doesn’t pay, and traditionally certainly hasn’t paid, its great scientists and technologists in universities the same amount that universities have paid faculty in the United States. It also hasn’t created the same kinds of opportunities for people to move from universities to start up their own businesses. The world is full of great European engineers, but they are not necessarily in Europe. There are a lot of them in California, Washington State, and elsewhere in the United States. Over time, I think that has eroded the technology base in Europe. In my view, there hasn’t been enough focus in Europe on how to re-ignite that base through stronger basic research in universities. Actually, Russia is now starting to find the recipe, which is really ironic in a lot of ways when you think about it. China and Korea are putting the United States to the test. The United 2 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

6 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD States has a huge, huge problem, in my view, and is going to have to do an awful lot if fifteen or twenty years from now the United States is going to be competitive with the great engineering talent that is coming out of universities in Asia. PROF. HANSEN: So they are behind in Europe, and in your view they will remain behind. Does that mean they are going to create a legal infrastructure that is defensive against foreign multinationals who are superior in IP and IT and who command large market shares? Will EU law adapt in a protectionist way to help EU companies? I have no case specifically in mind here, of course. MR. SMITH: I could imagine what you are talking about. [Laughter] PROF. HANSEN: But in a broader sense, do you see that? Usually net importing countries of IP products and services are inclined to limit strong protection for IP because it is in their economic interest, and net exporting countries want high protection because it is in their interest. In terms of entrepreneurship and advantages and disadvantages with regard to IT, will this have an effect on legal infrastructure? MR. SMITH: I would much rather sit down with policymakers and regulators in a country that has a healthy local industry and sees real promise for the growth of that industry. At a minimum, you are then contemplating rules that are going to be applied to their own companies as well as foreign companies. MR. CAPPUCCIO: It is complicated a little bit by the fact that a lot of the technology and IP software we are talking about can have network effects too. So there is also the sense in Europe — and Brad can agree or disagree — that the Europeans are often concerned that they do have companies that are in this industry, and they are innovative and they do have good engineers, but they frankly worry about the advantage that the American companies have in terms of scale or network. You are constantly discussing that issue. MR. SMITH: And there are network effects, that’s true. MR. FRICKLAS: I also think there is less of a difference in the cultural industries than there is in the IT industry. Under most of the trade agreements, there are cultural exceptions to free trade in cultural products. The politics for cultural and IT industries are quite different. Even countries that you would think of as free traders, like Canada and France and others, are quite protectionist about cultural industries, where they have very strict and overt quotas. The Television Without Frontiers Directive3 is about creating quotas, not about eliminating them. To the point about the domestic industry, the net imports and exports, I don’t know that that equation is as relevant in cultural industries as it is beginning to help even developing countries understand that developing a cultural industry of their own is critically important, and the only way you can do that is by protecting IP. So as countries begin to move along the scale ― for example, China is beginning to understand in the context of the Olympics that they have huge interests in domestically generated intellectual property. That is causing then to be interested in enforcing it. I think people are beginning to understand that it is very difficult to really make a distinction when you are talking about the marketplace about whether you are protective of IP or not. In other words, if you have a marketplace where everything is stolen DVDs and people are used to stolen DVDs, they are not going to make the distinction about whether it’s a stolen Chinese DVD in Beijing or whether it’s a stolen American one. You have to clean up the market and have people have respect for the product and understand that it costs money to make and that it should be protected. 3 Council Directive 89/552, 1989 O.J. (L 298) 23 (Television Without Frontiers Directive), available at http:// eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=31989L0552& model= guichett.

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 7

So I see signs of optimism in countries’ understanding the importance to their own economies of developing cultural industries. And not just to their economies, but to their political structure, to the ability to develop a shared cultural experience. It is important to have literature and movies and music and all the other things that go on with domestic culture, and that in order to achieve those things, protection of intellectual property is fundamental. MR. COTTON: There is a bit of history that is worth remembering if one is talking about U.S. content companies. Until the mid-1990s, all of the U.S. networks were essentially prohibited by U.S. law from getting into the content production and distribution business internationally. So you have one obviously large set of U.S. actors that were very late. The other U.S. actors, the film studios, were by and large an export business. They weren’t in local businesses. Obviously, there were vibrant incumbents in most countries. The point that Mike makes is that their cultures simply treat it differently — we treat it differently. We still have a 25 percent foreign ownership limit when it comes to broadcast television. That was true, and is true, in many, if not most, countries. Some are now backing away from it. But I would say that it is interesting. As at least NBC Universal starts to look at actually getting into the indigenous media business globally, the regulatory climate in many of these countries is very different in terms of tradition from the United States; the sensibilities are very different. And so the entire approach to the business, from a legal, regulatory, and production point of view, is really an evolutionary process. I think it is very different from the history of content companies in the business in this country. PROF. HANSEN: Is it a handicap for all of you operating overseas being an American multinational company? MR. JACOBS: I don’t find that to be the case. I just want to echo what Rick says. MR. COTTON: That’s because you’re Australian. MR. JACOBS: We are actually a company without a country. I would like to echo what Rick said. You really need to focus on local sensibilities. We don’t consider ourselves a global company; we consider ourselves a multi-local company. We bring a fair amount of expertise in how to run a TV station, how to produce programming, but you cannot succeed in any of these countries unless you hire local talent and you adapt the content for local sensibilities. You can form a TV station in Bulgaria that will be very successful. You can’t put U.S. TV programs on it. You can put on a Bulgarian version of the “Tonight Show” and that will be very successful. PROF. HANSEN: Is that a hypothetical or is there a Bulgarian “Tonight Show?” MR. COTTON: All of that is true. PROF. HANSEN: Very interesting. Let’s move to a completely different topic. This Conference will be dealing with some basic issues. One of them is copyright, whether it is sound, whether it needs exceptions, whether it needs reworking from the ground up. Or whether it’s okay, you just need to have fine tuning. Do you have any views about the state of copyright law? MR. FRICKLAS: I think you will find the people on this panel are, speaking for myself, very conservative on the issue of copyright law. We think it basically works. I would say to be careful about making changes, because given the amount of investment and infrastructure and organization in the businesses that depend on the law being the way it is today, the unintended consequences of every particular change can be enormous. We think that the courts are struggling with the right issues, that they are struggling with them on a case-by-case basis dealing with real facts and real situations, and that we fundamentally have a structure that works.

8 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD That doesn’t mean that there aren’t lots of very interesting issues being dealt with around the edges ― examples including Digital Millennium Copyright Act (DMCA)4 exceptions, technological protection measures, various other kinds of issues that are being dealt with around the edges ― but I think the fundamental structure is right, and I think the law is continuing to evolve on a case-by-case basis generally in the right direction. PROF. HANSEN: Brad? MR. SMITH: I agree completely with what Mike said. I just think it is important to step back and reflect upon the fact that, whether it is copyright or patents, we are really building on legal systems that have been constructed over about three centuries at this point and have proven to be remarkably resilient through amazing times of technological change, social change, and international change. The law will always continue to evolve, and certainly that is the other side of that coin. With each new wave of technological change, the law needs to adapt. It doesn’t adapt by rebuilding from the ground up. In the practical world, it is just not even really conceivable to think of that happening. It does seem to be important for it to keep changing in increments, so that the law can take a step and we can all see how it does in terms of adaptation. I also think it is important for us to keep in mind that the law provides one way to solve a problem. But a lot of the problems that concern many of us in this room have multiple solutions, and many of these can oftentimes be found outside the law, in terms of companies or consumer groups and others coming together in less formal ways than changing the law. MR. FRICKLAS: I want to add one thing to what you said, because I agree completely. There are lots of things that people will see as infringements, for example, that our companies see all the time and say, “That’s going to be fine; we’re going to let that happen.” Ultimately, as norms change and as people get used to the particular product, we ultimately get to a place where challenging it becomes impossible. We have seen that happen lots of times. In a way, sometimes, because there are nice issues that you can identify in theory and that you can write a paper about whether or not something works, there is an awful lot of conversation with consumers and with the businesses in trying to understand what the implications are. The industry has developed, I think, in nice ways, through combinations and through practical decisions about how these issues ought to be resolved, in many cases just as well as through opening the Copyright Act to the political process and trying to draft in the abstract. PROF. HANSEN: On this idea that there are other alternatives than the law, what about this movement to establish best practices or voluntary agreements that will control at least some marketplace activities? What about cooperation between ISPs and content providers in Europe? This is not to say that there are not legislative initiatives to have ISPs bar downloaders after a certain amount of illegal downloading. Are either of these a promising development? What is going to happen? MR. COTTON: I would just say that my view is that that these are necessary. It is what I was trying to refer to in my opening remarks in terms of the infrastructure and distribution businesses. I would say that the world has changed so dramatically, that I think it is important to remember that it is true in the physical world in terms of transportation capabilities as much as it is in the digital world, that you wind up with infrastructures that are enormously more capable than twenty years ago to transport what are essentially stolen or illegal or pirated counterfeit goods. 4 Digital Millennium Copyright Act of 1998, Pub. L. No. 105-314 (1998) (codified at 17 U.S.C. § 512) [hereinafter DMCA], available at http://www.copyright.gov/title17.

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 9

Therefore, when you refer to the agreements with ISPs, that’s just one example. YouTube is another example. When you create infrastructure that facilitates — I’m not trying to use the words legally now, just descriptively — access to either counterfeit or pirated goods, and that capability escalates to the point, for example, where 50 percent plus of an ISP’s bandwidth is devoted to transporting peer-to-peer file sharing, which is overwhelmingly pirated material, in some sense, either voluntarily or in another way, those infrastructure sectors have to come to the table in terms of simply not allowing their infrastructure to be utilized for that purpose. So I think that to the extent that it is happening voluntarily — and it is happening — that is probably much more constructive. It is much easier to make progress that way. And frankly, one of the huge problems in terms of regulation or law of any kind is actually keeping up with the marketplace. So to the extent that agreements can be worked out voluntarily, they are much more flexible, much faster, and ultimately probably much better. MR. CAPPUCCIO: I think we have a pretty good iterative process going. I would start with the proposition that going to Congress and asking them for legislation is dumb — you know, unintended consequences, opening the whole world back up, just not a good idea. So it is more a situation of you would have discussion among different entities, ISPs and content people. Both sides end up basically accepting things that may not be their ultimate theory. Whether it is the content companies never really going after DVR and cable, whether it is the ISPs acknowledging eventually we have to find a way to have some sort of filter, that sort of works itself out. Then, you use a court/legal system, which I think is very sound right now, to basically channel the outliers and channel the renegades and keep everybody in this consensus. If you take a snapshot of this process on any day, it may not look so pretty. But as it moves over time, I think it generally gets you to the right place. It has. PROF. HANSEN: What about digital rights management (DRM)? Is that bad? Is it going to be helpful? Is it obsolete? Is that part of the solution? What are we doing with that? MR. FRICKLAS: DRM is from our perspective an enabling technology. It is what lets us sell our products under various forms of distribution models that consumers might want. It lets us sell for a day, it lets us sell for a week, it lets us sell in a subscription, it lets us sell to own, it lets us sell to share. The person who wants all of the rights is willing to pay a different price than somebody who wants it for a day on a rental model. So we are able to satisfy different needs and different requirements. I think that music is being generalized to a more general conversation about DRM. I think that market has very peculiar characteristics. First of all, music is put out in the clear on a CD, and so most music is not protected by DRM. So trying to sell DRM-protected music in competition with unprotected music traveling around the Internet and elsewhere is in many ways much more difficult than it is for motion pictures and television product. Certainly, motion pictures are almost always distributed with DRM protections. So I think consumers are more accepting of DRM limitations. They are used to it. They see video-on-demand in their cable systems and otherwise. They understand rental models and other models. It is not so much uphill as it was with music, where people are used to owning it forever and that’s the consumer model. DRM will be a part of the landscape for a very long period of time. I think that should be something that everybody encourages, because it really is an opportunity to allow consumers to drive the business models that they want. MR. JACOBS: I agree with Mike entirely. Again, going back to the requirement that all of us need to come up with a new business model that provides the content as each individual wants it, you cannot do that without DRM. The music model is completely different: you buy it

10 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD once and you get to use it forever. We have much greater cost to produce our content. We need windowing opportunities. I just don’t see DRM going away any time soon. PROF. HANSEN: A number of you have said that music is different. Are record companies doomed? Would anyone buy stock in a record company right now? MR. FRICKLAS: I hope not. I think record companies are changing really quickly. I think their revenue models are going to be different. That comment I was making before about indigenous culture is every bit as important for music as it is for anything else. Music companies have been enormously efficient ways to raise money to finance people who want to create songs and innovate in what is a very important cultural business. People can quibble about how they do it and what their business models are and certain other aspects of the business, but fundamentally what has been going on is that record companies are ways to put venture capital into the creation of music, which I think is a very important thing. If the record companies don’t exist in their current form, something will continue to exist in order to raise capital to funnel to artists, and help those artists develop and find their audiences, and all of those things that record companies do. MR. SMITH: I think DRM will continue even for music because you cannot have a subscription music service without DRM. Certainly we find with our service that there is a real demand for subscription-based music — the idea that somebody can download as many songs as they want, they can put it all in their computer or their device, and as long as they keep their subscription current they’ll be able to continue to access all that music and add to it. It would not surprise me, especially as the market for MP3 players and iPods continues to mature, if we start to see companies offering these devices preloaded with music that’s DRM’ed and then a consumer can choose to pay to activate the subscription. We do need more interoperability between DRM systems than we have today. I think that would help address some consumer concerns and some industry concerns. So there’s a lot of room for improvement. But it would be very premature to declare DRM dead. MR. CAPPUCCIO: I just want to echo two points that I have heard from two different sides. One, you have to pause on what Mike said, because it’s so right. You have to view DRM as enabling. None of what we are talking about will happen without DRM, period. Not going to happen. The only way you can offer people professional content how they want it, where they want it, when they want it, assumes the existence of DRM. It is a necessary thing. It is enabling. The second thing is I think part of the “DRM good/DRM bad” debate is a misunderstanding of the difference between DRM and interoperability. Those are two completely different discussions and they should be kept separate. You should think of DRM as simply the bits and bytes that tell you what are the rules on which this is being offered. That is not the same as the interoperability issue. PROF. HANSEN: Let’s change the focus a little. Paul, before you said it would be silly to go to the government and try to ― MR. CAPPUCCIO: I said the Congress. PROF. HANSEN: Well, that’s my point. Who is in a governmental capacity that can have a positive effect. That you can go to, or that you want to go to in either the United States or abroad? In the EU, what role do you see being played by European Commission? Can they play a part even if you are leery about the implications of asking for new laws or amendments? MR. CAPPUCCIO: Well, look, the basic enforcement mechanism is already out there, and we have the courts. I don’t particularly think it is a good idea to ask the government to be the mediator through which the marketplace will develop solutions.

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 11 PROF. HANSEN: What about the U.S. Trade Representative on international issues? MR. CAPPUCCIO: Sure. MR. FRICKLAS: Sure, on piracy.

But to add to Paul’s comments, the situation is quite a lot different in Europe. We have seen, for example, in one of the agreements with respect to ISPs, one thing that sounds strange to free marketers, laissez-faire types, from the United States, which is the extent to which in Europe people feel perfectly comfortable regulating Windows, regulating lots of the business terms that go into distribution of IP. That government system works sometimes. It doesn’t work other times. It turns into questions about who has power and political issues, as opposed to what’s necessarily best for consumers or best for production. But we certainly have to deal with those folks in terms of participating in the negotiations with the government about very fundamental aspects of the business. MR. COTTON: I think it is important to remember that where we are right now, both digitally and in the physical world, piracy and counterfeiting are totally out of control. So I would answer the question, Hugh, by saying that I think the government’s enforcement role has to increase in terms of trying to deal with both the current technology and transportation capabilities that are out there. There is not a single FBI agent in the United States of America who is devoted full-time to investigating IP crime, not one. There are multiple different levels of this conversation. There is a basic enforcement function in the United States and globally that needs to escalate enormously. Now, when you get into some of the more technological, and in some sense complex, relationships — because, frankly, a lot of the sectors we are talking about are business partners of the content companies, so there are commercial relationships that already exist. Then the question is: Is it better to have it as Paul described it — it may not be elegant — in a dialogue and have the practices develop over time that work for both parties, rather than have the government try to legislate it? I think you find significant areas where that is true. But there is a fundamental proposition, which is right now law enforcement of IP rights against counterfeiting and piracy is at a level that is far below what I think is needed over the coming decades. MR. SMITH: I think there is a fascinating irony that has always existed for creative industries that are grounded in intellectual property. On the one hand, people in these industries always pride themselves on all the things they are doing on their own because they are the creators. And yet, none of us as companies would exist — we would not exist — without the government. If there were no copyright law, if there were no patent law, if there were no trademark law, none of us would be here. Frankly, many of you probably wouldn’t be employed to do what you do. So there is this balance that always needs to be struck. We can’t enforce the law without help from the government, without having good courts, and yet we also appreciate that it is a mistake equally to think that the government can solve every problem. But it does play a significant role. And yet the world has become more diverse, and sometimes people in government do their best work by being a catalyst, causing us to think harder and move faster to solve some things that we can solve ourselves. PROF. HANSEN: What about another branch of the government, the courts? Are you confident that the courts in the United States are going to reach the right decision? When you have a conflict are you thinking, “Well, I really could sue because we’re losing money, but I might not sue because the result would be so bad on these particular facts that it would affect our industry generally?”

12 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD I’ll give you the example of the Google Book Library case.5 The publishers sued pretty quickly probably wanting to stop the project in the bud. Now I think both sides are probably scared to death that this can’t really go to a court decision because so much is at stake. Now I think both sides are probably scrambling to settle it although there has been no public indication of that. But that realization seemed to come after the initial lawsuit, rather than before it. To what extent do you think about that in your litigation strategy today? MR. COTTON: Look, litigation is a very blunt instrument. So I think every time you think about litigation it is never with any great enthusiasm, for a lot of the reasons you just laid out. On the other hand, what I would say is that the process — you referred to the Google case — of both sides facing uncertainty and deciding that in fact they don’t want to leave the ultimate decision to someone who is not as familiar with the nuances and is not thinking through all of the perhaps unintended effects, actually clarifies a lot of minds, and then winds up frequently with a settlement that everybody can live with.So I would say it is a blunt instrument. But, on the other hand, I would say that over time, certainly if you compare how you feel about the courts in this country with what you face in other places, we have a pretty good system. MR. CAPPUCCIO: They’ve done a pretty good job, a darn good job. Everybody who faces litigation faces the risks. That’s a good thing, because that makes you more reasonable and it makes you talk to the other side. MR. COTTON: It makes most of us more reasonable. MR. SMITH: There are always sources of frustration. But I think, especially in those parts of the world that have well-established courts, it has been really impressive to see how the judiciary has grappled with a lot of these new issues. We had a case that went to the Supreme Court on patent law for software.6 That took place last year. I spent a week at the Court of First Instance in Luxembourg at a hearing the year before that. One case we won. One case we lost. In both cases the courts were incredibly impressive, to see how they got up to speed with understanding the technological issues. In one case in Luxembourg, the court enabled us to bring in computers for a week and set up an additional network for the courtroom so that all of the parties could use it. In the Supreme Court, they don’t have the technology in the courtroom and therefore rely more, to some degree, on the technological understanding of their clerks and the like. If you look at what the Supreme Court has done in the patent cases, it is impressive. Judges by definition need to be generalists. One thing I certainly came away appreciating, which is also what we on this panel have to be do in our jobs is grapple with specificity on a wide range of individual issues as they arise. I think the Supreme Court in the United States has been very thoughtful and very incremental. It has avoided broad swings, and yet it has tried to address real problems. I think that bodes well ― at least it creates cause for optimism — for the role that the judicial branches have the opportunity to play. MR. JACOBS: On the other hand, with respect to DMCA,7 I think most of us, with the possible exception of Viacom, would agree that we would prefer to avoid litigation. I think there has been a lot of cooperation, and there continues to be cooperation. I think that, as Brad calls it, “DMCA-Plus” is really moving along. I think we all hope that there will be very little litigation on the DMCA front. MR. FRICKLAS: Since our case has been mentioned a couple of times,8 I question whether the result on the DMCA negotiations would have been the same had we not stepped ahead and See Author’s Guild v. Google Inc., No. 05 CV 8136, 2005 WL 2463899 (S.D.N.Y. filed Sept. 20, 2005); McGrawHill Cos., Inc. v. Google Inc., No. 05 CV 8881, 2005 WL 2778878 (S.D.N.Y. filed Oct. 19, 2005). 6 Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007). 7 DMCA, supra note 4. 8 Viacom Int’l, Inc. v. YouTube, Inc., Case 1:2007cv02103 (S.D.N.Y. filed Mar. 13, 2007). 5

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 13

assisted when Google was not willing to acknowledge the fact that if you’re making money on people’s content and you are distributing that content and you are operating a Web site that is facilitating the distribution of piracy, that you have some obligation to keep the piracy off of your site. At the time we brought the case that was far from an accepted proposition. I think the law was clear. Google feels differently, or says they do. But I think the fact we were willing to push that point has resulted in that principle essentially being accepted by user-generated content sites. It resulted in the development of a filtering technology business, where there is an automated solution that has kept it relatively low cost for people who want to be in that business to filter their sites for copyright infringement and given us the tools to make it happen. So that is exactly an example of where I think litigation can accomplish a positive result. I don’t think our position was outlandish. Never mind outlandish. It is a very strong, and I think very simple, claim, but I think it is a principle that now other people have come to see why it has to be the right answer. MR. JACOBS: I just want to point out that MySpace did all of that before you brought the litigation. MR. CAPPUCCIO: Were you reading from the comp section of the proxy when you did that? MR. FRICKLAS: You should thank us, then, because your competitors weren’t. MR. CAPPUCCIO: I do have the sense that sometime in the next five years in the copyright area it is time for the Supreme Court of the United States to come in again and to have an updated discussion of the whole constellation of issues of contributory, vicarious, facilitating — all these things that we talk about in the very old and rusty terms of Sony Betamax.9 MR. SMITH: What happened with Grokster?10 MR. CAPPUCCIO: We snatched defeat from the jaws of victory. We did fine in Grokster. In Grokster the same thing, where it ends up being a case about summary judgment. That is going to happen every time because we don’t litigate these things. PROF. HANSEN: You’re talking about secondary liability? MR. CAPPUCCIO: No. Whether it’s YouTube or whether it’s Grokster or Napster, I feel that – it’s not urgent — an updated Supreme Court discussion about encouraging or building a business around that whole general concept sometime in the next five years would be very productive. MR. FRICKLAS: I do think secondary liability is the playing field now. What has changed over the last ten years is that ten years ago you were suing the company that stole your idea, your book, your movie, or we were being sued by people with the same kind of concepts. What has happened is that because copying is something that can be done at low cost and at home, the only way to have an impact is to figure out what the responsibility is of the intermediaries who facilitate that copying, as opposed to the people who are actually doing it. Those are tough issues. They are being worked out, but they are difficult issues to figure out. When you come up with a technology or a business plan that may or may not be innocuous but which is being used in a way that is resulting in people breaking the law, to what extent do you have to take steps to minimize that content? I think it is going to be a balancing that involves questions about how expensive it is, the extent to which you are profiting from it, the extent to which you know you are profiting from it, the extent to which you can take steps that would reduce that benefit from engaging in piracy. MR. CAPPUCCIO: We all could at the end of the day write the Supreme Court opinion that finally decides this. He just stated it. You kind of know that is where it is going to be at the end of the day. But there are a lot of steps in getting there. 9

Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984) (Sony Betamax). Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005).

10

14 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD MR. FRICKLAS: I think that Judge Posner did a pretty good job in Aimster11 early on, beginning to enunciate a standard there. Through various other means and through various other lines of the law, I think the cases are getting closer to the relatively simple test he laid out there. PROF. HANSEN: I am going to ask two quick questions and then we are going to go to the audience for some questions before lunch. How much IP do you have to know as a general counsel? How deeply do you have to get into it? Or can you rely on the people around you? Is it that after a while you do it so much you become absorbed into it, it just comes? Do you try to think about it and learn it? Or are you managers and so you rely on the people around you? How does it work? MR. COTTON: I have a lot of real lawyers who work for me. MR. FRICKLAS: I think we are all learning a lot. I am not an IP lawyer by background. Our jobs involve everything from securities law to employment law. I spent five or six years dealing with lots of asbestos cases and environmental cleanups and all kinds of other things. Right now this is a burning issue at the strategic level for our companies. When those are the issues you have, you end up learning quite a lot about the law. That said, I suspect that anybody who is a real IP lawyer would have much more breadth than I do. I know enough so that when they lay out the issues, I can help to sort through them. But I also know enough to know that for a “Greenfield” analysis of intellectual property law I certainly wouldn’t be the guy to turn to. PROF. HANSEN: A follow-up question on that, is: In this new world, this globalized world, this digital world, has it changed what you need in a lawyer that you hire, outside or in-house counsel? What you are looking for a lawyer to already have when you hire or engage him or her? Or is it your idea that every lawyer can adapt and pick up the necessary stuff on the job? MR. FRICKLAS: I will say if people are not able to talk technology it is a real disadvantage. In our industries, an awful lot of the lawyers who came through were people who got into it because they loved the music or they loved the show or they loved the creativity. There are still lots of people around with that bent. But if they can’t also understand what we are talking about when people are talking about what is happening online or happening in cellular, what the different formats are, and what the DRMs mean and all that, it would be an absolute negative in making a decision to hire them. MR. CAPPUCCIO: But there is a balance to that too, because at the end of the day the lawyers we hire have to persuade people who are essentially non-experts, be they the Justices of the Supreme Court — who are generalists — or policymakers. So you certainly need someone who understands the technology, but you still have to find that person who at the end of the day is very good at explaining it in a commonsense, general way. I think those skills have always been the great skills of lawyers. We would all hire Don Verrilli, for example. He is the ultimate smart generalist who can learn the technology and can translate it. MR. SMITH: Yes, I agree with that, although I do think that there are three things that have been changing. One is the point that Mike made. It’s hard to do this work well without understanding the technology. The second is the point that you made, Paul, although I would say to me what is different is that the world has become so media-dominated — media-dominated in the sense that it is not just media companies but bloggers, cable news networks, Internet new services, you name it — that in many cases, certainly cases that our companies are in, you have to be able to not only persuade the person at the front of the courtroom, the judge or judges. You also have to persuade the people at the back of the courtroom, which is where the journalists sit. If you 11

In re Aimster Copyright Litig., 334 F.3d 643 (7th Cir. 2003).

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 15

actually want to have your day in court, you better figure out how to connect with the court of public opinion, because it takes quite a while to get to your day in court. So that’s the second thing. The third thing, I think, is the question of whether individual lawyers can really cross borders. I believe that it is very important for our inside lawyers to be able to deal well with these issues on a multinational basis. That requires not just being familiar with what different courts are doing, but having some understanding of the different civil law systems, the difference between civil and common law approaches, the difference between countries that have their roots in a French system or a German system, and understanding the legal traditions that have spread around the world and have evolved along the way. That is not necessarily a prerequisite for every outside counsel. We will hire outside lawyers in a specific country because they are going to be the best lawyers to go to court in that country. But there is a bigger world of opportunity for people who figure out how to cross borders. PROF. HANSEN: That’s great. We are now going to open up to questions from the audience. Wait for the microphone. State your name and affiliation, please. QUESTION [Richard Pfohl, Canadian Recording Industry Association, Toronto, Canada]: A question for Rick Cotton. Rick, you talked about building partnerships with ISPs, but you also talked about how a lot of their business model is effectively built on moving infringing traffic across their networks. Given that that’s how they are making money now, how is it that you bring them to the table to partner with you to try to control the movement of infringing traffic across their networks? MR. COTTON: I actually don’t believe that at this point in time they are making money by transporting pirated content. Quite the reverse. There may have been a point in time when, in terms of attracting broadband customers, it was useful from their point of view to have a lot of free video and other pirated material out on the Internet that people needed faster bandwidth to access. But today, with the amount of traffic in, particularly, pirated video — (1) taking as much bandwidth as it is and (2) virtually every ISP is also in the business of selling content to their customers — that is no longer the case. So I think, while we may like to think that it is our persuasive powers that bring them to the table, I think their self-interest has changed. When I said that there are companies and commercial interests that do profit from weakening of intellectual property laws, they are not the ISPs. There are companies whose business model is enhanced by virtue of being able to provide their customers access to any and all content. But it’s not the ISPs. PROF. HANSEN: Howard? QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa, Canada]: Actually, it’s ironic Richard just asked this question. I am from Canada as well. We just had an incident reported where the Canadian Broadcasting Corporation, which is our national media network, tried a new business model. They tried to disseminate a popular program on Bit Torrent the day after it was broadcast. And guess what? Nobody could download it because our two big ISPs are throttling the Internet right now. So this is a promising business model. A very responsible corporation is trying to implement it. But they are being frustrated because our two ISPs have so many internal conflicts that they basically want to shut down the Bit Torrent technology on the Internet, which obviously is being used for unauthorized downloading a great deal, but has tremendous potential as a new business model to make all of your companies very successful I’m sure. So I’m hearing a lot of disturbing things that would shut down progress. PROF. HANSEN: Okay. That is a comment. Do you also have a question? QUESTIONER [Mr. Knopf]: The question is: What are you going to do about it?

16 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD MR. COTTON: Look, we are at the very beginning. The Internet is young. This technology is young. The capabilities of broadband access providers are extremely young. The thing that, frankly, always fascinates me about these kinds of technology discussions is that people who are enamored and desirous of seeing technology utilized, whether it’s Bit Torrent or any other distribution capability, and really have a great deal of confidence in technology’s ability to innovate, to adapt, when it comes to content protection think that for some reason, by definition, technology is deaf, dumb, blind, and stupid. I don’t think that’s true. So I think that it will happen in dialogue, it will happen in dialogue with lots of different constituencies. But ISPs will develop technological capabilities that will not violate people’s privacy, they won’t block legitimate content, but they will develop processes where they discourage and reduce — it will never be eliminated — but which discourage and reduce the use of their infrastructure to access pirated content. Will there be missteps along the way? Definitely. MR. CAPPUCCIO: And by the way, nobody had the creativity at the Canadian Broadcast System to pay $75 for a URL called Canadianbroadcasting.com and to put the program up there, number one; or to go to the Canadian cable companies and say, “We’d like you to provide this for free to people on demand for a certain period of time.” No one thought of that there? That’s not progress, that’s stupid. MR. FRICKLAS: A different issue. In talking about the protections, I often hear conversations that some kind of content protection threatens progress. I think that analysis needs at least to be balanced with the threat to content creation and production that the technologies also pose. Bit Torrent could easily incorporate, should they choose to, elements that would enhance or make it more difficult to use the technology for the purposes of piracy. I don’t think that would hurt progress, in the sense of Bit Torrent being a promising technology, which no doubt it is. But there is a certain amount by which people who are deliberately facilitating piracy, deliberately taking advantage of the value of content in order to induce people to come to their businesses, deliberately not incorporating anti-piracy measures, to say that the fact that there is some theoretical or some modest non-infringing use of their product is therefore a protection and the only interest of the public should be in protecting their business and not in protecting all the other elements and all the other businesses that get harmed by what they do. I am not saying, where that equation always comes out on the side of content, maybe everybody at this table might lean more in one direction than the other. But to have the conversation, you have to at least have the discussion about the fact that both interests are implicated by the protections. I don’t hear that enough. MR. SMITH: I think Mike makes a really important point. Just think about the following: digital music has been incredibly profitable for the companies that make the hardware devices that everybody uses to play it. All of these phenomena that we are talking about involve an ecosystem with a number of different participants. One of the fundamental challenges ultimately for the law, if others of us can’t sort it out, is how to balance the interests of the different participants. The truth is it does require a balance for the ecosystem as a whole to be healthy and grow. Now, part of the solution, I think, to the problem you described is also growing the infrastructure, adding capacity to the broadband pipes. But even that requires a clear understanding of how the different responsibilities are going to be apportioned. That is a lot of what I think is going to occupy us all for at least the next decade. MR. FRICKLAS: Maybe I’m underscoring the same thing, but at least at some point every property right in existence limits freedom or limits innovation. If you don’t want anybody to come on the piece of property that you have built your house on, it limits people’s freedom

PART A: GENERAL COUNSELS’ ROUNDTABLE: A VIEW FROM THE TOP 17

to take a shorter path down the street and it limits their freedom to do something that might be economically more profitable on your piece of land. But we think that overall it is socially useful for people to own property. I don’t think that IP is different in that. It does limit innovation in some ways and it does limit freedom in some ways to protect IP, but in the balance of the overall equation we have made the decision that that also facilitates all kinds of investment and all kinds of positive activity and that the balance of the limitations and the things that are encouraged is worthwhile. There are certainly cases where that needs to be analyzed. It just needs to be analyzed always through that lens. PROF. HANSEN: Another question? QUESTION [Timo Ruikka, Nokia Corp., Helsinki, Finland]: My experience from doing IP transactions is that it is a lot of hard work. I think it is fair to say that IP markets, markets for IP products, patents included, are very inefficient. The question is: Do you agree that they are inefficient, and should something be done about it, and if you have any ideas, what? MR. SMITH: I think that is a very good point, and I think there are a number of things that can be done about it. One of the things that we are seeing emerge, for example, in the patent area is the development of a secondary market. There is a lot of interest, and even some controversy, around some of the people who have been championing the creation of that secondary market by licensing rights and then sub-licensing them to others. Some of that controversy is even, I think, warranted. But the reality is I think the creation of a secondary market is probably important for any property-based market. So that is good. I think then it really is incumbent upon us as lawyers to find ways to make things simpler. It is hard to pick up a licensing agreement from our company, any company, anything that comes out of a law firm, and say, “Oh, this is easy to understand.” Just really focusing on how we accomplish that, we started with simple things, like using some of the features in our own products to measure how many years of education on average one needs to have in order to understand this document that you’ve just received. There is a feature in Microsoft Word that will do this. When we started, you had to have a Ph.D., and when we were done it only took eleven years of elementary and secondary education. But helping us all focus on how to make these things simpler is clearly very important. I think lawyers too often think that you show you are smart by managing complexity rather than figuring out how to simplify it. PROF. HANSEN: We are going to try to get two more questions in. QUESTION [Hon. Randall Rader, Court of Appeals for the Federal Circuit, Washington, D.C.]: If you have to litigate and you can choose a forum anywhere in the world, where do you go? If it’s the United States, which district? MR. CAPPUCCIO: You have to tell me what we are. Are we a plaintiff or a defendant? QUESTIONER [Judge Rader]: If you are choosing the forum you are probably the plaintiff. MR. FRICKLAS: My favorite forum is the one that I am in when I’m talking to the judge and telling him how much I like his forum. It’s a very hard question. That’s where we sit. MR. SMITH: I would say, in the United States, in a state that wasn’t previously a republic. PROF. HANSEN: But wouldn’t you be a little bit interested in the body of law in the circuit? MR. CAPPUCCIO: Yes. Okay, you are probably not going to California. PROF. HANSEN: You have had your hand up for a long time. QUESTION [Kathleen Paisley, White & Case LLP, London]: Following up on something Brad and Timo said, my question is: As technology moves on and we are thinking about wanting to create the right incentives for innovation, but at the same time maybe having concerns about the ability of our current system to really over time work, where what you are

18 CHAPTER I: CORPORATIONS & IP IN A CHALLENGING WORLD doing is you are basically trying to regulate copying in a world in which copying is difficult to regulate and to monitor, from your in-house perspective, what are you thinking about in terms of what the real business models are going to be ten years from now, twenty years from now, when the dust settles and we’ve really thought through what is a good way to make money and keep everybody motivated, and yet is practical given the technological challenges that digital gives us from a regulatory perspective? MR. CAPPUCCIO: I think it is really simple: It is greater consumer convenience supported by digital rights management. The technology is there. It is getting better all the time. DRM is the flip side of how you provide the convenience that consumers want and deserve. MR. COTTON: I would say, picking up on the convenience point, it is making legitimate content more convenient, much more convenient, and much higher quality for the consumer than pirated content. MR. FRICKLAS: I also think the technology enables all kinds of new things. We are all talking about delivery of content, and that kind of implies linear television and movies. But games and social networking and all these things are new experiences. As we think about legal rules, for example, we are trying to set up legal rules that enable those businesses to be successful. We were all talking about user-generated content a few minutes ago. We are all in the UGC business. We all depend every day on fair use. We don’t want to see extreme interpretations of some of these statutes become the law because they are fundamental to us. We are looking to provide that consumer experience. So we are looking actually, from where we sit, at trying to achieve the balance that we were talking about before. PROF. HANSEN: Last question. QUESTION [Alexander Macgillivray, Google, Inc., Mountain View, CA]: I’m Alex Macgillivray from this panel’s favorite company, Google. The question I want to ask is actually just to pick up where Michael left off. One of the big things that you are all doing now is diversifying into a bunch of different places and into UGC. So, putting your UGC hats on for a second, how does the difference in your advice to the UGC part of your operations work, and how do you balance off the two interests? MR. FRICKLAS: I would say, particularly given the policy issues that we are asserting, that we are absolutely joined at the hip. We are not asserting anything against anybody else that we wouldn’t be doing ourselves, and aren’t in fact doing. We have these debates. Obviously, there are businesspeople inside our organizations who have one interest in mind, and that is to have a free, unfettered UGC blogging experience. They have to understand that there is a larger and a more balanced position. MR. CAPPUCCIO: I don’t think any of us really have a difficult time giving different advice to our different divisions. PROF. HANSEN: Thank you all for a great panel. And thank you members of the audience for the excellent questions.

CHAPTER II

Developments in European Union IP Law Part A. Legislative Developments in European Union IP Law What are the current IP goals of the European Commission? Are they appropriate? Why the sudden interest in performers? Is further unification or centralization of patent law and institutions possible? Will there be cutting back on IP protection in existing directives? Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speakers TILMAN LÜDER

HARRIE TEMMINK

Head of Unit, Copyright and Knowledgebased Economy DG Internal Market and Services, European Commission (Brussels)

Industrial Property Unit, DG Internal Market and Services, European Commission (Brussels)

Panelists PROF. P. BERNT HUGENHOLTZ

HON. ROBERT VAN PEURSEM

Director, Institute for Information Law, University of Amsterdam

Vice President, District Court The Hague (The Netherlands)

PHILIP JOHNSON

DAVID SWEENEY

Barrister, 7 New Square (London)

Senior Legal Counsel, Interactive Software Federation of Europe (Brussels)

DAVID KEELING

PROF. ALAIN STROWEL

Boards of Appeal, Office of Harmonization for the Internal Market (OHIM) (Alicante)

Covington & Burling, Saint-Louis University (Brussels)

20 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW PROF. HANSEN: We are going to get started now on our EU session, which has always been interesting in the past. I am sure it will be today. Tilman Lüder is back, and that guarantees it is going to be very interesting. Our speakers are from the European Commission Internal Market Directorate. They are Tilman Lüder, Head of Unit, Copyright and Knowledge-Based Economy; and Harrie Temmink, who is in charge of the Industrial Property Unit. Our panelists are: Professor Bernt Hugenholtz, Director of the Institute for Information Law, University of Amsterdam, who is intimately involved, both independently as an academic and scholar and through commissions from the EU to do reports. Phillip Johnson, is an English Barrister, 7 New Square, formerly the Legal Adviser to the U.K. Intellectual Property Office. David Keeling is a member of the Boards of Appeal of the Office of Harmonization for the Internal Market (OHIM), which is the Community trademark and designs office in Alicante, Spain. The Honorable Robert van Peursem, whom you heard speak earlier with regard to passing of Sir Nicholas Pumfrey, is the Vice President of the District Court The Hague in The Netherlands. David Sweeney is Senior Legal Counsel of the Interactive Software Federation of Europe in Brussels. And finally, Professor Alain Strowel from Saint Louis University in Brussels and a consultant to Covington & Burling. Tilman, would you please start? MR. LÜDER: Good morning, everyone. Thanks a lot, Hugh, for inviting me yet again. This year we have to be very serious. All this slapstick has to stop, I decided. This year it will be dead serious. There will not be any jokes. There will be lots of figures and studies that we have conducted. I would like to focus on the project that is closest to my heart, which is the social and economic situation of performing artists in Europe.1 We have done some very extensive work on the fate and on the economic and social situation of performing artists. Some of it we have done ourselves.2 Some of it we have outsourced to consultants, one of whom is sitting on the panel. 1 For a more in-depth discussion, see Tilman Lüder, “The Economic and Social Situation of Europe’s Performing Artists”, in Chapter IV.A.1, “Copyright Agenda in the European Union: A View from the Commission”, infra this volume; IV.B.2(a), “Digital Licensing Issues—Europe”, infra this volume; see also Tilman Lüder, “Working Toward the Next Generation of Copyright Licenses”, presented at the Fourteenth Fordham Conference on International Intellectual Property Law and Policy (Apr. 10, 2006), available at http://http://ec.europa.eu/internal_market/copyright/ documents/documents_en.htm. 2 See European Commission, Management of Copyright and Related Rights, http://ec.europa.eu/internal_market/ copyright/ management/management_en.htm (last updated Feb. 13, 2008); see also European Commission, Music Copyright: Commission Recommendation on Management of Online Rights in Musical Works, IP/05/1261 (Oct. 12, 2005) [hereinafter Commission Music Copyright Recommendation], available at http://www.ebu.ch/CMSimages/en/ INFO_EN_233_tcm6-40326.pdf; Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (collective crossborder management of copyright and related rights for legitimate online music services), available at http://eur-lex. europa.eu/LexUriServ/site/en/oj/2005/l_276/l_27620051021en00540057.pdf. Note: Subsequent to the Conference, the European Commission adopted two initiatives in the area of copyright. Press Release, European Commission, Intellectual Property: Commission Adopts Forward-looking Package, IP/08/1156 (July 16, 2008) (“First, the Commission proposes to align the copyright term for performers with that applicable to authors, in this way bridging the income gap that performers face toward the end of their lives. Secondly, the Commission proposes to fully harmonise the copyright term that applies to co-written musical compositions. In parallel, the Commission also adopted a Green Paper on Copyright in the Knowledge Economy. The consultation document focuses on topics that appear relevant for the development of a modern economy, driven by the rapid dissemination of knowledge and information. Both of these initiatives comprise a unique mix of social, economic and cultural measures aimed at maintaining Europe as a prime location for cultural creators in the entertainment and knowledge sectors.”) [hereinafter Commission Adopts Forward-looking Package], available at http://europa.eu/ rapid/pressReleasesAction.do?reference=IP/08/1156; see also European Commission, Green Paper, Copyright in the Knowledge Economy, at 3, COM (2008) 466 (July 2008), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2008:0466:FIN:EN:PDF.

PART A. LEGISLATIVE DEVELOPMENTS IN EUROPEAN UNION IP LAW 21

There is a study by Bernt Hugenholtz that talks about the plight of performing artists.3 He calls it “term extension.” I don’t know why. I wanted to call it “the social and economic situation of the performing artists.” Bernt submitted this study to us. As you can see, it is dogeared, it’s well read. As always, we commission studies from Bernt, then we read them, then we post them on the Internet, and then we forget about them. That’s a symbolic ritual by now. That gives us certain credibility in the academic world that we do have academics advising us; and it gives us a bit of independence because we never follow them. I’m sure that Bernt will have some really tough things to say about this. I don’t know whether I dread or whether I look forward to his comments. Bernt, your study is excellent. It has been well received. I don’t think our Commissioner, Charlie McCreevy, has read it. Possibly, he came to a different conclusion than what you proposed. What I am trying to do here is to tell you why we also have solid and good reasons to do what we are doing. We have also done our own study, which is still under wraps. It will only be revealed once we have a proposal, which is supposed to be by July 2008. Some of you were hoping that I would say July 2011, which is our normal planning cycle. But this one will be ready July 2008, this year.4 There is some immediacy to all of this. That’s why I’m saying all this copyright slapstick has to stop, because now we are back in serious business. We are actually doing something positive for the right-holder community, instead of what we did up until now, which is widely perceived as not positive for the right-holder community but more positive for efficiency and economic considerations. I think that is the main theme. Maybe Europe has switched away from looking at economic issues. Maybe Europe is now focused more on the social and the societal impact of copyright. Maybe that is a reaction to the criticism that we are always looking at business, we are always looking at how big corporations license. I have heard the criticism we are always looking at collecting societies and how they operate. This time maybe we are looking at individuals. That is the first core message. This is a project about the fate of individuals. This is a project about the livelihood of individual performers. Some crucial figures — I cannot give you the real figures, because of course the real figures are highly confidential, so I will give you some fake figures to see how important this initiative is for the performing artists. Of course, we all know that if the big issue is that performers should be equal to authors; they should have a term that is somehow linked to their lifespan. The whole idea about the authors’ rights is that this is a right that you have at least for your life, and in the case of authors, for two-to-three more generations. Now obviously, the appropriate solution, if you say that performing artists get a bad deal, that performing artists do not get a livelihood out of their performances, that their social status needs to be enhanced, would be that the term is linked to their life, that at least during their lifetime they have a steady source of income. The optimal solution, obviously, under this heading would have been linking the term somehow to the life of an individual. This is what we have analyzed. This would have been a very good option. It just has one big disadvantage: as soon as you link the terms of copyright to the life expectancy of individual people, you are going to have a lot of administrative problems with regard to so-called co-performances. Because all the performers die at different stages, 3 Inst. for Info. Law, Univ. of Amsterdam, The Recasting of Copyright and Related Rights for the Knowledge Economy (Nov. 2006) [hereinafter IviR Report], available at http://www.ivir.nl/publications/other/IviR_ Recast_ Final_Report_2006.pdf. 4 See Commission Adopts Forward-looking Package, supra note 2.

22 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW when you have to calculate the term you have to determine who is the last surviving performer. This causes all kinds of administrative hassles. Therefore, we decided that another option would be to use ninety-five years as a proxy for life. Why is ninety-five years a suitable proxy for life? If you create something in your twenties and you live nowadays way into your eighties (average life expectancy in Europe is 81.5 years), when you add twenty and eight, you get a hundred. We are not that generous, so we said ninety-five. That is pretty easy economics. So nobody should ever say that we do not do economic analysis of the law anymore. Now, what is the benefit for a performing artist if it is linked to life or ninety-five years, which for the remainder of my presentation I will deal with as being equivalent? I have to be careful with these figures; these figures are highly confidential, of course, so I’ll give you them always a bit wrong, but they are somewhat in the ballpark. The added benefit for the individual performer would be € 115–2000 per capita. If there is an additional fund set up for the session musicians, you would have a per capita benefit of € 200–3000. That is always per year. This would be the additional income sources that a performing artist would maintain throughout his lifetime. A word about the Gowers Review.5 Gowers says the performing artist is not going to benefit from any of these initiatives because he has assigned his copyright to the sound-recording producer. That is partly correct as far as the exclusive rights are concerned, as far as, for instance, the reproduction and the making available and the rights linked to the physical sales of sound recordings are concerned. That is not correct in continental Europe — and now I am singing the praises of the continental European droit d’auteur system — where a significant revenue stream is not assigned to the sound-recording producer. These are all the revenues that stem from the broadcasting of a sound recording, revenues linked to the lending of a sound recording, and revenues linked to private reproductions of sound recordings. All of these revenue streams remain with the individual performers, and all of these revenue streams are collected by collecting societies on behalf of the performers. These revenue streams are a significant income stream for individual performers, especially for those who do not receive copyright royalties from the assignment of their exclusive rights to a phonogram producer. When I am talking about these figures of € 100–2000, or with a fund-based solution for session musicians € 200–3000, most of these figures stem from the fact that broadcasting royalties will go to individual performers throughout their lifetime. I think that is the crucial difference between our study and the Gowers Review, because the Gowers Review is based on the assumption that all rights that are vested in performing artists are exclusive rights and that all of these rights are the subject matter of a contractual transfer. That is true in the United Kingdom, but that is not true for the rest of the continent, where we have significant remuneration rights that stay with the performing artists. That is why I can say with a good conscience that our study comes to the result that a ninetyfive-year term, a term based on roughly the life expectancy of the average European citizen, will be of extreme value to individual performers. One word about the economic impact of this. In his study, Bernt Hugenholtz approached it more from the angle of how much revenue would be lost in the first year if certain works were to fall into the public domain. Bernt based his study on the assumption that roughly 3 percent of all protected sound recordings will fall into the public domain in a span of five years to a decade. So he just took that overall revenue figure of the sound-recording industry in any 5 U.K. Treasury, Gowers Review of Intellectual Property (Dec. 2006) [hereinafter Gowers Review], available at http://www.hm-treasury.gov.uk/media/6/E/pbr06_gowers_report_755.pdf.

PART A. LEGISLATIVE DEVELOPMENTS IN EUROPEAN UNION IP LAW 23

given year and said in the next five years it will be 3 percent less.6 That is what I would roughly characterize as a top-down approach. We took a bottom-up approach. We asked: What did they earn in the first fifty years and what do they expect to earn in the forty-five additional years? We said they earned X in the first fifty-year span; on that basis, we can extrapolate what they will earn in the forty-five years of additional term protection. That is how we came to these figures. Thank you very much. PROF. HANSEN: We are going to discuss copyright first because I think it is going to be difficult to remember all these figures that you have given if we wait too much longer. Who wants to make any comment about anything in the copyright area? Bernt? PROF. HUGENHOLTZ: I think there is a separate session on the term extension,7 so I will be very brief on that. I don’t think academics ever expect politicians to read their reports. I think what is more serious is if the politicians do not listen to the officials who are paid to advise them. I have been here on several panels with Tilman before. I think this is the first year that the word “performers” is actually being mentioned. It is baffling. By the way, the IviR report that Tilman refers to isn’t really about term extension for performing artists. That was mostly off the radar screen when we produced our report. We were looking at term extension for sound recordings for the recording industry. My guess is that this debate is still actually about that. But I did notice that sound recordings were not mentioned in Tilman’s intervention. PROF. HANSEN: So this is subterfuge? PROF. HUGENHOLTZ: Those are your words. In fact, our report wasn’t that much against the performers as you presumed it was. It was very much against a term extension for sound recordings. But if that is not on the agenda, then we are all happy. I would like to say a few more general things about copyright policy, because I thought that was what this panel was about. If we look at past European Union’s directives in this field, I see two main goals reflected in these efforts: • Creating an internal market, which of course is the main goal and creates the main legislative competence, which legitimizes harmonization of unharmonized terrain, removing disparities, fostering the internal market. The early Directives reflect that.8 A levies initiative, which is now resurfacing in Brussels, would also fit in here very well. • The other main goal — to promote the copyright industries, or more generally the information industries, promote innovation, promote competition within Europe — is also is reflected in various Directives, the Database Directive9 and the Information Society Directive.10 One might argue whether they are effective, but at least they are based on these main goals. They have a solid basis in the EC Treaty.11 See IviR Report, supra note 3. See Chapter IV.B.2(a), “Copyright: Digital Licensing Issues—Europe”, infra this volume. 8 See Council Directive 93/83, The Coordination of Certain Rules Concerning Copyright and Rights Related to Copyright Applicable to Satellite Broadcasting and Cable Retransmission, 1993 O.J. (L 248) 15; Council Directive 2001/29, The Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10 [hereinafter Information Society Directive]. 9 Parliament & Council Directive 96/9, 1996 O.J. (L 77) 20 (EC) (Database Directive). 10 Information Society Directive, supra note 8. 11 Treaty Establishing the European Community, Feb. 7, 1992, 1992 O.J. (C 224) 1, [1992] 1 C.M.L.R. 573, 626 [hereinafter EC Treaty], incorporating changes made by Treaty on European Union, Feb. 7, 1992, 1992 O.J. C224) 1, [1992] 1 C.M.L.R. 719, 331 I.L.M. 247 [hereinafter TEU]. The TEU, supra, amended the Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II), as amended by Single European Act, 1987 O.J. (L 169) 1, [1987] 2 C.M.L.R. 741, in Treaties Establishing the European Communities (EC Off’l Pub. Off. 1987). 6 7

24 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW Other goals, the goals mentioned in Tilman’s talk and in the famous press release12 where suddenly Commissioner McCreevy embraces the performers as his long-lost friends ― promoting cultural equality between performers and authors; social policies promoting the pension funds of the session musicians ― those are all equally laudable as well, but they have a very weak basis in the EC Treaty, if not none at all. I think that is perhaps a bit forgotten in all these initiatives. I think we should not forget that there is an EC Treaty that creates a competence, and not just public choice. PROF. HANSEN: If this went before the European Court of Justice (ECJ), for instance, on a Treaty-based challenge, what do you think would happen, Bernt? PROF. HUGENHOLTZ: We don’t know what “this” is. Is “this” simply a term extension for performers? If that is simply based on giving the session musicians more money — not Cliff Richard (he’s rich enough, of course, and even McCreevy recognizes that) ― I think you might make a good case against the Directive, especially in view of the fact that this is already harmonized terrain today. We have had our harmonization of the term. So it cannot be based on an internal market consideration. PROF. HANSEN: Bernt, so you think the ECJ is going to say the Commission can’t improve the lot of session musicians? Honestly? I’m a legal realist ― there’s no chance you would win on this in the ECJ, none, zero. In fact, most of the copyright directives would not stand up to a proper treaty interpretation, but the ECJ has been giving a green light for years to the Community in many areas that might be considered suspect under the Treaty. Tilman? MR. LÜDER: I think that we would win. I will tell you why. I think we would win the Council, the Parliament, and the European Commission as colegislators. In that case, it would be Bernt Hugenholtz v. Council and Parliament of the European Union. In that case, there is a serious chance that the latter institutions would win, for the simple reason that, as we discussed in our impact assessment, there is already disharmony in the term of protection for performing artists. We have found cases, for example in Greece, where, contrary to the current Term Directive, the term for the performing artist is based on the life of the performing artist, whereas in the EU Directive it says fixation plus fifty years. PROF. HUGENHOLTZ: Well, you go after them. MR. LÜDER: If other Member States now take similar initiatives and everybody does his own thing, there would be an unharmonized way of protecting performing artists, which would then cause the famous barriers to freedom of services or free movement of goods, which incorporate those sound recordings. So there is an obvious case to be made. PROF. HANSEN: Okay, we have two positions on the Treaty argument. Bernt, would you want to continue? PROF. HUGENHOLTZ: I think if certain Member States are not implementing the Directives correctly, then you should go after those Member States. I do not think that can form the basis of a new so-called “harmonization” effort. This is not harmonization. This is already harmonized terrain. So you need another argument in the Treaty. MR. LÜDER: There is some discretion. If that Member State happens to do something with which we do not fundamentally disagree, there is some discretion. Instead of bringing that Member State to the Court of Justice, we could extend that system to the rest of the Community, so that all performers benefit in a harmonized way from that policy decision. PROF. HANSEN: Let’s get off the legal basis and go to the policy basis. Phil? 12 Press Release, European Commission, Performing artists — no longer be the “poor cousins” of the music business — Charlie McCreevy, IP/08/240 (Feb. 14, 2008), available at http://europa.eu/rapid/pressReleasesAction. do?reference= IP/08/240 [hereinafter McCreevy Press Release].

PART A. LEGISLATIVE DEVELOPMENTS IN EUROPEAN UNION IP LAW 25 MR. JOHNSON: I think it is very interesting. If the Commission starts arguing in infraction proceedings that where a Member State has a better policy it does not need to follow the Directive, I think that is a very unusual stance. MR. LÜDER: No, that’s not very unusual at all. When I started my career, we had packaging waste legislation in my home country. It was used as a model for the Packaging Waste Directive.13 So we harmonized it for everybody because we think it is a good policy. MR. JOHNSON: There is a difference there because it wasn’t harmonized and then it became harmonized. But if you have a harmonized system where people say, “This is harmonized, you must follow this,” if they decide they do not want to follow it and they have a better idea, they can come back and say in a defense in an infraction proceeding, “Our policy is better; therefore, everybody should harmonize towards us.” MR. LÜDER: There is a risk to this approach because then every time we harmonize something, it is cast in stone for eternity, and we can never, ever change it, because once it is harmonized it is done. MR. JOHNSON: That is true. PROF. HANSEN: Either of the Davids? MR. SWEENEY: I am here to speak for the videogame industry, but as a former performing artist myself I find it irresistible to comment. Despite having a recording contract and being a session musician, the most money I ever made was playing in Irish bars here in New York City. So I am a bit skeptical. It is good to hear these ideas that Tilman has mentioned, though the reality may be somewhat different. In fact, my theme today — and I’ll speak again this afternoon14 — will be reality. There are a lot of good ideas, a lot of good proposals, but in the end it comes down to what is efficacious, what can actually be made to happen. That would apply to many issues that are under way or have been under way over the last ten years in Brussels involving, for example, the MTV case, which was the start of the interaction between copyright law and competition law. To be continued. PROF. HANSEN: David Keeling, do you want to say something? MR. KEELING: Just very briefly. I speak purely in my own capacity as an avid collector of recorded music, in particular jazz and rock ’n roll and rhythm and blues. It just so happens that all the music I buy seems to have been recorded in the 1950s. I saw the famous press release that was referred to, in which Commissioner McCreevy announced this plan to extend protection for performers’ rights to ninety-five years. He notes at the end that they have done an empirical study and they have observed that works that are out of copyright are not cheaper to buy than works that are in copyrightWell, I have done my own empirical study. I have bought about 1,000 jazz CDs over the last ten years. I have noticed exactly the opposite, in fact, that works that are out of copyright are a little bit cheaper, in particular compilations. There is no such thing as a free lunch. If somebody is getting a royalty, somebody is going to be paying for that royalty, and I can’t see who it is going to be, other than people like me buying the records. PROF. HANSEN: You just don’t want to pay more; is that basically it? MR. KEELING: That’s about it, yes. I’m a stakeholder here. PROF. HANSEN: Doesn’t it really come down to, if you just scratch the surface, that Bernt, Phil and David are against this type of protection for policy reasons? You certainly don’t want to extend it. Isn’t that right? [They nod yes.] Then you need to fight it on a policy basis, because a treaty-based attack stands no chance. 13 14

Parliament & Council Directive 94/62, 1994 O.J. (L 365) 10 (EC) (directive on packaging and packaging waste). See Chapter IV.B.2(a), infra this volume.

26 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW As for Tilman, it is pretty clear why he and DG Internal Market are interested in doing this. They are looking for something that is popular coming out of Tilman’s unit. This one provides pretty good P.R. You are on the side of lowly-paid performers, rather than the hated record companies. As for Bernt and other talking about going to the ECJ is, frankly, an academic approach that does not recognize reality of what the ECJ had done with claims that the Community does not have power to act. Nothing is going to result from this approach. The bottom line is it good policy or bad policy. You need to fight the Commission and try to thwart them on this basis within the two other Community legislative-making bodies — the Council and Parliament. The ECJ is just not interested. Bernt, your idea that this is a subterfuge is an interesting thought, but it would be interesting to hear you develop it more as to what effect this proposal will have on the larger issues of sound recordings. We don’t have sufficient time left to fully explore that now, but it would be interesting. That’s one of your points, isn’t it, that this is the back-door way to help the record industry as well? PROF. HUGENHOLTZ: Well, we still don’t know what “this” [the actual proposal] is and what we are talking about. We would love to know more, of course. PROF. HANSEN: The nice thing about the debate on this proposal is that there is an entire session on this topic this afternoon (see Chapter IV.B.2(a), infra this volume). Thank you very much for those comments on the copyright side. Now we will start the industrial property portion. MR. TEMMINK: Good morning, everyone. I don’t know whether the second part of this discussion will be as explosive as the first part. The main topic that I will address now is the question: Will 2008 be the year of the Community Patent and the EU-wide jurisdiction on patent litigation? Now some of you might say, “Well, that’s also a slapstick actually, because you have already been working for forty-six years on this issue. Why should you have success in 2008 when you have not been able to achieve anything in the previous years?” Well, one year ago we were also addressing the issue of the Community Patent, because that is something that is addressed every year in Fordham.16 I wouldn’t say that we were very positive one year ago, but we are much more positive now about the chances of success. In the next minutes I will explain to you why. Let’s look at some history first. You always have to start with the past and then go to the future. So what do we have as initiatives so far on the table? • We have the 2000 proposals of the Commission.17 • We have the Common Political Approach, a seven-page document, of the Council of 2003, which included already a full-fledged system of a Community Patent and a system of Community Patent litigation.18 As you all know, these negotiations on the details actually got stalled in 2004 in the Council because there was no agreement on the language regime. McCreevy Press Release, supra note 12. See Session I: Plenary Session, Part D: The Next Ten Years in Patents, Fordham Univ. Sch. of Law, 11 Intellectual Property Law and Policy 29 (Hugh C. Hansen ed., 2008) (16th Annual Fordham Intellectual Property Law & Policy Conference); Session V: Patent, Part B: EU Legislative and Related Developments, id. at 337. 17 Commission Proposal for a Council Regulation on the Community Patent, COM (2000) 0412 final — CNS (2000) 0177, 2000 O.J. (C 337E) 278–90, available at http://europa.eu.int/eur-lex/lex/LexUriServ/LexUriServ. do?uri=CELEX:52000 PC0412:EN:NOT. 18 Council of the European Union, Community Patent Common Political Approach, Doc. 7159/03 (Mar. 7, 2003), available at http://register.consilium.europa.eu/pdf/en/03/st07/st07159en03.pdf. 15 16

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• In 2006 the Commission decided to re-launch the debate, in the sense that we said if the Council doesn’t make any progress, then we’ll just ask the stakeholders what they think we should do as a Commission. Now we got a very clear message at the time: stakeholders want a Community Patent. Stakeholders also actually want an improvement of the jurisdictional system. Many stakeholders, industry in particular, said to the Commission, “Why don’t you start with the European Patent Litigation Agreement (EPLA),19 because that is already a draft on the table? You could start with that and then go to the Community Patent afterwards.” The Commission was initially actually ready to get involved in the EPLA process. But what happened in December of 2006 was that the Council caused a sort of bloodbath, where it was very clear that there is one group of Member States in the European Union who wanted to endorse EPLA, and there was another group of Member States actually who wanted to have a full-fledged European Community Court on Patent Litigation. The next step was that the Commission decided to start from scratch again. In our Communication of exactly one year ago, we announced two things. First of all, we said: “Let’s re-launch the debate on the Community Patent, in particular by having a fresh look at the language arrangements, on the one hand; and, on the other hand, let’s start discussing an EUwide patent litigation system.” Now, the words “EU-wide” were chosen deliberately, because it doesn’t say “Community” and it doesn’t say “European.” So it would make no distinction between the Community Patent and the European Patent. Now, what has happened since April 2007? First of all, on the basis of the Communication of the Commission,20 which was very much a step-by-step approach, the German presidency in the first half of 2007 actually spent most of its time on gathering information about patent litigation practices in the Member States of the European Union. It is very clear that we have Member States with zero cases per year, like Luxembourg, and we have Member States with a hundred cases per year, like Germany. On that basis, under the Portuguese presidency, we started with producing documents. We had actually a working document of the Council on the table, which started off, very simple, with the main characteristics of an EU-wide system of litigation: first instance, second instance; what kind of judges do we need; what about the rules of procedure; what about the allocation of cases; what about the financing, et cetera. Very modest. No big plans, but very modest ideas on the basis of what we thought actually was a good start from scratch for an EU-wide patent litigation system. That document of course was debated, and on the basis of the debate we came up with a new document, and with another document, and with another document. Now it is one year later, and what we have on the table since last week is a draft text for an EU-wide patent litigation system. Now I have some observations on this step-by-step approach, which on the one hand has to do with the Community Patent and, on the other hand, with the EU-wide patent litigation system. We must understand that if industry does not endorse what we are doing in the Community we will go nowhere. But we must also understand that if we do not get the support of twentyseven Member States, we will not go anywhere either. Now that’s a hell of a job. That is why the Commission, together with the Portuguese presidency, the Slovenian presidency now, with 19 European Patent Organisation, Working Party on Litigation, Draft European Patent Litigation Agreement (EPLA), Draft Agreement on the Establishment of a European Patent Litigation System (2004), available at http:// www.ige.ch/e/ jurinfo/documents/j11020201e.pdf. 20 European Commission, Communication from the Commission to the European Parliament and the Council — Enhancing the Patent System in Europe, COM (2007) 165 final (Apr. 3, 2007), available at http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=COM:2007:0165:FIN:EN:PDF.

28 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW the German presidency before, with the French presidency that comes afterwards, decided to start a very thorough debate with stakeholders, not only with big industry but also with small and medium enterprise (SME) organizations. We also started debates with judges, with experts, and we asked them, “Please help us to find solutions for the problems that we have on the table.” That is very logical, you would say, but in the Community context it is fairly unusual that we have such intensive debates at all stages, with all stakeholders. The main issues, of course, for the Community Patent system are: on the one hand, jurisdictional arrangements; on the other hand, the unsatisfactory language regime. We do not consider the EU-wide patent litigation a second-hand issue. But since there will be a special session on the EU-wide patent litigation system later, I will focus now on what we are doing in the Community Patent language regime. What has happened since 2004 is one very important development: machine translations. Now, who is aware of the European Patent Office (EPO) pilot project of machine translation? [Show of hands] Very few people. You should be aware of this. Anyone who is dealing with patents should be aware of the initiatives that are right now being undertaken in the EPO on machine translations. What is it? It is actually a centralized system of automatic machine translations. The pilot project now is dealing with two language pairs only, English-Spanish/Spanish-English and English-German/German-English. The most recent results are that in December 2007 there were already 50,000 requests for machine translations, without any publicity of the fact that this machine translation is freely available for the public. What does it entail? It is actually very simple. On the one hand, it is a machine engine, World Lingo, that can deal with grammar, et cetera, and, on the other hand, specific patent dictionaries developed by the EPO, with about 120,000 terms that were extracted from millions of documents and that are controlled by human beings, by experts in the field, by national patent offices, by the EPO itself. Using both together, you will get in thirty seconds a full description of the description of a patent. It is not a literary work. There are mistakes in the grammar. But for anyone specialized in the art, it is possible to read about the essence of the patent in question. This project was presented to the Council on March 12, 2008. We showed it to the Member States. We said to the Member States, “What do you think about it?” The vast majority of the Member States thought that this was a very good idea, to re-launch the debate on the Community Patent, to find a solution for the language issue. Only one Member State said, “We are against this” (the country whose official language is the second language spoken in this country and is located in the south of Europe between Portugal and Italy). Twenty-six countries said, “This is the basis for a debate on the language regime for the Community Patent.” This debate is going to continue in May of this year. We have high hopes that if we have an agreement on the language regime, we may also find an agreement on EU-wide patent jurisdiction at the same time. The aim is to get a patent agreement under the French presidency, which will be in the second part of 2008. In my remaining one minute, I will discuss the EU-wide patent jurisdiction. We decided in our 2007 Communication to say, “Well, since we have already EPLA on the table, since EPLA is a good draft, we should take as a basis for the future EU-wide patent jurisdiction the EPLA text. But the EPLA text should be embedded in a Community construction, in a Community framework.”

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On that basis, we started, not with the legal basis, but we started with the essential characteristics of that patent court. We started discussions on legally and technically qualified judges. We started discussions on the jurisdiction. We started discussions on first instance, which is very important, first instance being that we would have, if this draft goes through, a central division for the first instance, but also local and regional divisions. Those of you who want to know more about the details of the patent debate as far as the jurisdiction is concerned are welcome to come to the special session. PROF. HANSEN: A lot of information in a short amount of time. Thank you. By the way, also on Friday Harrie is going to go over the trademark agenda (see Chapter VI.A, infra this volume), and also speak on the Commission’s patent agenda (see Chapter V.E.1, infra this volume), in a more thorough way. This plenary session presents just the tip of the iceberg. Robert, do you want to say something? JUDGE VAN PEURSEM: The first thing I would like to say — and I frequently debate this with Harrie in various fora — is that the Commission says stakeholders want the Community Patent. Well, in the Commission questionnaire in 2006, 95 percent of the stakeholders said: “Forget about the Community Patent. We don’t need it. We need an EU-wide litigation system.” In the long run, nobody is against the Community Patent. Who can be? So that is a different kind of approach and it is always a bit annoying, I think. Second, if you take European Patent Litigation Agreement, the EPLA, as the basis for the EU-wide litigation system, it is a delicate building. When you take elements out of EPLA at random, the whole thing might collapse. That is what we are a little bit concerned about, that you take elements out of EPLA that are randomly put into a different system that could easily prove to be counter-productive. Those are our concerns. But I think in the long run, as far as the Community Patent is concerned, if there could be a breakthrough on languages, that might possibly trigger this whole scheme to work. In interested circles outside the Commission and Community level there is skepticism. I think the Commission is quite aware of that. I believe that we can go into the technical details in the special session on Friday. It is not necessary to tackle these at this point. But these are the two points I would like to make as a starter. PROF. HANSEN: Alain? PROF. STROWEL: I would like first to come back on the copyright side. The DG-Market February announcement regarding the term extension for performers shows quite a narrow focus of the Commission.21 I don’t think this issue is ripe for a legislative initiative at the EU level. Issues of term extension should rather be tackled at the international level so as to avoid countries’ always pointing at the longer protection terms existing abroad to justify further term extensions at home. The issue of the term for performers right is quite narrow, and thus sounds not very ambitious. We have just the opposite in the patent field. The Commission’s project on patents might be over-ambitious. The Commission is putting a lot on the table: a new treaty on the jurisdictional aspects, the revised Community Patent Regulation, a difficult discussion on the legal basis for harmonizing those issues, the necessary revision of the European Patent Convention,22 et cetera. Under the French Presidency (second semester of 2008), an agreement on the whole package should be reached or, on the contrary, everything falls apart and harmonization of patent law is once more delayed. 21 22

McCreevy Press Release, supra note 12. Convention for the European Patent for the Common Market, Dec. 15, 1975, 15 I.L.M. 5 (1976).

30 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW The Commission is aware of the many challenges in the patent field. Patent quality remains an issue. The efficiency of the litigation system that should be put in place is another important matter. Another complex and politically loaded aspect concerns the language of the proceedings. Even if the language issue is solved for the grant phase and in relation to the validity of the Community Patent, the problem of the languages to be used for the legal proceedings before the new patent court remains. The draft treaty on the jurisdictional aspects that was released by the Council is not completely satisfactory, because it will remain possible to use various languages before the local divisions of the Patent Court.23 Litigating patents will remain quite complicated, if you have to do it in languages that do not correspond at all with the European Patent Convention languages. PROF. HANSEN: Actually, we are in the embarrassing situation where we are significantly over time. This is the unit that will have a whole bunch of time on both copyright and patents later on, as well as trademarks. If somebody who hasn’t spoken wants to have a final comment on this, and then we are going to have to stop. Do you want to add something? JUDGE VAN PEURSEM: I have already spoken. But the thing is that it is more important in a way for practice to have the EU-wide issue solved because there are already 900,000 European patents there. If you start a Community Patent system, it will take years before the first ones are there. So from a practical point of view it is far more important to solve the first issue. It is only politically linked, that’s the whole problem. PROF. HANSEN: Okay. MR. TEMMINK: A very quick response to what has been said about patents. First of all, I am very sorry, but in all of our both formal and informal contacts that we have with industry they always start first with the Community Patent. Obviously, it should be a legally secure and a cost-effective Community Patent. But I do not hear any organization saying that it is against the creation of a Community Patent. Second, the comment that the Commission would be over-ambitious comes as a bit of a surprise to me. We have already been working for forty-six years on this issue. So if we are not ambitious and if we don’t put a little bit of pressure, then I fear that nothing will happen for the next forty-six years either. I do agree, however, that the present text on the table is still work in progress and there can still be a considerable amount of improvement. But that is another issue. So I will leave it here. I am looking forward to continuing the debate tomorrow. PROF. HANSEN: Thank you very much.

23 Council of the European Union, Working Party on Intellectual Property, Draft Agreement on the European Union Patent Judiciary, 9124/08 (May 14, 2008), available at http://register.consilium.europa.eu/pdf/en/08/st09/ st09124.en08.pdf.

CHAPTER II

Developments in European Union IP Law Part B: European Court of Justice and IP Law Are there any trends in the IP jurisprudence of the ECJ? What can we learn from its trademark jurisprudence? To what degree have Member State courts or OHIM followed its lead? What can be expected from the Court in IP/competition case law? To what extent has it been able to contribute to harmonization and certainty in Member State and Community IP law? How much more difficult is it to be consistent and clear in its IP judgments after enlargement of the European Union and expansion to 27 judges? What is the prognosis for the future? Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker WILLIAM ROBINSON

Freshfields Bruckhaus Deringer (London) Panelists PROF. LIONEL BENTLY

DAVID KEELING

Cambridge University (United Kingdom)

Boards of Appeal, Office of Harmonization in the Internal Market (OHIM) (Alicante)

PROF. WILLEM GROSHEIDE

JOHN TEMPLE LANG

University of Utrecht (The Netherlands)

Cleary Gottlieb Steen & Hamilton (Brussels)

32 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW PROF. HANSEN: This panel is going to discuss what is going on at the European Court of Justice (ECJ) — is it working or not working? We have on our panel Lionel Bently, Willem Grosheide, David Keeling, and John Temple Lang. William, would you start off, please, with an introduction to what we are going to be doing? MR. ROBINSON: Thanks, Hugh. At this session last year, the ECJ got an absolute thumping from the panel.1 I thought I would respond to that in two ways this year. First, I thought I might do a bit of thumping of my own, rather than just defending the ECJ. Second, I will throw out five areas that, hopefully, will spark debate within the panel. Let me start, first of all, with just a little bit of number crunching, statistics about how busy the ECJ is. The ECJ is incredibly busy. The Court is dealing with more cases and it is dealing with them faster. It dealt with 570 cases last year, of which about 4 percent were intellectual property cases. The interesting point is that 20 percent of the IP cases went to the Grand Chamber. Normally, only 10 percent of cases at the ECJ go to the Grand Chamber. There is a significant over-representation of IP cases in the Grand Chamber. The Court of First Instance (CFI), on the other hand, is dealing with more cases and dealing with them more slowly. They are dealing with 32 percent of their cases as Community Trademark cases. What has been happening with the trademark cases over the last year? In terms of the Community Trademark, it is very much steady as she goes, with a little bit of tweaking by the ECJ, particularly in respect of figurative marks. In respect of the relationship between national courts and the ECJ, it is also business as usual — that is to say, tension. There were a couple of classic cases in the last year where the national courts are still incredibly frustrated with the ECJ. Lastly on trademarks, a very important case was decided, Kaul,2 which has an impact on the relationship in the judicial architecture between the Office of Harmonization for the Internal Market (OHIM), the Boards of Appeal, the CFI, and the ECJ. It is a very technical case, but the implication from it is that the ECJ is going to give more responsibility to the Boards of Appeal, and, therefore, hopefully create a little bit of a barrier for cases going up to the CFI. The third area is the IP Enforcement Directive.3 The first case to consider the IP Enforcement Directive has been looked at by the ECJ.4 It was a case regarding copyright and whether or not a collecting company could use the IP Directive as an argument to get disclosure of the names and addresses of individuals who were using the Kazaa system, the peer-to-peer file-sharing system; could they use the IP Directive as a reason why the national court should give access on an interim basis to those names and addresses? The ECJ had to weigh up eight pieces of EC legislation, the Charter of Fundamental Rights, and various general principles.5 It weighed up half-a-dozen of those directives on one side, half1 See Session I: Plenary Session, Part F: “The Next Ten Years of IP Law in the European Court of Justice”, 10 Fordham Intell. Prop. L. Inst., Intellectual Property Law & Policy 59 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham International Intellectual Property Law & Policy Conference, Apr. 12–13, 2007). 2 Case C-29/05 P, Kaul GmbH v. Office for Harmonization in the Internal Market (OHIM) (ECJ Mar. 13, 2007) (Judgment of the Court, Grand Chamber), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=OJ:C:2007: 095:0006:0006:EN:HTML. 3 Council Directive 2004/48, 2004 O.J. L (157) 45 (IP Enforcement Directive). 4 Case C-275/06, Productores de Música de España (Promusicae) v. Telefónica de España SAU (ECJ Jan. 29, 2008) (Grand Chamber) (reference for a preliminary ruling under art. 234 EC by the Juzgado de lo Mercantil No 5 de Madrid (Spain), made by decision of 13 June 2006, received at the Court on 26 June 2006), available at http://eur-lex.europa. eu/ LexUriServ/LexUriServ.do?uri=CELEX:62006J0275:EN:HTML. 5 The reference for a preliminary ruling concerned the interpretation of: Council Directive 2000/31, 2000 O.J. (L 178) 1 (Directive on Electronic Commerce); Council Directive 2001/29, 2001 O.J. (L 167) 10 (Copyright Directive);...

PART B: EUROPEAN COURT OF JUSTICE AND IP LAW 33

a-dozen on the other. The other side was represented by privacy rights. The ECJ said: “Well, it’s up to you, national court, to have a fair balance.” So again, very little real guidance from the ECJ, but a very, very difficult case. For anyone who practices in the European Communities with multinational cases, you will know exactly how difficult the EC’s privacy regime is. The fourth area is TRIPs.6 The ECJ case law on TRIPs is an absolute mess. In particular, Advocate-General Ruiz-Jarabo has been saying this for a number of years and, in a recent Grand Chamber case this year, got to the point of saying, “The ECJ’s case law on TRIPs is political, it is not legal, and therefore I am not going to examine this in any great detail.”7 Such is his frustration. The ECJ went down the classic route. We can go into it in more detail if you like, but the upshot is that there is uncertainty in the ECJ and in the case law. It is just a complete mess, so you cannot advise clients quite comfortably on the results. The difficulty is they do not understand why. Again, a Grand Chamber confirmed the ECJ’s existing approach this year.8 Lastly, and my fifth point, 2007 was the year of IP/antitrust emergence in the European Union. There have, of course, been a number of antitrust/IP cases over the years, but Microsoft clearly is the headline-grabbing case.9 There is going to be lots of discussion about Microsoft, so let me give you some of the other things that are going on in 2007. First of all, patent ambush. Rambus is now live again before the European Commission.10 What is going to happen with Rambus, particularly looking at some of the results that are coming out of the courts here in the United States?11 There are two issues here: (1) U.S.-EU divergence; and (2) how are the Commission and the CFI going to deal with the factual analysis? Secondly, vexatious litigation enforcement of patent rights. This is springing up all over the place in the case law at the national level. In addition, the Commission has started its pharma inquiry, with one of its specific aims to look at whether or not pharmaceutical companies are using the enforcement of patent rights in a vexatious way.12 A further point, antitrust and IP jurisdiction for national cases. There was a very important case earlier this year, SanDisk, in the U.K. court, one of the last judgments to be given by Mr. Justice Pumfrey, concerning where you can bring antitrust lawsuits for patent rights within the Member States.13 Council Directive 2004/48, 2004 O.J. (L 157) 45 (Directive on The Enforcement of Intellectual Property Rights); and Charter of Fundamental Rights of the European Union, arts. 17(2) & 47, 2000 O.J. (C 364) 1. 6 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M.1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm. 7 Case C-431/05, Merck Genéricos-Productos Farmacêuticos Lda v. Merck & Co., ¶ 1, [2008] All E.R. (EC) 40, [2007] 3 C.M.L.R. 49 (Grand Chamber) (“It has been written of mixed agreements that they inevitably cause complications, because they help to establish a political situation which does so too.”). 8 Id. 9 Case T-201/104, Microsoft Corp. v. Comm’n, [2007] 5 C.M.L.R. 846, 2007 WL 2693858 (Sept. 17, 2007), available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Rechercher&alldocs=alldocs&docj=doc j&docop=docop& docor=docor&docjo=docjo&numaff=T-201/04&datefs=&datefe =&nomusuel=&domaine=&mot s=&resmax=100. 10 See Press Release, European Commission, Antitrust: Commission confirms sending a Statement of Objections to Ram-bus (Aug. 23, 2007) [hereinafter EC Rambus case] (noting that the Statement, sent July 30, 2007, claims that “Rambus engaged in intentional deceptive conduct in the context of the standard-setting process, for example by not disclosing the existence of the patents which it later claimed were relevant to the adopted standard.”), available at http://europa.eu/ rapid/pressReleasesAction.do?reference=MEMO/07/330. 11 See, e.g., Rambus Inc. v. F.T.C., 522 F.3d 456 (D.C. Cir. 2008), setting aside the decision of In the Matter of Rambus, Inc., No. 9302, 2007 WL 2086203 (F.T.C. Apr 27, 2007). 12 See Commission Decision No. 1/2003 of 15 January 2008 (initiating an inquiry into the pharmaceutical sector), available at http://ec.europa.eu/comm/competition/sectors/pharmaceuticals/inquiry/decision_en.pdf. 13 SanDisk Corp. v. Koninklijke Philips Elecs. N.V., [2007] E.W.H.C. 332 (Ch), available at http://www.bailii.org/ ew/ cases/EWHC/Ch/2007/332.html.

34 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW Two final points on antitrust. Firstly, that SanDisk case, but also Rambus, indicate that there is going to be a real movement towards misleading information being given to patent authorities and missing the patent system. The Astra Zeneca case14 is ongoing at the moment, about evergreening patent rights. Similarly, the U.K. authorities have been looking at Reckitt Benckiser’s alleged evergreening.15 And lastly, a couple of Apple cases. Firstly, on differential pricing between Member States, argued on the basis that this was required by copyright law, that came to an amicable settlement in January of this year, where Apple agreed to have universal pricing in Europe.16 Second, Apple got into difficulties with the Norwegian consumer ombudsman regarding its DRM that it puts on iTunes.17 That also is an issue that potentially comes back to life. Those are my five points. Thank you. PROF. HANSEN: Thank you very much. I think that is an excellent overview in a very short amount of time that very few people have the expertise to even begin to do. Two main themes, I suppose, that people are most interested in. One is the trademark jurisprudence. The other one that might be interesting is to what extent the ECJ is going to have a view of competition law that is going to be the same, different, or whatever, than what has been happening up until now. Let’s do trademark law first. Lionel, any thoughts? PROF. BENTLY: Yes. Last year there were fifteen ECJ decisions on trademarks. Thirteen were decided, as we have heard, in Chamber, two in the Grand Chamber. One of the questions you have asked us to reflect on is: What is the effect of the expansion of the number of judges to twenty-seven on the quality of the trademark jurisprudence? Now, I have been here on many occasions slamming the ECJ’s trademark jurisprudence. One would have expected that expanding the number of judges to twenty-seven would make it a lot worse. So it is a bit of a surprise that I find myself sitting here saying I think it is not too bad. And the judges from the new countries and the smaller Member States have been heavily involved with these decisions. In the thirteen cases, Ilešič, a Slovenian, was rapporteur judge three times (Céline,18 Celltech,19 and Adam Opel20); Juhász, a Hungarian, twice (Develey21and Henkel22); Klučka, the Slovakian judge, once (Shaker23) and Borg Bathelet, the Maltese judge, gave the commendable decision in Häupl.24 Given the rather low standard set by the ECJ in trade marks jurisprudence over the last decade, I would say that the judges from the post14 Commission Decision 2006/857, 2006 O.J. (L 332) 25 (EC) (Astra Zeneca), available at http://eur-lex.europa.eu/ Lex UriServ/LexUriServ.do?uri=OJ:L:2006:332:0024:0025:EN:PDF. 15 See David Leigh, “Company accused of cheating NHS”, Guardian, Mar. 7, 2008, at 12 (UK news), available at http://www.guardian.co.uk/society/2008/mar/07/health.nhs. 16 See Press Release, European Commission, Antitrust: European Commission welcomes Apple’s announcement to equalise prices for music downloads from iTunes in Europe (Jan. 9, 2008), available at http://europa.eu/ rapid/pressReleases action.do?reference=IP/08/22; see also Press Release, European Comm’n, European Commission Confirms Sending a Statement of Objections Against Alleged Territorial Restrictions in On-Line Music Sales to Major Record Companies and Apple (Apr. 3, 2007), available at http://europa.eu/rapid/press ReleasesAction. do?reference=MEMO/07/126. 17 See Posting of Eliot Van Buskirk to Wired Listening Post blog, “Norway: iTunes DRM Is Illegal”, http://blog. wired.com/ music/2007/01/norway_itunes_d.html (Jan. 24, 2007, 17:21:05 EST); see also Complaint against iTunes Music Store, Consumer Council of Norway, to Lars Grøndal, Consumer Ombudsman (Jan. 25, 2006), available at http://forbruker portalen.no/filearchive/Complaint%20against%20iTunes%20Music%20Store.pdf. 18 Case C-17/06, Céline SARL v. Céline SA, [2007] E.C.R. I-7041 (Grand Chamber). 19 Case C-273/05 P, OHIM v. Celltech R&D Ltd., [2007] E.C.R. I-2883. 20 Case C-48/05, Adam Opel AG v. Autec AG, [2007] E.C.R. I-1017. 21 Case C-238/06 P, Develey Holding GmbH & Co. Beteiligungs KG v. OHIM, [2007] E.C.R. I-9375. 22 Case C-144/06 P, Henkel KGaA v. OHIM, [2007] E.C.R. I-8109. 23 Case C-334/05 P, OHIM v. Shaker di L. Laudato & C. Sas., [2007] E.C.R. I-4529. 24 Case C-246/05, Armin Häupl v. Lidl Stiftung & Co. KG, [2007] E.C.R. I-4673.

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2004 countries have done very well. Let me categorize the cases into four classes: (1) those that continue establish jurisprudence; (2) those that dealt with issues that have not previously decided, but where I think the answer was inevitable; (3) those where the Court faced a choice of interpretations and came to a conclusion that I regard as unreservedly commendable; and (4) two cases that were in my view rightly decided but to some extent raise further matters that need to be resolved. (1) The first class is the largest: namely, cases that were uncontroversial applications of established principles. The ECJ remains fairly consistent in its approach to distinctiveness, to shape marks, to similarity in the context of relative grounds of refusal: cases such as Develey,25 Henkel,26 Celltech,27 and Shaker28 merely continuing to apply established principles in an unremarkable manner. (2) Other decisions were answered precisely as one would have predicted. The decision, for example, in Benetton,29 that acquired distinctiveness was irrelevant to the operation of the shapes exclusion, was inevitable. The same can be said of the holding in Nieto Nuno v. Monileo Franquet30 on well-known marks. The Court held that to constitute a well-known mark, the mark must known be in a substantial part of the territory, not merely in a little city like Tarragona. (3) The third class of decisions is those that had no previous answer, where the Court was faced with a number of options and chose what I think was the best reinterpretation. One such decision was in Il Ponte Finanziaria31 on families of marks. Here the question was whether, in assessing similarity of marks for the purposes of a relative grounds objection (or, by analogy, infringement) the courts should consider the fact that the opponent (or in the infringement case, the claimant) is the holder of a “family” or collection of marks of a particular sort. It would have been open to the Court, I think, taking a rigorous view about the nature of registration to reject the relevance of families altogether, though such a view would have been at the expense of the reality of consumer expectations in cases where such marks are registered and recognized in the marketplace. To my mind the Court took the very sensible view that the existence of a group of registrations of similar marks could be relevant to the “global appreciation” of similarity — but not on the basis of the existence of a group of registrations alone: rather the group must be known in the market through use. I think the same can be said of the Court’s decision in Häupl,32 where the ECJ was asked to elaborate on the notion of “proper reasons” for non-use of a trademark. The question of “proper reasons for non-use” classically arises in cases where a trademark registration is seeking to resist an action for revocation on the basis that the mark has not been in “genuine” use for five years (the EU equivalent to the U.S. notion of abandonment). The reference was prompted by the failure of supermarket chain, Lidl, to use one of its Austrian marks, which Lidl sought to explain by reference to the difficulty with getting various approvals to establish its supermarkets. Drawing on the TRIPs standards33 to assist interpretation of the Directive,34 Develey, [2007] E.C.R. I-9375. Henkel, [2007] E.C.R. I-8109. 27 Case C-273/05 P, OHIM v. Celltech R&D Ltd., [2007] E.C.R. I-2883. 28 Shaker, [2007] E.C.R. I-4529. 29 Case C-371/06, Benetton Group SpA v. G-Star Int’l BV, [2007] E.C.R. I-7709. 30 Case C-328/06, Alfredo Nieto Nuño v. Leonci Monlleó Franquet, [2007] E.C.R. ____ (ECJ Nov. 22, 2007) (LEXIS). 31 Case C-234/06 P, Il Ponte Finanziaria SpA v. OHIM, [2007] E.C.R. I-7333. 32 Case C-246/05, Armin Häupl v. Lidl Stiftung & Co. KG, [2007] E.C.R. I-4673. 33 TRIPs Agreement, supra note 6, art. 19(1) (referring to the requirement of use of the registered trade mark: “[T] he registration may be cancelled only after an uninterrupted period of at least three years of non-use, unless valid reasons based on the existence of obstacles to such use are shown by the trademark owner … such as import restrictions on or other government requirements for goods or services protected by the trademark . ...”). 25 26

36 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW the ECJ took a strict view of “proper reasons” as reasons beyond the control of the trademark owner and, additionally, required the trademark owner to establish a suitable nexus between the “reason” and nonuse of the particular mark. In reaching this decision the ECJ, I think commendably, set the threshold of proper reasons at a high level, on policy grounds. It seems to me that we should generally not have much sympathy for any mark owner who has failed to utilize their mark for five years (especially given the minimal requirement of “genuine use” set in the earlier Ansul v. Ajax35 and Laboratoires de La Mer36 decisions). The Céline decision37 on use of a trade name, saying that, in general, use of a trade name is not use as a mark, but it might in some circumstances amount to use that jeopardizes the essential function of the mark and comes within the trademark owner’s prerogatives, seems also to me to be very sensible. And Boehringer Ingelheim,38 on what exactly a parallel importer is permitted to do when repackaging pharmaceutical products in order to access markets within the European Union, seemed to me to come to the right decision: once it has been shown that packaging is necessary to access the market, it is not necessary that every minute detail of the repackaging be assessed to determine whether more has been done than was absolutely necessary. (4) The final set of cases is those where the decisions, commendable in themselves, raise issues that will later need to be resolved. Here I am thinking really of Dyson and Adam Opel. Dyson,39 decided by the Court at the beginning of last year, while a good decision, opens a Pandora’s box on the interpretation of the concept of “sign” — a concept at the heart of the definition of trademarks in Article 2 of the Directive.40 In this case, the ECJ indicated that national authorities (specifically the U.K. Trade Mark Registry) should decline an attempted registration of a transparent container for vacuum cleaners as a trademark. Ignoring the questions posed by the English court41 (which had focused on acquired distinctiveness), the ECJ explained that the application did not relate to a sign because it would give an unfair competitive advantage to a trader to be given the exclusive right to use a transparent bin on vacuums. I have no problem with the view that such a “concept” mark should be refused, but I have trouble with the view that such a mark is not “a sign,” and that something is not a “sign” because of its potential anticompetitive effect. While the ECJ was right to find some way to exclude an application that related (in substance) to an abstract concept (akin virtually to a patent claim), the language the Court used has the potential to demand an inquiry into the competitive impact of a mark in each and every case. This means that much of the work done by the so-called “requirement of availability” under Article 3(1)(c) of the Directive — and Article 3(1)(b) at least for colors (Libertel42), as well as Article 3(1)(e) for shapes — now falls also to be undertaken in assessing whether the subject matter of registration is a sign. This evidently undesirable implication means that the scope of the Dyson decision is likely to be narrowly interpreted. I do not think that EU trademarks have suddenly adopted wholesale a functionality doctrine akin to that recognized in U.S. law. 34 Council Directive 89/104, art. 12(1), 1989 O.J. L (40) 1 (EC) [hereinafter Trademark Directive] (requirement of “proper reasons” for non-use of trademark). 35 Case C-40/01, Ansul BV v. Ajax Brandbeveiliging BV, [2003] E.C.R. I-2439. 36 Case C-259/02, La Mer Tech. Inc. v. Laboratoires Goemar S.A., [2004] E.C.R. I-1159, available at http://www. bailii. org/ew/cases/EWCA/Civ/2005/978.html. 37 Case C-17/06, Céline SARL v. Céline SA, [2007] E.C.R. I-7041 (Grand Chamber). 38 Case C-348/04, Boehringer Ingelheim KG v. Swingward Ltd., [2007] E.C.R. I-3391. 39 Case C-321/03, Dyson Ltd. v. Registrar of Trade Marks, [2007] E.C.R. I-687. 40 Trademark Directive, supra note 34, art. 2 (“A trade mark may consist of any sign capable of being represented graphically, particularly words, including personal names, designs, letters, numerals, the shape of goods or of their packaging, provided that such signs are capable of distinguishing the goods or services of one undertaking from those of other undertakings.”). 41 Dyson, [2007] E.C.R. I-687, ¶ 38. 42 Case C-104/01, Libertel Groep BV v. Benelux-Merkenbureau, [2003] E.C.R. I-3793.

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The other decision that I welcome, but which contains some hostages to fortune, is the Adam Opel decision.43 Here the ECJ responded to a reference from Germany in a case concerning toy cars. Autec made remote-control toy cars, including one that bore the OPEL logo. Opel had registered the logo both for cars and toys. The German Court asked the ECJ whether the use of the OPEL logo on the toys, being a use of an identical mark for identical goods, infringed the trade mark, even if German consumers understood the mark not as indicating who made the cars but just as indicating that the cars were replicas. The ECJ responded that if the consumers purely saw the sign as indicating the toys were replicas, the use was one that did not infringe because it would not “jeopardize the essential function” of the OPEL mark — the essential function being to guarantee origin. While this conclusion may be welcomed, the ECJ did not take advantage of the opportunity to explain how the case could be reconciled with Arsenal44 (or even to address the contradiction between Holterhoff,45 Arsenal, and BMW v. Deenik46). In January 2008 Advocate-General Mengozzi gave an opinion in O2 v. Hutchison 3G,47 in which he described the case law as “bristling with difficulties.” So while I welcome the ECJ’s narrow response in Opel, it is regrettable that the Court did not do more to rationalize the case law. Let me give one brief example to highlight the contradiction: if a trader sells football shirts that are replicas of the Arsenal strips from the 1930s, the era of the great Herbert Chapman, would this infringe Arsenal’s trademark in the logo because the use jeopardized the essential function (as per Arsenal v. Reed48) or escape liability because the shirts are viewed as replicas (as per Adam Opel v. Autec)? Finally, it is worth observing the two other matters raised in Adam Opel. First, the ECJ addressed the possibility that Autec’s use of the OPEL logo might dilute (that is, in EC law, blur, tarnish or take unfair advantage of) the distinctive character or repute of the trademark (contrary to Article 5(2) of the Directive). The ECJ said that this was a question of fact for the national court. In so holding, the ECJ said nothing about whether infringement under Article 5(2) only occurs if the defendant’s use is as a mark or such as otherwise to jeopardize any essential function of the mark. The Court thereby implied — though it did not state clearly — that the Arsenal test is irrelevant when considering dilution. This looks consistent with AdidasSalomon v. Fitnessworld,49 but certainly would be regarded by many as a regrettable view. Second, the ECJ considered whether the defendant’s use of the OPEL mark might be defended on the basis that it was a use to describe the characteristics of the toys and was in accordance with honest practices in industrial and commercial matters. The Court held that such use could not be said to be descriptive and, thus, fell outside the defense. I must say I am rather unhappy with this conclusion. For one thing, it seems inconsistent with the generous interpretation of the defenses recognized in Gerolsteiner.50 For another, it seems that the use of the logo does communicate “this is a replica of an Opel car,” that is, it describes the characteristics of the goods. So overall I would say the ECJ has not done a bad job in 2007. It has applied established principles with a reasonable degree of consistency. Courts by their nature do not tend to be completely consistent, and the ECJ does not seem to have been much worse than any other court in this regard. Case C-48/05, Adam Opel AG v. Autec AG, [2007] E.C.R. I-1017. Case C-206/01, Arsenal Football Club PLC v. Reed, [2002] E.C.R. I-10273. 45 Case C-2/00, Hölterhoff v. Freisleben, [2002] E.C.R. I-4187. 46 Case C-63/97, Bayerische Motorenwerke AG (BMW) v. Deenik, [1999] E.C.R. I-905. 47 Case C-533/06, O2 Holdings Ltd. v. Hutchison 3G (UK) Ltd., [2008] E.C.R. ___ (ECJ June 12, 2008) (LEXIS). 48 Arsenal, [2002] E.C.R. I-10273. 49 Case C-408/01, Adidas-Salomon AG v. Fitnessworld Trading Ltd., [2003] E.C.R. I-12537. 50 Case C-100/02, Gerolsteiner Brunnen GmbH & Co. v. Putsch GmbH, [2004] E.C.R. I-691. 43 44

38 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW 2008 has the potential to be even more interesting. For one thing, in the O2 case,51 the Court might clarify the inconsistent case law on which uses jeopardize the essential function of a mark. Advocate-General Mengozzi declined to do so in his opinion, saying it was not necessary for the decision, and declaring the matter in issue was exclusively dealt with by the Comparative Advertising Directive.52 I am not sure he is right about that, and hope the ECJ will answer the question asked of it by the English Court of Appeal as to whether use of a mark in a comparative advertisement to indicate the trade mark owners goods (in the United States this would be called “nominative use”) jeopardizes the essential function of the mark. There are other interesting cases pending on the meaning of “bad faith” for the purposes of a claim that a Community mark should be regarded as invalid because the application was made in bad faith (Chocoladefabriken Lindt53) and on whether a trade mark owner can defend an action for non-use based on “giveaways” (Silberquelle GmbH54). But 2008 looks really exciting because the ECJ must finally address dilution, in response to two references from the English Court of Appeal in Intel55 and L’Oreal v. Bellure,56 one from Austria in Pago International,57 and two appeals from the CFI in Nasdaq58 and TDK.59 This time next year we will (hopefully) know a lot more about the scope of Article 5(2) of the Directive60 and Articles 8(5) and 9(1)(c) of the Regulation. PROF. HANSEN: Lionel, please let me stop you for a minute. You are going through this case by case. Most of the people in the audience are not familiar with the jurisprudence of the ECJ, and do not know particular case names. So let’s do it on a broader basis. Is the Court doing a good job? What’s its grade from A to D? PROF. BENTLY: I give them a B. PROF. HANSEN: To what extent can you say that the law is close to or different from U.S. law in trademarks? PROF. BENTLY: The starting point is really very different from U.S. trademark law. The basis of the EU trademark system is registration, not use. PROF. HANSEN: But in terms of substance, would you say there are core differences in the way they approach trademark jurisprudence from the way the United States does? PROF. BENTLY: Yes, there are core differences, but on many of the issues they end up pretty much coming out in the same place. One of the most interesting things in the ECJ jurisprudence is the way in which the Court has constantly said on references from Member States that the EU approach is not the approach of an individual Member State. So in the Windsurfing decision62 it said there’s no doctrine of freihaltebedurfnis, the German doctrine of the need to keep free. In the Nichols case63 the ECJ said that the U.K. Trademark Registry could not continue to use its Telephone Directory Rule64 O2 Holdings Ltd., [2008] E.C.R. ___ (ECJ June 12, 2008) (LEXIS). Parliament & Council Directive 97/55, 1997 O.J. (L 290) 18 (Comparative Advertising Directive). 53 Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2008 O.J. (C 37) 17. 54 Case C-495/07, Silberquelle GmbH v. Maselli-Strickmode GmbH, 2008 O.J. (C 22) 51. 55 Case C-252/07, Intel Corp. v. CPM (UK) Ltd., [2007] R.P.C. 35. 56 Case C-487/07, L’Oréal SA v. Bellure NV, [2007] E.W.C.A. Civ 968, [2008] R.P.C. 9. 57 Case C-301/07, PAGO Int’l GmbH v Tirolmilch registrierte Genossenschaft mbH, 2007 O.J. (C 223) 04. 58 Case T-47/06, Antartica Srl v. OHIM (Nasdaq), [2007] E.C.R. II-42 (appealed as Case C-320/07 P, 2007 O.J. (C 211) 50). 59 Case T-477/04, Aktieselskabet af 21 November 2001 v. OHIM (TDK), [2007] E.C.R. II-399 (appealed as Case C-197/07 P, 2007 O.J. (C 129) 20). 60 Trademark Directive, supra note 34, art. 5(2). 61 Council Regulation 40/94, arts. 8(5) & 9(1)(c), 1993 OJ (L 11) 1 (EC) (Community Trademark Regulation). 62 Joined Cases C-108/97 & C-109/97, Windsurfing Chiemsee v. Attenberger, [1999] E.C.R. I-2779. 63 Case C-404/02, Nichols PLC v. Registrar of Trade Marks, [2004] E.C.R. I-8499. 64 See id. at ¶ 8 (noting that the Registrar of Trade Marks found that “the surname ‘Nichols’ ... is common in the United Kingdom, given the number of times it appears in the London telephone directory.”). 51 52

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when considering personal names and whether they were registrable as trademarks. In the LTJ v. Sadas case65 the ECJ said the French could not continue to apply their doctrines of immaterial addition66 when considering whether marks were identical. So the ECJ has constantly said you cannot look to your own national law to interpret what is harmonized legislation. Where then does the ECJ look for guidance? Well, obviously it will look at the text and structure of the Directive. And, in a number of cases, we see it draw heavily on international treaties to aid its interpretation of the European legislation — the Häupl case67 is a very good example of this. But occasionally we also see the Court (or other European decision makers) looking to commentaries and to law from outside the European Union. There is a very interesting Grand Board of Appeal decision in the OHIM concerning Lego,68 on appeal to the CFI69), where they refer to the TrafFix decision70 from the U.S. Supreme Court with approval and import effectively TrafFix into European jurisprudence. And then there are other decisions, like the views of Advocate-General Francis Jacobs in Adidas-Salomon71 on trademark dilution, where he imports the notions of blurring, tarnishment, and unfair advantage and refers to Schechter.72 So the European Union is going through a strange phase. It appears to be suppressing its own national traditions as sources from which to understand and interpret Community law, and instead looking outside for guidance – in international norms and — a little bit — to the United States and U.S. commentary for ideas. PROF. HANSEN: That is very interesting. Thank you, Lionel. David Keeling, who is a judge on the Boards of Appeal of the Office of Harmonization of the Internal Market or OHIM. OHIM is the EU trademark and designs office. David what is your scorecard for the ECJ? MR. KEELING: I would have to give it a slightly lower score. Its performance has varied considerably over the years. If you look at the earlier judgments on relative grounds, on the concept of likelihood of confusion (Sabel v. Puma,73 Canon,74 Lloyd Schuhfabrik75), they are really rather good. I can tell you why they were good, actually. The ECJ commissioned a research note from its internal research division, a comparative note looking at the situation in Member States. That is why those were rather good judgments. For some reason, when they got Baby Dry76 a few years later, the first case on the Community trademark and almost the first case on absolute groups — there had been Windsurfing Chiemsee77 before — no research note was done on that case as far as I know, and the result was pretty disastrous. Since then, it has varied. They recovered slightly from that, but then they reverted to the same approach in the SAT .2 case.78 We were asked whether enlargement is going to have a big effect, twenty-seven Member States, one judge per Member State. I must say I am personally extremely pessimistic in this Case C-291/00, LTJ Diffusion SA v. Sadas Vertbaudet SA, [2003] E.C.R. I-2799. See id. at ¶ 21 (referring to Book VII of the French Code de la propriété intellectuelle (Intellectual Property Code), art. L. 713-2, and the concept of “ineffective addition”). 67 Case C-246/05, Armin Häupl v. Lidl Stiftung & Co. KG, [2007] E.C.R. I-4673. 68 Case R-856/2004 G, Lego Juris A/S v. Mega Brands, Inc., [2007] E.T.M.R. (11) 169. 69 Case T-270/06, Lego Juris v. OHIM — Mega Brands (Lego brick), [2006] O.J. C 294/114. 70 TrafFix Devices, Inc. v. Mktg. Displays, Inc., 532 U.S. 23 (2001). 71 Case C-408/01, Adidas-Salomon AG v. Fitnessworld Trading Ltd., [2003] E.C.R. I-12537. 72 Frank I. Schechter, The Rational Basis of Trademark Protection, 40 HARV. L. REV. 813 (1927). 73 Case C-251/95, Sabel BV v. Puma AG, [1997] E.C.R. I-6191. 74 Case C-39/97, Canon Kabushiki Kaisha v. Metro-Goldwyn-Mayer Inc., [1998] E.C.R. I-5507. 75 Case C-342/97, Lloyd Schuhfabrik Meyer GmbH v. Klijsen Handel BV, [1999] E.C.R. I-3819. 76 Case T-163/98, Procter & Gamble v. OHIM (Baby-Dry), [1999] E.C.R. II-2383. 77 Joined Cases C-108/97 & C-109/97, Windsurfing Chiemsee v. Attenberger, [1999] E.C.R. I-2779. 78 Case T-323/00, SAT.1 v. OHIM (SAT.2), [2002] E.C.R. II-2839. 65 66

40 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW regard. I think some day the European Union is going to have to face up to the fact the judicial architecture that we have is not perfect. We have the Court of First Instance — of which, by the way, I am more critical than of the European Court of Justice — one judge per Member State in the CFI, appointed by common accord, which basically means that each government puts forward its nominee and the others applaud loudly. The European Court of Justice, the same thing, except we have some Advocates-General, and there the larger Member States are slightly more strongly “represented” (“represented” in quotes, of course). Now just ask yourself if you had a similar rule in the United States for the U.S. Supreme Court. Imagine you had one judge from each state, perhaps appointed by the governor of the state, so one from Rhode Island, one from Wyoming, one from California, one from New York, and one from Texas. I think you might not be too happy about entrusting the interpretation of your Constitution to a court that was composed in that way. I think it is a serious problem. I think it is something that will have to be looked at. PROF. HANSEN: Well, isn’t the Boards of Appeal similar? MR. KEELING: Not really, no. In fact, from that point of view we are a model, because there has never been one member per Member State. We have had two or three German members over the years. We have two British members at present. There is a general belief that there should be some sort of geographical representation. There is not one per Member State. PROF. HANSEN: Let’s move on. OHIM and the Boards of Appeal pretty much ignore the ECJ in the day-to-day work of OHIM? Don’t you? MR. KEELING: You have been reading my decisions. Not so much the ECJ. I do cite the preliminary rulings that the ECJ has given. I am not enthusiastic about citing judgments of the CFI, in particular judgments that just repeat the standard formulas. PROF. HANSEN: For our audience, there is an initial trademark examination by OHIM, a denial can be appealed to the Board of Appeal where David sits. An affirmance of the examining Division’s denial can be appealed to the Court of First Instance, which is a Community Court, and from there can be appealed to the ECJ. Most of the cases outside of the OHIM and Board are in the CFI. David, you do think the panels of the CFI are lunatics, right? MR. KEELING: I wouldn’t say that in public. [Laughter] I may have said similar things in private. I think that they do have a problem as regards trademark law. They are in denial about the fundamental nature of trademark law. Trademark law is full of subjective appraisals — whether a trademark has distinctive character, whether there is a likelihood of confusion between two trademarks, whether a trademark is offensive to public morality, et cetera. It is full of these subjective appraisals. The CFI, and also the ECJ, simply refuse to accept this. They refuse to recognize it. They practice what is technically called legal formalism, the theory that there is a single right answer to every question, that you apply all the legal rules carefully and if you are a good enough lawyer you will get the only right answer and all other answers are wrong. Now we all know that is nonsense. It is probably nonsense in just about every field of law, but it is especially nonsense in the field of trademark law. PROF. HANSEN: Thank you, David. What is your grade for the Court of Justice — A, B, C, D? MR. KEELING: I’ll give them a B, possibly a B-minus. PROF. HANSEN: Willem, what would you give the Court of Justice? PROF. GROSHEIDE: I support you in your skepticism about the enlargement of the EU judges. PROF. HANSEN: William Robinon?

PART B: EUROPEAN COURT OF JUSTICE AND IP LAW 41 MR. ROBINSON: I think they are doing better this year in trademarks. I would give them a

B, and improving. PROF. HANSEN: Now let’s move on to competition law, called antitrust law here in the U.S. What role is the Commission going to play? Some think that the Commission is out of control, and the Court of First Instance failed to place a check on that control in the Microsoft decision.79 What does the future hold for the role of CFI? And is there a serious role for the ECJ in competition in the future? John Temple Lang, a leading expert on competition law and a former heavyweight in the European Commission, what do you think? MR. TEMPLE LANG: Yes, I think there has to be a role. But the role will not be played unless and until either the Commission or the CFI or the ECJ gets a firm grip on a definition of exclusionary abuses under Article 82. As long as none of the three bodies have got a clear concept of what they are talking about, we are going to have confused and unsatisfactory law. This is well illustrated, I think, by the recent Alrosa judgment of the CFI80 ― where I think the CFI got it right, let me be clear — but the question arose because the Commission, instead of accepting a commitment in terms that they could have imposed in a prohibition decision, decided that they would take the opportunity to accept a commitment that went very much further than could possibly have been justified under competition law, but was designed as a regulatory measure to create competition in the diamond industry. As long as the Commission fails to distinguish between possibly desirable regulatory changes altering an existing legal situation, which might or might not be a good idea in any particular context but is not the job of competition law, and clearly identified breaches of competition law, we are going to have intellectual confusion. That can only be solved in the end by the ECJ, because it is a question of Treaty interpretation and there is not going to be legislation. PROF. HANSEN: Are you confident that the ECJ can come up with the right judgment in a very difficult, complex area of the law, all sorts of policies and considerations? MR. TEMPLE LANG: No, I am not confident. You asked me was it ever going to get straightened out. I said this is a sine qua non for getting it straightened out. PROF. HANSEN: William, you have the last word. MR. ROBINSON: Hugh, on the antitrust cases, it seems to me that we are still very early. In terms of the IP/antitrust cases, Article 82, it seems to me that we need more cases to come before the ECJ. That is for a reason of looking back at the cases it has decided. IMS81 and Magill,82 the two founding cases in this area, were both in respect of pretty weak underlying IP rights. There is a strong suspicion that the Court took the approach it did because the underlying IP was actually pretty weak. You then have Microsoft.83 Potentially incredibly powerful IP underneath, but the Court didn’t even look at it. It said it didn’t need to. But there is just a hint that the Court was rather persuaded by the super-dominance issue, and certainly some of the things that Neelie Kroes [Commissioner of DG Competition in the European Commission] has said indicate that the 90–95 percent market share was strongly persuasive of what she was up to.84 Case T-201/104, Microsoft Corp. v. Comm’n, [2007] 5 C.M.L.R. 846, 2007 WL 2693858 (Sept. 17, 2007). Case T-170/06 Alrosa Co. Ltd. v. Comm’n (appeal pending at the ECJ, Case C-441/07 P), available at http:// eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62006A0170:EN:HTML. 81 Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, [2004] E.C.R. I-5039. 82 Joined Cases C-241/91 P & C-242/91, P RTE & ITP v. Comm’n, [1995] E.C.R. I-743 [hereinafter Magill]. 83 Microsoft, [2007] 5 C.M.L.R. 846. 84 See Stephen Castle & Dan Bilefsky, “Microsoft Case Could Make EU ‘Litigation Capital of the World’”, Int’l Herald Tribune, Sept. 17, 2007 (“Kroes highlighted that Microsoft had 95 percent of the world market for desktop operating systems, a figure she said she would like to see fall.”), available at http://www.iht.com/articles/2007/09/17/ news/ antitrust.php. 79 80

42 CHAPTER II: DEVELOPMENTS IN EUROPEAN UNION IP LAW So we have three leading cases, each of which has their own foibles. One of the things that I wanted to indicate was that I think there is going to be a rich pipeline of work coming through, both from the Commission but also from the Member States and the national courts, where there should be more opportunities to deal with some of these incredibly difficult issues in cases that are slightly less clouded by their underlying facts. PROF. HANSEN: We have also a whole session on competition Thursday afternoon (see Chapter VIII, infra this volume), standards Friday morning (see Chapter VIII.D, infra this volume), and parallel import, which has some competition things, Friday afternoon (see Chapter VII.D, infra this volume). We also will have a session on trademarks Friday morning (see Chapter VI, infra this volume). PROF. HANSEN: Thank you all very much.

CHAPTER III

Developments in the U.S. Supreme Court Part A: The U.S. Supreme Court & IP Law Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Panelists PROF. ROCHELLE DREYFUSS

HON. PAULINE NEWMAN

New York University School of Law (New York)

Court of Appeals for the Federal Circuit (Washington, D.C.)

PROF. MARSHALL LEAFFER

HON. RANDALL R. RADER

Indiana University School of Law (Bloomington, IN)

Court of Appeals for the Federal Circuit (Washington)

HON. PAUL R. MICHEL

PROF. JOHN R. THOMAS

Chief Judge, Court of Appeals for the Federal Circuit (Washington, D.C.)

Georgetown University School of Law (Washington, D.C.)

PROF. HANSEN: We are going to start our panel on the U.S. Supreme Court and Intellectual Property. We have an outstanding panel: Professor Rochelle Dreyfuss, New York University School of Law; Marshall Leaffer, Indiana University School of Law; Chief Judge Paul Michel, Court of Appeals for the Federal Circuit; Judge Pauline Newman, Court of Appeals for the Federal Circuit; Judge Randall Rader, Court of Appeals for the Federal Circuit; and John R. Thomas, Professor at Georgetown University School of Law. We are not going to spend much time with copyright law because the Supreme Court has not done much there lately. We will concentrate on patent cases and touch on trademark ones. We are looking for a broad appraisal, rather than with specific cases. This is the plenary session and we have a lot of people in the audience who are not familiar with the various cases. Moreover, we will have a session dealing with these issues (see Chapter V, infra this volume). Therefore, let’s be more broad-based: the Supreme Court’s role in intellectual property: where it is going? Also, where is the Court of Appeals for the Federal Circuit going? Are these two courts moving apart or coming closer together?

44 CHAPTER III: DEVELOPMENTS IN THE U.S. SUPREME COURT Let’s start out with an appraisal of the Supreme Court. Do we like what it is doing? I will start with John Thomas, an outstanding law professor. PROF. THOMAS: I give the Supreme Court an A-minus. I think the Court has engaged in an unwelcome trend of really not integrating its recent opinions with Federal Circuit jurisprudence very well. So it is largely citing its own older cases and not referencing Federal Circuit opinions, which I think is depriving patent law of a quarter-century of experience. But other than that, I tend to like the results in the cases, despite some of the procedures. PROF. HANSEN: Judge Rader? JUDGE RADER: B-minus. PROF. HANSEN: Do you want to expand on that? JUDGE RADER: It is a mixed record. They didn’t completely disrupt the law of obviousness in KSR.1 PROF. HANSEN: Not completely? JUDGE RADER: But there is an awful lot they have not considered, and each one of their opinions always entails as many problems as it solves. PROF. HANSEN: Judge Newman? JUDGE NEWMAN: I will try to be brief. It is very hard to come up with an overall grade, because looking at the recent decisions of the Supreme Court, some of them I think were excellent and long overdue. For instance, I have always thought that it should be easier to take your patent to court and resolve any uncertainties about it. At the same time, when you look at what is a clear change in the law of obviousness, it seems to me that it is based on a premise that is reminiscent to me of the situation in U.S. courts before the Federal Circuit was formed. Then, there seemed to be a general perception, “Well, we have all of these advantages; how can we make them cheaper and more available?” rather than thinking about the threshold of where the inventions come from. I would give KSR a low grade, if it continues a very low grade, depending on how it works out in industry. Otherwise, I would say the grade for the Supreme Court is an A. I would also point out that it is the law of the land. So it is not whether we like it or not. This is how things are. It is more up to you in this audience, if there is something that isn’t working out as well as it might in technological advance and industrial growth, to act upon it. PROF. HANSEN: Thank you, Polly. Chief Judge Michel? CHIEF JUDGE MICHEL: I think the Supreme Court will get much better at patent cases with more experience. At our level, we have multiple patent cases every week, fifty-two weeks a year. The Supreme Court hears one or two or three, or something of that order, and only then in recent years. I think if you look at the KSR argument versus the final opinion,2 that case apparently looked much harder and closer to them at the end than it did as of the time of the argument. So I surmise that they are on a steep learning curve and they are ascending it rapidly, and, therefore, they are likely to be even more helpful in the future than they are now in whatever cases they choose to take. PROF. HANSEN: Thank you. Rochelle? PROF. DREYFUSS: Well, I too like the results of most of the cases, so I guess an A-minus or an A. KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007). Compare id. (final opinion), with Brief of Petitioner, KSR Int’l Co. v. Teleflex Inc., 2006 WL 2515631 (filed Aug. 22, 2006) (No. 04-1350) (KSR’s argument). 1 2

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What I find frustrating is that the Court really has not thought about the fact that it is reviewing a court that was established to create expertise. It seems to me that there should be some deference in light of the role that it plays, depending on what the issues are. So for example, on international issues, where the U.S. interests extend beyond innovation policy and into things that look more like diplomacy, it seems to me the Supreme Court has a big role. I thought AT&T v. Microsoft3 was a good example of a case in which they executed that role. Federalism issues, again, where the relationship between the states and the federal government is at issue, that seems to be a place where the Supreme Court should be playing a big role. So Florida Prepaid4 from a few years ago makes a lot of sense to me. Some cases are about whether IP exceptionalism is appropriate or whether the law should be the same in intellectual property as in other areas. I think the Supreme Court should play a role in that. So I think eBay5 was a good place for the Court to intervene on the question of remedies and Illinois Tools6 was a good place for the Court to intervene on the question of the antitrust/IP interface. Maybe the Court also has a role in what William Robinson in the previous panel (see Chapter II.B, supra this volume) called “judicial architecture,” on the relationship between the PTO, the district courts, the Federal Circuit, and the Supreme Court. But on actual substantive issues of patent law, it seems to me more deference is appropriate. I am surprised that they haven’t been more deferential. PROF. HANSEN: Rochelle, what grade would you give them? PROF. DREYFUSS: An A-minus. PROF. HANSEN: Marshall? PROF. LEAFFER: As concerns trademark law, I would give them an overall B-minus. I give the Supreme Court this relatively low grade because I believe that the Court, in working around the edges of trademark law, has not sufficiently tackled the important issues of trademark law. But working around the edges, the Court has, from a technical standpoint, gotten it wrong. My principal example is the TrafFix decision,7 which dealt with the interplay of an expired patent and its effect on trademark rights. It is an unintelligible and incoherent opinion on the issue of what evidence proves that a design is functional for the purpose of trademark law. The Court held that features claimed in an expired utility patent constituted strong evidence of functionality. In fashioning this “bright line” rule, the Court did not seem to understand the function of claims in a utility patent. The other cases I think were wrongly decided. Samara,8 which required secondary meaning for a design, as opposed to a packaging trademark, I thought was overly technical. I do not think that this distinction serves the purposes of trademark law. PROF. HANSEN: Marshall, you are against two opinions that were written on trademarks, an area in which they don’t have expertise, understandably so. On overall policy, isn’t the Court saying, “We are worried about anticompetitive effects, certainly of three-dimensional trademarks which have some functionality, which will be a substitute for patent protection without the criteria needed for patents.” Isn’t that the bottom line of those cases? If so, what’s wrong with that? PROF. LEAFFER: It is a worthwhile issue. But if you look at the Samara case, it depends on what your attitude is about competition. I look at trademarks as a device for small companies Microsoft Corp. v. AT&T Corp., 127 S. Ct. 1746 (2007). Fla. Prepaid Postsecondary Educ. Expense Bd. v. College Sav. Bank, 527 U.S. 627 (1999). 5 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). 6 Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006). 7 TrafFix Devices, Inc. v. Marketing Displays, Inc., 532 U.S. 23 (2001). 8 Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205 (2000). 3 4

46 CHAPTER III: DEVELOPMENTS IN THE U.S. SUPREME COURT to enter into markets, to upset the entrenched monopoly, so to speak. Samara came out just the opposite. Wal-Mart was able to crush a small company to that extent, to usurp something that they created. PROF. HANSEN: In the Wal-Mart case, Wal-Mart takes the design of this boutique, for little boys’ and girls’ clothes that have flowers and other things on it that its representatives had seen in a trade show. Wal-Mart likes the designs, sends photographs of the clothes to one of its supplier and asks them to make children’s clothes like the boutique. The Wal-Mart supplier basically, knocks off the designs. After a week-long jury trial, the boutique wins on its copyright claims and gets $1.6 million in damages, interest, costs and attorney fees, together with injunctive relief. Then, the question is whether in addition the designs in the clothes were themselves a trademark for the boutique. I am a high-protection trademark person but I don’t think the designs on the clothes were inherently distinctive, which was the issue before the court. I think the jury and lower courts were influenced by the fact that this was a sympathetic case for the plaintiff: big bad Wal-Mart against a small boutique clothing designer. But sometimes hard cases make bad law, and this might have been one of them. So I think the Supreme Court was right to provide some correction thinking about the bigger picture. Especially when the trademark claim was really an add-on to the copyright claim. I think the Supreme Court was concerned that the jury, District Court and Second Circuit found a children’s copyrighted design also was an inherently distinctive trademark when the Court did not think it was inherently distinctive. I think the Court agreed with the wellrespected IP judge, Jon Newman, who dissented in Wal-Mart the Second Circuit. If the Court would affirm in Wal-Mart, it was probably afraid that competitors in the future would likely fold after receiving a cease and desist letter in these circumstances because they couldn’t take the chance of the courts finding trademark protection even for designs that were not inherently distinctive. They wanted to provide some protection for competitors so they said, “Okay, at least you have to show secondary meaning.” I think actually it was a pretty good decision in that regard. And the small guy in this case did all right. But we don’t have to debate it. PROF. LEAFFER: At least I think you have balanced the anticompetitive effects of overprotection and judicial error with the pro-competitive effects of product differentiation and the facilitation of market entry by companies that have created highly distinctive designs. PROF. DREYFUSS: Well, they don’t look at it in the big context. Dastar is another example.9 The bottom line wasn’t bad, but it was sort of with a bludgeon. PROF. HANSEN: So the big question, in addition to whether the Court was right or wrong in its IP cases, is: Will lower courts follow them or find ways to avoid them? Are they going to pretty much reach the same results or not? Any thoughts on that? The Federal Circuit, of course, does rigidly follow the Supreme Court decisions. CHIEF JUDGE MICHEL: The Supreme Court says we should not be rigid. PROF. HANSEN: Generally speaking, then, what role does the Supreme Court have? It is a serious matter. They do not do a lot of these cases. They are really viewed as dilettantes, not sophisticated, not a lot of respect — respect in other areas, but not respect in IP. Do lower courts sort of say “Okay. Whatever” and move on? JUDGE RADER: Usually, the Supreme Court attacks these questions quite wisely. When it leaves its own little sandbox — and the Constitution is its sandbox, where it builds its little castles and is very comfortable — it generally will weigh into an area, resolve three or four 9

Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003).

PART A: THE U.S. SUPREME COURT & IP LAW 47

cases, and then step back for a decade or so. I anticipate that you will see a stepping back while the Supreme Court observes what transpires after KSR10 and MedImmune11 and eBay12 and the other cases. It will be another period of time before they reassess what effect they had the first time they weighed in. PROF. HANSEN: Interesting observation. Anyone else? JUDGE NEWMAN: To enlarge on that, we have seen this pattern almost throughout history in the Supreme Court intervention. One could say that at this particular time, as these cases fortuitously came to the Court, at about the same time there was a lot of popular noise, a lot of noise in the press, attempts to change the patent law legislatively, some publicity on all sides of the issue, which may very well have given the Court the idea that perhaps things aren’t quite as right as they might be. If you read these recent decisions that are the focus of this discussion of the Supreme Court, they do go back in history. Over history, over the couple hundred years of our Supreme Court jurisprudence, they have been stalwart defenders and supporters of intellectual property systems in general, at times when assorted, mostly industrial, vested interests thought that things should change somewhat. Now, whether that is continuing, whether what we are seeing in the patent field, which seems, at least at this stage, to be a diminution, a reduction in the power of this particular property right at this time of enormous technology dependence of the nation and of the world, one might speculate that there is a sense that things have changed and it is time for a fresh look. Again, we may see the same change of direction in copyright and trademark law, if in fact that is the philosophical basis for what we are seeing. Now it also may be that the pendulum has swung a little too far. That is my personal view, not that it will affect my attempt to apply the law as it has been spoken. But the Supreme Court doesn’t have the time, whether or not they have the capability, to be the final arbiter of how technology advances, how industry and the entrepreneur, and the balance between big and small businesses and the national and international competitiveness, and all of the things which today are much more involved with intellectual property rights than they were even a couple of decades ago, as to how that law will work out. But that is how I see it. PROF. HANSEN: You had the last word, Polly. Thank you all for an excellent session.

10 11

KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007). MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).

CHAPTER IV

Copyright Law Part A: World Developments Section 1: Copyright Agenda in the European Union — A View from the Commission Moderator MORTON DAVID GOLDBERG

Cowan, Liebowitz & Latman, P.C. (New York) Speaker TILMAN LÜDER

Head of Unit, Copyright and Knowledge-based Economy, DG Internal Market and Services, European Commission (Brussels) Panelists DR. BERNT HUGENHOLTZ

DR. SILKE VON LEWINSKI

Director, Institute for Information Law, University of Amsterdam

Max Planck Institute for Intellectual Property (Munich)

MR. GOLDBERG: I’m Mort Goldberg. I’m the moderator and I’m the bad cop. Hugh Hansen is the good cop. My function is to simply enforce the traffic rules. We will begin in the middle, the middle being Bernt Hugenholtz, Director of the Institute for Information Law at the University of Amsterdam, who is one of the panelists scheduled to comment on Tilman Lüder’s presentation, which will be made after Bernt speaks. In the meantime, we have the opportunity to listen to Bernt and get his views on the subject matter, “Copyright Agenda in the European Union: A View from the Commission.” PROF. HUGENHOLTZ: This is a bit awkward. I had expected to be responding to Tilman Lüder’s presentation setting out the European copyright agenda for the next ten years. I was very interested in his vision and his ideas. I think it is a worthwhile exercise to query these policies, to look into the future. I have been on many of these panels before, perhaps too many. I have often been rather critical of European Commission policies in the field of copyright in the past, and I have had

50 CHAPTER IV: COPYRIGHT LAW some duels with Tilman’s predecessor as well. But at least there were policies and at least something was happening. I must say for the last couple of years I am a bit at a loss. Not a lot has been produced in terms of copyright policies, and what has been produced doesn’t really add up. What do we have in the books? An Online Music Recommendation,1 which is, at least in its objectives, a laudable attempt at de-territorializing the provision of online music services, although it seeks to achieve that in a wrong way, I believe. It is not being implemented on a large scale either. But it is there. Then, we have a failed levies initiative, which perhaps Tilman now wants to revive.2 I’d be curious to know about that. And we have term extension for performing artists.3 We already had a little discussion about that this morning (see Chapter II.A, supra this volume), and we will have more about that this afternoon (see Chapter IV.B.3(a), infra this volume), so I don’t think I have to say much about that. What we can say is that there is not really a common denominator in all this — at least I fail to see it. This morning Alain Strowel called the current agenda of the Commission “not very ambitious” (see Chapter II.A, supra this volume). I think that is an understatement. I really have no clue where they are going. What could be good future policies? I think that question should be on the table, and I hope to seriously discuss that. Part of that question we tried to answer in the report that Tilman this morning already referred to.4 That report actually has a lot more than discussion of term extension in it. It 1 See European Commission, Management of Copyright and Related Rights (Feb. 13, 2008) [hereinafter Commission Music Copyright Recommendation 2008], available at http://ec.europa.eu/internal_market/copyright/ management/manage ment_en.htm; see also European Commission, Music Copyright: Commission Recommendation on Management of Online Rights in Musical Works, IP/05/1261 (Oct. 12, 2005), available at http://www.ebu.ch/ CMSimages/en/INFO_EN_ 233_tcm6-40326.pdf; Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (collective cross-border management of copyright and related rights for legitimate online music services) [hereinafter Commission Recommendation 2005], available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2005/l_276/ l_27620051021en00540057.pdf. Note: Subsequent the Conference, the European Commission adopted two initiatives in the area of copyright. Press Release, European Commission, Intellectual Property: Commission adopts forward-looking package, IP/08/1156 (July 16, 2008), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1156 (“First, the Commission proposes to align the copyright term for performers with that applicable to authors, in this way bridging the income gap that performers face toward the end of their lives. Secondly, the Commission proposes to fully harmonise the copyright term that applies to co-written musical compositions. In parallel, the Commission also adopted a Green Paper on Copyright in the Knowledge Economy. The consultation document focuses on topics that appear relevant for the development of a modern economy, driven by the rapid dissemination of knowledge and information. Both of these initiatives comprise a unique mix of social, economic and cultural measures aimed at maintaining Europe as a prime location for cultural creators in the entertainment and knowledge sectors.”); see also Commission Green Paper on Copyright in the Knowledge Economy, at 3, COM (2008) 466 final (July 16, 2008), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008: 0466:FIN:EN:PDF. 2 See Press Release, European Commission, Performing artists — no longer be the “poor cousins” of the music business — Charlie McCreevy (Feb. 14, 2008), IP/08/240 [hereinafter McCreevy Press Release], available at http:// europa.eu/rapid/ pressReleasesAction.do?reference=IP/08/240 (“I am relaunching today a consultation process on copyright levies. These are the levies which are applied in 24 Member States to compensate rights holders from losses accruing due to private copying of protected works. I suspended work on this issue over a year ago since it was clear there was no hope at the time of finding a common way forward.”). Subsequent to the Conference, at a public debate hearing held by the Commission in Brussels on May 27, 2008, representatives of both collecting societies and the electronics industry backed proposals to harmonize the methodology for collecting levies. See “Commission Resumes Copyright Levy Talks”, Managing Intell. Prop., June 2, 2008, http://www.managingip.com/Article/1940371/ Commission-resumes-copyright-levy-talks.html. 3 See McCreevy Press Release, supra note 2. 4 Commission Music Copyright Recommendation 2008, supra note 1.

PART A: WORLD DEVELOPMENTS 51

has quite an extensive discussion on the future, or the possible future, of European copyright policies. What we believe — it’s not just my report; it’s the Institute for Information Law’s report, which we wrote with seven people in a joint effort5 — is that there are more ambitious steps that could be taken. Our most ambitious recommendation is that we advise the Commission to start seriously thinking about solving the problem of territoriality — the territorial nature of copyright, which has been, not the cause of all problems in European copyright law, but certainly the cause of many problems, and has caused massive transactions costs for providers of online services, not just music services but information services in general. That has made it much more difficult for European operators to compete with U.S. operators who do not have this same problem in their backyard. American service providers do not have the obligation to clear rights for fifty-two states in their home market. European providers do. We believe that that problem has to be taken much more seriously than it has been in the past. What we propose is, in fact, stopping the process of harmonization that has been dominating the EU copyright agenda, certainly until 20016 — maybe 2004, if you include the Enforcement Directive7 — and start taking this more radical route. Harmonization does not rid us of territoriality. What would — and this is what we propose in the report — is a European Community copyright that preempts national copyrights, that regulates European copyright at the Community level, a bit in the same way as the Community Trademark8 or the Community Design,9 except that those Community instruments do not preempt national regimes, so we still have territoriality in those fields. This, obviously, would not work for copyright. This would be a long-term project. It is typically the idea of academics. Academics are not afraid of coming up with ideas that are not implementable in the next two or three years. But we should seriously start thinking about it. There is already a lot of this thinking going on amongst European academics. In particular, there is a group of academics, many of whom are represented here, that has been deeply involved over the last three years in a project called the Wittem Project, which is aimed at creating unified norms of European copyright, at creating a European copyright code that might serve as a model of the European copyright law of the future.10 MR. GOLDBERG: Tilman Lüder is the Head of Unit, Copyright and Knowledge-Based Economy, DG Internal Market and Services, European Commission in Brussels. After Tilman finishes, we will have a thirty-second further comment from Bernt and comments from Silke von Lewinski, who is with the Max Planck Institute for Intellectual Property in Munich. Thereafter, we will have a discussion among panelists, audience, and the speaker. Tilman, you’re on.

5 Inst. for Info. Law, Univ. of Amsterdam, The Recasting of Copyright and Related Rights for the Knowledge Economy (Nov. 2006) [hereinafter IviR Report], available at http://www.ivir.nl/publications/other/IviR_ Recast_ Final_Report_2006.pdf. 6 Council Directive 2001/29, 2001 O.J. (L 167) 10 [hereinafter Information Society Directive]. 7 Parliament & Council Directive 2004/48, 2004 O.J. (L 157) 45 (EC) (European IP Enforcement Directive). 8 Council Directive 89/104, 1988 O.J. (L 40) 1 (harmonizing the legal provisions of member states concerning trademarks). 9 Parliament & Council Directive 98/71, 1998 O.J. (L 289) 28 (EC) (on the legal protection of designs). 10 The Wittem Group on the Unification of European Copyright Law project aims at producing unified rules of European copyright law.

52 CHAPTER IV: COPYRIGHT LAW

The Economic and Social Situation of Europe’s Performing Artists Dr. Tilman Lüder* I. WHAT HAS HAPPENED SINCE THE LAST CONFERENCE?

Much time and effort has been spent in the period from 2004 through 2007 on management aspects of European copyright. In 2005 collective management online was a big topic and the impacts of the 2005 Recommendation on EU-wide online licensing are still working their way through the system.11 In February 2008 we published our first monitoring report on the online recommendation.12 2006 and 2007 were mostly spent on consultations, studies and impact assessments surrounding the issue of private copying levies. This created a heated and, I believe, ultimately healthy debate. But it is fair to say that the debate so far has not yet allowed us to develop a policy around the phenomenon of private copying levies. The process is continuing and we have launched a second call for comments at: http://ec.europa.eu/internal_market/copyright/ levy_reform/index_en.htm. In 2007 we also issued the first report on the application of the Directive on the Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society,13 the so-called “Copyright in the Information Society” Directive.14 The report examines the application of Articles 5, 6 and 8 of the Directive in light of the development of the digital market. Article 5 is concerned with exceptions and limitations provided by the Directive, Article 6 is concerned with the obligation to protect against the circumvention of technological measures, while Article 8 is concerned with sanctions and remedies in respect of infringements of the rights and obligations set out in the Directive. The report assesses how Articles 5, 6, and 8 have been transposed by the Member States and applied by the national courts. II. WHAT ARE WE PLANNING TO DO NEXT?

As we enter the second phase of the current Commission, the social and economic implication of copyright policy has moved center stage. For quite a while now, but rather more in the background, policymakers have slowly come to the conclusion that the social aspects of copyright were not given the appropriate weight in the European debate. It is fair to say that European copyright discourse is often dominated by economic considerations as this field of law, quite naturally, is dealt with under the auspices of creating a “single market” for copyright protected works and sound recordings. In these circumstances, it is not a surprise that issues surrounding the free movement of protected works and sound recordings have been in the foreground. In latter years, especially with the 2005 online licensing recommendation, the focus has shifted to services. Now, however, might * Head of Unit, Copyright and Knowledge-based Economy, DG Internal Market and Services, European Commission, Brussels. My thanks to Barbara Norcross for drafting major sections of the impact study on the social and economic situation of performers and record producers in Europe. The views expressed here are my own and do not necessarily reflect those of the European Commission or bind the latter institution. 11 See supra note 1. 12 Id.; see also DG Internal Mkt. & Services, 2007 Annual Activity Report (adopted Feb. 2008), available at http:// ec.europa.eu/atwork/synthesis/aar/doc/markt_aar.pdf. 13 European Commission, Report on the application of Directive 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society, SEC (2007) 1556 (Nov. 30, 2007), available at http://ec.europa. eu/internal_market/copyright/docs/copyright-infso/application-report_en.pdf. 14 Information Society Directive, supra note 6.

PART A: WORLD DEVELOPMENTS 53

be the time to look at the social effects of copyright on those who devote their life to the creation of works and sound recordings. That is why the Copyright Unit has, already in 2006, started to examine the social implications of copyright and how it affects the livelihood of Europe’s performers. Work on this impact assessment has finally come to fruition and, on 14 February 2008, EU Internal Market Commissioner, Charlie McCreevy, announced that he will shortly come forward with a proposal to extend the term of protection for European performers. Summarizing the main thrust of the proposal, Commissioner McCreevy stated: “I strongly believe that copyright protection for Europe’s performers represents a moral right to control the use of their work and earn a living from their performances. I have not seen a convincing reason why a composer of music should benefit from a term of copyright which extends to the composer’s life and 70 years beyond, while the performer should only enjoy 50 years, often not even covering his lifetime It is the performer who gives life to the composition and while most of us have no idea who wrote our favorite song — we can usually name the performer.”15 When setting out the rationale underlying his proposal, Commissioner McCreevy stressed the social aspects of what he has in mind: “I am determined to ensure that this extension will benefit all artists — whether featured artists or session musicians. For session musicians, the record companies will set up a fund — a substantial fund reserving at least 20 percent of the income during the extended term to them. For featured artists, original advances may no longer be set off against royalties in the extended term. That means the artist would get all the royalties during the extended term.” The Commissioner also proposes a “use it or lose it” provision. That means that in case a record company is unwilling to re-release a performance during the extended term, the performer can move to another label. That sets the social policy agenda for the next two years to come. III. THE IMPACT STUDY ON THE SOCIAL AND ECONOMIC SITUATION OF PERFORMERS AND PHONOGRAM PRODUCERS

No proposal can come forward nowadays without an extensive study on its probable impacts. Usually in copyright, we look at economic, social and cultural impacts. This is what we did in respect of term extension as well. Some of our findings show the stark reality behind being a performer. We decided to delve into the typical career of a performer. We found that most European musicians or singers start their careers in their early twenties. That means that when the current fifty-year protection ends, they will be in their seventies and likely to live well into their eighties and nineties (average life expectancy in the European Union is seventy-five years for men and eighty-one years for women). As a result, performers face an income gap at the end of their lifetimes, as they lose royalty payments from record companies as well as remuneration due for the broadcasting or public performance of their sound recordings. The latter income streams are paid to performers directly through their collecting societies and are not affected by their contractual arrangements with the record companies. For session musicians who play background music, and lesser-known artists, that means that income from broadcasting and public performance decreases when performers are at the most vulnerable period of their lives, i.e. when they are approaching retirement. Once copyright protection expires, they will also lose out on potential revenue when their early performances are sold on the Internet. Moreover, when their rights expire, performers are exposed to potentially objectionable uses of their performance that are harmful to their name or reputation. Performers are also at a 15

McCreevy Press Release, supra note 2.

54 CHAPTER IV: COPYRIGHT LAW disadvantage as compared to authors whose works are protected until seventy years after their death. This could be seen as unfair since performers are nowadays not only just as necessary as authors but also more identifiable with the commercial success of a sound recording. As regards producers of sound recordings, our study shows that they face the challenge of keeping up the steady revenue stream necessary to invest in discovering and promoting new talent. Record companies claim that they invest around 20 percent of their revenues in the development of new talent. They have to discover promising singers, sign them up, promote their nascent careers and, all the while, produce innovative recordings. Therefore, a longer term of protection would generate additional income to help finance new talent and would allow record companies to better spread the risk in developing new talent. Due to uncertain returns (only one in eight sound recordings is successful) and so-called “information asymmetries,” such revenue is often not available on capital markets. IV. WHAT CAN BE DONE ABOUT THE SITUATION?

The impact study presents a total of six options. Apart from the standard option of “doing Nothing” and letting the music market develop, we analyzed two options linked to the term of protection for sound recordings and three options that would not require a change in the current terms that apply to sound recordings. With respect to the term of protection, our study looks at the option of extending the term of performers to “life or fifty years,” whichever is longer. This option would enhance the status of performers and, by linking protection to their lifetime, recognize the individual and creative nature of their performances. This option would not only apply to the performers’ exclusive rights but also to the variety of broadcasting and public performance rights that are not transferred to the record companies. Another option involving the term of protection would be to extend the current fifty-year term to ninety-five years for performers and record companies. This option ensures full equivalence with the longest term of protection in the world. In order to ensure that the benefit of term extension accrues to performing artists, especially session musicians that have transferred their related right against a one off payment, the extension of protection for record companies should be accompanied by a payment of a certain percentage of record companies’ increased revenues into a fund dedicated to improving the situation of session musicians. Again, similar to the “life or fifty year” option, the performer would be entitled to remuneration for broadcasting and public performance for ninety-five years. Another set of options looks at ways to address the problems identified above without modifying the term of protection. These options comprise various possibilities which could improve the financial situation and moral rights of performers. These measures, of course, could be used either as alternatives to a term extension or as measures to complement an extension of the term of protection. One of the most significant findings was how performers contractually transfer all of their exclusive rights (including their reproduction, distribution and making available rights) to the record producers. On the other hand, and this is often overlooked by the opponents of term extension, performers do not transfer their remuneration claims for broadcasting and public performances, to record labels. In order to limit the effect of the systematic contractual transfer of performers’ exclusive rights to record companies, we examined the economic and social impacts of an “unwaivable” right to remuneration to which performers would remain entitled even after having transferred their reproduction, making available or distribution rights to a record producer.

PART A: WORLD DEVELOPMENTS 55

The creation of a claim for equitable remuneration for online sales or other forms of making performances available online is an interesting option, however, whose time may yet come. At this stage, the uncertainties surrounding the issue of who should pay this “equitable remuneration” are such that the likely effects of this option cannot be quantified with any reasonable measure of certainty. In light of the uncertainties surrounding the practical administration of the claim for equitable remuneration, further study on this option is needed. While in the future this option might well be introduced to enhance performers’ participation in revenue generated online, it is too early to discuss this option at this stage. This option was therefore discarded before the analysis of impacts. Another option analyzed is to strengthen performers’ moral rights. The scope of their moral rights could be harmonized to include a right to restrict derogatory uses of their performances. A “safety net” for performers’ contracts is also analyzed. This type of clause is destined to protect performers against practices that deprive them of the economic benefits of their rights. As copyright contracts have not been harmonized at EC level, such contractual protection would have to draw upon national copyright contract laws. This safety net comes in the form of a “use it or lose it” clause, meaning that, if a record company is unwilling to re-release a performance during the extended term, the performer can move to another record company. This provision would also apply should the record company decide to only use certain channels of distribution (like sales of CDs) but not others (like online sales). In this case, a performer would recover his exclusive right to make his performance available himself or entrust this form of exploitation to another record company. It would appear logical that, once the exclusive right reverts to the performer, the producer would not block the performers’ independent exploitation by exercising his own producers’ rights. V. THE IMPACTS OF THE DIFFERENT OPTIONS

All options are measured as to their suitability to contribute to the following six operational objectives: (1) bring the legal protection of performers on a more equal footing with that of authors; (2) increase remuneration for performers; (3) bring the European music market on an equal footing with the US market; (4) ensure the availability of sufficient A & R resources, i.e., the development of new talent; (5) ensure availability of music at reasonable prices; and (6) encourage digitization of back catalogue. Our study concludes that “doing nothing” is not a preferable option. If nothing were done, thousands of European performers who recorded in the late fifties and sixties would lose all of their airplay royalties over the next ten years. This would have considerable social and cultural impacts. Equally, the sound recording industry would be obliged to cut down on the development of European-based sound recordings. The study reveals that the options not involving the term of performers’ and record producers’ rights are generally less suited to meet the four operational objectives set forth in the study. This is especially true for the option involving a strengthening of moral rights, which has no financial impact on performers and record producers. Options involving a term extension (either “life or fifty years” or “ninety-five years for performers and record producers”) seem to be rather more suitable in contributing towards the six operational objectives. Both options bring financial benefits to performers and would thus allow more performers to dedicate their life to creationThe option “life or fifty years,” by linking the term to the life of a performer, would most closely reflect the fact that protection represents a moral right to control the use of their work and earn a living from their performances. Also, it would align the performer more closely to the author and composer of the music when evidence shows that it is the performer who breathes life into a composition and it is often the performance that makes a piece of music memorable.

56 CHAPTER IV: COPYRIGHT LAW The option involving a term extension to ninety-five years would arguably increase the pool of A&R resources available to record producers and could, if properly implemented by its beneficiaries, have an additional positive impact on cultural diversity. In this context we looked at whether the benefits of a term extension are necessarily skewed in favor of famous featured performers. While featured performers certainly earn the bulk of the copyright royalties that are negotiated with the record companies, all performers, be it featured artists or session musicians, are entitled to so-called “secondary” income sources, such as single equitable remuneration when the sound recording incorporating their performances is broadcast or performed in public. A term extension would ensure that these income sources do not cease during the expected life of a performer. For the thousands of anonymous session musicians who were at the peak of their careers in the late fifties and sixties, “single equitable remuneration” for the broadcasting of their recordings is often their principal pension income. On a technical level, we found that a term extension not linked to the life of the performer would be easier to implement than the “life or fifty years” option, because the latter option is linked to the lifetime of thousands of individual performers. As the example of co-written works demonstrates, linking a copyright to the life of individual contributors raises complex issues when several performers contribute to a sound recording. VI. WHAT ARE THE LIKELY PROVISIONS IN THE PROPOSAL TO ENSURE THAT IT IS THE PERFORMING ARTISTS THAT BENEFIT?

In order to ensure that the benefit of term extension would accrue to performing artists, especially session musicians, our study concludes that record companies should set up a fund for session musicians. In order to have the financial volume necessary to ensure real benefits for session musicians, the fund should reserve some of the revenue that accrues during the extended term and distribute it to session musicians who signed a “buyout” contract. In respect of featured artists, the Commission’s analysis concludes that it would be an advantage for performers if the original advances paid by the record companies would no longer be set off against royalties in the extended term. That means the artist would get all the royalties during the extended term. We also considered whether a term extension should be accompanied by a “use it or lose it” provision. This means that, in the event that a record company is unwilling to re-release a performance during the extended term, the performer can move to another record company. This provision would also apply should the record company decide to only exploit certain channels of distribution (like sales of CDs) but not others (like online sales). In this case, the performers could make his performance available himself or entrust this form of exploitation to another record company. In the latter case, he could himself exploit the channel which his label chooses not to exploit. VII. PRICE EFFECTS OF A POSSIBLE TERM EXTENSION

Empirical studies show that the price of sound recordings that are out of copyright are not systematically lower than that of sound recordings in copyright. A study by Price Waterhouse Coopers concluded that there was no systematic difference between prices of in-copyright and out-of copyright recordings. There are not many studies that looked at the price differences in sound recordings. The Price Waterhouse Coopers study is the most comprehensive one and it looks at 129 albums recorded between 1950 and 1958. On this basis, it finds no clear evidence that records in which

PART A: WORLD DEVELOPMENTS 57

the related rights have expired are systematically sold at lower prices than records which are still protected. VIII. INTERNATIONAL DIMENSION

The IA also looked at the trade implications of a longer term of protection and provisionally concludes that most of the additional revenue collected in an extended term would stay in Europe and benefit European performers. All in all, the issue of how to best ensure that performers can devote their life to creation has now moved center stage. Our study is arguably just the beginning. MR. GOLDBERG: Thank you very much indeed.

Bernt, you have one minute left of your rebuttal time, after which Silke will make her comments, and then we will open it up to a few people who have some views. PROF. HUGENHOLTZ: We are still not really discussing the copyright agenda in the European Union. Anyway, a quick rebuttal. I still have the feeling that we are not hearing the entire story. Hugh Hansen referred to it earlier this morning as a “subterfuge” (see Chapter II.A, supra this volume). All this sudden pleading for the rights of the performers, however laudable the cause may be, does remind me of the Rome Convention16 and how it came into being, where the performing artists were basically pushed forward by the sound-recording industry, and to a lesser extent by the broadcasters, as stalking horses for introducing neighboring rights. The problem, of course, is that we still have not seen the proposal, so we don’t really know how it affects or does not affect sound recordings. But I have the feeling there is something fishy going on here. MR. GOLDBERG: You don’t like the music and you haven’t even seen the score. PROF. HUGENHOLTZ: If it is about sound recordings and if it is about term extension of sound recordings, I refer to an article that will be out soon in European Intellectual Property Review, which summarizes basically the arguments that we have made in the IvIR “recasting” study against such a term extension.17 I think they are quite powerful. I think the Gowers 16 International Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations, Oct. 26, 1961, 496 U.N.T.S. 43 [hereinafter Rome Convention], reproduced in International Treaties on Intellectual Property 417 (Marshall A. Leaffer ed., 1990). 17 See Open Rights Group, The Proposed Copyright Term Extension for Sound Recordings — A joint academic statement on the evidence (June 16, 2008), available at http://www.openrightsgroup.org/wp-content/uploads/soundrecordings-impact.pdf. This statement was sent to the European Commission June 16, 2008. It will also be published in the European Intellectual Property Review (forthcoming, EIPR/9/2008). The statement was drafted by Martin Kretschmer. Signatories (in alphabetical order): Prof. Lionel Bently, Director, Centre for Intellectual Property and Information Law (CIPIL), University of Cambridge; Prof. Michael Blakeney, Co-Director, Queen Mary Intellectual Property Research Institute, University of London; Christian von Borries, Composer, Producer, Conductor, project lead “Music about music,” Berlin; Richard Chesser, Chair, Trade and Copyright Committee, International Association of Music Librarians (UK/IRL); Dr. Martin Cloonan, Chair, International Association for the Study of Popular Music (UK/IRL); Prof. Nicholas Cook, Director, AHRC Research Centre for the History and Analysis of Recorded Music, Royal Holloway, University of London; Prof. Johanna Gibson, Co-Director, Queen Mary Intellectual Property Research Centre, University of London; Prof. P. Bernt Hugenholtz, Director, Institute for Information Law, University of Amsterdam; Prof. John Kay, Chair, British Academy Copyright Review; Prof. Martin Kretschmer, Director, Centre for Intellectual Property Policy & Management, Bournemouth University; Prof. Hector MacQueen, Co-Director, SCRIPT/AHRC Centre Intellectual Property & Technology; Law, University of Edinburgh; Prof. Charlotte Waelde, Co-Director, SCRIPT/AHRC Centre Intellectual Property & Technology Law, University of Edinburgh; First signatories: Anne Barron, law, London School of Economics; Dr. Maurizio Borghi, law, Brunel University; Abbe E. L. Brown, SCRIPT/AHRC Centre Intellectual Property & Technology Law, University of Edinburgh; Dr. Ronan...

58 CHAPTER IV: COPYRIGHT LAW Report18 proves that as well. Lionel Bently, who will be here for the next session (see Chapter IV.B.1, infra this volume), undoubtedly will add some arguments to that. MR. GOLDBERG: Thank you very much, Bernt. Silke, do you have some thoughts? PROF. VON LEWINSKI: I would also like to talk about the term extension. I agree with Bernt that the arguments on term extension in the recasting study are very powerful. Tilman said this morning that he is getting used to receiving bites from academics, so I won’t disappoint him. But maybe he should better pass on my bites to Mr. McCreevy once he will be back in Brussels. Like Bernt, I am somewhat suspicious about the Commission’s press declaration on term extension19 (we don’t have any further official document right now). First, the announcement to prolong the duration of performers’ rights to ninety-five years is linked to an announcement to possibly act again on the private copying remuneration. We know what kind of thoughts came out of the European Commission in this regard in recent times — namely, rather negative ones for right owners, especially authors and performers. So it sounds to me like: “Well, we’ll give you something that you must like — something positive, namely the term extension; but then you will have to swallow whatever we will propose in respect of the private copying remuneration.” This combination makes me uneasy. Second, I am suspicious because the Commission’s suggestion sounds all too good to become true in a real world. It sounds like a big P.R. campaign for performers’ protection. If you advertise a measure by pointing at its human face — the performers — but if you truly aim at increased protection for sound-recording companies, then this seems to me not perfectly honest. In fact, the initiative for term extension came from the sound-recording industry — as also reflected at last year’s Fordham Conference, when this initiative was already widely criticized, and some reacted by suggesting a term extension at least for performers (possibly with a view to avoid criticism in that case).20 And it is also true that especially the majors know that they currently have some image problems. It is of course much easier to use — or should I say, abuse — the much better, popular image of performers, to hide behind them and to Deazley, law, University of Birmingham; Prof. Simon Frith, Tovey Chair of Music, University of Edinburgh; Dr Christophe Geiger, Associate Professor and Director elect, Centre for International Industrial Property Studies (CEIPI), University of Strasbourg; lead researcher French-speaking countries, Max-Planck-Institute for Intellectual Property, Munich; Jonathan Griffiths, law, Queen Mary Intellectual Property Research Institute; Dr. Pekka Gronow, music, University of Helsinki; Prof. Paul Heald, University of Georgia and Bournemouth University; Dr. Natali Helberger, Institute for Information Law, University of Amsterdam; Prof. Dr. Thomas Hoeren, Director, Institute for Information, Telecommunications and Media Law, Münster University; Prof. Graeme Laurie, Director, SCRIPT/AHRC Centre Intellectual Property & Technology Law, University of Edinburgh; Prof. Fiona Macmillan, Pro-Vice Master for Research, Birkbeck, University of London; Dr. Lee Marshall, sociology, University of Bristol; Prof. Christopher May, political economy, Lancaster University; Tim Padfield (Chair) and Barbara Stratton (Secretary) for LACA: the Libraries and Archives Copyright Alliance; Prof. Jeremy Phillips, IP KAT weblog, intellectual property consultant; Rufus Pollock, economics fellow, Emmanuel College, Cambridge University; Dr. Andy C Pratt, LSE Centre for Urban Research, London School of Economics; Dr. Mark Rogers, economics fellow, Harris Manchester College, Oxford University; Prof. Derek Scott, School of Music, University of Leeds; Prof. Ruth Soetendorp, Associate Director, CIPPM, Bournemouth University; Dr. Jason Toynbee, ESRC Centre for Research on Socio-Cultural Change, Open University; Prof. Ruth Towse, Professor of the Economics of Creative Industries, Erasmus University Rotterdam and Bournemouth University; Stef van Gompel, Institute for Information Law, University of Amsterdam; Prof. Roger Wallis, Royal Institute of Technology (KTH) Stockholm, and composer; John Williamson, manager Belle and Sebastian, honorary research fellow, Department of Music, University of Glasgow. 18 U.K. Treasury, Gowers Review of Intellectual Property (Dec. 2006), available at http://www.hm-treasury. gov. uk/media/6/E/pbr06_ gowers_report_755.pdf [hereinafter Gowers Review]. 19 McCreevy Press Release, supra note 2. 20 See Session VIII, Part B, “The Recasting of Copyright and Related Rights in the European Union — What Should the EU Do? What Will the EU Do?” in 10 Intellectual Property Law and Policy 637 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham Intellectual Property Law & Policy Institute, Apr. 12–13, 2007).

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argue that they need a term prolongation (well sensing that the European Parliament might be more inclined to agree with a prolongation for performers than for producers). Yet, the beneficiaries of a prolongation of the performers’ term of protection, at least to a large extent, would indeed be the sound-recording producers. In addition, once performers would get such a prolongation, the producers would certainly claim (and possibly also get) their own term prolongation, arguing on the basis of non-discrimination. So it seems that what we can observe here is a little bit of a game that is not really honest. If one wants to test the honesty of the proposal as one made in favor of performers, one should add other elements which would guarantee that performers indeed will benefit at one hundred percent from the term extension of their rights. For example, one would have to prohibit national transitional provisions which provide for an automatic extension of existing contracts (in favor of producers) to the prolonged term; find a solution to avoid that existing contractual clauses which already extend the transfer of rights to any future prolongation of duration would not be applicable to such prolongation; ensure that revenues for uses of performances protected under the prolonged term are distributed by collective management organizations and also directly by professional users exclusively to performers rather than also to producers as derived right owners, and so forth. I can well imagine that the record industry would rapidly loose its interest in a term extension for performers. Of course, some measures are announced in the Commission’s press release which may point in the right direction, such as a “use it or lose it” provision in favor of the performer and a fund set up by industry for session musicians who should benefit from at least 20 percent of the income of the extended term. Yet, these suggestions so far seem very vague, and also not far-reaching enough. An alternative to a duration of ninety-five years, namely the existing fifty years but, at least, a duration until the performer’s death, was discussed within the Commission and looks like a much more reasonable approach which should not be discarded but rather preferred, if discussion on this topic will go on. One should also mention that inside the Commission the idea has been considered to make use of the model of the unwaivable remuneration right first established by Article 4 of the EC Rental Directive,21 in order to guarantee to performers a real benefit in their rights. This is indeed a very laudable idea, and one can only encourage the Commission to pursue and try to realize such and further ideas in the same direction, even if the record industry might not support or even oppose them. If I may, let me make a more fundamental remark at the end: some years ago, the record industry, especially the U.S. record industry, literally claimed — and you can still read this at several places — that Europe should “align” its duration to that of the U.S. law. Well, does the Commission now obey U.S. industry? Does the Commission now, let’s say, want Europe to become a satellite of the United States, like the Eastern and Central European countries were so-called “satellite states” of the Soviet Union at the time? Do we see a new pattern coming up here, after the Commission already did a big favor (mainly) to U.S. music companies through the online music licensing Recommendation of 2005,22 which has so far mainly benefited Anglo-American mainstream repertoire? In whose interest does — or should — Europe act? It’s just a question, maybe a little provocative, but certainly one to be raised. If alignment at all is an issue ― I don’t think it is, but that is for the next panel to discuss — if there is a need to globally align such term of protection, why not ask the United States to align its term, which is much longer than most terms in the world, to the predominant term that we find in most countries of the world for performers’ rights, namely fifty years? That is another question to be raised. 21 Council Directive 92/100, 1992 O.J. (L 346) 61 (on rental right and lending right and on certain rights related to copyright in the field of intellectual property). 22 Commission Recommendation 2005, supra note 1.

60 CHAPTER IV: COPYRIGHT LAW MR. GOLDBERG: Thank you, Silke. We have a little bit of time for comments or questions from the rest of us. I would ask that in order to sort out the time equitably, we do not at this point entertain questions from panelists on other panels, especially those on the panel that will be coming in. With that one minor exclusion, let me ask if there are any questions. QUESTION [Steven Metalitz, Mitchell, Silberberg & Knupp LLP, Washington, D.C.]: Professor von Lewinski, why do you think that the predominant trend in the world is fifty years? If you look at what most countries have done in the last ten or fifteen years, most countries provide at least seventy years of protection. PROF. VON LEWINSKI: Not for performers — maybe for authors — and that makes a fundamental difference. MR. GOLDBERG: Another question? QUESTION [John Simson, Executive Director, SoundExchange, Washington, D.C.]: Do you think that authors should also have their rights shortened to fifty years? Why should they be treated differently than performers? PROF. VON LEWINSKI: No. I would not have their protection shortened to the same duration as provided for performers. I am coming from a country of the continental European system — and, by the way, twenty-five out of the twenty-seven EU Member States adhere to that system — under which we make a basic distinction between authors’ rights on the one hand and performers’ and other related right owners’ rights on the other hand. This legal system values creation higher than investment or even artistic achievements that are not creations, such as performers’ interpretations. This distinction is not based on the amount of profit that may be generated by an author’s or performer’s contribution, nor on the degree to which an author or performer is well-known, popular, or famous, but on the nature of the very special, demanding, often unique, act of creation as opposed to simple “re-creation” or interpretation of existing creations by performers (or simple investments, such as those made in record producing) — an act that is, therefore, considered by law as deserving and requiring a higher level of protection than what we protect under related rights. Due to this distinction, authors are to enjoy a broader scope of protection as a matter of principle. It could even be a form of discrimination under the Continental system to equally treat authors and performers (or other related right owners) — right owners that are granted protection for different reasons and with a different justification — for example, by aligning their scope of protection. Even if this is not a perfect illustration, it might help: a CEO of a company would feel discriminated against if he received the same revenue for work as one if its average employees. MR. LÜDER: You are a performer. Why do you think you are less valuable than an author? If you talk to people, is that really an argument? Your performance has brought these particular lyrics to life; but, sorry, you are less valuable. MR. GOLDBERG: The gentleman over here? QUESTION [Tamir Afori, Israel Ministry of Justice, Jerusalem]: My name is Tamir Afori, from Israel. I am responsible for copyright legislation in the Ministry of Justice. We are used to hearing these kinds of arguments about social security, the pension-style arguments. I think they are completely unconvincing. I think there are very rare cases that music will survive fifty years and be successful, and even be broadcast at all. Of the very few songs that would be broadcast, most probably they have made enough money. The rest of the performers just will not enjoy it at all. So it would be the enjoyment of very few sound recording owners or very few performers. The very few performers that will enjoy it do not need it, as far as I am concerned. MR. LÜDER: Just to briefly answer that, that insinuates that all of these famous featured performers who are going to be successful after fifty years didn’t have session musicians in

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the recording. But obviously they had, and those would benefit as well. They are not famous. That is point number one. Point number two is that we are talking about recordings from the 1950s and the 1960s, and that will be successful. We have just never been in a situation where old recordings had such a value. But these recordings from the 1950s and 1960s actually will have a value far beyond the fifty years, and that is why this situation is unique. MR. GOLDBERG: Howard has promised to make a very, very brief comment. QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa, Canada]: Tilman, I am worried that this is going to simply kill off the public domain and be a windfall to the record companies. I am a former musician myself. I actually for my sins went to the Juilliard School next door way back when. We have retrospective neighboring rights in Canada. At the American Federation of Musicians nobody knows who played in sessions thirty, forty, fifty years ago. This is lost. They don’t know what to do with the money. The money ends up going nowhere except to a bunch of lawyers and accountants. The money will not get to the session musicians. And Paul McCartney doesn’t need the money, nor does his wife. MR. GOLDBERG: Thank you, Howard. QUESTION [Mario Bouchard, General Counsel, Copyright Board of Canada, Ottawa, Canada]: Tilman, two quick questions. Why do you want to change the social contract in midstream? And why do you want to change copyright law into social security legislation? MR. LÜDER: Is there anything wrong with saying that copyright has this human function of also ensuring your income? That’s what the idea is, that it incentivizes you to devote your life to the creation of music. QUESTIONER [Mr. Bouchard]: You don’t incentivize a twenty-year-old on the basis of the income he is going to have when he is eighty. MR. LÜDER: That is probably a bit shortsighted argument. I think that you will incentivize people if there is a general framework of protection that is favorable to creation. MR. GOLDBERG: We have a surprising difference of opinion. QUESTION [Ted Shapiro, Motion Picture Association, Brussels]: I haven’t really heard a definition of “performer.” I was wondering whether audiovisual performers were covered as well. MR. LÜDER: No. The impact assessment is on music performers, and the situation that I described is on music performers. We have no comparable data on audiovisual performers. PROF. HUGENHOLTZ: So they have less value? MR. LÜDER: No, I didn’t say that they have less value. I said that we have no data on these people. That’s a slightly different statement. But I think incentivization is a more global argument. Jurisdictions that value the creative process tend to give the higher level of protection. There is a fear that if we go to the downside of this, if we give the lower level, that ultimately you will produce for the taste of those jurisdictions that give the higher level, which then would of course disadvantage the European culture. In that sense, I think there is a general point to be made that we don’t want to be seen as the jurisdiction against the United States, against Brazil, against even India, that gives the least credibility to or least appreciation for the sound-recording industry. MR. GOLDBERG: We have no further questions, no further comments. Obviously, we have complete consensus, if not unanimity, on all of the issues discussed. Thank you very much.

CHAPTER IV

Copyright Law Part A: World Developments Section 2: Copyright Developments in Canada, Australia, and New Zealand Moderator PROF. ROBERT BURRELL

University of Queensland (Brisbane, Australia) CANADA Speakers PROF. DANIEL GERVAIS

STEVEN J. METALITZ

Acting Dean of Common Law, University of Ottawa

Mitchell Silberberg & Knupp LLP (Washington, D.C.)

JUSTICE WILLIAM VANCISE

HOWARD KNOPF

Chairman, Copyright Board of Canada (Ottawa)

Counsel, Macera & Jarzyna LLP (Ottawa) Panelist

RICHARD PFOHL

General Counsel, Canadian Recording Industry Association (Toronto) Speakers AUSTRALIA

NEW ZEALAND PROF. SUSY FRANKEL

PROF. ANNE FITZGERALD

Victoria University of Wellington (New Zealand)

Queensland University of Technology, Law School (Brisbane) Panelists

PROF. PETER BLACK

ROBERT BURRELL

Queensland University of Technology Law School (Brisbane)

University of Queensland (Brisbane)

64 CHAPTER IV: COPYRIGHT LAW PROF. BURRELL: There is one slight change in the program. Namely, we are going to have to deal with New Zealand before dealing with Australia, which obviously, as a matter of principle, is unacceptable, but I’m told it is unavoidable.

CANADA We will start with Canada. We are going to hear first from Professor Daniel Gervais from the University of Ottawa.

Recent Developments in Canadian Case Law Prof. Daniel Gervais* I want to talk mostly about Euro-Excellence, Inc. v. Kraft Canada, Inc.,1 a parallel import case from the Canadian Supreme Court. As we all know, of course, the question of parallel imports is left open in TRIPs.2 It is up to each country, to a large extent, to decide what rules it wants to apply. In this case, the defendant was Euro-Excellence, which imported and sold in Canada foreign-sourced Toblerone chocolate bars. (I know you’re all salivating.) The plaintiff was Kraft Canada, which is, obviously, the daughter company, if I can call it that, of Kraft Inc., and the exclusive Canadian distributor of the chocolate bars. Usually when you think about parallel imports, you think of trademark law. But that is rather difficult in Canada because the Supreme Court has only restrained parallel imports when the imported goods were different from the goods that were licensed for the Canadian market. In this case, these were the exact same bars of chocolate. So the lawyers said, “Let’s try copyright.” Kraft Canada had an exclusive license from Kraft that covered two logos. The logos appear on the wrappers. Kraft alleged that Euro-Excellence, by importing copies of the chocolate bars, had in fact imported copies of the artistic works — namely, the logos — and in doing so, violated Section 27(2) of the Canadian Copyright Act, which defines secondary infringement as “an infringement of copyright for any person to import into Canada for the purpose of sale a copy of a work that would infringe copyright if it had been made in Canada by the person who made it.”3 To unpack that provision, Kraft Canada had to show three things to win the case: (1) that there was copyright on the logos; (2) that when Euro-Excellence imported and sold the chocolate bars into Canada, those sales of the chocolate bars were actually a sale of the logos; and (3) If the logos (that is, the packaging) had hypothetically been made in Canada by the people who actually made it — under the so-called “hypothetical-maker”4 theory, in this case Kraft’s parent company — then that maker would have infringed copyright in Canada. Kraft Canada was successful before the Federal Court5 and the Federal Court of Appeal.6 The Supreme Court granted leave and heard the appeal, which was based on two main arguments. * Acting Dean of Common Law, University of Ottawa. 1 2007 S.C.C. 37 (July 26, 2007), available at http://csc.lexum.umontreal.ca/en/2007/2007scc37/2007scc37.html. 2 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299, 33 I.L.M. 1125, 1197 (1994), available at http://www.wto. org/english/tratop_e/trips_e/t_agm0_e.htm. 3 Copyright Act, R.S.C., c. C-42, § 27(2)(e) (1985). 4 Or “hypothetical infringer,” in the Court’s words. 5 Kraft Can., Inc. v. Euro-Excellence, Inc., (F.C.), [2004] 4 F.C.R. 410, 2004 F.C. 652. 6 Kraft Can., Inc. v. Euro-Excellence, Inc., (F.C.A.), 2005 F.C.A. 427, [2006] 3 F.C.R. 91.

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Euro-Excellence’s first argument was two-pronged: it argued that the sale of the logos on the wrappers was incidental to the sale of the chocolate bar, and that copyright should not apply to these incidental sales. The second argument of Euro-Excellence was that the plaintiff’s parent company was the copyright owner and that, while it had licensed Kraft Canada on an exclusive basis, the parent companies cannot infringe a copyright that it owns. Both arguments were interesting. A lot has been written already about the hypothetical-maker doctrine.7 The doctrine, a foundation of the secondary liability regime, basically asks whether, knowing that the parent company made the chocolate bars outside Canada, they would have infringed had they made those bars in Canada. Some people have argued that this hypothetical-maker doctrine applied to the importer. But the provision in the statute states quite clearly that it is the maker of the packaging, the maker of the chocolate bar, outside of Canada who is the hypothetical maker. In other words you have to ask: If Kraft Inc., the parent company, had made these chocolate bars in Canada, would they have infringed a copyright in Canada? One thing that makes this decision interesting is that the Supreme Court issued several opinions.8 It usually doesn’t do this. The net result of these separate opinions, once you figure them out, is that Euro-Excellence actually won the case. But if you read them carefully, you will notice that the nine Justices agreed only on one thing, and that is that there was copyright in the logos. On the other questions there was an uneven split. A majority agreed with Kraft Canada that when one sells a chocolate bar that has an artistic logo on the wrapper one also sells the logo. So that looked like prima facie infringement. Up to that point, it is fairly straightforward. Now, I will try to make the rest clear, but it is not easy. Three of the nine Justices said that secondary infringement, Section 27(2), was not triggered by the sale of products that are incidental to the sale of something else. They referred in their opinion to arguments based on internal coherence of the Copyright Act and to a new doctrine, at least in Canadian copyright law, which is the doctrine of legitimate economic interests.9 They wrote that there was no legitimate economic interest in protecting the logo on the wrapper separately from the chocolate bar. They devised a new test, referred to as the “reasonable consumer” test,10 and asked whether a reasonable consumer, looking at the chocolate bar, would consider that the logos were an important part of the transaction? They said, in this case, the answer would be, no, it is not important. The second part of the inquiry was whether Kraft Canada, as the exclusive licensee, could assert that copyright had been infringed by its parent company, the owner of copyright. As you know, with an exclusive license, you can actually exclude use by the copyright owner, even though you do not have ownership. Do you infringe copyright or merely the license agreement? Five Justices said the licensee could sue the owner for infringement; four said, no, it is a breach of contract. That is an interesting split, 5–4, which means, the way I read it anyway, that if Kraft Canada had obtained the assignment of copyright for Canada from its parent company, it would have won on that point, and then probably the whole case, which has implications beyond copyright, of course. 7 The hypothetical-maker requirement that arises in commonwealth copyright regimes (such as Canada’s) is derived from the 1911 U.K. copyright statute. The 1911 U.K. Copyright Act and its descendants, such as Canada’s, created the possibility of secondary infringement for importation of copies legitimately made abroad that would have infringed copyright if, hypothetically, they had been made in the country into which they are imported, i.e., if they had been made in Canada in this instance. See 1 Hugh Laddie, The Modern Law of Copyright and Designs (3d ed. 2000). 8 Binnie, Bastarache, Binnie, LeBel, Deschamps, Fish, Charron, and Rothstein, JJ., concurring; McLachlin, C.J., and Abella, J., dissenting. See http://scc.lexum.umontreal.ca/en/2007/2007scc37/2007scc37.html. 9 Kraft, 2007 S.C.C. 37, ¶ 8. 10 Id. ¶¶ 93–94.

66 CHAPTER IV: COPYRIGHT LAW The bottom line is this: Four Justices said no primary infringement because the exclusive licensee cannot sue its parent company, because the parent company is the owner of copyright; three said no infringement because the sale of the labels was incidental to the sale of the chocolate. Then, there is one member of the court who said some interesting things. I don’t know what to make of it, really. He says that copyright is not an instrument of trade control.11 I’m not entirely certain what that means. For those of you from the United Kingdom, you will probably recognize the fact pattern of the CBS U.K. case from 1980,12 which was very similar. As I understand it, the U.K. Act was amended after that decision to provide exclusive licensees with protection against parallel importers. In the European Union, the principle of Community-wide exhaustion also changes the rule somewhat. Recital 28 and Article 4(2) of the Information Society Directive13 limit the protection of parallel importers only to goods marketed with consent within the European Union. I looked at other jurisdictions. In Australia the Act was specifically amended to exclude infringement by importation of a product where a copyright work is incidental.14 Finally, in the United States the case may remind you of Quality King,15 but there is an important difference between the Canadian Kraft case and Quality King, namely that the labels in the Quality King case had been made in the United States, though by a third party, whereas here the labels were made outside of the jurisdiction. As a result, I think Quality King would not apply to this fact pattern in U.S. law. As I see it, a U.S. court would have found that there was an infringement of copyright under U.S. law. Very quickly, I want to tell you about two other trends emerging in Canada. One is a very significant increase in the use of statutory and punitive damages in copyright cases. In one case that just came out, in addition to actual damages the court added $40,000 in punitive damages for copyright infringement in a case involving Louis Vuitton products, $100,000;16 and in a case involving Microsoft products, the court awarded the maximum $20,000 statutory damage amount per infringement, which added up to $500,000, and then added $200,000 of punitive damages.17 The Canadian dollar now being serious currency, these are real amounts. Of course, I know these may not seem high by U.S. standards, but, still, it’s a change in our intellectual property picture. Finally, the Federal Court of Appeal confirmed a prior decision that prevented the Copyright Board from certifying a private copying levy on digital audio recorders or the memory permanently embedded in those recorders. I’m sure other members of the panel will tell you more about that. Thank you very much.

11 Id. ¶ 56 (Fish J.: “Without so deciding, I express grave doubt whether the law governing the protection of intellectual property rights in Canada can be transformed in this way into an instrument of trade control not contemplated by the Copyright Act.”). 12 CBS UK v. Charmdale, [1980] F.S.R. 289. 13 Council Directive 2001/29, The Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10 (EC). 14 Copyright Act 1968 (as last amended by the Copyright (World Trade Organization Amendments) Act 1994) (No. 149 of 1994), available at http://www.wipo.int/clea/en/text_html.jsp?lang=EN&id=275. 15 Quality King Distribs., Inc. v. L’Anza Research Int’l, 523 U.S. 135 (1998). 16 Louis Vuitton Malletier, S.A. v. Yang, 2007 F.C. 1179, available at http://decisions.fct-cf.gc.ca/ en/2007/2007fc1179/2007fc1179.pdf. 17 Microsoft Corp. v. 9038-3746 Quebec Inc., 2007 F.C. 659, available at http://decisions.fct-cf.gc.ca/ en/2007/2007fc659/2007fc659.html.

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PROF. BURRELL: Now Justice William Vancise, Chairman of the Copyright Board of

Canada.

Reasons — Because I Said So — Not Good Enough — but What Is? William Vancise*

Two recent decisions of the Federal Court of Appeal, the first remitting a matter to the Copyright Board to explain why it had fixed a tariff at a particular rate, the second which was characterized by one journalist as “seven brusque paragraphs,”18 caused me to examine the issue of the adequacy of reasons. The position of the Court in these two cases seems on its face contradictory. It smacks of two weights — two measures. If an administrative tribunal is required to explain how it arrived at a particular rate — something within its discretion in its home territory and expertise — does a reviewing tribunal have any less of an obligation? Is it enough to say we decided this in a previous case when the issue is whether the question was ever raised in the first place?19 I will begin this paper by exploring the sources of the duty to provide reasons in a Canadian context. I will then provide an overview of the principles governing the scope of this obligation. Thereafter, I will discuss how these principles translate in the context of the Copyright Board’s decisions. Finally, I will share with you my concern about the level of deference currently being afforded to decisions of administrative tribunals under the Canadian law and expose my reasons why. I. THE SOURCES OF THE DUTY TO PROVIDE REASONS

Although some administrative tribunals were, and continue to be, obligated by law to provide reasons, traditionally those that failed to do so did not necessarily breach the common law principles of natural justice or procedural fairness. While desirable, reasons were not necessary.20 In Baker v. Canada (Minister of Citizenship and Immigration),21 however, the Supreme Court of Canada changed that position and found that administrative tribunals were required to provide reasons based on the principles of natural justice and procedural fairness. That requirement was contingent on the following non-exhaustive factors: (1) (2)

The closeness of the administrative process to the judicial process;22 The nature of the statutory scheme and the “terms of the statute pursuant to which the body operates”;23 (3) The importance of the decision to the lives of those affected;24The legitimate expectations of the person challenging the decision;25 and

* Saskatchewan Court of Appeal, Chairman, Copyright Board of Canada. I would like to thank Mr. Mario Bouchard and Ms. Mélissa Lacroix for their assistance in researching and preparing this paper. 18 The decision in question was Apple Can. Inc. v. Canadian Private Copying Collective, 2008 F.C.A. 9, available at http://decisions.fca-caf.gc.ca/en/2008/2008fca9/2008fca9.html. 19 Id. 20 Northwestern Utils. Ltd. v. Edmonton, [1979] 1 S.C.R. 684, 706. 21 [1999] 2 S.C.R. 817, at paras. 23–27. 22 Knight v. Indian Head Sch. Div. No.19, [1990] 1 S.C.R. 653. 23 Old St. Boniface Residents Ass’n Inc. v. Winnipeg (City), [1990] 3 S.C.R. 1170. 24 Kane v. Bd. of Governors of the Univ. of British Columbia, [1980] 1 S.C.R. 1105, at 1113. 25 Canada (Att’y Gen.) v. Human Rights Trib. Panel (Can.), (1994) 76 F.T.R. 15.

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The choices of procedure made by the agency itself, particularly when the discretion or the expertise of the agency is at play.26

In Baker L’Heureux-Dubé J. examined the obligation to provide reasons for a decision dealing with an application to reverse a deportation order on humanitarian and compassionate grounds. Ms. Baker, a native of Jamaica, entered Canada on a visitor’s visa in 1981. She stayed and did not apply for permanent resident status. She gave birth to four children while in Canada, two of whom were still dependants. She suffered from significant medical problems and was likely to be a drain on the Canadian medical system. She was ordered deported by the Ministry of Citizenship and Immigration and thereafter applied for an exemption on humanitarian and compassionate grounds. The Ministry refused her application on the basis that there was insufficient grounds to warrant processing her application for permanent resident status. Ms. Baker appealed the Ministry’s decision on a number of grounds, including denial of procedural fairness for failure to give reasons for the decision refusing her application. L’Heureux-Dubé J. found the application of the doctrine of procedural fairness can be triggered when an administrative decision affects the rights, privileges or interests of an individual. This included the review of immigration decisions respecting on humanitarian and compassionate grounds. She emphasized that the underlying purpose of the participatory right is to ensure that administrative decisions are made using a fair and open procedure appropriate to the decision and the statutory and social context of the statute.27 Accordingly, the content or extent of the duty of procedural fairness is flexible and variable and must be decided in each individual case.28 Having established that in the circumstances a duty of fairness was owed to Ms. Baker, L’Heureux-Dubé J. turned to the obligation to give reasons. While acknowledging that the Federal Court of Appeal had previously refused to recognize a common law right to reasons in a similar immigration context,29 she also took note of favorable developments occurring in English case law.30 She dismissed the concern that an obligation to give reasons would impose an inappropriate burden on administrative tribunals and delay the administration of justice and noted that reasons allow parties to see that the relevant issues have been considered and are essential to appeals or judicial reviews. She held in unambiguous terms that “in certain circumstances” the duty of procedural fairness will require that the provision of a written explanation, particularly where the decision has important significance for the individual or when there is a right of appeal.31 Since Baker, the circumstances giving rise to a common law right to reasons have expanded.32 As cynicism and institutional distrust seems to have firmly taken its roots in this era of “inquiries,” reasons will undoubtedly become a frequent component of the duty of fairness to which individuals will be deemed entitled. Described as a salutary obligation which “reduces to a considerable degree the chances of arbitrary or capricious decisions, reinforces public confidence in the judgment and fairness of administrative tribunals... ,”33 it is now clear that IWA v. Consol. Bathurst Packaging Ltd., [1990] 1 S.C.R. 282. Baker, 2 S.C.R. 817, ¶ 22. 28 See Knight, 1 S.C.R. 653. 29 Shah v. Minister of Employment & Immigration, (1994) 170 N.R. 238 (F.C.A.). 30 R. v. Civil Serv. App. Bd., ex parte Cunningham, [1991] 4 All E.R. 310 (C.A.) (wherein reasons were required of a board deciding the appeal of the dismissal of a prison official); R. v. Secretary of State for the Home Dep’t, ex parte Doody, [1994] 1 A.C. 531 (wherein a duty to give reasons was imposed on the Home Secretary when exercising the statutory discretion to decide on the period of imprisonment that a prisoner who had been imposed a life sentence should serve before being entitled to a review); Norton Tool Co. v. Tewson, [1973] 1 W.L.R. 45 (N.I.R.C.), at 49; Alexander Mach’y (Dudley) Ltd. v. Crabtree, [1974] I.C.R. 120 (N.I.R.C.) (which stood for the proposition that reasons are required at common law when there is a statutory right of appeal). 31 Baker, 2 S.C.R. 817, ¶ 43. 32 Prud’homme v. Prudhomme, [2002] 4 S.C.R. 663, ¶ 23; Congrégation des témoins de, [2004] 2 S.C.R. 650, ¶ 13. 33 Northwestern Utils. Ltd. v. Edmonton, [1979] 1 S.C.R. 684, 706. 26 27

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“because I said so” will not discharge an administrative tribunal’s duty to provide reasons. So then what will? II. WHAT ARE ADEQUATE REASONS?

In the seminal case Northwest Utilities,34 Estey J., dealing with a statutory obligation to give reasons, held that it was it is not sufficient “to assert, or more accurately, to recite, the facts that evidence and arguments led by the parties had been considered … that much is expected.”35 He stated that reasons were desirable to avoid arbitrary and capricious decisions. It has since proved difficult to formulate a specific test of adequacy due to “the number of purposes served by a requirement of reasons and the range of decision makers subject to the duty of providing reasons.”36 Whether a decision maker will be said to have adequately set these out or not will ultimately be determined in light of all the circumstances of each case.37 Accordingly, when determining the adequacy of reasons, a reviewing court should not examine them in isolation, but in the context that the administrative body made the decision.38 For instance, the Court should look at the representations made at the hearing, the nature of the issues under appeal, the record of the proceedings, and any applicable statutes or regulations.39 A review of the case law suggests that generally speaking, a decision maker must set out in its reasons: (1) its findings of fact; (2) the evidence upon which it has drawn the findings of fact; (3) the major points in issue; and (4) its reasoning process, which should reflect consideration of the main relevant factors.40 It is also well accepted that administrative tribunals are not held to “some abstract standard of perfection.”41 Indeed, it has been acknowledged that “the reasons of administrative bodies should not be scrutinized with the same scrupulous attention to detail as the reasons of a court.”42 It follows that in discharging its duty to provide reasons a tribunal is not required to refer to all of the evidence and the arguments advanced by the parties or specify which standard of proof was applied.43 While it will sometimes be acceptable for a decision maker not 34

Id. Id. at 706–07. 36 Donald J.M. Brown & John M. Evans, Judicial Review of Administrative Action in Canada 12–78 (loose-leaf ed. 2007). 37 Congrégation des témoins de Jéhovah de St-Jérome-Lafontaine v. Lafontaine (Village), [2004] 2 S.C.R. 650, ¶ 12:5320; VIA Rail Can. Inc. v. National Transp. Agency, [2001] 2 F.C. 25 (C.A), ¶¶ 17–22. 38 Lor-al Springs Ltd. v. Ponoka County Subdiv. & Dev. App. Bd. (2000), [2001] 271 A.R. 149, ¶¶ 14–15; Keephills Aggregate Co. Ltd. v. Parkland (County of) Subdiv. & App. Bd. (2003), [2004] 348 A.R. 41, ¶ 24; Couillard v. Edmonton (City), (1979) 10 Alta. L.R. (2d) 295, 303 (C.A.); Rogers v. Strathcona (County) Dev. App. Bd., [1979] A.J. No. 370 (C.A.), online QL (AJ), ¶ 10. 39 Couillard, 10 Alta. L.R. (2d) 295, ¶ 303; Rogers, A.J. No. 370 (C.A.), online QL (AJ), ¶ 10. 40 Suresh v. Canada (Minister of Citizenship & Immigration), [2000] 2 F.C. 592, 637, 687–88 (C.A.), cited in VIA Rail, 2 F.C. 25 (C.A), ¶ 22; Gray v. Ontario (Disability Support Program, Dir.), (2002) 59 O.R. (3d) 364 (C.A.); Megens v. Ontario Racing Comm’n, (2003) 225 D.L.R. (4th) 757, ¶ 14; Harley v. Employment & Assistance App. Trib., 2006 BCSC 1420 (CanLII), ¶¶ 39, 45; Slawik v. Manitoba (Workers’ Compensation Bd.), (2006) 205 Man. R. (2d) 124, ¶ 23. A couple of cases have also succinctly set out the test for adequate reasons. See Lor-al Springs, 71 A.R. 149, ¶¶ 14–15; Keephills Aggregate, 348 A.R. 41, ¶ 24. 41 Ahmed v. Canada (Minister of Citizenship & Immigration), (2002) 225 F.T.R. 215, ¶ 13, cited in Hernando Paez v. Canada (Citizenship and Immigration), 2008 FC 204, at para. 25; Baker, 2 S.C.R. 817, ¶ 40. 42 Megens, 225 D.L.R. (4th) 757, ¶ 13. 43 Tsai v. Human Rights Comm’n (Canada), (1988) 91 N.R. 374 (F.C.A.); Lever v. Canadian Human Rights Comm’n, (1988) 10 C.H.R.R. D-6488 (F.C.A.); Slawik, (2006) 205 Man. R. (2d) 124, ¶¶ 28–29; Jaworski v. Canada (Att’y Gen.), (1998) 149 F.T.R. 184 (T.D.); Zang v. Canada (Citizenship & Immigration), 2006 FC 1381 (T.D.); Cepeda-Gutierrez v. Canada (Minister of Citizenship & Immigration), (1998) 157 F.T.R. 35, ¶¶ 16–17 (T.D.); Ozdemir v. Canada (Minister of Citizenship & Immigration), (2001) 215 F.T.R. 32, ¶¶ 9–10 (C.A.); Brown & Evans, supra note 36, at 12–81; 3 Robert W. Macaulay & James L.H. Sprague, Practice and Procedure Before Administrative Tribunal, 22-78.7 (2004). 35

70 CHAPTER IV: COPYRIGHT LAW to elaborate in detail on its rationale for arriving at a given conclusion, in other circumstances more details of the chain of reasoning and the evidence considered will be necessary. A reviewing court must be satisfied that the decision maker’s analysis of the evidence “must be such as to enable the parties and, on judicial review, the Court to understand how the Board reached its decision. Furthermore, the Court must be in a position to assess whether the Board understood the state of the law and whether it applied it to the facts of the case.”44 In other words, “the reasons must be ‘sufficiently clear, precise and intelligible’ to enable the individual [and the Court] to know why the tribunal decided as it did.”45 It follows that succinct reasons will be quite acceptable where a party appears before a tribunal in attempt to make “an improved kick at the can.”46 In such circumstances, it has been found that as long as the record clearly conveys that the tribunal came to grips with the evidence, explained why it did not accept the evidence, and that its factual conclusions are supported by the record, the reasons will be deemed adequate.47 Similarly, if as a result of “an intimate involvement in the process leading to the decision, a person understands, or has the means to understand the reason for the decision, the duty to give reasons will vary accordingly.”48 The importance of the evidence to the decision and whether the reasons adequately demonstrate that the person’s claim was properly considered will ultimately determine whether or not reasons are adequate.49 Where an administrative tribunal, rather than analyzing the law and the evidence in any meaningful way, simply relates the evidence and then immediately states its conclusion, the reasons will be deemed insufficient.50 Similarly, reasons have also been found inadequate where a tribunal merely quoted the language of the statute in arriving at its decision or recited the types of evidence considered together with a conclusion.51 For example, where the decision rests on an interpretation of a term or concept that is relative by nature, comparative indicators may be required to properly set out the reasoning process.52 The courts have also quashed decisions when the reasons did not mention documentary evidence “specific to and corroborative of an applicant’s allegations.”53 It goes without saying that a more onerous burden is imposed when credibility is in issue.54 When a decision 44 Brown & Evans, supra note 36, at 12–76, 77; Macaulay & Sprague, supra note 43, at 22-78.4; Northwestern Utilities, 1 S.C.R. 684, 706; Whiteley v. Canada (Minister of Social Dev.), 2006 FCA 72, ¶ 2; Kemping v. British Columbia College of Teachers, (2004) 31 C.C.E.L. (3d) 234 (BCSC), aff’d, (2005) 255 D.L.R. (4th) 169 (BCCA), leave to appeal to SCC ref’d, [2005] S.C.C.A. No. 381; Boyle v. New Brunswick (Workplace Health, Safety & Compensation Comm’n), (1996) 39 Admin. L.R. (2d) 150, 156, cited in Megens, 225 D.L.R. (4th) 757, ¶17; Harley, 2006 BCSC 1420 (CanLII), ¶¶ 27–28. Some cases suggest that where a great deal of deference is to be afforded to a tribunal’s decision, it is even more critical that clear and intelligible reasons are provided; see, e.g., Sinnathamby v. Canada (Minister of Citizenship and Immigration), (2005) 29 Admin. L.R. (4th) 65 (FC). 45 Brown & Evans, supra note 36, at 12–77 n.349. 46 FWS Joint Sports Claimants Inc. v. Border Broadcasters Inc., (2001) 16 C.P.R. (4th) 61 (FCA), ¶¶ 18–19. 47 Id. 48 Gardner v. Canada (Att’y Gen.), [2005] 339 N.R. 91 (FCA), leave to appeal to the S.C.C. ref’d, [2005] S.C.C.A. No. 480. 49 Macaulay & Sprague, supra note 43 at 22-78.15. 50 Whiteley, 2006 FCA 72, ¶ 4; Northwestern Utilities, [1979] 1 S.C.R. 684, 706; Harley, 2006 BCSC 1420 (CanLII), ¶ 54; O’Donnell v. New Brunswick (Workplace Health, Safety & Compensation Commission), (1997) 183 N.B.R. (2d) 397, (C.A.); MacKenzie v. LeBlanc, 2007 BCSC 768 (B.C.S.C.). 51 Kidd v. Greater Toronto Airports Auth., (2004) 252 F.T.R. 277 (T.D.) (where the court referred, in contrast to Maclean v. Marine Atl. Inc., [2003] F.C.J. No. 1854 (F.C.) (QL); Daneshwar v. Canada (National Dental Examining Bd.), (2002) 43 Admin. L.R. (3d) 256 (Ont. Div. Ct.); Whiteley, 2006 FCA 72. 52 VIA Rail, 2001 2 F.C. 25 (C.A.), ¶¶ 38–46. 53 Jones v. Canada (Att’y Gen.), (2005) 273, F.T.R. 309; N.S.T.U. v. Nova Scotia Cmty. Coll. (2006), 265 D.L.R. (4th) 288 (NSCA). 54 Harley, 2006 BCSC 1420 (CanLII), ¶¶ 41–42 (citing Re Pitts and Director of Family Benefits Branch of the Ministry of Cmty. & Social Servs., (1985) 51 O.R. (2d) 302 (Ont. H.C.), at 310–11); Brown & Evans, supra note 36, at 12–84.

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maker contradicts or rejects the report of an investigator or the testimony of a witness, a clear explanation for accepting or not accepting the evidence will normally be required.55 The underlying purpose is to avoid the perception of arbitrariness.56 In absence of a specific test, the comments of Nadon J.A. in Giannaros v. Canada (Minister of Social Development),57 which refers to his previous decision in Doucette v. Minister of Human Resources and Development,58 clearly express the flexibility with which the adequacy of an administrative tribunal’s decision should be assessed: [11] It is obvious that the Board could have explained its reasoning more fully, but one can nonetheless discern the Board’s reasoning from the language it has used. Consequently, as I am satisfied that the Board’s reasons allow us to exercise our review function, I have no difficulty concluding that they are adequate. [12] To conclude on this point, I would add that our Court, like other courts of appeal, must be mindful of Binnie J.’s remarks in Sheppard, supra, that we should not intervene because we are of the opinion that the courts below failed to express themselves in a way acceptable to us. The reasons under review should be fairly considered and in performing that exercise, we should, as Binnie J. suggests, examine the record on which the decision under review is based. We must guard ourselves from being too eager to conclude that reasons do not pass muster. [10] Whether one agrees or not with the Board’s reasons, they are, in my view, sufficiently developed for us to fully understand why it reached the conclusion that it did. III. THE APPROPRIATE STANDARD OF REVIEW

In Canada the standard of review applicable to judicial review of an administrative tribunal’s decision has recently been clarified by the Supreme Court of Canada in Dunsmuir v. New Brunswick.59 There the majority, under the joint authorship of Bastarache and LeBel JJ, determined that the function of judicial review is “to ensure the legality, the reasonableness and the fairness of the administrative process and its outcomes.”60 They found the process of judicial review involves two steps. The first is to determine whether the jurisprudence has already determined in a satisfactory manner the degree of deference to accord to a particular category of question. Second, where the first inquiry does not provide the answer, the courts must proceed to an analysis of the relevant factors to identify the appropriate standard of review. The analysis must be contextual and the courts are to consider the following relevant factors: (1) the presence or absence of a privative clause; (2) the purpose of the tribunal as determined by interpretation of enabling legislation; (3) the nature of the question at issue; and, (4) the expertise of the tribunal. It will not be necessary to consider all these factors in every case.61 In Dunsmuir the Supreme Court of Canada defined reasonableness as: [47] … a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions. A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, 55 Harley, 2006 BCSC 1420 (CanLII), ¶¶ 41–42; Kidd, (2004) 252 F.T.R. 277 (T.D.), ¶¶ 21–23; Megens, 225 D.L.R. (4th) 757, ¶ 29; see also Brown & Evans, supra note 36, at 12–84. 56 Harley, 2006 BCSC 1420 (CanLII), ¶ 42. 57 2005 FCA 187 (CanLII). 58 2004 FCA 292, ¶¶ 11–12. 59 2008 SCC 9. 60 Id. at para. 28. 61 Id. at paras 63–64.

72 CHAPTER IV: COPYRIGHT LAW transparency and intelligibility within the decision making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law. […] [49] Deference in the context of the reasonableness standard therefore implies that courts will give due consideration to the determinations of decision makers. As Mullan explains, a policy of deference “recognizes the reality that, in many instances, those working day to day in the implementation of frequently complex administrative schemes have or will develop a considerable degree of expertise or field sensitivity to the imperatives and nuances of the legislative regime.” D. J. Mullan, “Establishing the Standard of Review: The Struggle for Complexity?” (2004), 17 C.J.A.L.P. 59, at p. 93. In short, deference requires respect for the legislative choices to leave some matters in the hands of administrative decision makers, for the processes and determinations that draw on particular expertise and experiences, and for the different roles of the courts and administrative bodies within the Canadian constitutional system.

The Supreme Court defined correctness as follows: [50][…] When applying the correctness standard, a reviewing court will not show deference to the decision maker’s reasoning process; it will rather undertake its own analysis of the question. The analysis will bring the court to decide whether it agrees with the determination of the decision maker; if not, the court will substitute its own view and provide the correct answer. From the outset, the court must ask whether the tribunal’s decision was correct.62

The adequacy of reasons is not, however, determined on the basis of the standard of correctness or reasonableness. It is, rather, determined by the principles of procedural fairness. As the majority in Dunsmuir noted, “procedural fairness is the cornerstone of modern Canadian administrative law. Public decision makers are to act fairly in coming to decisions that affect the rights, privileges or interests of an individual.”63 Confusion as to the applicable standard of review may arise when dealing with the question of inadequate reasons. This confusion stems from the fact that when assessing a decision on the basis of “reasonableness,” a reviewing court must also look at the reasons of a tribunal. However, in such circumstances, it is not assessing their adequacy; it is rather determining whether or not the reasons “fall within a range of possible outcomes.”64 Hence, it is not the manner in which the decision maker went about making his decision that is under review; it is rather the outcome of the deliberations.65 The object of the analysis will thus affect the degree of deference at play. Normally, when an applicant attacks a tribunal’s outcome or the decision itself, the court will allow the application for judicial review only if it finds that the decision is devoid of “justification, transparency and intelligibility within the decision making process” and if it falls beyond “a range of possible, acceptable outcomes which are defensible in respect of the facts and law.”66 In my opinion, this analytical framework is flawed, particularly where decisions of specialized tribunals empowered by a policy-laden statute are concerned. Reviewing courts generally afford a relatively high level of deference to the decisions of such tribunals in recognition of their expertise and the mandate that has been conferred on them by the Legislature. 62 Baker, 2 S.C.R. 817; Moreau-Bérubé v. New Brunswick (Judicial Council), [2002] 1 S.C.R. 249, at para. 74; Gray, (2002) 59 O.R. (3d) 364 (C.A.), at para. 26, where the court qualifies the question as an error of law rather than jurisdiction, which ultimately amounts to the same standard of review; Harley, 2006 BCSC 1420 (CanLII), ¶ 60; Megens, (2003) 225 D.L.R. (4th) 757, ¶ 12. 63 Dunsmuir, 2008 SCC 9, ¶ 79. 64 Id. at para. 47; see also Histed v. Law Soc’y of Manitoba, (2006), 274 D.L.R. (4th) 326; Walsh v. Law Soc’y of Manitoba, (2006) 212 Man. R. (2) 5, ¶¶ 4–5; Law Soc’y of New Brunswick v. Ryan, [2003] 1 S.C.R. 247. 65 Binnie, J., in C.U.P.E. v. Ontario (Minister of Labour), [2003] 1 S.C.R. 539, ¶¶ 102–03, commented on this point. 66 Dunsmuir, 2008 SCC 9, ¶ 47.

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It follows that by opening the possibility of bypassing the deference owed to such tribunals’ reasons in the context of a fairness analysis, reviewing courts are providing parties a method of attacking an otherwise reasonable decision which should be accorded deference. Courts should only intervene when the reasons taken as a whole are not tenable and cannot support the decision. One is reminded of the admonition of Dickson J. (as he then was) not to lightly brand as jurisdictional that which is not jurisdictional so as to permit intervention and the substitution of a court’s opinion for that of the administrative decision maker. Courts should take care not to brand as insufficient reasons that are otherwise reasonable. Dunsmuir involved the firing of a public office holder. Mr. Dunsmuir had alleged he had not received adequate reasons for his dismissal but in the end nothing turned on that issue. It is not necessary for our purposes to review that analysis. Suffice it to say that there is an obligation under procedural fairness and indeed a statutory obligation to provide reasons. But to undermine the deference owed to specialized and expert tribunals on the basis that the reasons, in the absence of relevant cogent evidence, did not adequately explain the finding, seems to me to fly in the face of the deference owed to the decisions of these tribunals and the fundamental reason why the system of administrative decision making was created. Let me now turn to how these principles have translated in the context of the Copyright Board’s decision. In doing so, I will examine three fairly recent decisions of the Federal Court of Appeal in light of other decisions dealing more generally with the questions of damages resulting from copyright infringement. IV. ADEQUATE REASONS IN THE CONTEXT OF THE COPYRIGHT BOARD DECISIONS

When setting tariffs, the Copyright Board of Canada is required by law to provide reasons. Paragraph 68(4)(b) of the Copyright Act67 provides that “The Board shall … send a copy of each approved tariff, together with the reasons for the Board’s decision, to each collective society that filed a proposed tariff and to any person who filed an objection.” According to the principles discussed earlier, “because I said so” or “trust us, we know better” will not suffice to fulfill the Board’s duty to provide reasons. It follows that it must provide reasons that are “sufficiently clear, precise and intelligible to enable the individual [and the Court] to know why the tribunal decided as it did.” If there are “tenable reasons,” the prevailing view is that “[e]ssentially, it is agreed that a royalty rate set by the Board in the exercise of its broad statutory discretion is subject to review only on the ground of patent unreasonableness [now reasonableness].”68 Before turning specifically to some of the decisions of the Federal Court of Appeal reviewing the Copyright Board’s decision, it will be helpful to keep in mind that the Supreme Court of Canada, in Dunsmuir, just re-labeled the pragmatic and functional approach that the courts had used since 1988 as the “standard of review analysis.69 Whether this change is significant remains to be seen. As Binnie J. noted in separate reasons in Dunsmuir “that which we call a rose, by any other name would smell as sweet.”70 There is a reasonable argument that while the term has been banished, the approach, like cheap perfume, lingers on. Therefore, while the underpinnings of that approach are found in the earlier decisions, the language used by the reviewing court may differ but the concept is constant or as constant anything in this area is. R.S.C. 1985, c. C-42. Réseaux Premier Choix Inc. v. Canadian Cable Television Ass’n, 1997 CanLII 6313 (C.A.F.), ¶¶ 15–17; Society of Composers, Authors & Music Publishers of Can. v. Canadian Ass’n of Broadcasters, (1999) 1 C.P.R. (4th) 80 (F.C.A.) [hereinafter SOCAN v. CAB-1999]. 69 U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048. 70 William Shakespeare, Romeo and Juliet act 2, sc. 1. 67 68

74 CHAPTER IV: COPYRIGHT LAW In Réseaux Premier Choix71 the question before the Federal Court of Appeal was whether the Copyright Board erred by refusing to extend a 15 percent discount granted to Canadian specialty cable services to Canadian pay and American specialty services. Looking first at the appropriate standard of review, the court noted that the Board was an administrative tribunal charged with resolving complex technical issues and, accordingly, its decision should be given considerable weight.72 After considering the relevant factors, the Court applied the patently unreasonable standard of review (now reasonableness) and dismissed the application after summarily reviewing the Board’s reasons for granting the discount to some services but not of all. In this case, the Court reviewed the Board’s reasons to determine if the Board’s interpretation of its own jurisdiction, or its scope rather, was irrational or patently unreasonable. Hence, it was the outcome itself that the applicants were challenging and not the process by which the decision came to fruition. The reasons of the Board were also scrutinized in SOCAN v. CAB-1999.73 There, the Court had to decide, among other things, whether the Board had acted unreasonably in reducing by 15 percent the commercial television stations’ performing rights tariff. In deciding the issue, the Federal Court of Appeal once again applied the “patently unreasonable” standard of review, as the issue “is squarely within the Board’s statutory mandate and expertise to consider which factors are relevant to tariff-setting.”74 Once again, the Board’s decision was entitled to a high degree of deference because it was the outcome of the decision that was being challenged and not the adequacy of the reasons. The reasons served to assess the logic of the reasoning in light of the evidence and the law as opposed to their sufficiency. In this case, the Court of Appeal once again followed the approach that “[t]he Board properly understood its function when it stated that it had to regulate the balance of market power between owners and users.”75 In 2001 the Federal Court of Appeal once again examined the reasons of the Board in the matter FWS Joint Sports Claimants Inc. v. Border Broadcasters Inc.76 FWS, a collective that administers the retransmission rights of four professional sports leagues, was dissatisfied with the share of the royalties the Board had allocated to it. Even though the collective was dissatisfied with the outcome itself, it also claimed that the Board had committed an error in not examining some evidence. In their reasons, the Federal Court of Appeal did not address the standard of review applicable to questions relating to inadequacy of reasons. The Court noted that the Board (1) addressed the evidence, “albeit somewhat briefly,” and (2) provided a number of justifications as to why it rejects the evidence submitted. The Court, given the circumstances, was satisfied that the applicant was able to understand why the Board had reached the decision it had: [18] In evaluating the adequacy of the Board’s reasons, and in determining whether it can be inferred from them that the Board’s findings were made in a perverse or arbitrary manner, or without regard to the material before it, we have noted that this is the third time that FWS has made similar arguments to the Board, albeit with somewhat different evidence, and attempted to persuade it to adopt other measures for determining the value of sports programmes to cable companies. It is appropriate to read the relatively brief treatment of FWS’ evidence in light of the fact that FWS was taking what one of its witnesses aptly called, “an improved kick at the can.” Finally, although legally inadequate reasons cannot be cured by reference to the transcript, we would note that it is apparent from the discussions between Board members and the witnesses that the Board came to grips with their evidence Réseaux Premier Choix Inc. v. Canadian Cable Television Ass’n, 1997 CanLII 6313 (C.A.F.). Id. ¶ 10. 73 SOCAN v. CAB-1999, (1999) 1 C.P.R. (4th) 80 (F.C.A.). 74 Id. ¶ 6. 75 Canadian Ass’n of Broadcasters v. Society of Composers, Authors and Music Publishers of Can., (1994) 58 C.P.R. (3d) 190, 196g (FCA) (hereinafter CAB v. SOCAN-1994). 71 72

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[19] In all the circumstances, we are satisfied that, while not necessarily addressing every item of evidence in great depth or, in some instances, at all, the Board’s reasons adequately explain why it did not accept FWS’ approach or its evidence, and that its factual conclusions are supported by the record.

The reasons of the Federal Court of Appeal supports the legal proposition that administrative boards are not bound to perfection and may omit some evidence or arguments, as long as the applicants and the courts are able to properly understand the reasoning underlying its decision. The succinct discussion of the evidence did not preclude such understanding. The Court, in essence, did what the Supreme Court said it should do in Council of Canadians with Disabilities v. Via Rail,77 that is, determine whether the reasons taken as a whole are tenable as support for the decision.78 Now let me turn to the decision in Canadian Association of Broadcasters v. Society of Composers, Authors and Music Publishers of Canada.79 In the decision under the review, the Board had decided to increase the performing rights royalties of the larger commercial radio stations from 3.2 to 4.4 percent based on three reasons: (1) the value of music to radio was more than the Board had previously thought; (2) radio used more music than in the past; and (3) radio used music to create efficiencies that should be shared with composers. The Board used hard data to assess the second increase, but not the first or the third, as no such data was available on the record. Instead, the Board determined two ranges or reasonable outcomes and then selected a number within those ranges. The Federal Court of Appeal found that the royalty rate set by the Board in the exercise of its broad statutory discretion was subject to review only on the ground that the decision was patently unreasonable but then inexplicably found that the royalty increase warranted intervention by reason that the Board had failed to adequately explain how it arrived at the value of music in deciding the increased royalty. The matter was remitted to the Board to “redetermine the issues in respect of which the reasons have been found to be inadequate.” Interestingly, the Federal Court of Appeal characterized the question of “inadequacy of the reasons” under the umbrella of denial of procedural fairness only after having noted that the decision of the Board was entitled to the highest degree of deference. Significantly, the CAB, which had filed for judicial review, had failed to provide to the Board any relevant or cogent evidence on the value of music and yet, complained that in could not understand how the Board arrived at the value it placed on music. With respect to the issue of inadequate reasons for the findings respecting the reduction of the tariffs, the Court relied on its own decision in VIA Rail80 to find that it was not sufficient for the Board to justify its quantification by merely referring to evidence taken as a whole. The Court held that: “Adequacy” is to be assessed in light of the functions performed by reasons: enhancing the quality of decisions, assuring the parties that their submissions have been considered, enabling the decision to be subject to a meaningful judicial review, and providing future guidance to regulates. ... Equally important, the adequacy of the reasons must be assessed in context, including the agency’s record, the issues to which the reasons relate, and the scope of the agency’s expertise.81

The applicants, by packaging the question as one of procedural fairness, succeeded in having the Court become preoccupied with finding the “chain of reasoning” that could justify the two findings in question. The Court should have appreciated, as it had in past decisions, that FWS Joint Sports Claimants Inc.v. Border Broadcasters Inc., (2001) 16 C.P.R. (4th) 61 (FCA). [2007] 1 S.C.R. 650. 78 Id. ¶ 103. 79 (2006) 54 C.P.R. (4th) 15 (FCA) (hereinafter CAB v. SOCAN-2006). 80 VIA Rail, [2001] 2 F.C. 25 (C.A), ¶¶ 17–22. 81 CAB v. SOCAN-2006, 6254 C.P.R. (4th) 15 (FCA), ¶ 11. 76 77

76 CHAPTER IV: COPYRIGHT LAW questions of tariff-setting fell “squarely on [the Board’s] home territory” and should only be interfered with in the presence of untenable reasons. Unsurprisingly, given the paucity of evidence offered by the CAB, the Court was unable to identify a chain of reasoning to justify the percentage change in the tariffs and as a result found the reasons inadequate. The Court should have recognized that this was once again: a case where there are no useful proxies available to the Board. At most, there were a variety of marginally relevant indicators, all of which nevertheless serve to establish a “comfort zone” within which the Board, given all the circumstances, is able to exercise its discretion in setting the tariff… this is a case where tariff making involves looking at the characteristics of the industry and trying to figure out what makes sense at the time. In doing so, the Board will keep in mind its raison d’être … to balance the competing interests of copyright owners and users.82

I would argue that the rationale of the Federal Court of Appeal to find the reasons inadequate were more stringent than the rational for determining the adequacy of reasons as described by the Supreme Court of Canada in Council of Canadians with Disabilities, where the majority stated: 103 But whatever label is used to describe the requisite standard of reasonableness, a reviewing court should defer where “the reasons, taken as a whole, are tenable as support for the decision” (Ryan, at para. 56) or “where … the decision of that tribunal [could] be sustained on any reasonable interpretation of the facts or of the law” (National Corn Growers Assn. v. Canada (Import Tribunal), 1990 CanLII 49 (S.C.C.), [1990] 2 S.C.R. 1324, at pp. 1369–70, per Gonthier J.). The “immediacy or obviousness” to a reviewing court of a defective strand in the analysis is not, in the face of the inevitable subjectivity involved, a reliable guide to whether a given decision is untenable or evidences an unreasonable interpretation of the facts or law. 104 As Wilson J. recognized in National Corn Growers, at pp. 1347–48, it is the way a tribunal understands the question its enabling legislation asks it to answer and the factors it is to consider, rather than the specific answer a tribunal arrives at, that should be the focus of a reviewing court’s inquiry: [O]ne must begin with the question whether the tribunal’s interpretation of the provisions in its constitutive legislation that define the way it is to set about answering particular questions is patently unreasonable. If the tribunal has not interpreted its constitutive statute in a patently unreasonable fashion, the courts must not then proceed to a wide ranging review of whether the tribunal’s conclusions are unreasonable. To engage in a wide-ranging review of a tribunal’s specific conclusions when its interpretation of its constitutive statute cannot be said to be irrational, or unreasonable, would be an unwarranted trespass into the realm of reweighing and re-assessing evidence. Where an expert and specialized tribunal ha[ve] charted an appropriate analytical course for itself, with reasons that serve as a rational guide, reviewing courts should not lightly interfere with its interpretation and application of its enabling legislation.

One can argue, following Voice Construction Ltd .v. Construction and General Workers’ Union, Local 92,83 that the reasonableness of a decision is to be assessed not by attacking each facet of the decision one by one but by looking at the decision as a whole. As long as the decision rendered falls within a zone of reasonableness, the courts should not interfere. Asking a decision maker acting within its area of expertise to justify its choice of a figure that clearly falls within a zone of reasonableness would appear to contradict both Voice Construction and Council of Canadians with Disabilities. I would argue that the comments of the majority in Council of Canadians with Disabilities clearly indicate that the reasons are not written for the reviewing court but for the parties. 82 SOCAN/NRCC — Pay Audio Services for the Years 1997 to 2002, at 13 (Mar. 15, 2002) (citing in support CAB v. SOCAN-1994, 8 C.P.R. (3d) 190, 196g (FCA)). 83 [2004]1 S.C.R. 609.

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It must examine the reasons having regard for the total context in which the reasons were rendered. The Court may have preferred different reasons but there was nothing to support a contention that the reasons were unreasonable.84 As the majority in Council of Canadians with Disabilities noted, to engage in a wide ranging review of the tribunal’s specific conclusions when the interpretation of its constituent statute cannot be said to be unreasonable is an unwarranted trespass into reweighing and re-assessing the evidence. In my opinion, taken with its comments mandating deference when the “reasons taken as a whole are tenable support for the decision” is ample justification for not succumbing to what would be called in some milieux a “sucker punch.” Interestingly, in another context, courts are well aware that putting a dollar value on copyright or its infringement can prove difficult. In U&R Tax Services Ltd. v. H&R Block Canada Inc. 85 Richard J. (as he then was) stated: The Copyright Act does not permit the person who has infringed the copyright of the owner to escape a condemnation for damages merely because they are impossible or difficult to prove. Damages can be granted for breach of the Copyright Act without the necessity to prove them and if damages are difficult to assess or can not be evaluated. “… the tribunal must do the best it can, although it may be that the amount awarded will really be a matter of guesswork.”86

In the same vein, McLachlin J., (as she then was) stated in Slumber-Magic Adjustable Bed Co. Ltd. v. Sleep-King Adjustable Bed Co. Ltd. and TODD: This provision gives the court a much wider discretion in proving damages than exists in other branches of the law, recognizing, no doubt, the difficulty of proving precisely what loss of revenue has resulted from the defendant’s illegal use of the plaintiff’s business property. As stated by Spence J. in Standard Indust. Ltd. v. Rosen, [citation omitted]: “ … the inability to show exact damages does not bar the plaintiff’s recovery. It is perhaps the essence of such an action that the plaintiff would be unable to prove the actual incidence of deception …” […] I have considered whether there should be a reference to the registrar on damages in view of the uncertainties in the evidence on the matter. In my view, such a reference would not be of great assistance, given that the fundamental premise on which damages are determined — the amount of sales lost to the plaintiff and the amount of profit derived by the defendant from the publication of infringing work — cannot be precisely calculated. The determination of damages must, to a large extent, be a rough and ready one.87

Setting royalty rates is, if anything, even more a matter of guesswork. Insisting on too much specificity will sometimes result in increased expenses for parties, possibly with little or no benefit. It could also lead decision makers to construct, out of an abundance of caution, impenetrable mathematical edifices that few, if any, will comprehend. Hence, in finding that the Board failed to provide adequate reasons, the Court in CAB v. SOCAN-2006 overlooked, even if it acknowledged it in passing, that the Board did the best that it could with the information that it was provided. The Board is not an inquisitorial tribunal. It generally does not seek out evidence on which the parties seek to rely. It took a lot of chutzpah for the CAB, after it failed to provide the evidence, to complain to a reviewing Court that it could not understand the Board’s reasoning, which was based on the evidence it had. I am reminded of a child convicted of murdering his parents who sought clemency at sentencing on the basis that he was now an orphan! See the comments of Nadon, J., in Giannaros, 2005 FCA 187 (CanLII). (1995) 97 F.T.R. 259 at 272. 86 U&R Tax Servs. Ltd. v. H&R Block Can. Inc., (1995) 97 F.T.R. 259, 272, per Richard, J. (as he then was) (emphasis added). 87 Slumber-Magic Adjustable Bed Co. Ltd. v. Sleep-King Adjustable Bed Co. Ltd., [1985] 1 W.W.R. 113 at 120 (B.C.S.C.J.). 84 85

78 CHAPTER IV: COPYRIGHT LAW The analysis of the Federal Court of Appeal seems to confuse the two different purposes for which a reviewing court examines the reasons of a specialized tribunal. One is to assess the adequacy of reasons; the other is to assess whether or not the Board, in the exercise of its authority, rendered a decision that was reasonable. The case law subjects these different analyses to different standard of review. The Court referred to Law Society of New Brunswick v. Ryan88 on the issue of the adequacy of the reasons. At paragraph 16 of its decision it states: The Board is entitled to the greatest deference in the exercise of its discretion to set a rate and, accordingly, the discretionary decisions lying at the heart of its expertise are reviewable only for patent unreasonableness. However, it must explain the basis of its decisions in a manner that enables the Court on judicial review to determine on the basis of the reasons, read in context, whether the decision was rationally supportable. When an administrative tribunal’s decision is reviewable on a standard of reasonableness, its reasons are the central focus of a judicial review: Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247, 2003 SCC 20, at paras. 48–9, 54–5.

Yet Ryan involved a challenge on the result, not the fairness of the process. The Federal Court of Appeal, while applying the appropriate standard of review throughout all the decisions considered, fell into the trap against which Nadon J.A. warned reviewing courts! What is most fascinating about CAB v. SOCAN-2006 is that it may well have been decided per incuriam. During argument, the collectives argued that this was an issue of reasonableness, not adequacy of reasons. In support of this proposition, they relied on CAB v. SOCAN-1999. During argument, the 2006 panel, which comprised one member of the 1999 panel, asked the parties if the issue of adequacy of reasons was on the table in 1999. The parties could not answer and the 2006 Court acted as if it was not. Yet, an examination of the pleadings reveals that the issue of what are sufficient “reasons respecting the quantifications of royalty decreases” was raised in 1999, and that at that time the CAB argued against an examination of the sufficiency of the reasons. SOCAN then challenged each of the five reasons the Board had offered to justify lowering the rate SOCAN collects from commercial television stations. It also took issue with the fact that the Board had not offered any explanation whatsoever for setting the decrease at 15 percent. In its memorandum of argument, it stated: 38. The Board does not explain how each of the factors affects the royalties. Instead, it arbitrarily calculates a reduction by putting a notional cap on the royalties … and then setting the rate by reference to what the capped royalty amounts represents of the industry revenues when applied to 1996. There is no rational reason for doing so: the process cannot in no way account for any of the concerns that the Board has identified.

CAB responded to this argument in the following fashion: 54. The Board is not required to link each factor in its Decision to a specific and calculable variation in the proposed royalty. The 15% reduction in the Standard royalty rate represented the Board’s balancing of the broadcasters’ entitlement to reduced rates and the impact of a reduction on SOCAN and its members The previous 2.1% rate had never itself been “justified” by evidence as to the intrinsic value of television performing rights. The Board’s mechanism for reducing the Standard royalty rate for 1997 was the same mechanism employed to reduce the royalty rate in 1985 and 1986.

The Board also addressed the issue in its memorandum as intervenor: 23. The extent of a rate reduction to be granted is within the Board’s “home territory” and should not be challengeable unless patently unreasonable.

Equipped with these arguments, the Court “consider[ed] the bases upon which the Board decided that a 15 percent reduction in the tariff was appropriate” [¶ 5] and, applying a standard of patent unreasonableness, ruled that “it ha[d] not been adequately demonstrated that the 88

[2003] 1 S.C.R. 247.

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Board’s decision to lower the tariff rate was “patently unreasonable” or “clearly irrational” and went no further. Implicitly, then, the 1999 Court had to consider that the reasons were adequate: had they not been, they would never have reached the point of assessing the reasonableness of the conclusions. Yet, it is after referring to this very decision that the Court, in 2006, stated that “the adequacy of the Board’s reasons is a question of procedural fairness and, as such, is for the Court to decide for itself”89 and then went on to require that the Board at least “explain the reasoning supporting its quantification of the global royalty rate increase,”90 something the same Court did find in 1999. V. CONCLUSION

All that I have said may come as a surprise to those of you who are versed in American administrative law. My understanding is that in the United States a presumption of validity attaches to each exercise of a regulatory board’s expertise, and that seeking review of a decision involves “the heavy burden of making a convincing showing that it is invalid and unreasonable it its consequences” and that if the “total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry ... is at an end.”91 As long as a tribunal acts within its zone of reasonableness, courts are without authority to intervene. In a way, I suppose that this is what I am asking for. In my opinion, what constitutes adequate reasons is not difficult to determine. If in the given circumstances of a case, the decision can be sustained on any reasonable interpretation of the facts or the law it must be accorded deference. The reviewing court must examine the decision as a whole and as the majority noted in Council of Canadians with Disabilities, that to “engage in wide ranging review of a tribunal’s specific conclusions when its interpretation of its constituent statute cannot be said to be irrational, or unreasonable, would be an unwarranted trespass into the realm of reweighing and re-assessing evidence.”92 The point that I am making today is that the uncertainty in the current state of the law causes misunderstanding as to the different roles assigned to courts and administrative tribunals within the Canadian constitutional system. I suggest that once a decision falls within a zone of reasonableness, the decision is entitled to deference and the reviewing court should not interfere. The courts should not be quick to brand that which is adequate as inadequate so as to substitute its opinion for that of the tribunal. As lengthier reasons are unlikely a desirable answer to the ambiguity and uncertainty surrounding these issues, the Board will continue to apply the law in a consistent, logical fashion while balancing the competing interests of copyright holders, service providers, and the public. This is not always easy as demonstrated by the uninformed remarks of some unnamed editorial writer at the National Post following the Board’s decision in Private Copying Collective v. Retail Council of Canada93 and the intemperate comments of the CAB following the decision of the Board in 2005 in SOCAN v. CAB Tariff 1A. On a final note, reviewing courts should follow the same requirement to provide clear, cogent, and transparent reasons so that the parties, and indeed the tribunal being reviewed, can determine on what basis the reviewing court arrived at its decision. This is particularly true when the decision under review has dealt with serious and difficult legal issues, such as res judicata and estoppel, and has interpreted the constituent statute to answer a question that was central to the issue of whether the Board had jurisdiction. Surely to say “because we said so” is not good enough. It brings to mind geese and ganders! CAB v. SOCAN-2006, 54 C.P.R. (4th) 15. Id. ¶ 19. 91 Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591, 602 (1944) 92 Council of Canadians with Disabilities, [2007] 1 S.C.R. 650, ¶ 104. 93 Copyright Board, Private Copying 2008–2009 (July 19, 2007). 89 90

80 CHAPTER IV: COPYRIGHT LAW PROF. BURRELL: We are now going to hear from Steve Metalitz.

Why Canada Should Be Put on the “Special 301” Priority Watch List for 2008 Steven J. Metalitz* My topic this morning, as assigned by Professor Hansen, is “Why Canada Should Be Put on the Special 301 Priority Watch List for 2008.” I am glad to address it, since I agree with that proposition. That formulation tells us that we probably should say a word about what the Special 301 Priority Watch List is before we go any further. This derives from a feature of U.S. law, part of the Trade Act,94 which requires the U.S. Trade Representative (USTR), in an interagency process within the federal government, to look at whether countries are providing adequate and effective protection to U.S. right holders — in this case we are talking about copyright owners — as well as some other issues involving market access. This is a statute that has a standard that has been applied for some twenty years. We are not talking here about “my law can whip your law” or whose law is better. We are not on the playground here. This is really a question of whether there is adequate and effective protection for right holders under the law and enforcement regime of this country. While I am humbled to admit that your dollar can whip our dollar, apparently, I do not think that debate about which law is better is really very constructive. There are a lot of very positive features of Canadian law that many U.S. right holders would like to see incorporated into U.S. law. We heard about some of them in this room yesterday afternoon [see Chapter IV.B.1, infra this volume]. That is not really the issue. It is adequacy and effectiveness. The USTR basically uses two lists, the Watch List and the Priority Watch List. As the names would imply, the latter has higher priority and there would be more attention paid to intellectual property issues and the bilateral engagements that the United States and Canada have on a whole range of issues. We do feel that, since Canada has spent, I think, thirteen years continuously on the Watch List and yet the problems that we have addressed have gotten worse, it is time to move Canada to the Priority Watch List. That is the recommendation that we filed on behalf of the International Intellectual Property Alliance (IIPA).95 The USTR will make its decision, in consultation with other agencies, at the end of April.96 Why did we make that recommendation? There are really two main reasons: one has to do with copyright enforcement; the other has to do with the state of copyright law in Canada. On the enforcement side, there are profound problems, starting at the border, where Customs officials do not have the legal authority in Canada to seize pirate goods or counterfeit goods * Mitchell Silberberg & Knupp LLP, Washington, D.C.

Trade Act of 1974, as amended (19 U.S.C. § 2411), § 301. IIPA, 2008 Special 301 Report Canada (February 2008), available at http://www.iipa.com/rbc/2008/2008SPEC301 CANADA.pdf [hereinafter IIPA February Report]. 96 Office of the U.S. Trade Representative, 2008 Special 301 Report (Apr. 25, 2008), available at http:// www.ustr.gov/Document_Library/Reports_Publications/2008/2008_Special_301_Report/Section_Index.html; see also Press Release, IIPA, Statement on USTR’s Decisions in its 2008 Special 301 Review on Intellectual Property Rights and Enforcement Around the World (Apr. 25, 2008), available at http://www.iipa.com/pdf/ IIPA2008Special301STRDecisionsPress Release042508.pdf. IIPA provides a table of USTR’s 2008 Special 301 decisions, including estimated trade losses and copyright piracy levels for most industry sectors on a country-bycountry and industry-by-industry basis, which is posted on the IIPA Web site, http://www.iipa.com. Also, all the country reports in IIPA’s 2008 Special 301 submission remain posted on the IIPA Web site. 94 95

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when they come into the country, even if it is obvious that they are unauthorized, unless they have a court order.97 A court order is often very difficult and certainly untimely for them to obtain. That is one example. There is a general problem of lack of resources devoted to enforcement of copyright law in Canada. There is longstanding policy not to take action against retailers in pirated materials, even though in today’s environment many of those retailers are also producing — burning in the back room — their own pirate copies. The sentences that are imposed in those few cases that do come to court are minimal. There is no provision for confiscation of the proceeds of this crime. Every single one of these deficiencies has been cited, not just by the IIPA, but by Canadian parliamentary committees in reports that were issued last year. One was called Counterfeiting and Piracy Are Theft,98 which suggests that the Parliament felt it was necessary to send the message to the government that counterfeiting and piracy are theft. Then the other report said that “amendments to the Trade-marks Act and the Copyright Act are needed to give public authorities and intellectual property owners the powers and resources needed to stem the tide of counterfeiting and piracy.”99 So it is not just the U.S. copyright industry saying this; the Canadian parliamentary committees are saying that there is a serious problem here. The second issue that gave rise to this recommendation was the need to modernize Canadian copyright law, particularly with regard to bringing Canadian law into line with the WIPO Internet treaties that are now almost twelve years old.100 That is not the only reason — I will mention a few others — but that is not the tail wagging the dog; this is the dog that we are talking about. It isn’t hunting because the big problem of online piracy in Canada is threatening to spin out of control. The Canadian government agrees. They state that they have as a goal — one of the four points in their IPR strategy — to bring Canada’s copyright regime into conformity with the WIPO Internet treaties. Again, the parliamentary reports back them up. So there is recognition that new laws are needed, but somehow, despite many missed deadlines, they are not forthcoming.101 I want to dispel one myth here. When we are talking about laws that implement the WIPO treaties, we are not talking about doing what the United States did, copying the U.S. law. Many countries around the world have achieved, or are progressing toward, compliance with the WIPO treaties with legal regimes that are quite different from the United States, and laws that have been implementing these in many different ways. So that is a red herring. That is not really the issue here. 97 The Customs Act permits the Canadian Border Services Agency (CBSA) to detain goods that are prohibited, controlled, or regulated by any Act of Parliament. However, there is no legislation that specifically identifies counterfeit or pirated goods themselves as being prohibited, controlled, or regulated. The CBSA can detain (for a limited period of time) counterfeit or pirated goods only if either the IP holder has obtained a court order or the Royal Canadian Mounted Police (or local police officers) agree to seize the goods. 98 House of Commons, Standing Comm. on Indus., Sci. & Tech., Eighth Report, Counterfeiting and Piracy Are Theft (June 2007), available at http://cmte.parl.gc.ca/Content/HOC/committee/391/indu/reports/rp3060548/ 391_INDU_Rpt08-e.html. 99 House of Commons, Standing Comm. on Pub. Safety & Nat. Sec., Counterfeit Goods in Canada — A Threat to Public Safety (May 2007), available at http://cmte.parl.gc.ca/Content/HOC/committee/391/secu/reports/ rp2985081/securp10/securp10-e.pdf. 100 World Intellectual Property Organization (WIPO) Copyright Treaty, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 36 I.L.M. 65 [hereinafter WCT]; World Intellectual Property Organization (WIPO) Performances and Phonograms Treaty, Dec. 20, 1996, 36 I.L.M. 76 [hereinafter WPPT], available at http://www.wipo.int/treaties/en/ip/wct/pdf/ trtdocs_wo033.pdf. 101 Bill C-59, An Act to amend the Criminal Code (unauthorized recording of a movie), received first reading in the House of Commons on June 2, 2007. The Bill seeks to amend the Criminal Code to prohibit the unauthorized camcording of a movie in a movie theatre. See also CMP/Dep’t of Justice, Copyright Enforcement Policy, available at http://www.justice.gc. ca/en/dept/pub/fps/cep/index.html.

82 CHAPTER IV: COPYRIGHT LAW But I think the issue is — again, getting back to the standards that the USTR is supposed to be applying in this Special 301 exercise — that in the year 2008 it is “blinking reality” to say that a country that will not bring its laws up to the level of the WIPO Internet treaties, twelve years after their implementation, that have been adopted by virtually every OECD country.102 I guess there is a race between Canada and New Zealand to see who will be last in the OECD to bring their laws into compliance. Canada is winning, I can tell you that. PROF. FRANKEL: No, it’s not. But we’ll get to that. MR. METALITZ: Okay, we’ll get to that. Maybe there is breaking news on that topic. Anyway, I think it is too late in the day to say that you can have an adequate and effective enforcement system against online piracy without coming into compliance with those treaties. It is obviously a serious problem in Canada. The OECD has calculated that Canada has the highest per-capita incidence of unauthorized file swapping in the world.103 So the problem is very serious there, and the statutes are inadequate to deal with that. On the issue of technological protection measures, one of the important innovations that the WIPO treaties have brought to the law, we see now, because of the lack of protection against these measures in Canada, that it has become one of the leading sources for the modification chips that are used to circumvent access controls in video games, for example. It is not surprising that the U.S. government finds it very uncomfortable to see this haven for piracy, for this form of circumvention, right across its border. Let me just mention, in conclusion, some other issues that are not, strictly speaking, WIPO Internet treaty issues that are also crying out for reform in Canadian law. One is the question of notice and takedown or enforcement against online piracy, trying to create, as many countries are struggling to do, an environment for cooperation between copyright owners and online service providers against the online piracy that ultimately is a threat to both of their businesses. This is not, strictly speaking, required by the treaties, but the treaties do require that countries implement adequate and effective enforcement measures for all the rights covered by the treaties. This is the method that many countries have used to do this. Again, if you look at the circumstances of online piracy, online infringement in Canada, this clearly is a problem today. There are other issues, including whether authorization liability in Canada covers peer-topeer services that set out to encourage people to infringe. We again have a growing consensus in many countries that there is some liability for this type of inducement of infringement. There have been court decisions in the United States, Australia, Korea, and Taiwan that indicate this.104 I will stop by saying that it is not clear in Canada. It should be made clear. This is another example of why the adequate and effective protection is not being accorded. PROF. BURRELL: Now Howard Knopf.

102 A list of all contracting parties to the WCT and WPPT is available at http://www.wipo.int/treaties/en/Show Results.jsp?country_id=ALL&start_year=ANY&end_year=ANY&search_what=C&treaty_id=16&treaty_id=20. 103 See OECD, The Economic Impact of Counterfeiting (1998), available at http://www.oecd.org/dataoecd/11/11/ 2090589.pdf. 104 See Chapter 9, “The Role, Effectiveness and Issues in Infringement Actions Against Individual P2P Downloaders; Recent Legislative Initiatives Aimed at Downloaders”, infra this volume.

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Why Canadian Copyright Law Is Already Stronger and Better than that of the USA — And Why the USA Should Look in The Mirror Rather than at its “Special 301” Watch List Howard Knopf*

I. CANADA IS UNDER PRESSURE FROM THE UNITED STATES

Canada is presumably about to engage in another round of copyright reform. Canada is under considerable pressure in this effort, mostly from the U.S. Government and various lobbyists105 acting forcefully on behalf of mainly American interests, to implement and ratify the 1996 WIPO treaties by enacting a version of the DMCA,106 which some are calling a “CDMCA.” This prospect has generated much controversy, with the result that the expected introduction of a new bill in early December of 2007 has been put on hold until further notice. Any uncertainty is greatly compounded by the politics and logistics of a minority government. Moreover, copyright has the potential to actually become an election issue and could be an interesting factor in any federal election, particularly in a number of close ridings where there are large university and college populations.107 The rhetoric has been strong. The American Ambassador to Canada, David Wilkins, was quoted by Deirdre McMurdy on Nov. 16, 2007 in The Ottawa Citizen as saying that “Canada is known for having the weakest copyright protection in the G8.”108 That is not only risible and even ridiculous. It is simply false and misleading. For starters, the G8 includes Russia. Enough said. II. SPECIFIC EXAMPLES OF HOW CANADIAN LAWS ARE ALREADY STRONGER AND BETTER THAN AMERICAN LAWS

More to the point, Canadian copyright law is actually much stronger than U.S. copyright law in many ways, some of which are worth quite a lot of money109 to the United States. It is worth noting as well that, for most of the last century, most copyright royalties in Canada have been flowing to American corporate interests. Here are some examples of Canada’s already stronger and better regime: (1) Broadcasters pay more for copyright royalties than their counterparts in the United States, much of it for rights that do not even exist in the United States — for example the “ephemeral right.” Now, about $50 million a year more over and above is being 105 The most visibly active copyright lobbyist organization in Canada is the Canadian Recording Industry Association (CRIA), the Canadian counterpart of the RIAA, which speaks mainly for the big four multinational record companies. CRIA has lost much, if not most, of its independent Canadian membership. Many leading Canadian artists have formed a coalition, called the Canadian Music Creators Coalition, which is opposed to litigation against their own fans. These artists include Feist, Broken Social Scene, Sarah McLachlan, Bare Naked Ladies, and many more. 106 Digital Millennium Copyright Act of 1998 (DMCA), Pub. L. No. 105-314, 112 Stat. 2974 (Oct. 28, 1998) (codified at 17 U.S.C. § 512, available at http://www.copyright.gov/title17. 107 Michael Geist, The Conservative Copyright MPs — An Update (Fed. 3, 2008), available at http://www.Michael geist.ca/content/view/2666/125. 108 Deirdre McMurdy, “Copyright act key to Canada’s Industrial Strategy”, Ottawa Citizen, Nov. 16, 2007, available at http://www.canada.com/ottawacitizen/news/story.html?id=f05596b7-28b6-4065-a80a-0c902ec38213&p=1. 109 Any Canadian figures can be multiplied by a factor of 10, or even more, especially in view of the effective current parity of the currencies, to be seen in comparison to corresponding American figures.

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(2)

(3)

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(7)

demanded by the record labels110 for this right in addition to amounts now collected by composers, authors, and publishers. The United States provides an outright exemption in 17 U.S.C. §112 for the “ephemeral right.” Canadians pay large amounts to SOCAN111 and NRCC112 for performances in countless bars, restaurants, retail stores, and other small area business establishments. The United States notoriously exempts these establishments, contrary to a WTO “Section 110” ruling that the United States continues to flout.113 The United States is by far the leading adjudicated current violator of international copyright law. Canada has “neighbouring rights.” The United States does not. This translates into very big payments for record producers and performers. For example, the Copyright Board estimates that these rights generated about $15.9 million a year from traditional analog commercial radio alone in 2005.114 Canadian movie theatres have to pay SOCAN for exhibiting films. While these rights are normally bought out and cleared for Hollywood productions in the United States, and there is no further requirement to pay ASCAP, BMI, or SESAC. Canadian law has thus permitted SOCAN to collect from theatres in Canada for showing the same films. SOCAN collected $881,000 for theatrical exhibition of films in 2005. Canada has a rich blank media levy scheme that has generated more than $200 million overall to date, and at last report almost $40 million a year, most of which goes to the United States. The United States has nothing comparable. Canadian educators pay far more relatively than in the United States. We pay far more for reprographic rights than in the United States, with far fewer exceptions for educators in our legislation. The U.S. counterpart to Access Copyright115 has only a little over three times Access’s income, while normal ratios would suggest that it should have at least ten times the amount. Canadian educators are subject to statutory minimum damages. American ones are not if they reasonably believe that they are engaging in fair use. We have no distance educational exceptions. The United States does. Canada has no specific reference to “teaching (including multiple copies for classroom use),” as is found in 17 U.S.C. §107. Canada has moral rights for all types of works. The United States does not, with the limited exception of visual arts works. Any possible pretense that the United States provides moral rights generally through other means was put to rest by the U.S. Supreme Court in the 2003 Dastar decision.116

110 See Communiqué, CAB/ACR, Broadcasters Denounce Music Labels’ Copyright Demand (Nov. 4, 2007), available at http://cab-acr.ca/english/media/news/07/nr_nov0407.shtm. 111 Canada’s only performing rights organization for composers and authors. 112 Neighbouring Rights Collective of Canada, which represents collectives dealing with record producers and performers. 113 WTO Dispute Settlement DS160, filed by the European Communities, WT/DS160 (Jan. 26, 1999) (requesting consultation on § 110(5) of the U.S. Copyright Act, as amended by the Fairness in Music Licensing Act, which was enacted on Oct. 27, 1998). The EC contended that § 110(5) of the Copyright Law of the United States, 17 U.S.C. § 110, permits, under certain conditions, the playing of radio and television music in public places (bars, shops, restaurants, etc.) without the payment of a royalty fee. The EC considered that this statute is inconsistent with U.S. obligations under Article 9(1) of the TRIPs Agreement, which requires Members to comply with Articles 1–21 of the Berne Convention. A summary of the dispute is available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ ds160_e.htm 114 Copyright Board of Canada, Collective Administration of Performing Rights and of Communication Rights, at 32 (Feb. 22, 2008), available at http://cb-cda.gc.ca/decisions/m20080222-b.pdf. 115 Access Copyright (Canadian copyright licensing agency) statistics are available at http://www.accesscopyright. ca. See also Copyright Board of Canada, Hearings: Educational Institutions — Access Copyright Tariff (2005–2009), available at http://www.cb-cda.gc.ca/hearings/eie200706-e.html. 116 Dastar Corp. v. Twentieth Century Fox Film Corp., 540 U.S. 806 (2003).

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(8) Canada seriously respects the right of independent creators to own their copyright. The United States walks all over this with its broad “work for hire” doctrine that favors large corporations.117 (9) Canada long ago got rid of most of its compulsory licenses, including the mechanical license for sound recordings. The United States still has this and many more, while it continues to preach to other countries against compulsory licenses. (10) Canada has about thirty-six copyright collectives, many of which have received substantial direct and indirect government subsidies. The United States has only about five, with no government largesse.118 (11) Canada has a full-time Copyright Board with four full-time members plus an appellate judge as chairman and several full-time professional and administrative support staff. The Board has enormous policy and, effectively, law-making powers. No other comparable country comes close to having such a permanent, specialized, full-time, and powerful copyright tribunal. (12) Canada has no parody right/exception for users. The United States does.119 (13) Canada has no time-shifting exception that would clearly allow for legal use of personal video recorders (PVRs), such as the Tivo, in Canada. The United States has had this since the 1984 Betamax decision from U.S. Supreme Court.120 (14) Canada has Crown copyright, which leads to all kinds of unnecessary costs and complications for those, ranging from advanced researchers to fishermen, who should be able to depend on mapping and GPS information from the government and not from some privatized for-profit party. Canada privatizes its government copyright for profit, which cannot happen in the United States. (15) Canadian provinces enjoy no Crown immunity and already pay exorbitant amounts for educational uses of copyright, much of which revenue flows to the United States. U.S. states have state sovereign immunity for copyright infringement, arguably in contravention of the Berne Convention.121 Historically, Canada has provided overall far greater protection to American works and American citizens than vice versa. In 1923 an historic bilateral agreement between Canada and the United States ensured that each country gave the same treatment to nationals from the other country as it did to its own. This meant that Canada provided much better protection to Americans than vice versa because Canada, even then, had a life-plus-fifty-year term with no formalities and much stronger rights in many other respects. Even today, Americans reap the benefit of Canada’s earlier recognition of the life-plus-fifty term and the sacred Berne Convention principle of “no formalities.”122 For example, early works by Irving Berlin and others that have long since entered the public domain in the United States will still generate royalties in Canada for a long time to come.123 This is also the case 117 See U.S. Copyright Office, Circular 11, Works Made for Hire Under the 1976 Copyright Act (2004), available at http://www.copyright.gov/circs/circ09.pdf. 118 ASCAP, BMI, SESEAC, Copyright Clearance Center, and SoundExchange. 119 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994). 120 Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984) 121 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 14, 1967, 102 Stat. 2853, 828 U.N.T.S. 221. 122 Id. art. 5(2) (“The enjoyment and the exercise of these rights shall not be subject to any formality; such enjoyment and such exercise shall be independent of the existence of protection in the country of origin of the work. Consequently, apart from the provisions of this Convention, the extent of protection, as well as the means of redress afforded to the author to protect his rights, shall be governed exclusively by the laws of the country where protection is claimed.”). 123 Graham F. Henderson, “Canadian Copyright Law in the Context of American-Canadian Relations”, (1977) 35 C.P.R. (2d) 67.

86 CHAPTER IV: COPYRIGHT LAW with films, since many classic Hollywood films that are now in the public domain in the United States will be protected in Canada for the life of the creator or joint lives of the creators (whoever they may be124) plus fifty years. III. THE IIPA “SPECIAL 301” REPORT

The latest attempted incursion into Canadian copyright sovereignty comes from the International Intellectual Property Alliance (IIPA),125 which promoted Canada this year into the highest echelon of its hit list by recommending that Canada be on the “Priority Watch List.” Canada now joins the ranks of Argentina, Chile, Costa Rica, Egypt, India, Mexico, the People’s Republic of China, Peru, Russia, Saudi Arabia, Thailand, and Ukraine. Canadians, frankly, do not get very excited about the “Special 301” list. A senior Canadian official told a Parliamentary Committee last year that: In regard to the Watch List, Canada does not recognize the 301 Watch List process. It basically lacks reliable and objective analysis. It’s driven entirely by U.S. industry. We have repeatedly raised this issue of the lack of objective analysis in the 301 Watch List process with our U.S. counterparts. I also recognize that the U.S. industry likes to compare anyone they have a problem with, concerning their IPR regime, to China and the other big violators, but we’re not on the same scale. This is not the same thing. If you aren’t on the Watch List in some way, shape, or form, you may not be of importance. Most countries with significant commercial dealings are on the watch list.126

The IIPA notes this year that “Only two of America’s top ten trading partners (China and South Korea) surpass Canada’s record of appearing continuously on a Special 301 list every year since 1995.” That puts Canada in very good company in economic terms. We must be important. Criticism of the U.S. “Special 301” approach is coming not just from the Canadian government and from distinguished Canadians, such as Professor Michael Geist,127 but from such respected U.S. expert commentators, such as Bill Patry.128 Mr. Patry has pointed out that, if Israel can stand up to the USA on “Special 301,” surely Canada, which is much larger and much less vulnerable, should be able to do so: Of course, even large countries like Canada have been threatened: The U.S. is reported to have told Canada that the United States will not do anything Canada wants in other areas unless Canada adheres to the WIPO treaties in the exact form that the U.S. has, and that such implementation is the highest priority in U.S.–Canada relations. That’s ridiculous bluster. I hope that the example of Israel, a much smaller and very vulnerable nation, standing up to the IIPA inspires the Canadians in drafting their anticipated copyright reform legislation. And one thing that might strengthen Canadian resolve is the experience of Israel with the migration of the watch list into an evolving wish list.129

Also, Canadians are becoming increasingly aware of America’s own problematic shortcomings in copyright protection. In addition to the usual sovereignty sentiments, Canadians are well This is the source of much uncertainty in Canadian law. IIPA February Report, supra note 95. 126 House of Commons, Standing Comm. on Pub. Safety & Nat. Sec., No. 35, 1st Sess., 39th Parliament (Mar. 27, 2007), at 1150 (testimony of Nancy Segal). 127 Michael Geist Blog, “Responding to the IIPA’s ‘Inaccuracies and Hyperbole’”, Mar. 17, 2008, available at http://www. michaelgeist.ca/content/view/2765/125/. 128 William Patry, “No One Likes a Bully: The IIPA and Canada”, Patry Copyright Blog, Feb. 23, 2008, available at http://williampatry.blogspot.com/2008/02/no-one-likes-bully-iipa-and-canada.html. 129 See William Patry, “Israel Fights Back: A Purim Story”, Patry Copyright Blog, Mar. 21, 2008, available at http:// williampatry.blogspot.com/2008/03/israel-fights-back-purim-story.html. 124 125

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aware of the many ironies implicit in the maxim that folks who live in glass houses should not throw stones. For example, in the areas I have identified above, the United States has not only weaker protection but in some cases is arguably in contravention of well-established international law to which it is actually bound. These include: • Lack of moral rights protection: Even thought the United States cleverly managed to immunize itself from the dispute settlement mechanism in TRIPs on this front, it does not look good that it flouts this basic provision of the Berne Convention which is so important to the European and other civilian countries and to Canada, which has deep roots in both common and civil law. • State sovereign immunity: There is arguably a strong case that the very broad exemption confirmed by the U.S. Supreme Court130 goes well beyond any exception contemplated by the Berne Convention. Whether or not it is causing any “damage” may be open to argument, but it is quite clear that American educational institutions pay far less per capita for reproduction rights than their Canadian counterparts, perhaps because of the implicit right the state-operated institutions have not to pay anything. • The Section 110 I (“Irish Music”) matter: This is an adjudicated violation of a major aspect of the Berne Convention as incorporated in TRIPs. As long as this is unresolved and the United States pays only less-than-token compensation in consequence, it will have difficulty in credibly criticizing alleged substantive deficiencies in copyright regimes elsewhere, especially where there is no binding international law to support the allegation. • Depending on how things turn out in certain of the RIAA cases now working their way through the district courts131 and in the Jammie Thomas appeal it may turn out that the United States does not even have a “making available” right, which was a cornerstone of the 1996 WIPO treaties.132 This is because, inter alia, the plain language of Section 106(3) limits the distribution right to the dissemination of tangible material objects.133 On the other hand, I know of no area in which current Canadian copyright law has been credibly alleged to violate existing international law to which Canada is bound. CRIA has made certain treaty-based allegations that would not be justiciable in a Canadian court concerning the broad scope of the exemption from liability resulting or potentially resulting from the private copying levy regime. This is actually fraught with irony because CRIA was probably the main proponent of this regime in its present form. Interestingly, CRIA recently supported my client134 and certain manufacturers, such as Apple, which successfully argued in January of this year that the Copyright Board could not extend the levy regime to iPod-type and other digital audio recorder devices.135 Politics — and even the law — sometimes make strange bedfellows. 130 Seminole Tribe of Fla. v. Florida, 517 U.S. 44 (1996); see Robert W. Clarida, “Sovereign Immunity — It’s Everybody’s Problem”, Legal Language Services, Dec. 2000, available at http://www.legallanguage.com/lawarticles/ Clarida009.html. 131 See Atlantic Recording Corp. v. Howell, 554 F. Supp. 2d 976, 985 (D. Ariz. 2008) (holding that merely making a work available on a peer-to-peer network did not constitute a distribution); Elektra Enter. Group, Inc. v. Barker, 551 F. Supp. 2d 234 (S.D.N.Y. 2008). For a discussion of these and other cases, see Chapter 9, infra this volume. 132 See Capitol Records v. Thomas, Civ. No. CV 06-1497 MJD/RLE, 2008 WL 4405282 (D. Minn. Sept. 24, 2008) (subsequent to the conference, the court’s decision was issued, granting a new trial on the basis that the jury instruction on the “making available” right was flawed); see also Chapter 9, Recent Legislative Initiatives Aimed at Downloaders, infra this volume. 133 See R. Anthony Reese, “The Public Display Right: The Copyright Act’s Neglected Solution to the Controversy Over ‘RAM Copies’”, U. Ill. L. Rev. 83 (2001). 134 The Retail Council of Canada, which represents the major retailers. 135 Apple Can. and Retail Council of Can. v. Canadian Private Copying Collective, 2008 FCA 9, available at http:// decisions.fca-caf.gc.ca/en/2008/2008fca9/2008fca9.html.

88 CHAPTER IV: COPYRIGHT LAW Moreover, anecdotal experience suggests that enforcement activity in the United States is much weaker than in Canada in key respects. One has never seen flagrant sellers of pirated and counterfeit goods operating openly on the streets of major cities in Canada, as one has seen here in New York, not just on Canal Street but openly in midtown. Moreover, Canada recently added anti-camcording provisions to its Criminal Code, beefing up the previously existing offense provisions in the Copyright Act.136 At least one arrest has been made under these news provisions, and resulted in an enthusiastic press release by a Government of Canada Minister.137 Canada’s laws seem to be capable of dealing with serious commercial scale pirate activity at both a civil and criminal level. There have been countless civil seizures (“Anton Piller orders”) and large damage awards.138 On the criminal front and in the sound recording business, there was a recent high-profile “bust” in which about 200,000 allegedly pirated CDs and DVDs were seized. This raid coincided quite nicely with Canada Music Week.139 According to the Hollywood Reporter: The raid by 10 officers followed a yearlong investigation into Audiomaxxx and its pirate operation. “We sincerely thank the RCMP officers who have worked so hard to bring Audiomaxxx to heel, and to the federal prosecutors who have worked closely with them,” CRIA president Graham Henderson said.140

Curiously, CRIA has retracted141 its initial press release about this event, dated March 6, 2007, and has instead issued a statement dated March 7, 2008, indicating that: In the same media release, it was also reported that Raj Singh Ramgotra was among those arrested. CRIA cannot confirm the identities of any of those arrested and therefore retracts its statement to the effect that Mr. Ramgotra was arrested. CRIA regrets the error.142

Meanwhile, the government’s Minister of Public Safety issued an enthusiastic and unretracted press release about the event.143 Canada’s government seems to be very eager to issue press releases about its enforcement efforts, though the connection to “public safety” is somewhat less than obvious in this instance. Nobody has ever died from exposure to allegedly pirated reggae music, as far as I know. IV. THE ISRAELI APPROACH TO SECTION “SPECIAL 301”

In certain obvious respects, Israel is perhaps more dependent than any other country on the United States. This fact, however, has not stopped Israel from drawing a line in the sand 136 Bill C-59 was given Royal Assent on June 22, 2007, available at http://www2.parl.gc.ca/content/hoc/Bills/391/ Government/C-59/C-59_4/C-59_4.PDF. 137 Press Release, Gov’t of Canada, Government of Canada Comments on Latest Arrest Under New Movie Piracy Law (Jan. 8, 2008), available at http://www.marketwire.com/mw/release.do?id=812183. 138 E.g., Microsoft v. Cerrelli, 2006 FC 1509, available at http://decisions.fct-cf.gc.ca/en/2006/ 2006fc1509/2006fc 1509.html. 139 See Canadian Music Week—2008 Conference Speakers, available at http://www.cmw.net/cmw2008/ conference_ speakers.asp. 140 Etan Blessing, “Mounties Bust Canadian CD, DVD Counterfeiter”, Hollywood Rep., Mar. 8, 2008, available at http:// www.hollywoodreporter.com/hr/content_display/international/news/e3i669ba7401585bee06e32d16311170635. 141 Marc Weisblott, “CRIA’s Big Cock-up — Today on the Scroll: Canada’s Beleaguered Music Biz Lobby Boasted of a Bust Last Thursday … So Why Did They Issue a Retraction the Day After?”, EYE Wkly, Mar. 6, 2008, available at http://www.eyeweekly.com/city/scrollingeye/article/20372; see also Jon Newton, “Huge CRIA Audiomaxxx.com Screw Up, P2PNET”, available at http://p2pnet.net/story/15197. 142 Canadian Recording Indus. Ass’n, Press Releases, http://cria.ca/news.php. 143 Press Release, Public Safety Canada, Minister Day comments on the largest ever seizure of alleged counterfeit CDs and DVDs in Canada (March 7, 2008), available at http://www.publicsafety.gc.ca/media/nr/2008/nr20080307eng.aspx.

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on “Special 301” with a bold and detailed recent response.144 The Israeli response does not challenge the legitimacy of the USTR/IIPA approach as much as it dissects it point by point. Notably, Israel points out with respect to the IIPA and RIAA obsession with technological protection measures (TPMs): Israel is not a member of either the WIPO Copyright Treaty (WCT) or the WIPO Performances and Phonogram Treaty (WPPT), the only multilateral instruments that obligate implementation of TPM. Hence, Israel is under no obligation to introduce TPM and use of the Special 301 process to sanction countries for not implementing aspects of treaties to which they have no obligation seems rather unjust.145 … Accordingly, can the non-membership in a voluntary treaty be the basis for invocation of the Trade Act, and placement on a Watch List? If so, then why doesn’t IIPA recommend non-ratifying countries such as Switzerland, Norway, Iceland, Denmark, Finland, France and Austria for Watch List status? (Emphasis added).

The latter point is a particularly good point. There is no conceivable basis for the United States to legally impose or demand sanctions for a country’s failure to ratify, implement, or ratify a treaty in respect of which it has no legal obligation. If and when the next round of WTO talks moves forward, the United States is free to attempt to make ratification of the 1996 WIPO treaties a requirement. But that is pure conjecture at this point. There is one notable inaccuracy in the Israeli report that touches on Canada, though it does not detract from the overall thrust. It refers to Canada as an example of “developed and OECD countries (such as Canada, Australia, EU members) which do not have statutory damages for copyright infringements at all.”146 This, of course, is not true. Canada was one of the first countries to adopt the flawed American approach to statutory minimum damages, which was surely not meant to deprive families of their life savings because somebody may have allegedly downloaded and perhaps inadvertently potentially shared some songs, an activity that has resulted in litigation against children and even dead grandmothers by the RIAA. Israel has a clever solution to this problem, which is to allow a hefty upper limit of about US$28,000 for statutory damages without proof of actual damages, but no minimum and other safeguards as well to protect against the Jammie Thomas type of travesty. Some, such as Michael Geist, would like to see Canada react to the IIPA and the USTR as aggressively and explicitly as Israel. He suggests that: “Given those views, why doesn’t the Canadian government (or many other governments for that matter) follow the Israeli lead by standing up for its national interests?”147 This may not be a bad idea, as long as it does not imply any particular legitimacy to the “Special 301” process. V. THE LEGITIMACY OF “SPECIAL 301”

The continued legitimacy of American effort involving “Special 301” should not be taken for granted. The legitimacy of certain aspects of Sections 301–310 of the US Trade Act of 1974 has already been looked at by the WTO. The United States managed to survive the dispute brought by the European Communities, with several third parties including Canada involved, but only on the basis of certain undertakings provided by the United States that it would not proceed to impose sanctions on a unilateral basis and would only do so within the mechanisms 144 Available at http://www.justice.gov.il/NR/rdonlyres/8D2F1766-8611-4734-8EAA-891CB4182BEF/18762/ 2008Special 301Submission.pdf. 145 Id. at 16. 146 Id. at 20. 147 Geist, supra note 119.

90 CHAPTER IV: COPYRIGHT LAW established by the WTO. The WTO noted that: “The panel stated therefore that should those undertakings be repudiated or in any other way removed, its findings of conformity would no longer be warranted. The DSB adopted the panel report at its meeting on January 27, 2000.”148 VI. WHAT THE IIPA ET AL. WANT CANADA TO DO

The IIPA has added to the litany of complaints from Ambassador Wilkins and CRIA to the effect that Canada is behind other countries in terms of its failure to date to implement and ratify the 1996 WIPO treaties. The general wish list for what the IIPA wants Canada to do in 2008 is this: In terms of substance: • Enact legislation bringing Canada into full compliance with the Copyright Treaty (WCT) and WIPO Performances and Phonograms Treaty (WPPT). • Create strong legal incentives for Internet Service Providers (owners in combating online piracy. • Amend the Copyright Act to clarify the scope of the private recordings. • Amend the Copyright Act to clarify liability for those who knowingly contribute to infringement (such as illicit file-sharing services). In terms of enforcement: • Make legislative, regulatory or administrative changes necessary to empower customs officials to make ex officio seizures of counterfeit and pirate product at the border without a court order. • Increase resources devoted to anti-piracy enforcement both at the border and within Canada. • Direct the Royal Canadian Mounted Police (RCMP), Canadian Border Services Agency (CBSA), and Crown prosecutors to give high priority to intellectual property rights enforcement, including against retail piracy and imports of pirated products, and to seek deterrent penalties against those convicted of these crimes.

I have some brief comments on some of these issues. A. Canada’s “Obligations” Under the 1996 WIPO Treaties As I wrote in my blog on February 11, 2008, if and when there is a new copyright bill introduced before a possibly imminent election, there will be much talk about the 1996 WIPO treaties. I make no comment on whether or not Canada should ultimately ratify the 1996 WIPO treaties. This is a complex legal, economic, and political issue, and I am frankly rather agnostic about it at this time. The decision to ratify should be taken with fully informed analysis on what is actually required to achieve compliance with these treaties, a subject upon which learned minds profoundly disagree at the moment. Ratification of these treaties may well be a good thing for Canada if there is a way of doing so that is good for Canada. I will venture, however, to say that the maximalist formulations for compliance being suggested in some quarters are neither required, nor are they in Canada’s best interests. Moreover, since Canada already provides stronger and better protection than the United States in many material respects, there is no reason whatsoever for the WIPO treaties to become the tail wagging the dog of Canadian copyright reform — which everyone agrees is long overdue. Users, in particular, have a strong case to make that reform is overdue. And, in the meantime, let’s be accurate about just what Canada’s current “obligations” are regarding these treaties. The Hon. Jim Prentice, himself a lawyer and the lead Minister on this file, seems to be aware that he is walking a tightrope here. In his recent speech in Calgary, he 148 WTO Dispute DS152 – Sections 301–310 of the Trade Act 1974, WT/DS152 (1999), available at http://www. wto.org/ english/tratop_e/dispu_e/cases_e/ds152_e.htm; see also the WTO one-page summary at http://www.wto.org/ english/tratop_ e/dispu_e/cases_e/1pagesum_e/ds152sum_e.pdf.

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made reference in the subsequent Q&A to the WIPO treaties and to “certain obligations to bring our law into conformity with, in a general sense, the treaties that were signed . …” Signing a treaty is to ratification about the same as dating, or maybe at most “going steady,” is to marriage. The latter does not necessarily follow from the former, and the influences on the relationship during the initial (i.e., signature) phase are, just as in person-to-person relationships, often defined more by influences other than legal “obligations.” Let’s just leave it at that. But, there is no need to take my word for this. Here is a learned comment on the effect of treaty signature in respect of international treaties: The effect of signature is not, of course, to bind the signatory State but simply represents an acknowledgment of its intention to enact a law based on the Convention and, in due course, to ratify the Convention. It is only the ratification of the Convention by an existing member State which has signed the Convention, or accession to the Convention by a new member State, which creates an international legal obligation. (Emphasis added)

This is not the statement of a radical “anti-copyright” person. It actually comes straight from WIPO itself.149 Coming from WIPO, that is about as strong a statement as one can find from a credible institutional source, and is not inconsistent with my simple dating analogy. Others see the effect of signature as even less. Professor J. Craig Barker puts it as follows: The effect of signature is not, as one might expect, to bind a state to the terms of a treaty. There is usually a further stage of ratification required before a state party can be said to be fully bound. Nevertheless, the signature of a state to a treaty is not without effect. A state that has signed, but not yet ratified, a treaty is bound not to do anything contrary to the objects and purposes of that treaty prior to ratification or withdrawal of signature. However, a state is not bound to follow the terms of a treaty in their entirety until ratification. [Emphasis added]

The point is very simple. Canada may or may not choose to ratify the 1996 WIPO treaties. That is for the elected Government of the day to decide, and to be accountable for according to domestic law, accepted procedure, practice, and ultimately, politics. However, Canada has not yet ratified these treaties. We have only signed them. Certain politicians may or may not have made certain statements and promises to certain lobbyists and ambassadors. But that is not the same thing as an “international legal obligation” in respect to the 1996 WIPO treaties. Let us be precise with our language here and not use language too loosely. There is too much at stake. Finally, it does not help the cause of the USTR, IIPA, CRIA, and other lobbying forces that our distinguished friend Bruce Lehman, the architect of the 1996 WIPO Treaties and the Digital Millennium Copyright Act (DMCA), has publicly indicated that “I don’t think it [DMCA] has achieved the objectives we necessarily intended.”150 This is how Professor Michael Geist summarized Mr. Lehman’s comments at a symposium on March 23, 2007, at McGill University: Moreover, Lehman says that we are entering the “post-copyright” era for music, suggesting that a new form of patronage will emerge with support coming from industries that require music (webcasters, satellite radio) and government funding. While he says that teens have lost respect for copyright, he lays much of the blame at the feet of the recording industry for their failure to adapt to the online marketplace in the mid-1990s. In a later afternoon discussion, Lehman went further, urging Canada to think outside the box on future copyright reform. While emphasizing the need to adhere to international copyright law (i.e., Berne), See WIPO, Chapter 5, “International Treaties and Conventions on Intellectual Property” §5.580, available at http://www.wipo.int/about-ip/en/iprm/doc/ch5.doc. 150 Digital Dystopia at McGill, http://video.google.com/videoplay?docid=4162208056624446466&hl=en (video of Bruce Lehman speaking at McGill Univ. in Montreal). 149

92 CHAPTER IV: COPYRIGHT LAW he suggested that Canada was well placed to experiment with new approaches. He was not impressed with Bill C-60, seemingly because he does not believe that it went far enough in reshaping digital copyright issues. Given ongoing pressure from the U.S., I’m sceptical about Canada’s ability to chart a new course on copyright, yet if the architect of the DMCA is willing to admit that change is needed, then surely our elected officials should take notice.151 VII. WHAT WOULD CANADA NEED TO DO TO RATIFY THE WIPO TREATIES?

The irony of much of the debate is that Canada arguably need not do a lot in terms of implementation to ratify the WIPO Treaties. The problem for the IIPA and those who are driving it is that it is demanding a lot more than is necessary in order to implement and ratify these treaties. If these interests persist in this approach, Canada may not get around to ratification. If these interests really want to have Canada on the list of ratifying countries — which so far is largely a coalition of the billing rather than the willing — they need to be realistic about what the treaties actually require. In terms of the major issues that the U.S.-based lobbyists, such as CRIA, would like to see taken care of, there are some interesting developments. A. Making Available Right First, there is strong argument now that Canada already has a “making available” right in place, at least for “works,” i.e., musical compositions. This is reinforced by the recent Federal Court of Appeal decision that confirmed that the digital delivery of a ring tone directly to the computer or cell phone of a member of the public upon request constitutes a “communication to the public by telecommunication.”152 The cell phone providers are seeking leave to appeal this decision (cf. certiorari) to Canada’s Supreme Court.153 This situation is pregnant with irony, and interesting potential conflicts within the music industry. If the cell phone providers succeed in getting leave and ultimately overturning the decisions below, there will be, at the very least: • A significant domino effect at the Copyright Board on numerous other pending and already decided tariff decisions; • A much harder, and perhaps impossible, task for CRIA to argue that P2P file sharing is illegal in Canada, absent a major change in legislation — which cannot be taken for granted. CRIA has attempted to sue alleged downloaders and file sharers in Canada in the past, but without success.154 B. TPMs and Anticircumvention The issue likely to be of most concern to the general public in Canada concerns technical protection measures (TPMs) and the excessive manner of protection for such measures demanded by the pro-CDMCA lobbyists. 151 Michael Geist, “DMCA Architect Acknowledges Need for a New Approach”, Mar. 23, 2007, available at http:// www. michaelgeist.ca/content/view/1826/125. 152 Canadian Wireless Telecomm. Ass’n v. Society of Composers, Authors and Music Publishers of Can., 2008 FCA 6. 153 Canadian Wireless Telecomm. Ass’n v. Society of Composers, Authors and Music Publishers of Can., No. 32516 (Supreme Court of Canada), available at http://cases-dossiers.scc-csc.gc.ca/information/cms/docket_e.asp?32516. 154 BMG Can., Inc. v. John Doe, [2004] F.C.J. No. 525 (QL), [2004] 3 F.C.R. 241; appeal dismissed, [2005] F.C.J. No. 858 (C.A) (QL); see Linda Wright, “An Overview of the BMG Case”, 6 Internet & eCommerce Law in Canada (July 2005), available at http://www.moffatco.com/pages/publications/ BMG%20Case%20-%20E-Commerce.pdf.

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First, it is quite clear that the WIPO treaties do not require any measures directed at devices as such, in contrast to behavior. The drafters of the treaty could have said otherwise, but they did not. And not for lack of consideration. They were more than aware of what they were doing on this point. The folly of directing legislation that targets devices is easy to illustrate. If DMCA-type legislation had been in place in 1980, we would likely be living in a world without VCRs and without personal computes. It’s really that simple. Many Canadians would prefer protection from TPMs and DRM rather than for them. There may be a compromise provided that the legislation does not target devices as such, or at least deals only with devices the primary purpose of which is illegal circumvention. And it will be very important if a compromise is to be reached that circumvention be permitted for any purpose that is legal, such as fair dealing, access to public domain works, backup, time, space and format shifting purposes (whether these are permitted by way of fair dealing or other specific exceptions). C. ISP Liability Many Canadians have little patience with the notion of “notice and takedown.” There is nothing in the WIPO treaties that requires this. We have a longstanding, adequate, and effective voluntary “notice and notice” system that seems to work quite well. This should be protected by legislation, and not undone by it. VIII. THE CANADIAN POSITION GENERALLY

As everyone is aware, copyright has become a very political issue in Canada — partly as a result of the very efforts of lobbying organizations, such as CRIA. I dealt with this in my Fordham presentation last year.155 This is yet another illustration of “be careful what you wish for.” New coalitions are forming, one of which is particularly important. This is a coalition known as the Business Coalition for Balanced Copyright, which includes some notable bluechip members, such as the Canadian Association of Broadcasters (CAB) (cf. NAB), Canadian Association of Internet Providers, a division of CATAlliance (CAIP), Canadian Wireless and Telecommunications Association (CWTA), Computer and Communications Industry Association (CCIA), Retail Council of Canada (RCC), Google, Yahoo! Canada, and several of Canada’s largest communications companies. IX. IN CONCLUSION — WATCH LISTS, WISH LISTS AND WHITHER WIPO?

Those who advocate for a CDMCA in Canada fail to understand certain elementary things about Canadian law and politics. Canada remains a sovereign country next door to the United States precisely because it does not like being dictated to by American interests. It may and often, though not always, does come around eventually to accommodating the United States — but usually in Canada’s own time and in Canada’s own way. There are many ways to implement and ratify the 1996 WIPO treaties, but Canadians should only accept a way that is beneficial to Canada. We should take into account the advice of knowledgeable American experts. When influential Americans, such as Bruce Lehman, the architect of the WIPO treaties and the DMCA, tell us to learn from American mistakes, we 155 See Howard P. Knopf, “Online Music 2007”, 10 Intellectual Property Law and Policy 110 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham International Intellectual Property Law & Policy Conference, Apr. 12–13, 2007).

94 CHAPTER IV: COPYRIGHT LAW ought to listen. Another example is Bill Patry, who tells us that the United States is being a bully and we should stand up and fight back. Canada has always provided strong protection for creators and corporate copyright interests, and in very many important ways has done so for much longer and for much more principled reasons than the United States. This has provided, and will continue to provide, great financial benefit to the United States. And it actually does serve to benefit real creators to some extent, which is one of the main things that copyright law is supposed to be about — in case anybody has forgotten. Canadians are increasingly awakening to the ironies arising from weaknesses in American copyright law and the ironies of the demands being driven by American interests. The “born again” extreme American vision of copyright law is being considered in context by a country that has, for at least eighty-five years, provided far greater protection to American nationals and their creations than vice versa. If there were a mechanism in the Trade Act of 1974 to put the United States on the priority Watch List, it would surely need to be invoked. As I have shown, the United States has far more to worry about than Canada in terms of the inadequacies of its copyright regime. There is no need for Canada to defend itself, or even to be defensive about alleged weakness in its copyright regime. If anything, Canada’s regime is too weak in its protection of users’ right, particularly in respect of fair-dealing issues and exceptions that are available in the United States. The fact that the United States has chosen to implement the 1996 WIPO treaties in an excessive and counterproductive way does not for a moment entitle it to demand that other countries join in its folly. The United States is itself being watched by the WTO156 on the “Special 301” issue and is vulnerable if it actually acts unilaterally. Meanwhile, if it continues to preach too loosely and profusely, it will continue to lose credibility — which may be even a more serious consequence. Just a few days ago, EU Ambassador John Bruton, Head of the European Commission Delegation to the United States, reminded the United States that it needs to get the American house in order: At a time when there is increasingly impressive cooperation between the EU and the U.S. in combating intellectual property infringements, it is high time for America to resolve our outstanding IPR disagreements. As the stakes continue to grow in the intellectual property arena, the U.S. should not weaken its voice in the debate by ignoring treaty obligations and WTO decisions. American delay on fixing the “Irish Music” and “Havana Club” cases diminish the arguments that both the U.S. and EU countries have against China and other countries that continue to tolerate widespread intellectual property rights infringement.157

The United States does much good in the IP world and there is much to admire in its IP regime. But there is also more than a little inconsistency and even hypocrisy in American positions at times and the United States is in danger of becoming the country that everyone loves to hate in IP. Therefore, it may be fitting for America to step back from its overwrought “Special 301” regime and take some time out to step in front of and look straight into the mirror. PROF. BURRELL: Thank you. Richard, would you like a few moments to comment? WIPO Dispute DS152, supra note 147. Press Release, John Bruton, Head of the European Commission Delegation to the United States, EU Ambassador Calls for Resolution of IPR Cases (Mar. 19, 2008), available at http://www.businesswire.com/portal/ site/google/?ndmViewId=news_view&newsId=20080319006105&newsLang=en. 156 157

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MR. KNOPF: Richard agrees. MR. PFOHL: It probably won’t surprise you I do not agree with much of what Howard said.

I do agree with him that no one’s copyright laws are perfect. I am pleased to see Howard championing neighboring rights. We are actually part of the Music First coalition that John Simson described yesterday [Chapter IV.B.1, infra this volume], because actually Canadian artists will benefit if the U.S. laws are reformed so that Canadian artists get paid when they are played on U.S. radio. So I’m pleased about that. Frankly, the discussion about neighboring rights in Canada, or moral rights, or any of these other issues, is really irrelevant to two core issues. Those core issues are that Canada is out of step with international norms with respect to digital copyright protection and with respect to IP enforcement. Howard mentioned that with respect to the G8 countries — “Well, aha!, Russia is in the G8, so we are clearly not as bad as everyone in the G8. So congratulations, Canada, you are worse than everyone except Russia in the G8.” Frankly, all those other countries in the G8, virtually every country in the OECD, have ratified the WIPO treaties, have moved to fix their IP enforcement regimes. Canada lags increasingly behind the rest of the world. When it comes to the Internet, basically if you look at WIPO treaty ratification as Internet 1.0, most countries have moved beyond that. They are now in Internet 2.0, 2.1, 2.3. You’ve got the Olivennes Commission in France.158 You’ve got the Gowers Commission in the United Kingdom.159 They are moving on to deal with these issues as they come up. Canada increasingly is out of step with everyone else in the world. There is consensus on this issue in Canada. So Howard says, “Well, this is just a CRIA position.” Well, it’s not actually. This is a top priority of the Canadian Chamber of Commerce, which represents 157,000 businesses across Canada. They recognize that in an information society, in order to be successful you need adequate protection of IPR.160 As far as creators go, I can go through a laundry list. But suffice it to say that CRIA does not stand alone. In fact, it stands in solidarity with virtually every other creator society in Canada. Howard describes it as a U.S. issue. It is not a U.S. issue. This is actually a Canadian issue. Just to give you an example, there was an editorial yesterday in the Vancouver Island News.161 I want to quote it: “There is no reason to put off any longer bringing Canada’s copyright law into the digital age. Such reform is long overdue. The growth of the Internet has enabled consumers to copy and share material with a few clicks of a computer mouse, thereby eroding the ability of artists to control and earn a living from their work. Canada’s Copyright Act simply hasn’t kept up. By failing to update its laws to take this new reality into account, Canada risks stifling creativity and innovation among artists who may be even harder pressed to make a living. This is an issue for Canadian creators.” It is also, however, a global issue. The whole point of the WIPO copyright treaties, the whole point of harmonization of international copyright law, was a recognition that, particularly in 158 A Memorandum of Understanding between music and film producers, Internet service providers, and the government was signed on Nov. 23, 2007. Under the agreement, France is to set up a new Internet authority with powers to suspend or cut access to the Web for those who illegally file share, and access providers are to implement filtering and blocking instruments. See Accord pour le développement et la protection des oeuvres et programmes culturels sur les nouveaux réseaux, available at http://www.culture.gouv.fr/culture/actualites/index-olivennes231107. htm; Eric Bangeman, “France’s Plan to Turn ISPs into Copyright Cops on Track”, Arstechnica, Jan. 28, 2008, http:// arstechnica.com/news.ars/post/20080128-frances-plan-to-turn-isps-into-copyright-cops-on-track.html. 159 U.K. Treasury, Gowers Review of Intellectual Property (2006), available at http://www.hm-treasury.gov. uk/ media/6/E/pbr06_gowers_report_755.pdf. 160 See Press Release, Canadian Chamber of Commerce, Business coalition stresses need for better protection of intellectual property rights (May 26, 2008), available at http://www.chamber.ca/cmslib/general/ ReleaseIPCoalitionLaunch 260508.pdf. 161 Editorial, Vancouver Isl. News, Mar. 27, 2008.

96 CHAPTER IV: COPYRIGHT LAW the global digital age, piracy anywhere is a threat to creators everywhere. That’s why they set minimum standards and said, “Let’s get all the countries of the world that are creators in the international community to agree to those minimum standards.” Canada agreed. It committed to sign those treaties. Now, Howard says: “Well, a commitment’s not a legal obligation; therefore, Canada can break its commitment.” Well, at the time that it signed those treaties over a decade ago, Canada described it as a commitment. Since then, successive governments have repeatedly committed to ratifying the WIPO Treaties. Now, whether or not we can get a legal loophole — it is not a legal obligation; no one can sue us if we do it — is really irrelevant. The question is whether Canada ought to renege on its international commitments. My position is that it should not, and that is the position of the Canadian government. As Steve mentioned, four parliamentary committees now have unanimously said that Canada needs to update its IPR regime. The government has agreed with unanimous parliamentary committees that Canada needs to ratify these things and bring its laws up to speed. The final point I want to make is that the courts agree too. I see Roger Hughes sitting in the audience. Roger is a member of the federal bench. He is probably the most knowledgeable on copyright issues. He has publicly stated that, because the law is so out-of-date, it is very difficult for jurists to be able to interpret it. The Supreme Court of Canada said precisely the same thing in 2004 in the first music-onthe-Internet case.162 They said that the law is so out-of-date, because Canada hasn’t ratified the WIPO Treaties, that the courts are lost. So, simply, this is not a U.S. issue. It is an international issue and it is Canadian issue. PROF. BURRELL: Thank you. We’ve got just over ten minutes for questions. QUESTION [Mario Bouchard, General Counsel, Copyright Board Canada]: Very quick points. Twelve years there is a consensus, everybody says it’s a priority, and it has not happened. That should tell you something about the solidity of the consensus. Two, I haven’t heard that peer-to-peer ceased to be a problem since countries have ratified and implemented the WIPO Treaties. Third, I agree with Steve’s statements, with a little bit of a twist on what he said about rogue countries. I think that a country that in 1988 had not found its way, after 102 years, to ratify the Berne Treaty was in serious trouble. It took them 102 years. We are only at twelve. Give us a break. MR. PFOHL: If I could, I will just respond briefly to Mario’s two comments. With respect to why it is taking twelve years, the government actually recognized this was a problem five years ago. They said: “It’s because we keep on piling on all these issues. So what we are going to do is we’re going to break everything up into short-term, medium-term, and long-term issues and we are going to deal with them in that order. So we’ll deal with the short-term ones first.” The first two they mentioned were WIPO ratification and ISP liability. Unfortunately, then all the long-term issues started getting piled on again. For example, Howard mentioned the Business Coalition for Balanced Copyright. Well, what they came out with was basically a laundry list of what they wanted. For example, the broadcasters want an exemption from the exclusive right of reproduction — okay. The telecom companies want complete limitation on liability but they don’t want notice and takedown. If you look at the 162 Society of Composers, Authors & Music Publishers of Can. (SOCAM) v. Canadian Ass’n of Internet Providers, 2004 S.C.C. 45, [2004] 2 S.C.R. 427.

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letter, it is everyone again trying to pile on. That is what has happened repeatedly in Canada. It simply causes gridlock. Finally, on the point about whether P2P persists or not, I think that Steve Metalitz’s statistic that Canada has, according to the OECD, the highest level of file sharing in the world is telling. QUESTIONER [Mr. Bouchard]: I think that Steve should fire both his lawyer and his statistician. MR. KNOPF: The music industry is one of the best-performing industries in Canada. Statistics Canada, which has no vested interest here, keeps reporting that the Canadian music industry is doing incredibly well by any measure, including other industries in Canada, something like 9 percent return on money, and compared to other countries. So despite us being a haven for piracy, proceeds being laundered into terrorism, and all kinds of other unfounded allegations, the sky has not fallen. MR. PFOHL: Let me just respond to that one point. With regard to Canada’s recording industry, number one, approximately 20 percent of the people in that industry have been laid off, and it is most acute among the independent companies. Their profit margin is less than 1 percent. PROF. BURRELL: Steve, I think you had a comment. MR. METALITZ: I think Mario is right. Obviously, some of these issues have become quite controversial, and that is one reason why progress has not been made. We can get into that. But what I think many of us find puzzling is how issues have been handled that I would not think are particularly controversial. For instance allowing Customs officials in Canada to do what Customs officials in almost every developed country have authority to do ― when they see a video coming in that is still in the theaters, has never been released on video anywhere in the world, they cannot seize it. The same with mod chips; they cannot seize them because they may not even have legal authority to do so. I am not sure at what level there would be controversy over better enforcement of the law that now exists. And yet that, too, seems to be somehow in gridlock in the Canadian system. That’s why I mentioned enforcement first, because I wouldn’t think that many of those issues would be as controversial. Yet, somehow, they never get addressed. QUESTION [Hon. Roger Hughes, Judge, Federal Court of Canada (Ottawa)]: Steve, I want to rebut that one. I sign orders three times a week doing these kinds of things. I think it’s the reluctance of the copyright owner. You’d rather complain. Get in there, roll up your sleeves, and muck into the court system. We readily grant orders. It’s just not true what you’re saying about Customs import stuff. Is there a Microsoft guy here today? I signed three Anton Piller orders for you last week on these things. I think you are living in a myth. I don’t know where this happens. It reminds me of South Park, where, if everything else goes wrong, blame Canada. I will leave it at that. MR. METALITZ: Much of your parliament seems to be in the same mythological universe. QUESTIONER [Justice Hughes]: The laws are there and they work. Forget about parliament. You don’t need it. You’re just whining about something you don’t need to whine about. Get in there and do your job as a lawyer. PROF. BURRELL: Another question here. QUESTION [Mihály Ficsor, CITP, Budapest]: I would like to say simply that it is hardly appropriate to say that “Canada is not alone in G8 in respect of having not ratified, or acceded to, the two 1996 WIPO ‘Internet treaties’ since Russia has not done so either.” It is not appropriate since Russia has implemented the two Treaties in the new IP Part of the Civil Code, which entered into force at the beginning of this year. I have read it in the original Russian version.

98 CHAPTER IV: COPYRIGHT LAW Although, it is not totally perfect, it is a reasonable implementation; it also extends to TPM protection. And there is actually a governmental decision to accede to the two treaties. PROF. BURRELL: Thank you. So perhaps Canada is worse than Russia after all. MR. KNOPF: Can I make a couple of points? There is a legitimacy problem with this 301, too. The United States came close to getting nailed back in 1999 at the WTO on this. The WTO said: “You can talk all you want, but you can’t take any unilateral action under 301. If you are going to impose any sanctions, it has to go through WTO.” And, as Israel has pointed out, how in the world can you complain about countries not implementing treaties that are not part of the WTO when they are under no legal obligation to do so? So the whole business about the WIPO Treaties is, frankly, a red herring. The other point I want to make while I’ve still got the microphone is on a totally different point, just to follow up a bit on what Daniel said about the Kraft case.163 I was very much involved with the Kraft case for the intervenor, the Retail Council of Canada, and it was actually our arguments that won the case on the hypothetical maker point. The interesting thing about the case, for those of you who have studied it closely, is the incidental use argument wasn’t made by any of the parties. The whole point came from the judges themselves. The really big thing, I think the big follow-up on this case, which everybody should watch very carefully, is the issue of misuse. Three of the judges put the issue of copyright misuse — i.e., à la Richard Posner in the Wiredata case164 — very squarely on the radar screen of the Canadian Supreme Court. So in rounds two and three — and round two has already started — there are at least two cases going right now where there is an attempt to get an end-run around the Supreme Court. You can rest assured that we will hear about the misuse doctrine in the future. PROF. BURRELL: Thank you. Are there any more questions? We have time for at least one more. If not, I have a comment. Steve may not want to respond. Whenever I hear Americans talking about the Special 301 process, there is always a big emphasis on compliance with the international norms and so forth. And yet, if you look at Australia’s history of being on the Special 301 list, it was really over two issues: first of all, Australia’s approach to parallel imports, something entirely unregulated by the international conventions; and secondly, the judgment in Holder v. Searle,165 where an Australian court had the temerity to ask U.S. movie studios to prove they owned the copyrights in the works for which they were suing for infringement. Neither of these struck most Australians as being particularly unacceptable. I don’t know if you wanted to respond to that. MR. METALITZ: Well, Australia is not on any Special 301 list. PROF. BURRELL: Not now, not anymore, no. But I’m just trying to say the history is these 301 lists have not been used solely to force compliance with international norms; far from it. MR. METALITZ: The standard under the statute is whether there is adequate and effective protection for U.S. right holders. That is the standard that the USTR is supposed to apply. International norms are obviously one good way to measure that. They are not the only way. Other issues can be worth raising in the Special 301 context, whether or not they are a violation of a particular international obligation. Howard is correct that Canada has not ratified the WIPO Treaties, although I believe Richard is correct that the governments over the last twelve years have consistently taken the Euro-Excellence, Inc. v. Kraft Can., Inc., 2007 SCC 37 (July 26, 2007). Assessment Techs. of Wis. LLC v. Wiredata Inc., 361 F.3d 434 (7th Cir. 2004). 165 44 I.P.R. 1 (1997). 163 164

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position that Canada should ratify and implement those treaties. The WIPO Internet Treaties have a very weak dispute settlement mechanism anyway, and I don’t think anyone would be contemplating taking Canada to court over this. It’s just the fact that when over 100 countries got together in 1996 and adopted the Treaties, and the fact that nearly every developed country has already implemented these treaties or are well on their way to doing so, including all the G8 countries except for Canada, it indicates that Canada is out of step with an international consensus. There is nothing inherently wrong with that, except that the proof of the pudding is the problem of digital piracy in Canada, which is serious and is getting worse. I think it is awfully late in the day to say that Canada should spend another ninety years thinking about whether it wants to join these treaties. It obviously has that legal right to do so, to refrain from being part of this international consensus and continue to be an outlier. But I wouldn’t think that’s in the interest of Canadian creators and ultimately of Canadian consumers. And certainly, from the standpoint that the USTR is supposed to apply in its decision, which it will be coming down with at the end of the next month, I think it is clear that Canada’s outlier status continues to be a problem in terms of adequate and effective protection of right holders. PROF. BURRELL: A question in the back. QUESTION [Steven Tepp, U.S. Copyright Office, Washington, D.C.]: I would like to take the question out of the context of Special 301 or U.S. vs. Canada. That is really, I think, not the core issue. Rather, I would focus it on why is Canada where it is. Why hasn’t Canada implemented these treaties? Yes, it is true that Canada’s copyright regime is ahead of Russia’s, but, at least in regards to the WIPO Treaties, it is behind China. There are over sixty countries that have ratified each the WCT and WPPT. Setting aside any sort of regional rivalries or jealousies — and I address this to all the Canadians on the panel — why is Canada where it is, apparently in this regard behind countries of equal and lesser development? PROF. BURRELL: Daniel? PROF. GERVAIS: I can’t speak on behalf of the government, obviously. But the government has certainly done its homework in terms of analysis. Analysis, obviously, sometimes can be over-analysis. But there are difficult issues that have emerged since the early implementations of the WIPO treaties. I think some of them are both genuine and interesting. For example, just for music — I think we should talk about film separately — having legal enforcement of anticircumvention devices or TPM may not be such a big part of the solution. In fact, many of the labels have moved away from TPMs (not DRM or RMI) because consumers don’t accept them very easily. Understanding this market is a moving target. It seems too many people in Canada that you must be careful before you legislate in this area; the technology changes and the business models evolve. So the question is: Do you take a snapshot and live with the unintended consequences of regulating something without the certainty of achieving your purpose? There is no easy answer to that question. To say, “Well, just ratify the Treaties and implement them” really doesn’t solve the issue. The second issue that has come up repeatedly, and to which there are several good answers, but I’m not sure there’s a best answer, is: How do you interface the implementation of the treaties with exceptions and limitations? There is in parallel a broader debate about the exceptions and limitations — not just in Canada, by the way—and this does not make matters easier. Put all that in the mix and complexity emerges. Certainly I don’t sense any desire for this issue to continue to be on the radar forever and ever. Yet, I think the analysis in Canada has shown that it is more complex perhaps at this stage than it might have been ten years ago to implement the Treaties.

100 CHAPTER IV: COPYRIGHT LAW PROF. BURRELL: Thank you.

Join me in thanking our Canadian speakers.

NEW ZEALAND AND AUSTRALIA PROF. BURRELL: Now I will pass over to Professor Susy Frankel to talk about the developments in New Zealand.

Recent Copyright Law Developments in New Zealand Copyright (New Technologies) Amendment Bill Parallel Importing Review: Impact on Creative Industries Prof. Susy Frankel* When I gave Hugh my two-line description for the program I said something like, “Why the Digital Copyright Bill Is Not Likely To Become Law.” Since that time it is likely to become law.166 I will discuss some key features of the new New Zealand law and also summarize the recent review of parallel importing. I. DIGITAL COPYRIGHT REFORM

On the 19th of March, the New Zealand Digital Copyright Bill progressed another step in the parliamentary process and has now become law.167 One of the things New Zealand has in common with Canada is that digital copyright reform has been a long and hotly debated process. The new law had been in the parliamentary system for two or so years, but the policy discussion process preceding it stretches back almost ten years. One of the reasons for my initial pessimism about its becoming law is partly because it is an election year in New Zealand and this is not high on the government’s list of priorities. Daniel Gervais made the point that it is hard to form a law that is compliant with all relevant treaties, given the number of the interests that need to be balanced. What New Zealand has attempted to do is to find a version of digital copyright law that reflects what the legislators and policymakers describe as New Zealand’s public-interest approach to benefit New Zealand as a whole and to contribute to overall growth and development in New Zealand. This bill is the first time that New Zealand has written a copyright law for New Zealand rather than, as it has done in the past, almost wholesale adopted the law from somewhere else. On the other hand, I think it is a less-than-perfect piece of legislation. Let me tell you some of what is in it. * Victoria University of Wellington, New Zealand. 166 Note: Subsequent to the Conference, the Copyright (New Technologies) Amendment Bill received royal assent on Apr. 11, 2008. Most of the Amendment Act comes into force on a date still to be set by Order in Council). The Amendment Act updates the Copyright Act 1994. 167 Hon. Judith Tizard, Copyright (New Technologies) Amendment Bill (Formerly Copyright (New Technologies and Performers’ Rights) Amendment Bill) Government Bill As reported from the committee of the whole House, available at http://www.legislation.govt.nz/bill/government/2006/0102-3/latest/096be8ed801aae8a.pdf.

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The new law enacts a communication right in compliance with the WCT. In addition, a category of work called “the communication work,” is created.168 This new category of work is an attempt to technologically neutralize some of the broadcasting and cable program definitions. Protecting communication works as such is also a method of protecting some modes of access to works, without protecting access controls. Next I want to focus on two particular areas. One is format shifting of sound recordings and the other is the TPM protection. A. Format Shifting When format shifting was initially introduced, there were a lot of submissions saying more or less that the law should not allow format shifting because such an exception is not going to be able to be kept to genuine copying for domestic use. Despite these types of submission, there is a format-shifting provision. It has a number of requirements with which users must comply. A user cannot borrow a sound recording in order to format shift it. The person format shifting must also keep the original sound recording. There are several other conditions, all of which are an attempt to balance the rights of users and owners. Good intentions aside, there is an air of impracticability to the conditions. At one stage, the recording industry was successful in negotiating a sunset clause for format shifting. It was to be reviewed in two years. The legislation no longer requires a review in two years. B. Technological Protection Measures As for TPM protection: This is where New Zealand has, in some sense, “gone it alone” in trying to reach the halfway house. In our existing copyright law, we have some TPM protection. It has for sometime been an infringement to supply or manufacture devices that are designed to circumvent TPMs. However, under the new law it is an infringement to circumvent and copy, but the act of circumvention itself is not an infringement. The law makes a distinction from what you might say is the DMCA law, or indeed Australian law: There is no liability for the act of circumvention, only for the infringement that might occur as a result. There is an attempt in the law to allow circumvention for permitted acts. We all know that it is not easy to circumvent for research or private study or whatever the permitted act might be. There might be some form of digital lockup. So the new law creates a regime in which qualified persons can assist in circumvention for certain permitted act purposes. The user needs a so-called “qualified person” because one cannot go out and buy a circumvention device. Selling such a device is a copyright infringement. The law does not create a situation where allowing circumvention for permitted uses allows circumvention devices to be sold, either online or in a retail outlet. 168 Id. pt. 1, cl. 7: 3 Associated definitions for communication works: (1) References in this Act to a person communicating a work or making a communication work are — (a) to the person transmitting the communication work or making it available by means of a communication technology, if that person has responsibility to any extent for its contents; and (b) any person who provides the contents of the work and who makes with the person communicating the work the arrangements necessary for its communication. (2) For the purposes of this Act, in the case of communicating a work by satellite transmission,— (a) the place from which the work is communicated is the place from which the signals carrying the work are transmitted to the satellite: and (b) the person communicating the work is the person who transmits those signals to the satellite.

102 CHAPTER IV: COPYRIGHT LAW The elite who are allowed to circumvent on behalf of individuals for permitted acts include educational establishments, libraries prescribed under the legislation, and archives. These elite might also be able to circumvent for their particular purposes, archival purposes, as well. The other digital copyright reform that might be of interest is that decompilation of software for certain research purpose is permitted. There is a provision that provides that any contract that attempts to prohibit or restrict this limited decompilation of software is not allowed. This is the only expressly mandatory provision in the whole of New Zealand copyright law. There are also provisions that give ISPs exemptions from liability. The law establishes a notice-and-takedown procedure, which is similar, but not identical, to the DMCA. II. PARALLEL IMPORTING

In the remainder of my time, what I want to tell you about is that New Zealand has undertaken a substantial review of the parallel importing law. We allow parallel importing of copyright works. The main reason that New Zealand first allowed parallel importing of copyright works is because we include a lot of industrial design under our copyright law. The political issue that originally sparked the allowing of parallel importing was to allow cheaper cars into New Zealand. Many New Zealand cars are imports from Japan. Cars used to be assembled in New Zealand. But New Zealand, as many of you will know, is a very trade-friendly country, so we do not indulge in industries in which we have no comparative advantage, and car assembly would be one of those. So parallel importing of cars became a necessity, in order for them to cost less than at least several months’ salary for the average person. Copyright law stood as a barrier to that. One of the cases brought initially by Toyota was to stop parallel importing. The ban on parallel importing was lifted in 1998.169 Parallel importing is now allowed. Recently there has been a significant review to see the effect on the creative industries of allowing parallel importing.170 The review analyzed the effect on book sales, sound recordings, computer software, and film in New Zealand. It is also one of the best economic reviews of copyright law ever to come out of New Zealand. Somewhat shamefully, but because of resource issues, previous economic reviews of copyright law have been thin on economics. This one is relatively dense. Briefly, the method of review: Extensive interviews were undertaken of industries, not just New Zealand industries, but what one might call the New Zealand global copyright industries. They were given counterfactual scenarios, as well as actual scenarios, to look at what would have happened if parallel importing had not been allowed. Book sales have increased in New Zealand. More people will buy from New Zealand bookstores or distribution chains of publishers from overseas companies, provided they get the books there quickly enough. Sales through online bookstores decrease if the New Zealand distributors will pay the shipping instead of the consumer. It is generally thought that parallel importing has actually been good for local book sales, because it has managed to improve the book distribution network. For sound recordings, it has been concluded that there needs to be further study. This is because the major issue with the sound recording has been the absence of digital copyright protection. The report concludes that digital piracy, rather than anything to do with parallel importing, has affected the sound recording industry. However, there is to be an ongoing review of the sector. 169 See Posting of James Love, [email protected], to [email protected], New Zealand Lifts Ban on Parallel Imports — US Objects (May 26, 1998), available at http://lists.essential.org/1998/info-policy-notes/ msg00025.html. 170 Ministry of Economic Development, Parallel Importing in New Zealand (Dec. 18, 2007), available at http:// www.med. govt.nz/templates/Page____1230.aspx

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Regarding parallel importation of audiovisual works, since about 2001 parallel importation of DVDs is not permitted immediately upon release; rather, parallel importation is only permitted after a nine-month window of opportunity for release in New Zealand. As some of you know, recently a number of films have been made in New Zealand and supporting the film industry was considered in the review. In essence, the regime allows film producers nine months to release in New Zealand before a parallel import. So they have this window of opportunity to release it. The big issue for places likes New Zealand — and it has been an issue for Australia too — is that we have to wait and wait and wait for DVD and cinema releases. With the Internet, that sort of wait is unrealistic. People will start to download and import if the market is not supplied. The report recommends that this nine-month window be shortened to six months. PROF. BURRELL: Professor Anne Fi

Recent Copyright Law Developments in Australia Prof. Anne Fitzgerald*

I am going to be talking about Australian developments in 2007–2008. If anyone is interested in following up on the work that I will be talking about here in documentary form, you can have a look at our publications. Internet and e-Commerce Law was published by Thomson Reuters in late 2007.171 This is part of our ongoing digital project, which really kicked off around 1995–1996. We are documenting what has happened with IP law and the Internet in Australia since that time. We are also doing a lot of IP research through the IP Research Unit at Queensland University of Technology (QUT), through projects called OAK Law. Through links on our Web site, www.oaklaw.qut.edu.au, you will find a lot of our reports and publications. I will essentially try to give you a snapshot of what is happening. There are two main headings. I will probably only have time to go through one. The first heading is the enforcement issues. The second is what I would call the new business model/open access agenda. I. ENFORCEMENT ISSUES

The enforcement agenda is an externally driven agenda, whereas the new business models/ open-access agenda, which is really much more interesting from our perspective, is internally driven. Given that this is an international audience, I probably should focus on the externally driven enforcement agenda, because I think it does actually have some lessons for other countries, particularly in terms of criminal copyright provisions. A. Australia–U.S. Free Trade Agreement Essentially, the spur for this has been the Australia-U.S. Free Trade Agreement of 2004,172 under which Australia and the United States have both committed to WCT-plus commitments. * Queensland University of Technology Law School, Brisbane. 171 Brian Fitzgerald, Anne Fitzgerald, Timothy Beale, Yee Fen Lim & Gaye Middleton, Internet and e-Commerce Law — Technology, Law and Policy (2007). 172 U.S.-Australia Free Trade Agreement, May 18, 2004, T.I.A.S. No. 6422, 43 I.L.M. 1248, available at http:// www.ustr.gov/Trade_Agreements/ Bilateral/Australia_FTA/Final_Text/Section_Index.html.

104 CHAPTER IV: COPYRIGHT LAW This is a bargain bilateral agreement covering a whole range of trade and investment aspects of the relationship between Australia and the United States. Essentially, IP, from the Australian perspective, is part of the bargaining parcel that includes agriculture, access to markets, etc. That was largely given effect by the United States–Australia Free Trade Agreement Implementation Act of 2004,173 which added to the existing criminal enforcement provisions. B. Copyright Amendment Act Further amendments were made under the Copyright Amendment Act at the end of 2006,174 which totally replaced the existing provisions on TPMs, which had been inserted by the Digital Agenda Act in 2000175 and greatly expanded the existing criminal copyright provisions.176 So there are now numerous offenses. Again, if anyone is interested, have a look at our Internet and e-Commerce Law book. Typically, each of the offenses has three variants: strict liability, summary, and indictable offenses. The amending clauses were, in fact, spectacularly poorly drafted. They were dumped on us late in 2006. They were enacted, finally, just before Christmas in 2006. They required substantial revision. What are called exposure drafts in the Australian context were in bits. They were put out for comment. They required a lot of amendment and change before the bills were introduced into Parliament. Then, in the Senate review of the legislation, a further eighty amendments were made, when the bill came back into the Senate, which involved the deletion of at least thirteen of the strict liability versions of the offenses. C. Technological Protection Measures On TPMs, protection had been introduced in Australia pretty early on, under the Digital Agenda Act in 2000. That was considered by the High Court in Stevens v. Sony in 2005, where “mod chips” to get around region coding were held not to infringe the anticircumvention provisions. 177 The Australia-United States Free Trade Agreement required Australia to enact DMCA-equivalent TPM protection, which has essentially been done. The version of the TMP amendments that was proposed by the Senate when it reviewed the bill in November 2006 was rejected by the government in favor of text that was supplied by the United States. I am not sure where that came from. The enacted version explicitly states that region coding, which was the issue that had come up in Sony v. Stevens, is not a TPM. So circumventing that will not, in itself, be within the prohibitions. Pub. L. No. 108–286, 118 Stat. 919 (2004) (codified at 19 U.S.C. § 3805). Copyright Amendment Act 2006, available at http://www.copyright.org.au/pdf/acc/infosheets_pdf/g096.pdf. 175 Australia Copyright (Digital Agenda) Act (Amendment), Apr. 9, 2000, available at http://www.wipo.int/clea/ en/ details.jsp?id=297. 176 See Parliamentary Committee Report, Cracking Down on Copycats: the enforcement of copyright in Australia (2000). The Government established the Intellectual Property Enforcement Consultative Group, which is chaired by the AFP and is made up of representatives from the film, music, and software industries, as well as brand owners, government agencies including the Attorney-General’s Department, IP Australia, the Australian Customs Service, the Australian Institute of Criminology and the Australian Crime Commission, some State police services and the Federal Director of Public Prosecutions. The main function of the Group is to encourage practical cooperation between industry, police services, and Customs mainly by information sharing. The Federal Director of Public Prosecutions prepared outline briefs for prosecuting IP offences, which it distributed to industry and State police to assist them in dealing with IP crime, which include guidelines for investigators in preparing briefs of evidence, a breakdown of elements of the offences under the relevant Acts, as well as broader prosecution policy. 177 Stevens v. Kabushiki Kaisha Sony Computer Entm’t, [2005] HCA 58, (2005) 221 ALR 448, (2005) 79 ALJR 1850 (Oct. 6, 2005), available at http://www.austlii.edu.au/au/cases/cth/high_ct/2005/58.html (holding that access codes are not technological protection measures because they do not prevent or inhibit infringement). 173 174

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D. Criminal Enforcement The criminal enforcement provisions, although they are enacted, will prove difficult in transposing to practice. The issue of jurisdiction of state and federal courts does not appear to have been properly understood by the drafters of the provisions. Again, as I said, this is an externally driven agenda. We do not know where the drafting was done. It was not done by us. A lot of people in Australia put in a submission to have it brought into line with something we thought would stand a chance of working in the Australian context. Primary jurisdiction for criminal matters is with the state and territory courts. There are summary and indictable offenses. Remember, the strict liability notices of infringement are essentially like a speeding ticket. Depending on the state or territory in Australia, they will be heard by courts ranging from local magistrates courts up to the state supreme court. For example, indictable offenses where the defendant opts for a jury trial will be heard in the state supreme court. In general, the Federal Court and the Federal Magistrates Court have primary jurisdiction over copyright and IP matters. However, neither the Federal Court nor the Federal Magistrates Court has primary jurisdiction to hear criminal cases. An appeal from a state or territory court on any copyright matter, civil or criminal, goes to the Federal Court or to the High Court, if the High Court grants special leave to appeal. So, in particular, appeals on sentences and other matters arising from the criminal copyright cases which are heard in the state and territory courts will go to the Federal Court or, with special leave, directly to the High Court. A case where we have recently seen this in operation was in the Federal Court recently, in September 2007, Le v. The Queen, an appeal from the Magistrates Court in Liverpool, Sydney, to a single judge of the Federal Court.178 Justice Edmonds in the Federal Court set out sentencing principles citing criminal law authorities from state courts and other courts exercising criminal jurisdiction, and does not refer to a single Federal Court precedent on sentencing — essentially, there are none — and reduced the time in custody that had been ordered by the magistrate from a total of eight months to three months. The Federal Court has not until now functioned as an appeal court hearing criminal cases from the state courts. So it gives rise to some quite fundamental problems. The usual line of appeal on criminal matters would be to the higher courts, such as the Court of Criminal Appeal or the full Supreme Court within the state or territory. It is very unusual, if not unique, to have a criminal matter being appealed from a state or territory court to the Federal Court. You need to appreciate that the Federal Court has not been regarded as a criminal court. Judges appointed to the Federal Court have usually practiced largely, though not exclusively, in commercial litigation. Many would have no experience whatsoever in criminal practice. This has produced a problematic outcome. It really has not been thought through. The criminal enforcement provisions do not appear to have been crafted by senior lawyers who understand the operation of the criminal law system in Australia. So where to from here? Basically, I think that if Australian governments are to carry out the expense of constructing and operating this piece of legal infrastructure, which is seen as so essential from the point of view of our trading partner’s economic interest under the Australia– United States Free Trade Agreement, we need to ensure that they will operate effectively and coherently within the Australian legal system. Essentially, it does need to be reviewed, probably as a matter of urgency. It needs to be done perhaps by one or more retired judges or senior prosecutors with extensive criminal experience and understanding of copyright law. 178 Le v. The Queen, [2007] FCA 1463 (Sept. 18, 2007), available at http://www.austlii.edu.au/au/cases/cth/ federal_ct/ 2007/1463.html

106 CHAPTER IV: COPYRIGHT LAW So far there do not appear to have been many cases under the legislation. The criminal enforcement provisions have been enacted. They came into force at the beginning of 2007, so they have been in force for a year now. At the moment, we would probably say they are more window dressing than an effective system of criminal copyright enforcement. To ensure that the legal system is not degraded by the enactment of ill-thought-out models, I suggest that it needs to be reviewed with a degree of urgency. II. NEW BUSINESS MODELS/OPEN ACCESS AGENDA

In the minute I have remaining, I will very briefly go back to the new business models/open access agenda. Again, this is internally driven.179 In that respect, it is much more interesting, much more forward-looking. It is all about ensuring appropriate legal infrastructure, including IP, to enable access to and re-use of public-sector information that is collected, held, or funded by public-sector bodies. The aim is to remove impediments to access and reuse. We put out a report, Building the Infrastructure for Access and Reuse, for research data.180 Also we hosted national summits on access to public-sector information in July 2007 and March 2008. I won’t have time to talk about it, but one of the interesting issues coming to the fore in Australia is the Copyright Agency Limited v. New South Wales case,181 which involves copyright in survey plans, plans introduced by surveyors.

PROF. BURRELL: Thank you. Peter, do you have a few comments? PROF. BLACK: Just a few comments, touching on some of the things Anne was talking about. I would like to start with the Copyright Agency Ltd. (CAL) v. The State of New South Wales case. Basically, Australia has Crown copyright. This was a case on the Crown copyright, namely whether the government had copyright in surveyors’ plans. The court concluded in that case that the government did not have copyright in those plans. One of the reasons this case was interesting is that we had a review of Crown copyright some years ago, where it was suggested that we should get rid of Crown copyright.182 There was no mention or reference to that made in the court’s decision. That is one reason why it is particularly interesting. Let me just touch on the criminal provisions and the ongoing process that we have in Australia of reviewing our copyright laws. An announcement was made by Communications Minister Stephen Conroy in February,183 suggesting the idea that Australia would look at the “three strikes and you’re out” model that the United Kingdom is contemplating, whereby if you are caught downloading illegal or copyright-infringing material three times, then the ISP would be required to block you, which 179 See generally John Shipp, “Open Access in Australia” in Open Access: Key Strategic, Technical and Economic Aspects (Neil Jacobs ed., 2006); “Victorian Government Takes Up the Open Access Agenda”, Center for Pol’y Dev., July 21, 2008, http://cpd.org.au/node/4672. 180 Anne Fitzgerald & Kylie Pappalardo, “Building the Infrastructure for Data Access and Reuse: An Analysis of the Legal Context” (June 2007), available at http://eprints.qut.edu.au/archive/00008865/01/8865.pdf. 181 [2007] FCAFC 80. 182 Copyright Law Review Comm., Crown Copyright (April 2005). The Report and all submissions received are available at http://www.ag.gov.au/agd/WWW/clrHome.nsf/Page/Overview_Reports_Crown_Copyright. 183 See Heath Gilmore & Kerrie Armstrong, “War on Music Piracy”, Sydney Morning Herald, Feb. 17, 2008, available at http://www.smh.com.au/articles/2008/02/16/1202760662778.html.

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is another unusual move when that is coupled with our increased enforcement and penalty provisions that we sought from the previous government.184 We do not know how far the current government will take that particular proposal, but it is reflects the ongoing trend of really cracking down on copyright infringement, particularly through the Internet. PROF. BURRELL: Thanks. Questions from the audience? QUESTION [Prof. Brian Fitzgerald, Queensland University of Technology, Brisbane, Australia]: I would be interested to know a little bit more about the CAL case. Could you please tell us a little more about that case? There is a second limb of that. Basically, the surveyors’ claims were not copyright to the Crown, but what does that mean for the Crown? PROF. ANNE FITZGERALD: To explain that it is necessary to run through what the questions were. The issue really is that the production of these plans by surveyors was required by legislation. The requirement to produce them and the form they take are very heavily prescribed by provisions in the legislation and regulations. Two issues really arose. First, who owns the copyright? The surveyor/land developer or the government? We have Crown copyright provisions that say that for works produced by or under the direction or control of the Crown copyright actually belongs to the Crown. The Fourth Federal Court said the surveyor/ developer owns the copyright. Second, does the government have a license to use the plans, for example, to create its own digital database of land information and to provide access to the public to copies of the original plans and the digital database? The court said the government does have a non-statutory license and does not have to pay a royalty to the surveyor/developer copyright owner. CAL was given leave to appeal that decision by the high court. CAL argues that the government does not have a license to use the survey plans, to provide access, and that what applies is the statutory license for government copying, so that any copying by government, if done legally for the services of the state, will not be an infringement of copyright. However, it will require payment of remuneration to the relevant collecting society, which in this case is CAL, in an amount to be determined by the Copyright Tribunal if the parties cannot agree. That case is coming for hearing before the High Court on April 24, 2008.185 MR. METALITZ: Could I make a comment on the New Zealand situation? I am glad that Professor Frankel pointed out that under current law in New Zealand there is a provision that addresses circumvention, technological protection measures, and it is based on the U.K. law from the 1980s. That is one thing I was referring to when I said I thought Canada would win the race to be last, because I think New Zealand already has something in place. The New Zealand legislation takes a different approach than the United States, Europe, or Australia on the issue of the act of circumvention or access control. In all those other systems, that is prohibited. In the United States it is subject to a number of exceptions. The exceptions differ, but there are a number of them. But the proposal in the New Zealand legislation is that 184 Under the “three-strikes” plan, Internet users who are caught sharing copyrighted files will receive an e-mail warning them from their ISPs; upon the second offense, file sharers would face temporary account suspension; and be entirely cut off on the third infraction. 185 Note: Subsequent to the Conference, on Aug. 6, 2008, in Copyright Agency Ltd. v. The State of NSW, [2008] HCA 35, a unanimous High Court overturned the Full Federal Court’s ruling that Lands and Property Information (formerly the Land Titles Office), part of the New South Wales Department of Lands, does not have an implied license extending to allow the LPI to scan copies of survey plans, lodged with the office as a necessary element in registering title to land, and pass copies on to LPI staff, government agencies, councils, relevant authorities, information brokers and members of the public. One thing we don’t yet know is how much the NSW government will have to pay. The use will still fall within the government’s statutory license (Div), which means the government can make the copies but must pay equitable remuneration, to be determined by the Copyright Tribunal.

108 CHAPTER IV: COPYRIGHT LAW it is simply not prohibited at all, under any circumstances. Do you know what the thought process was leading up to that approach? PROF. FRANKEL: That is correct. I thought that you had actually indicated that Canada was going to win the race because they were further ahead of New Zealand. A couple of months ago it looked that way. MR. METALITZ: They win the race to be last. PROF. FRANKEL: Yes. The rationale for that is there is a lot of dispute about TPM protection worldwide. Some people in the United States are often surprised that it is 2008 and we are having our first digital copyright law. But part of the reason for that is that New Zealand has tried to come to this with a halfway approach between the two extremes that the United States and Canada currently represent. So the rationale between the separation between the access and the copy controls is exactly that: copy controls are directly a copyright right. New Zealand is willing to accept up to a point that copy controls are about copyright, but access controls is a different issue. That said, it is it is difficult to separate those concepts. I think that the New Zealand legislators and policymakers recognized that. But there is an attempt here to do that because they raise different policy concerns. One question that arises is certainly WCT-compliance.186 New Zealand takes the view that it is approach is WCT-compliant. We have not ratified the WCT, although we have reference to its standards it in our free trade agreements, but that is another matter. We thoroughly expect people to challenge the New Zealand approach. But ultimately it comes down to a view of the appropriate justifications for and boundaries of copyright law. QUESTION [James Bouras, New York]: I believe your question is mistaken in being limited to access controls. Circumvention for purposes of copying is also permitted in the case of audio format shifting, in the case of permitted acts, which is a very broad conception of the fair use doctrine. The same thing is going to be permitted under the new Swiss copyright law. So what’s the big deal? It is nothing unusual. MR. METALITZ: The U.S. law and the European law187 also allow circumvention of copy controls, but U.S. law and Australian law prohibit circumvention of access controls, subject to certain exceptions. The exceptions, while they vary, cover a number of uses. I was asking why New Zealand had taken the approach that circumvention of access controls was never prohibited under any circumstances. I recognize that circumvention of copy controls is not prohibited. PROF. FRANKEL: There is no official government statement. I am giving you the translated version from the discussion that occurs. My university is over the road from the parliament building. This is the discussion that occurs. There is no official statement, but that is part of the rationale. 186 See Alain Strowel & Severine Dussolier, “Legal Protection of Technological Systems”, WCT-WPPT/IMP/2, at 1–3, available at http://www.wipo.int/eng/meetings/1999/wct_wppt/doc/imp99_2.doc (Nov. 23, 1999) (presented at a Workshop on Implementation of the WCT and WPPT); Pamela Samuelson, “The Digital Agenda of the World Intellectual Property Organization”, 37 Va. J. Int’l L. 369, 378 (1997). 187 Council Directive 2001/29/EC, Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10 [hereinafter EUCD], available at http://europa.eu.int/eur-lex/pri/en/oj/ dat/2001/l_167/l_16720010622en00100019.pdf (June 22, 2001). The EUCD came into force on June 21, 2001. See EUCD art. 6(1), at 1; EUCD art. 6(3), at 17 (“For the purposes of this Directive, the expression ‘technological measures’ means any technology, device or component that, in the normal course of its operation, is designed to prevent or restrict acts, in respect of works or other subject-matter, which are not authorised by the rightholder of any copyright or any right related to copyright as provided for by law or the sui generis right provided for in Chapter III of Directive 96/9/EC. Technological measures shall be deemed ‘effective’ where the use of a protected work or other subject-matter is controlled by the rightholders through application of an access control or protection process, such as encryption, scrambling or other transformation of the work or other subject-matter or a copy control mechanism, which achieves the protection objective.”).

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Those of you familiar with the U.K. law know that they had to decide whether its law actually did cover access controls and so on.188 We have been specific about it in order to avoid that conundrum. Those would be some of the policy reasons, to reflect the competing interests there. I was interested in the comment that you made about permitted acts. One of the reasons that it is perceived that you can do this is because the permitted acts are not wide, they are very prescribed rights. We do not have a wide fair use with five factors that might bring out something else. So it is the permitted act version of the very detailed kind that you see in the United Kingdom.189 They are very specific. PROF. BURRELL: One last question. QUESTION [Sandra Aistars, Time Warner, New York]: As a follow-up question to what you were explaining about the differences between access controls and copy controls in New Zealand, I am curious whether there are protections against circumventing conditional access methods that would apply to cable or satellite means of distributing audiovisual works under the New Zealand law. If there are, what is the rationale for not protecting the same sorts of distribution models that you might undertake via the Internet? PROF. FRANKEL: To briefly answer your question, yes to the first. There are many detailed provisions, as you might know from your involvement with the legislation. Why? Because TPMs are regarded as a slightly different mechanism, partly because of the way cable and broadcast happen in New Zealand. We have quite different issues. We do not have immediate neighbors in whose footprint we fall. That is not a complete answer, but there is a rationale. If you give me your card, I can send you some of the discourse on it. PROF. BURRELL: Please join me in thanking the panel.

188 See UK Patent Office, EC Directive 2001/29/EC on May 22, 2001 on Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society: Consultation Paper on Implementation of the Directive in the United Kingdom (Aug. 7, 2002), available at http://www.patent.gov.uk/about/consultations/eccopyright/ pdf/2001_29_ec.pdf. 189 The Copyright and Related Rights Regulations, (2003) SI 2003/2498, available at http://www.legislation.hmso. gov.uk/si/si2003/20032498.htm (Oct. 3, 2003) [hereinafter 2003 Regulations], to implement the EUCD. The 2003 Regulations came into force on Oct. 31, 2003. UK Patent Office, Implementation of the Copyright Directive (2001/29/ EC) and Related Matters Transposition Note, http://www.patent.gov.uk/copy/notices/2003/copy_direct3a.htm (last modified Oct. 21, 2003).

CHAPTER IV

Copyright Law Part A: World Developments Section 3: Orphan Works Legislation in the United States and Around the World Moderator STEVEN J. METALITZ

Mitchell Silberberg & Knupp LLP (Washington, D.C.)

Speakers PROF. WILLEM GROSHEIDE

OLIVER METZGER

University of Utrecht (The Netherlands)

U.S. Copyright Office (Washington, D.C.) Panelists

TILMAN LÜDER

JULE L. SIGALL

Head of Unit, Copyright and Knowledgebased Economy, DG Internal Market and Services, European Commission (Brussels)

Senior Policy Counsel/ Copyright & Trademark, Microsoft Corp. (Redmond, WA)

MR. METALIZ: This is “Copyright, Orphan Works Legislation in the United States and Around the World.” As always, we have a lot packed into this panel, between the United States and Europe, which I guess is around the world in terms of this presentation, but I hope we will hear also about how this issue is being approached in some other countries. I’m Steve Metalitz. I’m the moderator of this panel. I want to introduce our speakers. To my right is Professor Willem Grosheide from the University of Utrecht, who will be speaking on the European perspective. Then, Oliver Metzger from the U.S. Copyright Office will be speaking on the U.S. legislation on orphan works. We have with us two commentators: Tilman Lüder from the DG Internal Market and Services of the European Commission in Brussels; and Jule Sigall, who is Senior Policy Counsel/Copyright & Trademark for the Microsoft Corporation.

112 CHAPTER IV: COPYRIGHT LAW Without further ado, let me turn the program over to Professor Grosheide for his presentation.

Orphan Works Regulation: The European Perspective Prof. Willem Grosheide* Good morning to all of you. It’s a surprise that so many colleagues at this early hour showed up for this session. I am happy to see you all. In the ten minutes I have been given I will try to give you some overview and some insight into the European perspective on the possible protection of orphan works. I. INTRODUCTION

I will start with the definition of an orphan work, which, apparently, is the basis of everything in this respect. I have taken a definition that you can find in most of the readings about orphan works: “An orphan work is a copyrighted work where it is difficult or impossible to identify and/or to locate the right holder. As a consequence, the legally required permission for (commercial or noncommercial) access to and use of the work cannot be gotten.”1 If you read that, you may say, nothing new with that. Orphan works have been with us since the invention of copyright law. What, then, made orphan works all of a sudden problematic, in the last ten, twenty years? I would say that is due to the fact that, more than ever, digitization has brought the possibility to bring to the fore all sorts of works from archives, libraries, and whatever, that so far have been sleeping there because no one was interested in doing all the really difficult work to bring them to the open in the paper version. But now we can digitize and we can open a vast archive of interesting materials.2 Looking at the definition, and acting according to what copyright law asks us to do, we should have permission of the rights holder. But we cannot find him. II. PROBLEM DELIMITATION

What, then, exactly is the problem? If I try to delimitate the problem, I come to four major issues here: (1) First, you cannot ask permission because there is no one to ask permission from. This particularly damages the general interest that the public at large has in having access for different purposes. It follows from the impossibility to identify and/or locate the right owner and the consequential impossibility to ask permission for using the work, that particularly general-interest uses, such as those by archives and libraries, or for educational, scientific, or touristic purposes, are hampered. (2) The problem applies, in principle, to all types of works, but may raise specific difficulties with regard to works of multiple ownership. Very many works will have * University of Utrecht. 1 Council Directive 2001/29, art. 5(2)(c), Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10 (“Member States may provide for exceptions to the reproduction right provided for in Article 2 in the following cases: … (c) in respect of specific acts of reproduction made by publicly accessible libraries, educational establishments or museums, or by archives, which are not for direct or indirect economic commercial advantage.”).

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multiple owners. If you cannot find one, it is even worse to find all the rest of them. What we have seen in the past, even in the paper world, is that multiple-ownership works have not been brought into the open because no one wants to take the risks that are involved if you have six or five authors and you cannot find one. What will happen if you publish and that one comes forward? (3) Another aspect of the orphan work problem is whether — and, if so, how far — a distinction should be made between unpublished works and published works. Will they be involved both categories? That is a problem also. (4) The extent of the problem is unknown. There are no factual materials at present that can instruct us about how big the problem really is. There are some figures, however. The British Library has calculated that 40 percent of its collection contains orphan works,3 which is quite a lot. If you expand that to other, similar libraries, you will probably come to the same sort of conclusion. III. EU REGULATIVE INITIATIVES

The European Union has taken the following regulative initiatives in order to deal with this problem. • The Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, and the Committee of the Regions, i2010 Digital Libraries.4 • Commission Recommendation of August 24, 2006 on the digitization and online accessibility of cultural material and digital preservation.5 • Council Conclusions on the Digitization and Online Accessibility of Cultural Material and Digital Preservation.6

2 For a balanced view of the respective roles of analogue and digital copies in the libraries of the future, see Robert Darnton, “The Library in the New Age”, 55 N.Y. Rev. Books, June 12, 2008, at 72. 3 See British Library, “Orphan Works and Mass Digitisation” 1 (2007), available at http://www.bl.uk/ip/pdf/ orphanworks.pdf; see also B. White, “No Idea is an Island — Rights Clearance of Sound Recordings by the British Library”, Copyright World, Feb. 2007, at 167. In Poland, according to research conducted in 2007 by the Committee for Digitisation, the number of digital objects in libraries was estimated at 200,000, of which over 130,000 were accessible online. In Polish archives, of the approximately 500,000 digital objects only 1 percent is estimated to be accessible over the Internet. For museums, only 1–2 percent of the approximately 500,000 digital objects can be found online. Cultural Heritage Communication, note 8 infra, at 4.2. In Germany, the Institut für Museumsforschung recently requested all German museums to provide information on their current digitization status. Although about a thousand museums reported possessing digitized artifacts, only 250 of them replied that they had made arrangements to offer actual online access to these objects. Id. According to the Supreme Court in Eldred v. Ashcroft, 98 percent of the works in copyright are orphan works, and liable to disappear long before their copyrights expire. Eldred v. Ashcroft (formerly v. Janet Reno), 239 F.3d 372 (D.C. Cir. 2001), reh’g and rehearing en banc denied, 255 F.3d 849 (D.C. Cir. 2001), cert. granted, 534 U.S. 1126 (2002), order granting cert. amended, 534 U.S. 1160 (2002), reh’g denied, 538 U.S. 916 (2003). 4 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of Regions, i2010 Digital Libraries, SEC (2005) 1194, SEC (2005) 1995, COM (2005) 465 final; see also Commission Staff Working Document, Annex to the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of Regions, i2010 Digital Libraries, SEC (2005) 1194 (Sept. 30, 2005). 5 Commission Recommendation 2006/585, Digitisation and Online Accessibility of Cultural Material and Digital Preservation, 2006 O.J. (L 236) 28 (EC). 6 2006 O.J. (C 297) 1, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2006:297:0001 :0005:en:pdf.

114 CHAPTER IV: COPYRIGHT LAW A. The i2010 Project In order to support the EC implementation of the i2010 project, a High Level Expert Group of Digital Libraries was established in February 2006, which, in turn, formed a Copyright Subgroup.7 1. Copyright Subgroup The Copyright Subgroup has made some general recommendations with respect to how orphan works regulations in the European Union could be made:8 • Take preventive measures, such as voluntarily establishing databases offering an overview of the supposed orphan works in combination with establishing an appropriate rights management system with regard to orphan works. • Find contractual solutions supported by an extension effect, i.e., a legal assumption of representation by the right owners. • Leave it up to the Member States to find the best solutions, provided that they are in line with some common core principles. a. Core Principles What are those core principles? The first is formulating a common definition of the orphan work. That is quite understandable. The second is introducing the criterion of “diligent search.”9 What does that mean? That means that in order to have the permission by whatever public authority or representative 7 Commission Decision 2006/178, Setting Up a High Level Expert Group on Digital Libraries, 2006 O.J. (L 63) 25 (EC). 8 High Level Expert Group on Digital Libraries, Copyright Subgroup, Final Report on Digital Preservation, OrphanWorks, and Out-of-Print Works, available at http://ec.europa.eu/information_society/activities/digital_libraries/doc/hleg/ reports/copyright/copyright_sub group_final_report_26508-clean171.pdf. Subsequent to the Conference, at the June 4, 2008, meeting of the High Level Expert Group on Digital Libraries, the Memorandum of Understanding on Orphan Works was signed. See http://ec.europa.eu/information_society/activities/digital_libraries/doc/hleg_ minutes/mou/mou.pdf. On Aug. 11, 2008, the Commission adopted the Communication on Europe’s Cultural Heritage at the Click of a Mouse — Progress on the Digitisation and Online Accessibility of Cultural Material and Digital Preservation Across the EU, COM (2008) 513 final [hereinafter Cultural Heritage Communication], available at http://ec.europa.eu/information_society/activities/digital_libraries/doc/communications/progress/ communication_en.pdf.The Communication describes progress towards the creation of the European digital library as well as the actions deployed by Member States to address organizational, financial, technical, and legal issues, essential for making cultural material available on the Internet. It calls on Member States and stakeholders to step up their efforts to make the EU common heritage more accessible, and confirms the Commission’s commitment to support this goal through its policy actions and funding programs. A Staff Working Paper accompanies the Communication, available at http://ec.europa.eu/information_society/activities/digital_libraries/ doc/communications/progress/swp.pdf; see also Press Release, Opening Soon: A Digital Library for Europe (Aug. 11, 2008), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1255; see also Europe’s Cultural Wealth at the Click of a Mouse — FAQs, http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/08/546. The Commission has stimulated and coordinated work towards the creation of Europeana, a common multilingual and digital access point to Europe’s cultural heritage. Through this access point, users will be able to search different collections in Europe’s cultural institutions in their own language, without having to visit multiple sites or countries. Europeana will be launched as a prototype in November. The European Digital Library Foundation, established in November 2007, represents the commitment of the different cultural sectors to deliver Europeana. Its founding members include major European associations of libraries, museums, audiovisual and other archives. A first presentation of Europeana can be found at http://www.europeana.eu. 9 See High Level Expert Group, Memorandum of Understanding on Diligent Search Guidelines for Orphan Works (June 4, 2008), available at http://www.ifrro.org/upload/documents/Memorandum%20of%20Understanding%20 orphan%20works.pdf; Joint Report — Sector Specific Guidelines on Due Diligence Criteria for Orphan Works, http:// www.ifrro.org/upload/documents/i2010%20Sector%20specific%20guidelines%20orphan%20works.pdf.

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organization will deal with this point, the applicant should make a “reasonable” search, or “diligent” search — or whatever word you would like to introduce here — in order to find the right holder. Well, that raises, of course, immediately amongst lawyers interesting problems. This is an open norm. What is “reasonable”? What is “diligent”? No one knows. In most of my reading, I haven’t got any guidance here for what we should consider to be reasonable or diligent. So this will be something for the courts to decide when it arises. There should be a legal procedure to cope with the ultimate showing-up of a right owner. What will we do if eventually a right owner shows up? There should be a proper procedure in order to give him the position as a right owner that he really should have. Third, the applicable regime should serve both commercial and noncommercial users. Of course, that is a question of main interest. Do we only serve the general interest when it is noncommercial, or should we allow, with regard to the touristic purposes that are at stake here also, commercial interests to be served by this new regulative regime? We should acknowledge that in this regulative instrument the Subgroup is suggesting that individual treatment cannot be given under all circumstances. This is understandable. Fourth, there should be general financial compensation in the case that the right owner eventually shows up. This raises also interesting questions, like what to do with all the money that has been put into a fund, for instance, if no one shows up. That fund is growing and growing and growing. What do you do with that? There are examples in the world — I think my colleague from the United States will speak about that — where the money goes to certain general-interest purposes. You can leave that, maybe, up to the Member States to decide. IV. NATIONAL APPROACHES

Let me give you a very condensed overview of what national regulative systems are in place already in the European Union in four countries: France, Germany, the United Kingdom, and Sweden. None of those have specifically addressed the orphan works problem, but they have regulations in place that can be used to address, in a certain way, this problem of the orphan works I have delimitated. A. France The French Intellectual Property Code (Articles L. 121–3 (moral rights), L. 122-9 (exploration rights), and L. 211-12 (related rights)) includes a provision for dealing with the risk of a blockage. The Act of 1 August 2006 also introduces a special provision connected to the exploitation by the Institut National de l’Audiovisuel (INA) of its archives, including performances of artists-performers.10 The Conseil Supérieur de la Propriété Littéraire et Artistique (CSPLA) has established its Programme de Travail 2007–2008.11 CSPLA issued a comprehensive Report on Orphan works in March 2008.12 The Commission pour la relance de la politique culturelle issued its Livre Blanc pour la relance de la politique culturelle in February 2007, which contains a section on Les oeuvres orphelines: “L’oeuvre orpheline est celle pour laquelle, malgré toutes diligences appropriées, 10 Copyright (Part I) Code (Consolidation) No. 92-597, Annex, Intellectual Property Code, Title II. Authors’ Rights, ch I. Moral Rights, available at http://www.wipo.int/clea/en/text_html.jsp?lang=en&id=1610#JD_AL121_1. 11 See Ministère de la Culture et de la Communication — Actualités 2007, http://www.culture.gouv.fr/culture/ actualites/index-publications.htm. 12 See Conseil Supérieur de la Propriété Littéraire et Artistique, http://www.cspla.culture.gouv.fr/.

116 CHAPTER IV: COPYRIGHT LAW il s’avère impossible pour son utilisateur d’identifier ou de retrouver l’auteur ou ses ayants droits.”13 INA has the task of preserving and exploiting audiovisual archives produced or co-produced by public television companies. INA has concluded general and collective agreement with representatives of various categories of right holders through their collecting societies or their trade unions. INA and SACEM, SACD, SCAM, SDRM, and SESAM agreed on June 16, 2005 to a new general protocol defining the conditions under which INA may use the audiovisual and sound repertoire of these societies for the purpose of exploitation in its archives.14 Under this regime, there is a collective management of the relevant authors’ rights. This solution only concerns authors who have contributed their royalties on the works involved to the societies of authors that are signatories of these agreements with INA. Regarding the artists-performers, the agreements concluded by INA with trade unions authorize INA to exploit the presentations of “all” the performers on its archives’ fund (subject to possible restrictions appearing in some employment contracts) for all modes of exploitation (even those which did not exist when their employment contracts were signed). B. Germany A provision of the new German Copyright Law (UrhG), Section 31 (new modes of use), addresses authors’ appropriate remuneration for the exploitation of their works, including media or data formats.15 Bedarf nach einer Urheberrechtslösung für verwaiste Werke (nach Möglichkeit noch im Rahmen des Zweiten Korbs), an initiative of Aktionsbündnisses, Urheberrecht für Bildung und Wissenschaft, an alliance of seventy-nine science societies, research institutions, and organizations, and 1,145 professionals from the science sector, signed the “Göttinger Erklärung zum Urheberrecht für Bildung und Wissenschaft vom 5. Juli 2004,” a submission to the Consultation on the review of EU legislation on copyright and related rights in response to the Commission Staff Working Paper on the review of the EC legal framework in the field of copyright and related rights, SEC(2004) 995, July 19, 2004. Alternative proposal § 52(c), submitted on March 29, 2007, deals with Offentliche Zugänglichmachung verwaister bzw Nicht mehr verwerteter oder obsoleter Werke (orphan works, abandonware, and obsolete works).16 C. United Kingdom The British Screen Advisory Council (BSAC) prepared a paper, “Copyright and Orphan Works,”17 recommending revision of the Copyright Act, for the 2006 Gowers Review of Intellectual Property18 Recommendation 13 of the Gowers Review was to “Propose a provision 13 Commission pour la relance de la politique culturelle, Livre Blanc pour la relance de la politique culturelle pour une nouvelle politique de la propriété intellectuelle en faveur des auteurs et des artistes-interprètes, 70 (Feb. 22, 2007), available at http://www.spedidam.fr/actu/doc/LivreblancCPRC.pdf 14 Press Release, INA, Accord INA-SACEM-SACD-SCAM-SDRM-SESAM sur les conditions d’utilisation des œuvres audiovisuelles et sonores sur de nouveaux modes d’exploitation d’image et de son (Oct. 3, 2005), available at http://www.scam.fr/Telecharger/DocumentsInfos/Communiques/cp03-10-05-accordINA-SPRD.pdf. 15 Gesetzentwurf de Bundesregierung June, 15, 2006, Drucksache 16/1818, available at http://dip.bundestag.de/ btd/16/018/ 1601828.pdf. 16 Available (in German) at http://www.urheberrechtsbuendnis.de/docs/verwaisteWerke.pdf. 17 British Screen Advisory Council, Copyright and Orphan Works (Aug. 2006), available at http://www.bsac.uk.com/ reports/orphanworkspaper.pdf. 18 U.K. Treasury, Gowers Review of Intellectual Property (2006), available at http://www.hm-treasury.gov.uk/ media/6/E/pbr06_gowers_report_755.pdf [hereinafter Gowers Review].

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for orphan works to the European Commission, amending Directive 2001/29/EC (Information Society Directive).”19 D. Sweden Article 42a of the Swedish Copyright Act provides: “An extended collective license as referred to in articles 42b–42f applies to the exploitation of works in a specific manner, when an agreement has been concluded concerning such exploitation of works with an organization representing a substantial number of Swedish authors in the field concerned. The extended collective license confers to the user the right to exploit works of the kind referred to in the agreement despite the fact that the authors of those works are not represented by the organization (Extended Collective Licensing System).”20 V. FUTURE ACTION

I refer you to a very interesting report by the Institute for Information Law, The Recasting of Copyright and Related Rights for the Knowledge Economy.21 The report has been mentioned in many instances already, not all the time in a favorable manner. I will discuss this very much in favor of this report. It gives a very good overview of the state of affairs with regard to the orphan works problem in the European Union. So read it and be aware of what national systems are in place.22 Six alternative solutions (either nationally or EU-wide) are presented: (1) Copyright ownership and rights management information (publicly accessible). (2) Collective rights management (by specific rights management organizations). (3) Indemnity or security system (granted by a representative private organization). (4) License by public authority (specific competent authority). (5) Statutory exceptions/limitations (for specific purposes, under specific conditions). (6) Liability rule (clearance upon reasonable diligent search. The Report states: It would be, therefore, an important step to address the orphan works problem if the Member States were to introduce a system whereby a prospective user, after a reasonably conducted inquiry, may apply to a public authority to obtain a licence to use an orphan work. … On the other hand, it appears to be premature for any legislative initiative to be developed at the EU level. So far, it has not been demonstrated that the orphan works problem has a noticeable impact on the internal market. In fact, the exact scale of the orphan works problem remains largely unknown, as Id. at 69–72. Copyright Act Amendment 26/05/2005, No. 359, Act 2005:359 of May 26, 2005, Amending the Act (1960:729) on Copyright in Literary and Artistic Works, available at http://www.wipo.int/clea/en/text_html.jsp?lang=EN&id=3670. 21 Inst. for Information Law, University of Amsterdam, “The Recasting of Copyright and Related Rights for the Knowledge Economy” (Nov. 2006), available at http://www.ivir.nl/publications/other/IviR_Recast_ Final_ Report_2006.pdf [hereinafter IvIR Report]. 22 Recent status reports show that Sweden, Finland, Denmark, and Hungary are dealing with orphan works via an “extended collective licensing” arrangement, which allows collective management societies in certain circumstances to issue licenses on behalf of rights holders it does not formally represent. Germany, Hungary, and Denmark are in the process of adopting stronger regimes. The problem is still under discussion in most EU nations, often in working groups treating orphan works with other copyright-related issues in the digital libraries arena. See Posting by William New to Intellectual Property Watch, “Support Mixed for U.S. Orphan Works Bill as Issue Catches Global Attention”, http://www.ip-watch.org/weblog/index.php?p=1028 (May 7, 2008 14:53 EST). In the Czech Republic, a dedicated working group for the European Digital Library and Copyright was convened by the Copyright Department of the Ministry of Culture to discuss key principles for orphan works, out-of-print works, and rights clearance centers, to launch consultations on copyright-related problems, and to collect the opinions of the different stakeholders, including libraries, museums, archives, and publishers. Cultural Heritage Communication, supra note 8. 19 20

118 CHAPTER IV: COPYRIGHT LAW quantitative data on the degree to which orphan works actually present a problem for the reutilisation of these works or on the frequency with which orphan works impede creative efforts have not yet been presented. Therefore, it is advised to conduct further research into the practical importance, in economic and social terms, of the orphan works issue, before any legislative initiative at EU level were to be considered. Nevertheless, a recommendation by the European Commission of limited scope that would partially address the issue might be in order here.23

I may, in one respect, not concur with the IvIR Report. The IvIR report says leave it up to the Member States to introduce a regulation according to the core principles of the Subgroup on Copyright. That is not what I would propose. I would propose a real harmonization. I think Europe cannot do without a harmonized system of orphan work protection. VI. CONCLUSION

Now I can tell you what I would suggest for the conclusion. I would say part of the European harmonization instrument should include: • Reasonable search. • Commercial and noncommercial uses. • Published and unpublished works should be covered. • There should be installed a representative organization or a public authority to give permission, to give the license. • Finally, funding should be raised for the financial compensation, leaving it up to the Member States what purposes for general interest they think should be appropriate here.

Orphan Works Legislation in the United States Oliver Metzger*

Good morning. I am going to be speaking about the efforts that the U.S. Copyright Office and the U.S. Congress have made on the problem of orphan works over the past three years. You already have received a definition of orphan works, so I will not repeat that. I. COPYRIGHT OFFICE REPORT ON ORPHAN WORKS

In January 2005 the U.S. Congress asked the Copyright Office to conduct a study of the orphan works problem. We sent out a Notice of Inquiry for Public Comments the same month.24 There were, I think, 700-odd initial comments25 and 150 reply comments26 — all told, over 850 public comments. We held roundtables and meetings with the interested parties over the course of a year27 and then, the following January, published our Report on Orphan Works, 23 Id. at 193–94. * U.S. Copyright Office, Washington, D.C. 24 U.S. Copyright Office, Notice of Inquiry, 70 Fed. Reg. at 3739–743 (Jan. 26, 2005). 25 U.S. Copyright Office, Orphan Works Initial Comments, http://www.copyright.gov/orphan/comments/index. html. 26 U.S. Copyright Office, Orphan Works Reply Comments, http://www.copyright.gov/orphan/comments/reply. 27 U.S. Copyright Office, The Importance of Orphan Works Legislation, http://www.copyright.gov/orphan (collected links to transcripts and audio recordings of roundtables and meetings on Orphan Works legislation).

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which is available on our Web site.28 Shakespeare it isn’t, but we think there are a couple of good suggestions in here to address the problem. We received suggestions of a lot of different solutions. The final architecture that we came up with to address the situation was to, first, provide a limitation on remedies.29 The alternative would be a bona fide exception to copyright. We did not go in that direction. Use of the orphan work would still be infringement, but the remedies available to a reappearing owner would be reduced from the normal panoply provided under U.S. law. You have to qualify for this limitation on remedies. The way you would do that is by conducting a search and providing attribution — to the extent that you are able to do that — on the use of the work. For example, you might actually be able to figure out who the author is, but not where the author is now, in terms of contacting the author. Or you might find out who the author is and where they used to be, but now they are dead and you cannot find their heirs. So the information that you come across in the course of your search we thought you should put on the work that you are using. As has been mentioned, we proposed that the search be “reasonably diligent.” But that is a vague term. We left the search criteria up to the judge. So what do you get if you qualify?30 One of the big things under our system is that if the owner reappears and sues you, statutory damages and attorney’s fees are off the table. Under our system, you would only get these anyway if you had registered the work. If this is an unregistered work, you are not losing anything here. But if this is a registered work, this is a significant issue, because statutory damages under our system, as you know, are significant. For non-willful infringements, they would be from $750 up to $30,000 per work.31 Here, ironically, you could almost be sure that it was a willful infringement, because the person was looking for the owner to get permission, which evidences the fact that they knew it was under copyright, and therefore their infringement, when they went ahead and did it anyway, is willful. That could, arguably, increase the ceiling on statutory damages to $150,000 per work. So taking this off the table is a major hurdle removed for the use of orphan works. Instead of getting your actual damages or profits, we said that the owner who reappears would get “reasonable compensation.”32 That term we defined in terms of the Davis v. Gap case,33 in which a photographer had been infringed for an unregistered work and the court awarded what was summarized in our report as the amount that a reasonable willing seller and a reasonable willing buyer would have agreed on immediately prior to the use. It turned out later that people liked Jule’s summary of Davis v. Gap better than the actual case.34 A hue and cry went up to include that summary in the statute, as opposed to just leaving it with the vague term “reasonable compensation.” A narrow safe harbor was included in the recommendation. This would mean that, if you qualified for these uses, there would be no reasonable compensation. So there would be essentially a true exception. The parameters were that it would have to be without the purpose of direct or indirect commercial advantage and also, importantly, that you would have to cease the infringement expeditiously after the time that you received notice from the owner.35 28 U.S. Copyright Office, Report on Orphan Works, A Report by the Register of Copyrights (Jan. 23, 2006), available at http://www.copyright.gov/orphan/orphan-report-full.pdf [hereinafter Report on Orphan Works]. 29 Id., I.E.4. at 11; VI.B.2.d, at 115. 30 Id. at 127. 31 Id. at 50. 32 Id. at 116. 33 Davis v. The Gap, Inc., 246 F.3d 152 (2d Cir. 2001). 34 Report on Orphan Works, supra note 28, at 116. 35 Id. at 119.

120 CHAPTER IV: COPYRIGHT LAW This was targeted to things like historical societies. We heard a lot of comments during the commenting period about museums, historical societies, and so on, that have 50,000 photographs in their basement that have been sitting there for seventy years. Most of them are probably orphan works. But it’s a little historical society that has no money. Even a small amount of potential liability per work — $100, $200 — could chill the use of all 50,000. So we tried to create a public-interest exception, where if the use stopped immediately, then those people would be in the clear, with no monetary exposure. There were several provisions related to injunctions.36 In the proposal, we provided that a judge could not order the infringer to stop the use if the infringer had added a significant amount of expression to the orphan work. For example, if I took an orphan-work novel and made it into a film and spent $60 million on the film, there would be no injunction against the continued use of the film. However, I would have to pay reasonable compensation, essentially a reasonable license fee, for the use of that novel on a going-forward basis. However, if I had just taken the orphan-work novel and reprinted it as is, that kind of use could be enjoined going forward, although my reliance interest could be recouped. For example, if I had 1,000 copies of the novel still sitting on the loading dock, then maybe I could sell off the 1,000 copies. But going forward beyond that, I would not be allowed to continue to use the novel. Then a savings clause that says that things like fair use and all the other defenses in the Copyright Act are not affected by this. This is just an add-on provision. II. LEGISLATION

Over the last two Congresses, there has been a fair amount of interest in this. In the 109th Congress, there were two hearings.37 There were also significant industry negotiations. The 109th Congress expired. There was a bill introduced that is available on Thomas.gov that never made it out of the subcommittee.38 There was major support for the bill from us (the Copyright Office), cultural institutions, book publishers, and documentary filmmakers.39 The people who had expressed concerns about it were primarily photographers, illustrators, and some other visual artists.40 Id. at 119–21. See “The Copyright Office’s Report on Orphan Works: Oversight Hearing of the Subcomm. on Courts, the Internet, and Intellectual Property, Comm. on the Judiciary”, 109th Cong., 2d Sess. (Mar. 8, 2006) (statement of Jule L. Sigall, Associate Register for Policy & International Affairs), available at http://www.copyright.gov/docs/regstat030806. html. A similar hearing in the Senate was held Apr. 6, 2006. “Orphan Works: Proposals for a Legislative Solution, Subcomm. on Intellectual Property of the Senate Comm. on the Judiciary”, 109th Cong., 2d Sess. (Apr. 6, 2006) (statement of Jule L. Sigall, Associate Register for Policy & Int’l Affairs), available at http://www.copyright.gov/docs/ regstat040606.html. Testimony of other interested groups and individuals is available at http://www.orphanworks.net/ ViewsandTestimony/ index.html. 38 Orphan Works Act of 2006, H.R. 5439, 109th Cong., 2d Sess. (2006) (to amend title 17, United States Code, to provide for limitation of remedies in cases in which the copyright owner cannot be located, and for other purposes), available at http://thomas.loc.gov/home/gpoxmlc109/h5439_ih.xml. The Orphan Works Act was introduced in the House by then House Judiciary Committee Intellectual Property Subcommittee Chairman (now full Committee Ranking Member) Lamar Smith of Texas on May 22, 2006. The bill included revisions to the Copyright Office’s original proposal and incorporated a number of changes that were designed to protect photographers and other visual artists in particular. These changes included a requirement that users document their searches, a definition of “reasonable compensation” (taken from the Copyright Office’s Report on Orphan Works), and the availability of attorney’s fees under circumstances where a user fails to negotiate in good faith with an owner who has previously registered his work. That bill was later embedded in the Copyright Modernization Act of 2006, H.R. 6052, 109th Cong., 2d Sess. (2006), available at http://thomas.loc.gov/cgi-bin/query/z?c109. The 109th Congress ended before the bill could be addressed. 39 See Orphan Works: Testimony and Views, http://www.orphanworks.net/ViewsandTestimony/index.html. 40 Over sixty art licensing businesses have joined together in opposing both The Orphan Works Act of 2008 and The Shawn Bentley Orphan Works Act of 2008.[11] Known collectively as “Artists United Against the U.S. Orphan 36 37

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In this Congress there was a hearing just a week ago that Marybeth Peters testified at, also some representatives from the photographer community and a museum.41 So it is back on the table in this Congress.42 I thought what I would do next is quickly go through some of the proposals that have been aired and included (or not included) in the 109th and 110th Congress. A. Search Several of these relate to just fleshing out the vague terms in the statute. For example, people wanted more specificity as to what would be required for the search. We have come up with some ideas related to that.43 One important one is to make clear that you have to follow leads that are uncovered during the search. Even if someone provides you a list, “Here are five good things that you should do when you search for a sound recording,” if you come across additional information — this person left all their intellectual property to their daughter — then you have to follow that lead. You can’t just check off the initial list and be done. Along the same lines, proposals have been raised that search criteria should incorporate industry guidelines or best practices, that we should collect those and act as a formulator of them. The Copyright Office should also certify electronic databases that match PGS works — “PGS” is a copyright term in the U.S. for “pictorial, graphic, or sculptural works.”44 The primary complaints that we have received have been from the owners of pictorial, graphic, and Works Acts,” the Artists Rights Society, the Illustrator’s Partnership of America (IPA), the Advertising Photographers of America (APA), Association of American Editorial Cartoonists, Society of Children’s Book Writers and Illustrators, the Stock Artists Alliance, National Writers Union, the National Cartoonists Society, American Association of Independent Music, the Illustrators Partnership, the National Association of Music Publishers, the National Association of Record Industry Professionals, the Association of Independent Music Publishers and the American Federation of Radio and Television Artists (AFL-CIO) (among others) have joined forces to oppose the bills, which they believe “permits, and even encourages, wide-scale infringements while depriving creators of protections currently available under the Copyright Act.” See Orphan Works Legislative Action Center, Groups Opposed to the Orphan Works Act, http://www.illustratorspartnership.org/01_topics/article.php?searchterm=00273. A list of groups opposing the orphan works legislation as of Aug. 2, 2008, is available at the Web site of Orphan Works Opposition Headquarters, http:// www.owoh.org/groups-opposing.php. In July 2008 the Artists Rights Society (ARS), the Illustrators’ Partnership of America (IPA), and the Advertising Photographers of America (APA) submitted to Congress a document titled, “Suggested Amendments to H.R. 5889: Orphan Works Act of 2008, available at http://ipaorphanworks.blogspot. com/2008/07/hr-5889-amendments.html. The document outlined twelve amendments that ARS, IPA, and APA believe will decrease the potential negative impact of the legislation. 41 “Orphan Works 2008: Hearing before the Subcomm. on Courts, the Internet, and Intellectual Property of the H. Comm. on the Judiciary”, 110th Cong. 2d Sess. (Mar. 13, 2008) (Statement of Marybeth Peters, The Register of Copyrights, U.S. Copyright Office), available at http://www.copyright.gov/docs/regstat031308.html [hereinafter Peters 2008 Testimony]; see also Views and Testimony at http://www.orphanworks.net/ViewsandTestimony/index. html. 42 Note: Subsequent to the Conference, on Apr. 24, 2008, Rep. Howard Berman (D-CA) introduced H.R. 5889, 110th Cong., 2d Sess., Orphan Works Act of 2008, to provide a limitation on judicial remedies in copyright infringement cases involving orphan works. The House Judiciary Intellectual Property Subcommittee approved H.R. 5889 on May 7, 2008. Also on Apr. 24, 2008 Sen. Patrick Leahy (D-VT) introduced S. 2913, 110th Cong., 2d Sess., The Shawn Bentley Orphan Works Act of 2008, to provide a limitation on judicial remedies in copyright infringement cases involving orphan works, available at http://www.govtrack.us/congress/bill.xpd?bill=s110-2913; see also Press Release, U.S. Sen. Patrick Leahy, Leahy, Hatch, Berman, Smith Introduce IP Legislation (Apr. 24, 2008), available at http://leahy. senate.gov/press/200804/ 042408e.html. On May 15, 2008 the Senate Judiciary Committee passed its managers amendment to S. 2913, available at http://www.publicknowledge.org/pdf/s2913-amend-20080515.pdf. No other amendments were adopted. 43 See Peters 2008 Testimony, supra note 41. 44 S. 2913, 110th Cong. § 3 introduces the idea of a Database of Pictorial, Graphic, and Sculptural Works and states: “The Copyright Office must create and undertake a certification process for the establishment of electronic databases of visual works. Certain requirements for any such registry are prescribed. The Copyright Office will post a list of all certified registries on the Internet.” H.R. 5889 also calls for a database of pictorial, graphic and sculptural works.

122 CHAPTER IV: COPYRIGHT LAW sculptural works, because it is supposed to be harder to match photos of those on the Internet. So those people wanted special treatment in terms of the databases that are constructed to perform those matches. Another simple one is that if you have a photograph and it does not say who is the owner of the copyright on its face, it is not enough to just say, “Okay, I’m done. My search is over. It is an orphan work.” You have to always do some work beyond the face of the document or the face of the copy. B. Reasonable Compensation I mentioned that people preferred Jule’s formulation of Gap v. Davis to the actual case, so they wanted that “reasonable willing seller and reasonable willing buyer” language put into the statute.45 There are also some issues that I have started to call “speed bumps,” because they do not necessarily relate to intellectual property theory of orphan works; they are more in the nature of slowing down bad actors who are trying to use the orphan works statute as an excuse for piracy. One of those would be that you should have to plead orphan works and your basis for asserting it early in litigation rather than waiting until the remedy phase of the trial. A very important one is that if the owner reappears and says, “Look, that’s infringing my copyright,” and the user says, “I followed all the rules of orphan works. I am entitled to pay you only reasonable compensation. But since I followed all those rules and I know that your reasonable compensation would be in the nature of $300, just sue me. I know that it won’t be worthwhile for you to sue me, because nobody ever brings a case for $300” — if somebody does that and negotiates in bad faith, then the idea was that attorney’s fees would be back on the table, so that the owner would not be at a complete loss for remedy. This was the persistent complaint of the photographers. They said, “Most of our licenses are low-value economically compared to the cost of filing a federal case. We can’t enforce our rights, and orphan works, by taking statutory damages off the table, will completely erase any remedies that we have.” This is one effort to reach out to those people.46 Along the same lines, we were asked to do a study of how those people might get remedies. A recent photographer proposal is: “nonprofit or nonfiction.”47 So in very, very quick order, that is the last three years of work on orphan works. MR. METALITZ: Thank you very much. I think we’ll kick off the discussion now, starting first with our panelists as well as with our two speakers. We have heard a summary of some of the developments in Europe and in the United States. One of the issues, which Oliver touched on again at the end, is the concept of “reasonably diligent search.” It is a keystone of this approach, I think, because it differentiates what is an orphan work and what is not an orphan work. If you made a reasonably diligent search and you cannot find the owner, then it is an orphan, and different procedures may apply. 45 Under the proposed Orphan Works Act, a copyright holder can only claim “reasonable compensation,” which is defined as “the amount on which a willing buyer and willing seller in the positions of the infringer and the owner of the infringed copyright would have agreed with respect to the infringing use of the work immediately before the infringement began.” S. 2913, 110th Cong. 46 See Advertising Photographers of America, APA Position on Orphan Works 2006, available at http:// APAnational.com/files/public/APA_on_Orphan_Works; APA Position on Orphan Works 2008, available at http:// www.apanational.com/i4a/pages/Index.cfm?pageID=3866. 47 ASMP, Update on 2008 Orphan Works Legislation, http://www.asmp.org/news/spec2008/orphan_update.php.

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I would be interested in the perspectives, both from Tilman and from Jule, as well as others, about how this concept might be applied in the European system versus the U.S. system. In particular, in the United States we have a very robust copyright registration system. Copyright registration was mandatory for many years. It no longer is, but still it is a very robust system, and many works are registered.48 Certainly, that is one place that people can look if they are trying to find the owner of a copyright. In general, the European Member States do not have such systems, and certainly never had a requirement of registration, so that might not be a path that the user could take. Should that make a difference in whether there should be an orphan works regime in a particular country; and, if so, what might that regime cover? Maybe we could ask Tilman and Jule if they want to address that, or any other reactions to the presentations. MR. LÜDER: Thank you, Steve. I think that, of course, we have a solution for everything in Europe. It starts with a big “C.” Can you guess? The second word starts with “S.” Everything in Europe is solved by the existence of powerful collecting societies. That brings me to my favorite topic, and that’s why I love to talk about orphan works, because it is yet another way to speak about collecting societies. We do not have a registration system, as you rightly pointed out, but we have collecting societies that keep extensive databases and that are really specialized in a lot of sectors. You have collecting societies for visual images, you have collecting societies for literary works, for musical works. They have extensive databases. Obviously, to answer your question directly — as a good European, of course I defend our system — you have to check with a collecting society. If you check with the collecting society that is active in that field, the photographers’ or the painters’ collecting societies, they usually have extensive databases of a variety of works. I think that would be considered to be highly diligent, if you go in different Member States to the different collecting societies and check out their databases, or ask them to do it for you. That brings me to one of three or four options that are being currently discussed in Europe about how to deal with orphan works. One of them would be actually somewhat linked to the function of the collecting societies, the extended collective management of orphan works. Now, of course, to Americans maybe that sounds very sinister. What actually does it mean? An orphan, obviously, cannot entrust his work or in any way mandate a collecting society to license his work. Because it is an orphan, the author is inactive; he cannot be found. The Nordic Member States have developed a system to say that does not really matter. If there is a collecting society active in that sector — so let’s take photographers again — and that collecting society has a significant amount of other authors who have mandated that collecting society with the management of their rights, then this collecting society is deemed to also represent the orphans. This collecting society will collect for the orphans and it will keep the money in escrow. Somebody who is badly minded would say “and hope that the orphan never turns up,” because then they get to keep the money. I think that is the idea behind the extended collective rights management.49 48 See Eldred v. Ashcroft, 239 F.3d 372 (D.C. Cir. 2001) (98 percent of the works in copyright are orphan works and liable to disappear long before their copyrights expire); Kahle v. Gonzales, 487 F.3d 697 (9th Cir. 2007) (holding that, followed the ruling in Eldred, orphan works are still protected under the “opt-out” copyright regime). 49 For a discussion of the Nordic model of extended collective licensing for orphan works, see European Commission’s Results online consultation ‘i2010: digital libraries,’ launched Sept. 30, 2005, available at http://www. europa-kommissionen. dk/eu-politik/noegleomraader/forskning/digitalt_bibliotek/results_of_online_consultation_ en.pdf, which accompanied the Commission Communication ‘i2010: digital libraries,’ adopted on the same date. The consultation was published at http://europa.eu.int/information_society/activities/digital_libraries/index_en.htm.

124 CHAPTER IV: COPYRIGHT LAW Willem Grosheide talked about Sweden’s approach. Sweden, for instance, has a system in which, if you have a collecting society representing a substantial number of Swedish authors in the field concerned, that society is deemed to represent the rest of them as well. It collects for the rest of them and keeps that money in escrow. If the orphans do not turn up, which is actually highly likely, then that money can be spent for good purposes. That would be one approach, extended collective management in respect of orphan works. Another approach has been put forward by the Gowers Review in the United Kingdom.50 Gowers wants to create a copyright exception for orphans. Of course, that is going far beyond anything that we have heard up to now, where orphan works has been seen as a rights clearance issue, as an issue that these rights in principle are protected by copyright; it is just difficult to clear them, and we will have to find a mechanism of giving a license and ensuring that the one who does the diligent search is not then later held liable. Here Gowers proposes that will create an exception to orphan works and, as the exceptions are in the field of the Community competence, that would then require an amendment to the Community’s Information Society Directive51 that would create a new and harmonized exception for orphan works across the European Union. You can read about that and the rationale behind this in the Gowers Review. The thing with that proposal is that we would still, as traditional copyright lawyers, consider orphans to be copyright protected; it is just that you can’t locate the authors. So I think creating an exception, with all due respect for Mr. Gowers, probably shoots beyond the target. Anyway, it is one of the options. Another option is a public body that grants a license to ensure that the exploiter of the orphan work is legally on safe ground, that there will be no damage claims subsequent. If the owner shows up, then the user will have to engage in a licensing relationship with him — what Jule would call “the willing buyer, willing seller” principle — but only for the future use. The past use would then be in the clear. Of course, as we are a heterogeneous body, we would have a problem in the European Union, you may appreciate, in defining who that body would be. We do not have a central body. Somebody has said that should be done by the Copyright Department of the European Commission. Their initial response is: “No, thank you. That would be a rather strange task for us, to be a public body licensing orphans. But we would obviously be a natural candidate if you would seek a solution along those lines.” That is what our Canadian friends have done.52 MR. METALITZ: Tilman, why don’t we let Jule have a crack at this question also, and then we will continue the discussion? MR. SIGALL: Thank you, Steve. First, I would like to just say I am delighted to see that moral rights are alive and well here in the United States, as my right of attribution to a particular piece of this legislation has been vindicated here, as everyone has said that it is my provision, apparently, that defines “willing buyer, willing seller.” I can only hope my right of integrity survives the legislative process in the United States. I do not deserve that credit, but thanks to the speakers for giving it to me. See Gowers Review, supra note 17. Parliament & Council Directive 2001/29, Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10 (EC). 52 Canada has created a supplemental licensing scheme that allows licenses for the use of published works to be issued by the Copyright Board of Canada on behalf of unlocatable copyright owners, after a prospective licensor has made “reasonable efforts to locate the owner of the copyright.” Copyright Act, R.S., c 77. Licenses issued to use works where there is an unlocatable copyright owner are listed on the Copyright Board’s Web site at http://www. cb-cda.gc.ca/unlocatable/licences-e.html. As of September 2006 the Board had issued 189 such licenses. Id.; see also Mario Bouchard, General Counsel, Copyright Board of Canada, Unlocatable Copyright Owners: Canada’s Orphan Works Regime, Presentation Before MILE Conference, Malta (June 4, 2008), available at http://www.mileproject.eu/ asset_arena/document/RD/IPR_CEPIC_JUNE_ 2008_ORPHAN_WORKS_BOUCHARD.PPT 50 51

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To answer Steve’s question about “reasonable search” and “diligent search” and the flexible standard approach that the Copyright Office and the Congress are considering, I would like to answer that by putting this particular approach that the United States is considering in the context of a larger question that came up in the General Counsels’ Roundtable [Chapter I.A, infra this volume] as to what kinds of reforms to the copyright system we should be considering. Brad Smith mentioned that we should be considering incremental changes to the system, not wholesale reforms. I think the orphan works approach taken in the United States is a great example of the kind of incremental change that is appropriate, in part, because of various factors and facets of that approach. First of all, it is incremental predominantly in the sense that it tinkers with the remedies of copyright. It does not, as the Gowers Review recommends and as Tilman pointed out, affect the rights and exceptions in the scope of protection. I think that is an incremental approach in and of itself, because the question of unintended consequences I think is greater when you are tinkering with rights and exceptions, as opposed to when you are tinkering with remedies. This is an approach the United States has taken in Section 512 with respect to Internet service provider liability, and I think, by and large, has been relatively successful and beneficial in that context.53 So I think that is important. I think that is part of the reason I am going to lay out these observations for those other jurisdictions around the world considering it. I think, whatever solutions are being considered, they should try to meet these facets as well, because I think those are the kinds of beneficial changes to copyright that we should be considering. The other reason I think this is a good incremental change is that it is largely nondisruptive of current practices, as Tilman was pointing out, to the extent a country or a particular sector has already created systems and databases and other ways to deal with the licensing and the rights clearances of works, whether it should be done through collecting societies. Here in the United States, by and large, there is not really an orphan works problem in the area of performing rights for music, because of ASCAP’s and BMI’s databases and their practical steps to allow people to license works. The approach taken in the United States leaves that intact and, perhaps more importantly, leaves room for other sectors to develop similar mechanisms. Whether they be collective licensing or whether they be databases or information exchanges where rights information can be developed and transmitted, it leaves room for that to be developed. In fact, in some senses, the uncertainty around whether something is a reasonably diligent search creates an incentive for owners to create those databases in order to forestall any potential infringing defendant from claiming they made a reasonably diligent search when in fact they have not. A rights holder can point to systems that they have put in place that make it very easy for people to find them and find their work. So I think that is another way that the system is both nondisruptive to existing practices and leaves room to experiment and develop new systems, and perhaps even creates incentives for developments of those new systems going forward. I think the other salutary benefit, although it also has its costs in a flexible, of a reasonable search standard, which Steve was questioning, is that we can experiment, and we can, as was mentioned at the Roundtable yesterday, try some things, see how they work, and adapt if they don’t work. I admit this is, by and large, a very common-law approach to regulation, which may or may not be appropriate in other jurisdictions, particularly civil-law jurisdictions. But it is, I think, the way to try to deal with this problem, in part because, as we learned at the Copyright Office in assessing this problem, this problem spans all types of works, all types of owners, all types of users, and it is very hard to develop a blanket system that covers that. 53 Digital Millennium Copyright Act of 1998 (DMCA), Pub. L. No. 105-314, 112 Stat. 2974 (1998) (codified at 17 U.S.C. § 512 (Oct. 28, 1998)), available at http://www.copyright.gov/title17.

126 CHAPTER IV: COPYRIGHT LAW That has been, I think, a general, somewhat under-appreciated problem in copyright over the past twenty years as it has spread over different types of works. Each sector has its own concerns and facets that are really hard to address with generalized rules. This approach in the United States I think — and I think most people are hopeful — will give the ability to tailor particular systems for particular sectors. I think it is understood that the photographers and illustrators and other individual creators have problems with this approach. They might even argue that it is disruptive of their system. I think, by and large, the problems are not necessarily with the orphan works proposal; it is a problem systemic to the existing system as it is, in terms of the cost of enforcement. I am not sure that this approach exacerbates that in any way, but I think it has been a helpful highlight to those discussions and those broader issues that go beyond just orphan works but go more to the question of whether the copyright system as created really is designed for the individual creator. I think that is a larger question that deserves attention. I think the incremental approach reflected here is the right one to take for these issues. I think that is the way that the other jurisdictions should be looking at this problem as well. MR. METALITZ: Thank you very much, Jule. Before we open up for questions or observations from the floor, I want to ask if either of our speakers have any responses to the comments that have been made. MR. METZGER: One thought is that we do not have collecting societies in the United States that would cover many of the uses that we heard people want to make of orphan works. So that may be a solution that works elsewhere, but for visual arts and for things that you would not even think of, there may be no adequate collecting society. In fact, even in music, one of the collecting societies proposed in its initial comment to us that musical works be exempted from orphan works because you can find every one of them on its database.54 Of course, that just painted a target on them. I counted at least six reply comments that said, “Well, I searched for this song and I couldn’t find it, and I searched for this song and I couldn’t find it.”55 There was a whole comment devoted to Yiddish folk songs. It just became an easy target when somebody said “every work is available.” I think Yiddish folk songs are a good example of something that somebody might want to make an orphan work use of. It is almost to the point where I think you could say that it is exactly those things that need the orphan works system. They are the kinds of things that are not going to end up represented by a collective management society, unless there is this extended concept, where you are allowed to represent owners who actually never came to you and said, “I’d like you to represent me.” PROF. GROSHEIDE: Also about this collecting society issue, of course this is helpful in many domains of copyright-protected works, but not particularly where the main interest is in archival works and library works. There you will not have any resort to collecting societies. So it is only a partial solution for the problem to refer things to collecting societies. MR. METALITZ: Thank you. Why don’t we open this up to comments and questions from the floor, including, in particular, if people have observations from other jurisdictions beyond those that we have discussed up here on the panel, this would be a good time to bring that up as well? QUESTION [David Rigney, Fordham University, New York]: Thank you. I am interested in professional photographers’ rights in particular. My overall model would be, assuming that most, if not all, professional photographers copyright their works, have them registered, and those images are available on databases that can be searched quite readily to determine who 54 U.S. Copyright Office, Orphan Works Initial Comments, http://www.copyright.gov/orphan/comments/index. html. 55 U.S. Copyright Office, Orphan Works Reply Comments, http://www.copyright.gov/orphan/comments/reply.

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is the creator of that work, isn’t orphan works generally kind of alien to that notion, because they are by definition legally protected and available through both the copyright system and through these image databases? MR. METZGER: I might say yes, but just to the second half. If they are findable, then yes. The fact that they were registered with our Office does not mean that they are findable, especially since, starting about ten years ago or less, we started allowing group registration of photographs. So you can take a stack of 1,000 photographs and send it to us with no description of any of them, let alone a digital image or anything like that, and we will register the 1,000 under one application. So if you were to come to our Office and say, “I need to find the photograph of three people standing in front of a 1965 Buick,” it is just not going to happen. You will never find that photograph in our files. However, it might be on an electronic database. QUESTIONER [Mr. Rigney]: You can find it in Corbis’ files.56 MR. METZGER: Exactly, those databases. A lot of the process that we have gone through in the last three years is hearing from technology companies that have very impressive software for matching photographs to other photographs. Absolutely, if you were going to send a request in the nature of “I need to try to find the owner of this photograph” to Corbis and they put it through their search machine and found a match, then absolutely then you are done. If there is a match, it is no longer an orphan work, you know who the owner is, and this whole remedy reduction is not available to that user. MR. METALITZ: Other questions or observations? QUESTION [Virginia Jones, Access Copyright, Toronto]: Access Copyright is one of the collectives in Canada that assists with the administration of the orphan works regime there.57 One of the roles that we play is a continued search function. So after the license has been issued by the Copyright Board we continue to search for the missing rights holder.58 Over the course of that administration, we have found over 50 percent of the royalties collected in our orphan works regime to pay out. I am wondering what the Board thinks of a continued search obligation or databases or registries that track orphan works licenses that have been issued. MR. METALITZ: That is a very interesting observation to me because, in terms of data, we have been speculating in the United States how often it will be that the copyright owner will show up later after they have not been found after a reasonably diligent search. Now we have at least the Canadian experience that it happens fairly often. Responses? MR. METZGER: Yes, although I understood her point to be a little bit different. It is not that the owners showed up, but that the owner was tracked down. QUESTIONER [Ms. Brown]: We continue to search and find them. So every year we have a staff of five librarians that once a year runs a diligent search. With the Internet and the way that it changes, information that wasn’t available at the time that the application was processed is available the next year, or two or three years later. MR. METALITZ: So the tools are improving and people are becoming more findable over time. QUESTIONER [Ms. Brown]: Exactly. MR. METALITZ: Jule, do you want to respond? MR. SIGALL: I just want to comment that that was a consideration in the Office’s deliberations about this and part of the justification for what a flexible “reasonably diligent search” Corbis, http://www.corbis.com. See Access Copyright, http://www.accesscopyright.ca (the Canadian copyright licensing agency). 58 See supra note 52. 56 57

128 CHAPTER IV: COPYRIGHT LAW is, because, to the extent you try at some point to fix a list of things to do which is considered “reasonable,” the next day a technology comes out that is easily accessible but is not on that list of things people should use. If you fix the specification at a point, the way the technology and the marketplace change, it can become actually a distraction to answering the right question about what was “reasonable” under the circumstances. I think those continuing searches or the continued developments in those fields need to be accommodated in some way with whatever legislative solution you are considering. MR. METZGER: First of all, as a sideline, I don’t know if we have made it clear that Jule used to be my boss. That is why I keep saying “his input to the report.” He now says “Microsoft” under his name, but he was not drafting the report when he was working at Microsoft. That should be made very clear. In answer to your question, the paradigm we were operating in is that someone is preparing a work and they are trying to include an orphan work in that. So, for example, for a history book there is only one photograph of this person at this time, nobody can find the owner, and they want to include that in a history book. Or a historical society is taking 30,000 photos and putting them on a Web site. The investment and the decisions are being made sort of in a snapshot. That is a fiction, we all know, but there should be some point at which they are going to need to know whether they can go ahead with that use. So they print the history books; the printing press has got to roll at some point. If, a year later, they find the owner and that person says, “I don’t want my photo in your history book,” the books have already been printed. So we do not require any ongoing search that would somehow retroactively undo the orphan work situation. We had the word “use” in there. So if there was a new use, if you said, “Now I want to make a movie out of the history book,” then you would have to conduct a fresh search at that point, and then you would go through the same things you did the first time. But even that is not really an ongoing search obligation. It is sort of a snapshot. QUESTION [Mario Bouchard, General Counsel, Copyright Board, Canada]: I will not tell you more than we have a regime that is license-based. You have to apply for a license. You get a license and then you are immune from prosecution with that license. The only right of the copyright owner, unless the license says otherwise, is to collect the royalties that were set by the Board within a certain period of time. What Virginia is trying to point out is not that the conditions change. In all of the applications that we get, we find, with the collectives or ourselves, 22 percent of rights holders before we issue a license. After we issue the license, the collective societies still keep on looking for the orphan works owners so that they can take the money that was paid to the collective society and pay it to the orphan works owners. That is what she is referring to, I think, and that is where the technology is going on. That is where the collective societies are playing a useful role in Canada.59 I will not tell you any more about the Canadian regime, except to tell you that within a period of several weeks we will be issuing the first report that reviews our activity of the last eighteen years with statistical analysis and stuff like that. Anybody who is interested in it, it will be posted on our Web site.60 MR. METALITZ: Thank you very much. It will be interesting, too, to get information from other countries that have orphan works provisions in their laws, such as Korea61 and Japan.62 59 More information on Canadian collecting societies is available at http://www.cb-cda.gc.ca/societies/index-e. html. 60 Copyright Board of Canada, http://www.cb-cda.gc.ca. 61 Republic of Korea Copyright Law of 1989, as amended Jan. 8, 2007, art. 31a provides for the statutory license for use of works whose authors cannot be identified or located is made inapplicable to foreigners’ works. 62 The Japanese allow “orphaned works” to be “exploited under the authority of a compulsory license issued by the Commissioner of the Agency for Cultural Affairs.” Copyright Law of Japan, § 8 art. 67. Such licenses require the...

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Korea just modified theirs so that it only applies to Korean works, which I guess is also an issue that might be in the mix here as far as what works the regime would apply to. Other comments or questions? QUESTION [Charlotte Lund Thomsen, International Video Federation, Brussels]: I cannot claim to speak for Korea, but I can just add some information about the work in the European Community. We talked about diligent search guidelines. In a different part of the Commission than that represented by Tilman, work is going on to provide input sector by sector to the work of the High Level Group referenced by Professor Grosheide. I am part of the group that works on the audiovisual sector. What we are trying to do is to develop a set of recommended search guidelines sector by sector. So in the particular field of audiovisual, apart from the reference made to collecting societies — of course, you may be aware that in the film sector we do not license via collecting societies; we license directly from the producer — collecting societies can be helpful for search of authors. We also recommend that people contact film archives. Every single country in Europe has elaborate film museums and archives: the professional organizations, for example, the national producers’ organizations, the national performing artists’ organizations. In France, the Centre National de la Cinématographie keeps a register of all contracts relating to filmographic works. With a bit of luck, coming this summer there will be, at least for the audiovisual and the music and the book sectors, some recommended guidelines for search for orphan works.63 MR. METALITZ: Thank you very much. The guidelines are being developed, technology is advancing, people are becoming more findable. Maybe this is a shrinking problem even as we start to address it. Tilman? MR. LÜDER: There may be an issue on the European front that has an international dimension. If there is all this work on guidelines, and if different jurisdictions adopt such guidelines on what is a standard of diligence, I think the issue what ultimately comes to the fore is: What happens if a work is recognized as an orphan in a particular jurisdiction and that work travels to another jurisdiction? Is there a mutual recognition system in place? I think it will be very interesting to hear what the Canadian colleagues and the U.S. colleagues think. Are they able in their systems to accommodate a work that has been recognized, for instance, by a European jurisdiction as an orphan for commercial exploitation also in Canada or the United States? MR. METALITZ: Oliver or Jule, any response to that from the U.S. perspective? MR. SIGALL: I’ll just give some thoughts on that. I think the approach that the United States has taken, although it is colloquially called “the orphan work problem,” isn’t really a designation applicable to the work. It is more a designation applicable to a particular defendant, a particular infringer. The question is what that particular defendant did to find the work or not. Certainly whether the information coming out of a particular jurisdiction about who the owner of that work is and the sources you might look to may be relevant to the particular litisubsequent creator deposit a fixed amount to compensate the copyright owner, should he or she come forward or be found. 63 On June 4, 2008 European representatives of libraries, archives, audiovisual archives and right holders signed a Memorandum of Understanding, orphan works legislation that will not harm rights holders who are managing their copyrights. It will help cultural institutions to digitize books, films, and music whose authors are unknown, making them available to the public online. See High Level Expert Group, Memorandum of Understanding on Diligent Search Guidelines for Orphan Works, supra note 9; Joint Report – Sector specific guidelines on due Diligence Criteria for Orphan Works supra note 9; Final Report on Digital Preservation Orphan Works and Out-of-Print Works, supra note 8. Additional information available at http://ec.europa.eu/information_society/activities/digital_libraries/doc/ hleg_minutes/copyright/copysub_final.pdf.

130 CHAPTER IV: COPYRIGHT LAW gation around that defendant and whether they could have found the owner. Based on that, because our approach is so targeted towards the actor and not the work, I am not sure if we would have a mechanism to recognize a designation of orphan works from other countries. I think it is a little different approach. It does potentially raise some issues as to how you accommodate different systems for dealing with this problem, and those may arise. But I think ours, although called “orphan works,” is really about particular defendants and circumstances around that defendant. PROF. GROSHEIDE: I would like to concur with your last comment, particularly because, of course, copyright law is still territorial-bound. If you have to ask the question “Who is an infringer?” necessarily you come to speak about the national law of the country where the infringement possibly has been made. PARTICIPANT [Mr. Bouchard]: In Canada territoriality is an issue. We issue licenses only for uses in Canada. However, I can tell you almost certainly that in determining the reasonableness of searches that are needed in order to decide whether to issue a license for Canada the fact that research had been done in Europe would weigh very heavily in the balance in deciding to issue the license. MR. METALITZ: With that, we will wrap up this program. Thank you very much to all of our speakers and panelists and to the audience.

CHAPTER IV

Copyright Law Part B: Copyright and Music Section 1: Sound Recordings U.S., EU and global terms of protection; increased protection for performing artists; Role of SoundExchange; Section 115 revision. Moderator MORTON DAVID GOLDBERG

Cowan, Liebowitz & Latman, P.C. (New York) Speakers DAVID CARSON

SHIRA PERLMUTTER

Associate Register for Policy & Executive Vice President, Global Legal Policy, International Affairs, U.S. Copyright Office International Federation of (Washington, D.C.) Phonograph Industry (IFPI) (London) JOHN SIMSON

Executive Director, SoundExchange (Washington, D.C.)

Commentators PROF. LIONEL BENTLY

FABIENNE BRISON

Cambridge University (U.K.)

Howrey LLP, Free University of Brussels

BARBARA NORCROSS-AMILHAT

Principal Administrator, Copyright and Knowledge-Based Economy, DG Internal Market and Services, European Commission (Brussels)

132 CHAPTER IV: COPYRIGHT LAW MR. GOLDBERG: Let me introduce our panelists: David Carson, the Associate Register for Policy and International Affairs at the U.S. Copyright Office in Washington; Shira Perlmutter, Executive Vice President for Global Legal Policy, International Federation of the Phonographic Industry (IFPI) in London; John Simson, Executive Director of SoundExchange in Washington, D.C.; Professor Lionel Bently, Cambridge University, U.K.; Fabienne Brison, Howrey and Free University of Brussels; and Barbara Norcross of the European Commission.

The New Efforts to Expand the Public Performance Right for Sound Recordings in the U.S. and the Copyright Office Regulatory Activity with Respect to Section 115 Compulsory License, Especially with Respect to Digital Phonorecord Deliveries David Carson* I am going to talk about two sections of U.S. copyright law,1 both of which relate to sound recordings.2 The first relates to the rights in sound recordings. The second relates to when one can make a sound recording of a musical work without getting the permission of the owner of the rights in the musical work. There is some hope for some progress on both fronts. With respect to Section 115, rights in the musical works,3 we are hoping perhaps to start moving into the 21st century. With respect to Section 114, rights of performers and owners of rights in sound recordings,4 we are hoping to move into the 20th century. The basic provision is Section 106 of our Copyright Act, which enumerates the exclusive rights of the copyright owner.5 I should say those of you who are very familiar with this subject are not going to learn anything from me. But there are many of you in the room who are not, so I am going to stick more or less to the basics. The pertinent rights here that we want to focus on are the rights in subparagraph (4), the right of public performance, which, when you look at the nature of the works that have a public performance right, does not include sound recordings. * Executive Director, SoundExchange, Washington, D.C. 1 Copyright Act of 1976, Pub. L. No. 94-553, 90 Stat. 2541 (enacted Oct. 19, 1977) (codified at 17 U.S.C. § 101 et seq.), available at http://www.copyright.gov/title17/92chap1.html. 2 Sound recordings are defined as “works that result from the fixation of a series of musical, spoken, or other sounds, but not including the sounds accompanying a motion picture or other audiovisual work.” 3 17 U.S.C. § 115 (scope of exclusive rights in nondramatic musical works: compulsory license for making and distributing phonorecords), available at http://www.law.cornell.edu/uscode/17/usc_sec_17_00000115----000-.html. 4 17 U.S.C. § 114 (scope of exclusive rights in sound recordings), available at http://www.law.cornell.edu/ uscode/17/usc_ sec_17_00000114----000-.html 5 17 U.S.C. § 106 (exclusive rights in copyrighted works: “Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.”).

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However, in 19956 we added subparagraph (6), which did give us a limited public performance right with respect to digital audio transmissions of sound recordings. That granted essentially an exclusive right with respect to interactive digital audio transmissions and a compulsory license with respect to certain kinds of transmissions, which I will get to in a moment. We also amended Section 114, which is the basic provision governing rights in sound recordings, to clarify that the exclusive rights of performance do not extend to sound recordings.7 As I mentioned, Section 114 also goes on and has a compulsory license. It exempts certain kinds of transmissions from that exclusive right, including, most interestingly, nonsubscription broadcast transmission, which means that broadcasters to this day, although they have to pay the copyright owners in musical works when they transmit recordings of those works, have to pay absolutely nothing to the performers or the record companies who own the copyrights in those sound recordings. And of course, in the United States sound recordings are governed as part of our copyright law, not a neighboring rights regime. The statutory license as enacted in 1995 covered subscription digital audio transmissions as well as what were called “eligible nonsubscription transmissions”8 and a “new subscription service,”9 such as satellite digital audio radio — but again, not broadcasting. I will return in a moment to what eligible nonsubscription transmissions. For quite some time, performers and record companies have wished that they could have a performance right that was broader than what we have had for the last twelve years or so. Of course, sound recordings came very late into our statutory copyright world.10 There was no copyright in sound recordings in the United States until 1972. Prior to that they were governed by state law. In 1972 we did not include a performance right. We simply included distribution and reproduction rights.11 In the 1976 Act we essentially kept that.12 There was also a derivative work right, which was extended to sound recordings. But public performance was not included. 6 Digital Performance Right in Sound Recordings Act of 1995 (DPRA), Pub. L. No. 104-39, 109 Stat. 336 (Nov. 1, 1995) (amending 17 U.S.C. §§ 114–115). DPRA provided a limited performance right. The right was limited to digital transmissions that are not over-the-air; “noninteractive services,” such as cable and satellite radio services, were given a statutory compulsory license to play the music, meaning they did not need permission from the performer or recording owner and only had to pay them a government-set royalty. See also Performers and Performance Rights in Sound Recordings: Oversight Hearings before the Subcomm. on Intellectual Property and Judicial Administration of the House Comm. on the Judiciary, 103rd Cong., 1st Sess. (1993). 7 17 U.S.C. § 114 (scope of exclusive rights in sound recordings: “The exclusive rights of the owner of copyright in a sound recording are limited to the rights specified by clauses (1), (2), (3) and (6) of section 106, and do not include any right of performance under section 106(4).”). 8 An “eligible nonsubscription transmission” is a noninteractive digital audio transmission that, as the name implies, does not require a subscription for receiving the transmission. The transmission must also be made as a part of a service that provides audio programming consisting in whole or in part of performances of sound recordings the primary purpose of which is to provide audio or entertainment programming, but not to sell, advertise, or promote particular goods or services. 17 U.S.C. § 114(j)(6). 9 A “new subscription service” is “a service that performs sound recordings by means of noninteractive subscription digital audio transmissions and that is not a preexisting subscription or a preexisting satellite digital audio radio service.” 17 U.S.C. § 114(j)(8). 10 There was no recording industry or recording artists when the Copyright Act of 1909 was implemented. 11 In 1971 Congress recognized sound recordings as “writings” deserving copyright protection. Copyright protection was granted, but owners of copyright in sound recordings were not granted the full array of exclusive rights afforded other authors; the controversial public performance right was withheld. Sound Recordings Act, Pub. L. No. 140, 85 Stat. 39 (1971); see also Shaab v. Kleindienst, 345 F. Supp. 589 (D.D.C. 1972) (sound recordings qualify as writings of an author that may be copyrighted); Goldstein v. California, 412 U.S. 546 (1973) (the term “writings” can be broadly interpreted by Congress to include sound recordings). 12 The Copyright Act was revised in 1976, but sound recordings were still denied a performance right pending a study. The Register of Copyrights noted that opposition to a performance right appeared to be limited to thosewho would have to pay royalties. In 1978 the two-volume study recommended a full performance right for sound...

134 CHAPTER IV: COPYRIGHT LAW Lately there has been some hope that perhaps that would change.13 Last summer, the Intellectual Property Subcommittee of our House of Representatives held a hearing to examine that.14 It is probably fair to say that most of the members of that subcommittee expressed a great deal of sentiment in favor of extending those public performance rights, in particular to extend them to cover broadcasting. Then, in November there was a hearing in the Senate Judiciary Committee, in which one could detect probably some similar sentiments, perhaps not as strongly.15 But there definitely was quite a bit of sentiment to move forward in the direction of extending those rights. Notwithstanding that, in October a number of representatives, well over 100 members of the House of Representatives, put their names on a concurrent resolution, Supporting the Local Radio Freedom Act,16 which resolved that Congress should not impose any new performance fee, tax, royalty, or other change relating to the public performance of sound recordings on local radio stations. So there is definitely some political support for keeping the system as it is. Similar to what happened when the so-called Fairness in Music Licensing Act17 was enacted, when people lamented the fact that in every congressional district you could find bars and restaurants but you couldn’t find songwriters in every such district, you can also find broadcasters in every congressional district but you don’t necessarily find record companies or performers in every congressional district. So it is largely due to their political clout that broadcasters have managed to remain immune from any such right thus far. However, on December 18, 2007, legislation was introduced in both the House and the Senate sponsored by some pretty important folks — Patrick Leahy, Chairman of the Senate Judiciary, and Orrin Hatch, the former chairman; and in the House introduced by Howard Berman, the Chairman of the Intellectual Property Subcommittee, as well as John Conyers, the Chairman of the Judiciary Committee, and others — called The Performance Rights Act, which would in fact extend the public performance right.18 It would do it with a fair economy of language. For example, we would simply change subparagraph (6) of Section 106 to make clear that the public performance right extends to all audio transmissions, not just digital audio transmissions; that would cover analog broadcasts. Similarly, the definition of “eligible nonsubscription transmission” would be amended to take recordings. U.S. Register of Copyrights, Performance Rights in Sound Recordings, 95th Cong., 2d Sess. (Comm. Print No. 15, June 1978). 13 See Section 115 Reform Act of 2006: To Amend Section 115 of Title 17, United States Code: To Provide for Licensing of Digital Delivery of Musical Works and for Other Purposes, H.R. 5553, 109th Cong. (introduced June 8, 2006), available at http://www.govtrack.us/congress/bill.xpd?bill+h109-5553; Reforming Section 115 of the Copyright Act for the Digital Age: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the H. Comm. on the Judiciary, 110th Cong., 1st Sess. (Mar. 22, 2007) (Statement of Marybeth Peters, Register of Copyrights), available at http://www. copyright.gov/docs/regstat032207-1.html. 14 Hearing on Ensuring Artists Fair Compensation: Updating the Performance Right and Platform Parity for the 21st Century Before the H. Comm. on the Judiciary, Subcomm. on Courts, the Internet, and Intellectual Property, 110th Cong. (July 31, 2007), available at http://judiciary.house.gov/Oversight.aspx?ID=363. 15 Hearing on Exploring the Scope of Public Performance Rights Before the S. Comm. on the Judiciary, 110th Cong. (Nov. 13, 2007), available at http://judiciary.senate.gov/hearing.cfm?id=3030. 16 Concurrent Resolution Supporting the Local Radio Freedom Act, H.R. Con. Res. 244, 110th Cong. (introduced Oct. 31, 2007), available at http://www.opencongress.org/bill/110-hc244/text. 17 Fairness in Music Licensing Act of 1998, Pub. L. No. 105-298, Title II, 112 Stat. 2827, 2830 (Oct. 27, 1998). The Digital Millennium Copyright Act of 1998, Pub. L. No. 105-314, codified at 17 U.S.C. § 512 (Oct. 28, 1998) [hereinafter DMCA], available at www.copyright.gov/title17, expanded the digital transmission performance right to cover Internet transmissions (webcasters). The right was still based on a statutory compulsory license. Over-the-air radio was again excluded. 18 Performance Rights Act, H.R. 4789 & S. 2500, 110th Cong. (introduced Dec. 18, 2007). For further information on this legislation, see GovTrack.us (database of federal legislation): http://www.govtrack.us/congress/bill. xpd?bill=h110-4789; http://www.govtrack.us/congress/bill.xpd?bill=s110-2500.

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the word “digital” out, which would then bring those broadcast transmissions within the scope of the statutory license that exists right now with respect to, for example, webcasting. By the way, the proceeds from that license go 50 percent to the record companies and 50 percent to the performers. That is what would be anticipated with respect to broadcasters. I do not have time to get into all of the exemptions, but there are some fairly minor exemptions. The legislation includes some exemptions from the public performance right for sound recordings, including exemptions for nonsubscription transmissions of services at a place of worship or other religious assembly and of the incidental use of musical sound recordings. It would also set a cap on royalties under the statutory license for broadcast stations with gross revenues of less than $1,250,000 and for public broadcasting stations. Let me outline very briefly some of the arguments made in favor and against. I think perhaps some of our panelists have more to say on that, so I will leave most of that to them. The arguments in favor of the performance right I think are pretty obvious to most of us: • As I mentioned, songwriters get those revenues from broadcasters. Why shouldn’t performers? It’s a matter of basic fairness. If broadcasters are making money off of the performance of sound recordings, why shouldn’t they pay the people who produced them? The argument on the other side from broadcasters that was heard most frequently at the hearings was: “This is a performance tax.” Every thirty seconds, those words seemed to come out of the broadcasting companies’ witnesses. That term was not very well received by the members of the committees, because of course this isn’t a tax; it is money that would go to the performers and the record companies. • The argument was made that broadcasters actually serve the interests of record companies because of the promotional value that broadcasting brings to the sale of records. But of course, in this day and age, as record sales are declining dramatically, you do not even have to argue about whether historically there has been a promotional value. Whatever promotional value there has been does not seem to be working too well right now, and maybe we need to recalibrate how the revenues come in to those who produce those sound recordings. Those are the basic arguments. We may get into more of those later. Then, after the legislation was introduced, some other folks came to the table with some other suggestions.19 We see the extent to which they have been accepted thus far in the bill itself. The bill says: “Nothing in this Act shall adversely affect in any respect the public performance rights of or royalties payable to songwriters or copyright owners of musical works.” That is because, of course, we all know that whatever value a broadcaster might find in a sound recording has absolutely no relation whatsoever to the value in the musical work that the sound recording is a recording of; so why should that be taken into account? The big one that is not in the bill at this point is an attempt to overrule the decision of the U.S. District Court in New York about a year ago in United States v. ASCAP,20 where the court, correctly in our view, concluded that when you have a pure download there is no public performance under U.S. law. The performing rights organizations have been very upset about that, and they have asked that the definitions of “public performance,” of “perform,” and of “to perform publicly” be amended in our Copyright Act so that when you have a transmission of a file containing a 19 See Posting of David Oxenford to Broadcast Law Blog, House Judiciary Committee Hearing on Broadcast Performance Right — No Breaks for the Broadcasters, http://www.broadcastlawblog.com/archives/intellectualproperty-house-judiciary-committee-hearing-on-broadcast-performance-right-no-breaks-for-the-broadcasters.html (July 31, 2007). 20 United States v. Am. Soc’y of Composers, Authors & Publishers (ASCAP), 485 F. Supp. 2d 438 (S.D.N.Y. 2007).

136 CHAPTER IV: COPYRIGHT LAW musical work that is received by someone else, even though they do not hear it at the time they receive it and they may never hear it, it is nevertheless a public performance. This is a rather radical change in the current definition, and one that would have quite a bit of consequences in the real world and in the world of licensing. I don’t have time to get into what those consequences will be, but I think we may hear something about that in the next panel. As my time is about up, I will just mention that there is a rulemaking that the Copyright Office commenced back in the year 2001, which would, among other things, address whether the Section 115 mechanical license, which includes a compulsory license for digital photo record deliveries (downloads, for example), also addresses the reproductions made in the course of streaming of public performances. That would include server copies, intermediate copies, and buffer copies. We have had that on a sort of sidetrack for a while because it seemed there were prospects that there would be legislation on this subject. But the legislation has never been introduced, never made much progress. So we are probably this year, probably quite soon, going to put out a Notice of Proposed Rulemaking21 and, hopefully later this year, hopefully before the Copyright Royalty Board issues its ruling on rates for streaming, we are going to offer some guidance in the form of a regulation that would address whether those reproductions made in the course of streaming do fall within the scope of the statutory license, guidance that the Copyright Royalty Board certainly could use, since they have to determine whether to set the rates and terms for that kind of conduct. I think Marybeth may tell you a little bit more about the history of that Board proceeding and how it has come about to be in the situation that we are in now. Thank you. MR. GOLDBERG: Thank you, David. Now we will hear from Shira Perlmutter.

Term Extension, Broadcasting Rights, and ISP Cooperation Shira Perlmutter* So far this conference has been a rather disheartening experience for someone representing the record industry. I started this morning hearing that we were the scum of the earth. This afternoon I have heard that the Commission’s new initiative is really a subterfuge or secret agenda to help record companies, as if that would be a terrible thing. I have also heard statements that the record industry has been abusing the image of performers by working with them to ask for term extension, which I find rather shocking. All in all, when you think about it, we are talking about an industry that is a creative industry, that, as was pointed out in the General Counsels’ Roundtable earlier (see Session I, Part F), invests capital to bring new music to the public. And we are talking about an industry that is working very closely with performers on many issues, and especially on term extension, which is an area where we have tremendous mutual interest. 21 See Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Devices, Notice of Proposed Rulemaking, 73 Fed. Reg. 40,802 (July 16, 2008) (codified at 37 C.F.R. pts. 201, 255), available at http://www. copyright.gov/fedreg/2008/73fr40802.pdf. * Executive Vice President, Global Legal Policy, International Federation of the Phonograph Industry (IFPI), London.

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With that as an introduction, what I am going to do in my nine minutes is briefly address three issues: term extension, broadcasting rights, and ISP cooperation. On term extension, we need to bear in mind that we are talking about a current reality where there is a tremendous inequality of term, in the European Union in particular. That is an inequality of term vis-à-vis the United States and other countries that have longer terms, and vis-à-vis other right holders, with the result that the same song which often has been made famous by a particular recording by a particular performer, the song itself remains protected while the recorded performance can be up for grabs, even during the lifetime of the performer. And we are not talking about a minor difference. We are talking about approximately half of the total term. That is quite a difference. Now the Commission has announced, as we’ve heard, its intention to propose an extension of term.22 There is not a lot of specificity in the announcement. But I would say that it is difficult to conceive of an extension of term that would apply only to performers and not to record producers, because we are talking about a sound recording, which involves rights of different kinds of right holders. The kinds of goals that are described in the Commission’s press release23 could not be accomplished without extending all of the rights in the work, and I’ll talk about that in a minute. There is nothing sinister about the idea that the term would be extended for both record producers and performers. That’s the way it normally works. Again, performers and producers work together in producing the recording and bringing it to the public, including various ways of getting compensation after the record is out there. So what would be the result if the European Union extended the term? We would have a better fit between Europe and its major trading partner, the United States, and with other countries that have longer terms. It’s interesting, the question that was posed earlier: “Does that mean the European Union becomes the satellite of the United States?” I didn’t hear anyone suggest that the United States became the satellite of the European Union in 1998 when it extended its term24 specifically to match the European extension of term in the Term Directive.25 22 See European Commission, Music Copyright: Commission Recommendation on Management of Online Rights in Musical Works, IP/05/1261 (12 Oct. 2005) [hereinafter Commission Music Copyright Recommendation], available at http://www.ebu.ch/CMSimages/en/INFO_EN_233_tcm6-40326.pdf; see also Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (collective cross-border management of copyright and related rights for legitimate online music services), available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2005/l_276/1_27620051021en00540057.pdf. Note: Subsequent the Conference, the European Commission adopted two initiatives in the area of copyright. Press Release, European Commission, Intellectual Property: Commission adopts forward-looking package, IP/08/1156 (July 16, 2008), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1156 (“First, the Commission proposes to align the copyright term for performers with that applicable to authors, in this way bridging the income gap that performers face toward the end of their lives. Secondly, the Commission proposes to fully harmonise the copyright term that applies to co-written musical compositions. In parallel, the Commission also adopted a Green Paper on Copyright in the Knowledge Economy. The consultation document focuses on topics that appear relevant for the development of a modern economy, driven by the rapid dissemination of knowledge and information. Both of these initiatives comprise a unique mix of social, economic and cultural measures aimed at maintaining Europe as a prime location for cultural creators in the entertainment and knowledge sectors.”); see also European Commission, Green Paper, Copyright in the Knowledge Economy, at 3, COM (2008) 466 final (July 16, 2008), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=COM:2008:0466:FIN:EN:PDF. 23 Press Release, European Commission, PerformingArtists — No Longer Be The “Poor Cousins” of the Music Business — Charlie McCreevy, IP/08/240 (Feb. 14, 2008) [hereinafter McCreevy Press Release], available at http://europa.eu/rapid/ pressReleasesAction.do?reference=IP/08/240. 24 Sonny Bono Copyright Term Extension Act of 1998, Pub. L. No. 105-298, Title I, 112 Stat. 2827 (Oct. 27, 1998) (codified at 17 U.S.C. §§ 302–304), available at http://www.copyright.gov/title17/92chap3.html. 25 Parliament & Council Directive 2006/116, 2006 O.J. (L 372) 12 (EC) (on the term of protection of copyright and certain related rights) (consolidated version of the former EU Directive harmonizing the term of copyright protection, including amendments made up to and including 2006, replacing the text of the older directive),...

138 CHAPTER IV: COPYRIGHT LAW There would be more money available for record companies to invest in bringing new artists to the public, at a time when their income from other sources is shrinking dramatically. This is good for the culture of Europe and it is good for the economies of Europe. There is a big economic debate on the issue of term, with conflicting results from different people. I think it is very hard to argue there wouldn’t be some economic benefit. The real debate is over exactly how big that economic benefit is. There would be more incentive for record companies to digitize and re-release old recordings. Performers in their old age would keep getting income, and this is particularly important to them at a time when they can no longer tour and make money from giving live performances. There are people who say, “Let them just perform instead,” but not all performers can do that throughout their lifetime. And finally, given the particular economic structure of the record industry, the only available evidence that has been independently collected so far shows no significant difference in prices to consumers from recordings that are out of copyright or in copyright.26 So far the only studies that have shown major differences in price have been in other industries, like the publishing industry, which has a very different structure. It is important to make sure that any extension benefits all performers, not just the successful performers. Now successful performers will benefit when record companies sell more records during an extended term because they will be the ones who have already had their advances recouped and they will continue to get money. They will be the ones whose recordings, because they are popular, will continue to be in print. But what about less successful featured artists? What about session musicians? That’s why, if you look at the Commission’s press release,27 you will see three different proposals, which are not fleshed out in any great detail but are very important. • One is that featured artists’ advances would be deemed to have been recouped as of the beginning of the extended term, so they would start getting income from all of the sales of records during that time period without it being deducted from outstanding advances. • Second, there is a proposal that a fund would be set up for session musicians. The press release talks about 20 percent of record company income being used to fund it. It’s unclear exactly what “record company income” means, and there is obviously some work to be done to figure out how such a fund would work. But the concept is to make up for the fact that session musicians are generally paid by getting one lump sum at the beginning when they record their performance, and that’s it. So if there is a new term, the idea would be to find some way to compensate them and give them some payment that they can share through their unions or collecting societies for the extra rights during the extended term. • Finally, there is a proposal for something called “use it or lose it.” Again, that needs to be fleshed out. This would allow a featured performer, if his or her recording is no longer being distributed, to go to the record company, ask for it to be distributed, and then, if the record company doesn’t want to, take it elsewhere. That is a way to avoid any kind of functional lockup of older content. If the initial company doesn’t want to release it, someone else will be able to do so and the performer will benefit. That’s all I wanted to say about term extensionOn broadcasting rights, I’d like to give some international perspective, because John will talk some more about the U.S. situation. It is important to bear in mind, in addition to the points that David made, that broadcasting available at http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&numdoc=3200 6L0116&model=guichett. 26 Price Waterhouse, The Impact of Copyright Extension for Sound Recordings in the UK (2006) (report commissioned by the BPI). 27 See McCreevy Press Release, supra note 23.

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remuneration is an increasingly important element of the income from recordings today. It is not just that the sale of physical copies is declining.28 It is also that the way that consumers want to experience music is changing. They are more and more moving toward a form of experience where it is the listening process, rather than the ownership of a physical copy in itself, that matters. It is no longer possible to rely on the argument that it is promotional to play music for consumers to listen to, because in fact that experience is becoming the goal, rather than the sale of records. So more and more, a broadcasting right is critical, a public performance right is critical, to the industry around the world. Not only are these rights recognized in international treaties, but the vast majority of countries provide them. The United States is today the only major developed country that does not provide a broadcasting right for sound recordings. China is the other major country that does not. And then there is a handful, only a handful, of mostly small developing countries. Everywhere else in the world, this right exists. Now, why is it so widespread? Because of a recognition that it is just fundamentally unfair to allow businesses to use other people’s product to increase their own revenues and not pay for it. This is particularly true about broadcasters, because the recordings for them are not just background ambiance to make their product more appealing; the recordings are the substance of their commercial offering, and they should pay to use them. I should say this isn’t just a question of principle, because there is real money at stake. There is a lot of money being left on the table abroad because U.S. right holders cannot get access to it because they do not get reciprocity because there is no right in the United States. If the right were offered here, U.S. performers and producers would be entitled to income from the broadcasting of U.S. recordings in other countries. U.S. recordings are very popular in other countries. Overall, as an average, they represent about a third of all the recordings that are listened to on the radio outside of the United States. So that is substantial money, probably we’d estimate at this point — and we are still trying to figure out the numbers — more than $50 million, somewhere between $50 million and $100 million a year, that would be being paid. That’s all I have to say about broadcasting. In my last few seconds, I’ll address ISP cooperation. This issue too was raised on the General Counsels’ Panel (Session I, Part F). It is the most critical issue today for the future of the industry. On it will turn our ability to develop a thriving legal digital market. What we are looking for from ISPs is partnership and cooperation in controlling online pricing. There is much more they could do that is reasonable, that is proportional, and that is not expensive or burdensome. We need to work together to develop all of those things. This is beginning to happen in some places. We need to see more. The subject will be discussed more in a panel tomorrow (Session VIII, Part C). The fundamental point is that ISPs should not wash their hands of any role. They should play a responsible role in terms of licensing possibilities, in terms of enforcing their terms of service, and in terms of exploring technological solutions. Thank you. MR. GOLDBERG: Thank you, Shira.

John Simson.

28 See Press Release, IFPI, Recording Industry in Numbers 2008 (June 16, 2008), available at http://www.ifpi.org/ content/section_resources/rin/rin.html; IFPI, Recording Industry in Numbers (2008), available at http://www.ifpi.org/ content/section_resources/RIN/RIN-Versions.asp.

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SoundExchange John Simpson* Thank you. My name is John Simson. I opened for Jethro Tull in the Aqualung Tour in 1971, and I got so successful I went to law school. I also recorded my album in London in 1971. Good news, it was a Rome territory, so I can collect if anyone ever plays it. Bad news is I recorded it in 1971, so I have no copyright in it. Little did I know then what I know now. I am running the SoundExchange, which is the first performing rights organization in the United States that represents sound-recording copyright owners and performers. We are now at 31,000 U.S. performers. We are at 3,500 independent labels and the four major record companies.29 We are part of the Music First Coalition, which is a coalition of ten artists’ groups, two label associations, and us, a joint society. A couple of comments that I need to address that were made in the earlier panel. One is that there are tens of thousands of background musicians who are identified, who have played on many sessions from the 1950s, 1960s, 1970s, 1980s, and 1990s, who are receiving royalties collected by SoundExchange and paid from “reuse” funds through the American Federation of Musicians (AFM) and the American Federation of Television Radio Artists (AFTRA). So the notion that it is falling into a black hole may be true of certain payments, but many of them are going out. The other factor is that SoundExchange is the long-tail company. Internet radio, satellite radio, with hundreds of channels of music, broadcasters now with high definition (HD) that will have multiple channels of much deeper programming — we have over 70,000 performers whose works are being exploited in these media. It’s not just the major performers. Yes, they get the most, but tens of thousands of dollars are being earned by children’s performers, blues performers, Hawaiian performers — many, many genres. In terms of the relationship between the musical work and the sound recording, I think John Coltrane’s version of “A Few of My Favorite Things” proves the creation piece of this argument. He took a work and made it something entirely new and different and deserves to be paid for that. Another piece of the puzzle internationally is that in Scandinavia, for example, U.S. repertoire is not protected at all, so Scandinavian broadcasters can play U.S. repertoire and not pay for it. What has been done in those territories is to use content restrictions: you can’t play all U.S. repertoire because then we would be able to collect nothing in the local society. Broadcasters have threatened to play only U.S. repertoire so they would not have to pay. The Danes, the Swedes, and the Finns would love to have protection of U.S. repertoire so they could collect money. It depresses what they actually get to collect in their own territory. We have had serious meetings with GRAMEX, the Danish collecting society. SoundExchange now has reciprocal deals with The Netherlands, with the United Kingdom, and with the Spanish performers’ society. In the world of the United States and our campaign for broadcast royalties, I would like to address a couple of things. David and Shira pointed out that we are the only country in the Organization for Economic Co-operation and Development (OECD), an organization of thirty developed free-market * Executive Director, SoundExchange, Washington, D.C. 29 See SoundExchange, http://www.soundexchange.com; SoundExchange, Annual Report for 2007, available at http://www.soundexchange.com/assets/download_forms/2007AnnualReport-PDF-3-31-08-PRE_AUDIT.pdf.

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economies, that does not have a broadcast right. We are the only copyright in the United States that can be publicly performed that does not have a performance right. And now in the United States over-the-air radio is the only platform that delivers a radio service that does not have to pay. So we have three basic anomalies in our law. Internet radio pays, satellite radio pays, cable radio pays, even over-the-air radio pays when they simulcast their signal. But terrestrial radio still has an exemption from paying. Again, I think we have some other issues as well. Webcasting, for example, is a worldwide phenomenon, it is not a territorial phenomenon, although certain webcasters have now blocked their signals in other countries because there are publishing issues. Pandora recently said it was blocking its signals into certain countries in Europe because of publishing issues.30 You may be able to go to Pandora Anywhere and go around the work-around. But it is a worldwide phenomenon. The IFPI came up with a worldwide webcasting agreement.31 There are forty signatory countries, most of Europe and South America. The United States has not signed yet. One of our major issues is, because we are not a Rome32 signatory, we want to ensure that U.S. performers get paid if we are going to sign on and let other countries use the rights in an area where we do protect European performers and where we do pay significant royalties now to Canadians, to Europeans, to anyone whose music is being used on U.S. webcasting and satellite radio services. A fairly large percentage of those being performed are foreign. In that worldwide webcasting agreement, we have received assurances, but we want side letters that basically say that U.S. performers will be paid. It is a major point for us. That raises another interesting issue for us, which is satellite radio in the United States has become a very significant business. While you probably read recently, the merger between XM and Sirius has been approved,33 these are businesses that have struggled in some ways but they have not struggled in others. They were the fastest-growing subscription service in history, faster than any of the other subscription services that have been rolled out. Over 16 million subscribers, and the fees that they collected last year from their subscribers were approximately $2 billion.34 We just recently received a Copyright Royalty Board ruling providing that we receive a rate of 6 percent of their revenues.35 And again, there are certain revenue exclusions. It dramatically increased SoundExchange’s revenues, which went from $60 million in 2006 to over $120 million last year, at an administrative fee of under 6 percent. So very efficient. We are a fixedcost business. Like any collecting society, the more money you put through the pipes, the cheaper it should be. We are adamant about finding and paying every performer, wherever they reside; we do not draw territorial restrictions. 30 See Scott Gilbertson, “Pandora Licensing Fees Force Pandora to Shut Down U.K. Music Service”, Wired, http:// blog. wired.com/monkeybites/2008/01/licensing-fees.html (Jan. 8, 2008). 31 For more information the IFPI Simulcasting and Webcasting Agreements, see Press Release, IFPI, Major Step Forward in Cross Border Music Licensing Regime (Apr. 27, 2007), available at http://www.ifpi.org/content/section_ news/2007 0427.html. 32 International Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations, Oct. 26, 1961, 496 U.N.T.S. 43 [hereinafter Rome Convention], reproduced in International Treaties on Intellectual Property 417 (Marshall A. Leaffer ed., 1990). 33 See David Goldman, “XM-Sirius Merger Approved by DOJ”, CNNMoney.com, http://money.cnn.com/2008/03/24/ news/companies/xm_sirius/index.htm (Mar. 24, 2008). 34 See Press Release, Sirius XM Radio, SIRIUS XM Radio Reports Second Quarter 2008 Results (Aug. 7, 2008), available at http://investor.sirius.com/releasedetail.cfm?ReleaseID=346881. 35 U.S. Copyright Royalty Board, Docket No. 2006-1 CRB DSTRA, Final Determination of Rates and Terms for Pre-existing Satellite Digital Audio Radio Services (Jan. 24, 2008) (notice announcing commencement of proceeding published in 71 Fed. Reg. 1455), available at http://www.loc.gov/crb/proceedings/2006-1/sdars-finalrates-terms.pdf.

142 CHAPTER IV: COPYRIGHT LAW In other countries, satellite radio is deemed broadcast. When the WIPO Performances and Phonograms Treaty (WPPT)36 are passed, will we get paid for satellite broadcasters in other countries if we don’t get our over-the-air radio right? It is an interesting issue for us to explore. Building a collecting society in the United States has been also an interesting exercise, since we got to do it in 2000, when many other territories built them, for example seven years ago in the United Kingdom, or maybe fifteen years ago in The Netherlands, ten years ago (still counting) in Canada. It is an interesting exercise. We have tried to do this as efficiently as we can using the best practices that we have seen around the world, and trying to be as transparent as we can be. We are regulated by the Copyright Office. Obviously, we have an antitrust exemption granted in the law that we can represent the entire industry. Unlike the musical works side in the United States, we are a one-stop shop. We represent 90 percent of the copyright owners in the United States right now. The other 10 percent are probably 10,000 long-tail companies, artists who own their own masters, small little labels from around the world. So you can get all of the rights you need in one place. It is not as fragmented as the publishing side. There is not a mechanical right or reproduction agency and then a performance agency. Obviously, we don’t license both rights. But in any event, it is built on the European model. It is a work in progress, but we are trying to do this as efficiently as we can, trying to work with our partners around the world. Obviously, the first three things that always get brought up to us are Rome, Rome, and Rome. Please visit musicfirstcoalition.org. That said, I will yield the rest of my time to the next panelist. MR. GOLDBERG: Thank you very much, John. Now we have very brief comments, first from Lionel Bently. PROF. BENTLY: Firstly, I have to disagree with Shira that the idea of an extension of copyright term for performers requires also an extension of copyright term in sound recording. It seems to me that the case law extending copyright term in sound recordings basically involves economics. The case for performers is, in contrast, one based on morality. The economic case for extending copyright term for sound recordings has no basis. The economic case for extending copyright term for sound recordings has been looked into by two independent reports, one by my center in Cambridge (the Centre for Intellectual Property and Information Law [CIPIL] in a report37 commissioned by the Treasury to assist the Gowers Review of Intellectual Property38) and one by Bernt Hugenholtz’s Institute for Information Law at the University of Amsterdam (in a Report for the European Commission entitled Recasting Copyright for the Knowledge Economy39). Both reports have, I think, conclusively shown that there is no economic case that justifies extension of copyright term in sound recordings. There is no extra incentive provided by the term beyond fifty years, as the Nobel Prize-winning economists showed in their amicus 36 WIPO Performances and Phonograms Treaty, 2186 U.N.T.S. 245, 36 I.L.M. 76 (Geneva, 1997) (entered into force May 20, 2002) [hereinafter WPPT], available at http://www.wipo.int/treaties/en/ip/wppt/trtdocs_wo034.html. 37 Centre for Intell. Prop. & Info. Law, “The Review of the Economic Evidence Relating to an Extension of the Term of Copyright in Sound Recordings” (2006), available at http://www.hm-treasury.gov.uk/media/B/4/gowers_ cipilreport.pdf. 38 U.K. Treasury, Gowers Review of Intellectual Property (Dec. 2006), available at http://www.hm-treasury. gov. uk/media/6/E/pbr06_ gowers_report_755.pdf. 39 Inst. for Info. Law, Univ. of Amsterdam, “The Recasting of Copyright and Related Rights for the Knowledge Economy” (Nov. 2006), available at http://www.ivir.nl/publications/other/IviR_Recast_ Final_Report_2006. pdf.

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brief in Eldred v. Ashcroft,40 and of course there is no extra incentive for works that are already created. So the economic case for extending copyright terms in sound recordings does not exist. There may be a good moral case for extending performers’ rights. But if you were going to extend performers’ rights, you would want, first of all, to make it linked to a life-plus term. I find Tilman Lüder’s argument that this would be too complex wholly unpersuasive. Dealing with multiple authorship in copyright is a complex business, but we manage it. It doesn’t seem to me that dealing with multiple performers is a significantly more complex business. Secondly, if the proposal is justified on the basis of the moral claim by performers, then the extension should be granted in relation to all performers (not just performers who feature on sound recordings). If this is a matter of moral principle, then it is difficult to see how that moral principle can apply only to sound recordings. The Commission representative has responded that there is no data for performers other than performers of works in sound recordings. Well, go get some data, Tilman. You’re the governmental body. You have the money. Go commission some data. And do so before you make a proposed legislative change. Thirdly, if the Commission implements an extended term for performers, with the intention of benefiting performers, then it is absolutely essential to provide that existing contractual agreements that assign future rights in performances do not apply. Anyone who has ever looked at a recording contract knows that the record companies have anticipated that new rights and new terms may be granted to artists, and have written in provisions — so called “boilerplate” — to ensure that these benefits go to the companies, not the artists themselves. If the Commission is serious in its intention to benefit poor performers, all such boilerplate must be made ineffective. This means that the transitional provisions must be determined centrally, not left (as happened with the Term Directive41) to Member States. Beyond that, some of the other things that are mentioned in Mr. McCreevy’s press release seem to me to be very interesting.42 The idea of a termination right for performers is very attractive indeed. I believe that consideration should be given to such a termination right during the existing term of protection, as well as for the extension. Indeed, such a termination right could also be valuably conferred on authors. Of course, such a termination right must be one that cannot be overridden either by contract, or by agreements as to the applicable law. That is really all I’ve got to say. I oppose an extension of the term of copyright for sound recordings, and fear that the performers’ claim is being used as a stalking horse by the record companies. However, I am sympathetic to the moral claims of performers to longer protection. There will be a social cost, that is, consumers will pay: but I believe it might be justified if the benefits go to performers. If the Commission is serious, the proposal should apply only to performers. It must not be an indirect mechanism by which record companies gain an extended term for copyright sound-recordings. MR. GOLDBERG: Thank you, Fabienne. Barbara Norcross? MS. NORCROSS-AMILHAT: Actually, everybody said everything I wanted to say, so perhaps I will just highlight a couple of things. 40 See, e.g., Brief for George A. Akerlof et al. as Amici Curiae Supporting Petitioners, Eldred v. Ashcroft, 538 U.S. 916 (2002) (No. 01-618), 2002 WL 1041846, reh’g denied, 538 U.S. 916 (2003), available at http://cyber.law.harvard. edu/open law/eldredvashcroft/supct/amici/economists.pdf. 41 Parliament & Council Directive 2006/116, 2006 O.J. (L 372) 12–18 (on the term of protection of copyright and certain related rights) (consolidated version of the former Council Directive 93/98, 1993 O.J. (L 290) 9–13, of 29 October 1993 harmonizing the term of protection of copyright and certain related rights, including all amendments made up to and including 2006. It replaces the text of the older directive). 42 McCreevy Press Release, supra note 23.

144 CHAPTER IV: COPYRIGHT LAW Shira was mentioning the accompanying measures I was going to talk about. Everybody is panicking about this term extension that is going to be proposed. But, of course, there are accompanying measures that will qualify it. As she mentioned, the fund will be destined solely for session musicians, who would of course perhaps lose out in an extension anyway. It is going to be set at probably 20 percent. Now the details of that fund have to be sorted out. Of course, the recording industry will want to make it as little as possible and the performers would like it as much as possible. We in the middle will certainly try to make it as equitable as possible. She mentioned also the “use it or lose it” clause. I think we find that very important too. Of course, it does exist in contract law for authors in certain Member States. We want to adapt it for performers. I think it exists for live performances somewhere. This is very important because of course we have had a lot of criticism — not necessarily today, I must admit — about access to lots of music and everything is being locked up. Well, this will be one way of actually helping to get more things out into the marketplace for people to enjoy. On that particular getting more stuff out into the marketplace, we do hope as well that the recording industry will continue its digitization process that it has started and is doing very well. We, I think, at the Commission would encourage them to digitize as much as possible, and especially back catalogues, because a lot of people complained that they can’t get hold of older versions or older pieces of music because they are not being exploited. I would also like to highlight the fact that this term extension will be good for performers’ moral rights. We had not actually really talked about that. But it is true that with the extended term they will have control of their moral rights and will have a say in how their performances are used, which they would have lost after the fifty years. Also, perhaps we have forgotten, but I would say the Commission too does hold culture very highly in its political priorities at the moment. MR. GOLDBERG: Can we end on a cultural high note, Barbara? MS. NORCROSS: Oh, okay. MR. GOLDBERG: With that boundless enthusiasm, thank you very much. We do have a little time left for comments and questions from the audience. I would ask first those who have not posed a question or made a comment in the earlier session to make their comments or pose their questions now. Or do we once again have consensus or unanimity on everything that has been said? The silence astounds me. There is no dissenter? Ah, the gentleman in back. QUESTION [Michael Gruenberger, University of Cologne Institute of IP Law, Cologne]: Just two remarks. First, on the moral rights question, it is basically not true that moral rights endure until the death of the performer. That has been implemented with the WPPT Treaty43 in most European countries. Second, the “use it or lose it” provision is going to be quite problematic because, as we know, the recording industry has an exclusive right in a recording. The performer has an exclusive right in the performance that has been fixed in a recording. So we have to filter out a provision for how we can give the performer a right to take his performance away without abridging the exclusive right of the recording industry. MR. GOLDBERG: Thank you.More questions? More comments? Howard, you have a chance to do an encore. QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa]: I just wonder whether anybody has looked into or studied the issue of whether, if there is going to be a back end — if 43

WPPT, supra note 36.

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there is going to be a possibility of royalties down the road for a long period of time — this will result in lower payments initially to session musicians. In other words, the record company says, “We’ll only give you a hundred pounds now because you are going to get this money for the rest of your life.” MR. GOLDBERG: Does anyone want to respond to that? MR. SIMSON: These types of payments — back-end payments, reuse payments — have been in effect for forty-fifty years through collective bargaining. QUESTIONER [Mr. Knopf]: But they don’t work because people lose track of the data. MR. SIMSON: The musicians’ reuse funds are sending out about $80 million a year when recordings go onto CDs and DVDs and home video. MR. GOLDBERG: Other questions or comments? Tilman? QUESTION [Tilman Lüder, Head of Unit, Copyright and Knowledge-Based Economy, DG Internal Market and Services, European Commission, Brussels]: To answer Howard’s question, I think that in the European system there wouldn’t be a confusion between these two royalty streams because the performing artist gets his broadcast royalty directly through a collecting society, and that does not go through the label. He gets that money in a separate stream. So there would not be confusion and there is no way the record company could minimize those payments. As I said earlier, much of the benefit for the session musician, who is not a featured performer, who has lost his exclusive rights, comes through those secondary payments, which are automatically channeled through a system different than the sound-recording labels. MS. PERLMUTTER: I would just add that this is all collective bargaining. Obviously, the intent behind the term extension is to increase income for the musicians, not to decrease it. That would be a given in any collective bargaining discussion. MR. SIMSON: I think there is a downward pressure now anyway. There are fewer new artists being recorded by major record companies because they have less money to invest. So there is a downward pressure anyway in the marketplace right now. MR. GOLDBERG: The gentleman in the last row. QUESTION [Michael Sukin, Sukin Law Group, New York]: I would like to suggest that “use it or lose it” is too encompassing a term. The fact of the matter is that the record companies do own these masters. If they are not releasing them and an artist wants to take it somewhere else, I think some consideration has to be given to compensating the record company for their property. On the other hand, forty bazillion record contracts have similar provisions in them, and it just isn’t that hard. MS. PERLMUTTER: I think, obviously, that for a lot of these things the details would still need to be worked out. But you are right, it is not an unheard-of concept, and it makes a lot of sense. MR. GOLDBERG: Barbara Norcross, can you sustain your cultural high note for another minute or so? MS. NORCROSS-AMILHAT: No. I finished on the culture side. I was going to be a bit provocative. Will you excuse me if I am a bit provocative? MR. GOLDBERG: Yes, please. MS. NORCROSS-AMILHAT: We have had so many people being provocative, I wanted to be also. MR. GOLDBERG: But in polite language, I trust. MS. NORCROSS: It’s a bit naughty. MR. GOLDBERG: Better still. MS. NORCROSS-AMILHAT: Being in America, I am going to imitate our American friends. It is really nice to see that you are going forward perhaps with legislation on public performance, etc., in the analog world. I was just thinking: How is that going to stimulate future legislation

146 CHAPTER IV: COPYRIGHT LAW that might change the exceptions you have currently in your law that mean so many public places do not have to pay the public performance license fees? MR. CARSON: It is hard to say which of those will be enacted first. Let’s put it that way. MR. GOLDBERG: Barbara is suggesting that those who get too big for their britches get exposed in the end. Is that correct? MS. NORCROSS-AMILHAT: No. I was just being naughty. MR. GOLDBERG: I want to thank our audience and our commentators.

CHAPTER IV

Copyright Law Part B: Copyright and Music Section 2(a): Digital Licensing Issues in Europe Moderator ERIC J. SCHWARTZ

Mitchell Silberberg & Knupp LLP (Washington, D.C.) Speakers JOHN TEMPLE LANG

DAVID SWEENEY

Cleary Gottlieb Steen and Hamilton (Brussels)

Senior Legal Counsel, Interactive Software Federation of Europe (Brussels)

SARAH FAULDER

JOSEPH SALVO

Public Affairs Director, MCPS-PRS Alliance (London)

Special Counsel, Intellectual Property & Media Group, Weil, Gotshal & Manges (New York)

Panelists DR. SILKE VON LEWINSKI

TILMAN LÜDER

Max Planck Institute for Intellectual Property (Munich)

Head of Unit, Copyright and KnowledgeBased Economy, DG Internal Market and Services, European Commission (Brussels)

MR. SCHWARTZ: My name is Eric Schwartz from the law firm Mitchell Silberberg & Knupp. Welcome to the panel on digital licensing issues, where, in the next fifty minutes, we plan to resolve all the digital licensing issues globally. I have a few words of introduction on the broad swath of issues we plan to address today. In film terms, what I am about to do is called a “crane shot,” wherein I pull the focus back a little bit and give you the big picture, and then, later, our panelists we will dig deeper into the issues.

148 CHAPTER IV: COPYRIGHT LAW Digital licensing is, obviously, a very broad topic to cover. Let us break it down into three parts — two we will cover in depth, and the third we will skim over. The first is the “teasing out” of the rights. You heard a little about this on an earlier panel. It is, in short, dependent on the facts of a particular service or use, and determining, what right (or rights) apply — whether reproduction, distribution, public performance, or all of the above — as well as the application of the rights to temporary and cached copies, the server copy, and the implication for transmissions or downloads of the public performance right. This alone has been a big part of the U.S. debate on digital licensing. The second piece of the puzzle is the ability of the organizations to collect for each or all of the rights implicated by a particular digital delivery service — by either all-in or unilicenses, or licenses particular to one portion of the service (such as reproduction only). A lot of this is governed or limited by copyright statutory or case law, by longstanding practices, by contracts, by antitrust law, by anti-competition law, and by consent decrees. Juxtapose the practical ability of the organizations that can or will collect, with the private agreements to do so, as well as by the new business models that we heard about in the General Counsels’ Roundtable discussion this morning (see Chapter I.A, supra this volume) to get these legal services operational, and that helps us understand the success, failure, or delays in getting certain digital services up and running. Thus, the focus today is on these collective administration and new business models, as well as on the parsing of rights, on the implications for right holders seeking to license their works ― cable, satellite, Internet, etc. We will try to cover all of these services on this panel. Those are the two issues that I think we will spend our time on today. What we likely will not have time to cover, unless any of the panelists wishes to do so, or you wish to address it in your questions to the panel, is, I suppose, the proverbial 800-pound gorilla in the room: namely, the enforcement of digital licensing systems — through direct infringement and third-party liability, in court decisions, via legislative changes, or technological means including DRMs and watermarks and the like, that are used to make these systems effective and operational or not; and lastly, through the cooperation, or the lack thereof, of the delivery systems and the content owners. These are the challenges that apply both in hard copy and online in enforcement issues, as was discussed this morning by the content provider General Counsels’ Roundtable. Our speakers are: John Temple Lang from Cleary Gottlieb Steen and Hamilton in Brussels; Sarah Faulder, Public Affairs Director of the MCPS-PRS Alliance in London; David Sweeney, Senior Legal Counsel of the Interactive Software Federation of Europe, Brussels; and Joe Salvo, Special Counsel, Intellectual Property & Media Group, Weil, Gotshal & Manges. Our two panelists need no further introduction: Silke von Lewinski and Tilman Lüder, who will add to the discussion after the other panelists have made their presentations.

Collecting Societies’ Perspective Sarah Faulder* It seems to become a tradition in this conference for the second speaker to speak first. I was expecting, in part, to be responding to John Temple Lang. I will try to anticipate a bit, but I may have more comments later on. * Public Affairs Director, MCPS-PRS Alliance, London.

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For those of you who have never heard of MCPS-PRS Alliance (Mechanical Copyright Protection Society and Performing Right Society), we are the two collecting societies representing songwriters, composers, and publishers in the United Kingdom. We have some 50,000 members. The equivalents over here are the American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI), the Society of European Stage Authors & Composers (SESAC), and Harry Fox Agency. We have formed ourselves into one operational organization for everyone’s convenience. I want to tell you a bit about what we have actually been doing in terms of implementing and getting on with the business of cross-border online licensing in Europe. There has been a huge drive from the European Commission and from Tilman’s Recommendation,1 which Tilman discussed earlier (see Chapter II.A, supra this volume; Chapter IV.A.1, supra this volume), to get this moving, to stimulate the market for e-commerce, starting with music. It is felt that Europe is lagging behind the States. I am going to talk about the practicalities under three broad headings: (1) right holder choice; (2) cultural diversity; and (3) the use experience, which is more where John Temple Lang’s commentary will come in. Fundamental to all of this working, and to getting the rights moving and being available for licensing, is very much the right holders’ having the confidence in the systems, that if they make their rights available for licensing online they will be properly rewarded and paid for that promptly, efficiently, effectively. This is where the issue of right holder choice comes in. Through the Recommendation of the Commission, it has been made clear that all right holders have the choice as to how they organize their rights for online licensing in Europe. This means that they can go to whichever collecting society (or collecting societies) they choose. They can even choose to withdraw their rights totally from the collective framework and license directly. This puts a huge impetus on the societies to compete with each other to attract members. That means driving up their service levels so as to meet the requirements of the right holders and offer them the service that they actually want and deserve. That goes to issues of frequency of distributions, efficiency, transparency, and accountability — all the things that are very important to right holders. The Recommendation provides a real impetus for all of this. Any alternative to the so-called Option 32 that is enshrined in the Recommendation would in our view be potentially disastrous 1 European Commission, Management of Copyright and Related Rights (Feb. 13, 2008) [hereinafter Commission Music Copyright Recommendation 2008], available at http://ec.europa. eu/internal_market/copyright/management/ management_ en.htm; see also Tilman Lüder, The Economic and Social Situation of Europe’s Performing Artists (Apr. 2008), Chapter IV.A.1, “Copyright Agenda in the European Union: A View from the Commission”, supra this volume. Note: Subsequent the Conference, the European Commission adopted two initiatives in the area of copyright. Press Release, European Commission, Intellectual Property: Commission adopts forward-looking package (July 16, 2008), IP/08/1156, available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1156 (“First, the Commission proposes to align the copyright term for performers with that applicable to authors, in this way bridging the income gap that performers face toward the end of their lives. Secondly, the Commission proposes to fully harmonise the copyright term that applies to co-written musical compositions. In parallel, the Commission also adopted a Green Paper on Copyright in the Knowledge Economy. The consultation document focuses on topics that appear relevant for the development of a modern economy, driven by the rapid dissemination of knowledge and information. Both of these initiatives comprise a unique mix of social, economic and cultural measures aimed at maintaining Europe as a prime location for cultural creators in the entertainment and knowledge sectors.”); see also European Commission, Green Paper, Copyright in the Knowledge Economy, COM (2008) 466/3 (July 2008), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=COM:2008:0466:FIN:EN:PDF. 2 See Commission Music Copyright Recommendation 2008, supra note 1, at 1 (“(3) give right-holders the choice to appoint a collective rights manager for the online use of their musical works across the entire EU (‘EU-wide direct licensing’).”).

150 CHAPTER IV: COPYRIGHT LAW for the value of music. It would drive down the value of music because if you’ve got societies competing with each other to attract licensees, that provides the opportunity for the users to shop around and try to get the cheapest possible license. So that is the framework within which we are working. MCPS-PRS has supported this concept of right holder choice from the start, and is unusual in that regard. But in fact it is not just the Recommendation that has got all this going. Before the Recommendation was even published and the Commission had come down in favor of Option 3, one of our major right holders, EMI Music Publishing, was already reacting to what it perceived to be a market failure within the collective rights framework. That was that its rights were not being properly licensed in several territories in Europe for ringtones. So it was getting no money at all from some countries. Accordingly, it had already started making moves to realign its rights and reorganize how it did business. EMI invited a number of societies across Europe — large and small — to tender for its business. In the end, it opted for two societies, which happened to be large societies that in its view met the service standards that it was looking for. So the market essentially has already started moving. The Recommendation has provided a useful catalyst for this, but it is not the cause. This is very much a market-led movement. Now a number of right holders over and above EMI have already reorganized their rights. We already have about six different licensing platforms for online rights in Europe. There are several societies, large and small, involved in this. Svenska Tonsättares Internationella Musikbyrå (STIM), the Swedish performing rights society, is perhaps the smallest, and many of the other societies as well are involved. The MCPS-PRS Alliance features in a number of those platforms, either on its own or jointly with others. These platforms do not only manage the Anglo repertoire; it is the Anglo-American repertoire. EMI Music Publishing’s Ango-American repertoire is being managed by Centralized European Licensing and Administration Service (CELAS), the joint venture between MCPS-PRS and Gesellschaft für Musikalische Aufführungs-und mechanische Vervielfältigungsrechte (GEMA) in Germany. Warner/Chappell’s Anglo-American repertoire is being managed by GEMA, MCPS-PRS and STIM; and peermusic’s Anglo-American repertoire is being managed by MCPS-PRS. It is also Latin repertoire: peermusic’s Latin repertoire is being managed by Sociedad General de Autores y Editores (SGAE); ARMONIA is managing the combined repertoires of the Société des Auteurs, Compositeurs et Éditeurs de Musique (SACEM), SGAE, and the Società Italiana degli Autori ed Editori (SIAE). Finally Universal’s English- and French-language repertoire is being managed by SACEM. So there is a broad spread, and we are seeing a real development in the market, with a number of different models emerging. Moving on to cultural diversity, our belief is that collective management of rights, per se, is not the stimulant or the investor in creativity and cultural diversity. It does, however, have a role in supporting cultural diversity. Therefore, we need to have the most efficient licensing framework possible to make sure that money goes back to the writers whose music is being used. That, in turn, is what will stimulate the creativity and cultural diversity. We are seeing that online delivery of music actually promotes cultural diversity more than it has ever been promoted before. The long-tail phenomenon shows that people are getting access to and enjoying an enormous range of music that perhaps was not otherwise possible in the offline world. Moving on to the users, this is a period of transition. Things are changing. New panEuropean licensing models are emerging and licenses are being issued. Our whole system has been rooted in a territorial approach, with collecting societies and rights being organized nationally. We cannot expect all of this to change overnight. The societies are currently in

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discussion, working out how to develop a more streamlined experience for users wanting a license for the world’s repertoire, one that does not contravene competition law but ideally provides a single access point. MR. SCHWARTZ: Thank you very much. We very much appreciate John Temple Lang rushing here so that he may now tell us about his perspectives on collecting society issues in Europe.

European Music Online — The Three Scenarios Dr. John Temple Lang* There are several reasons why radical changes in performing rights for music distribution are now being discussed in Europe. There are three scenarios: revised reciprocal agreements, a centralized system, and a series of licenses by big music publishers to specific collection societies. Each has advantages and disadvantages. The existing situation is a classical situation of reciprocal agreements between collecting societies by which they license one another to sub-license their repertoires to users in their national territories. That has been the tradition in Europe for a long time. The Present Situation – Reciprocal Agreements In Europe the agreements between all the Societies handling performance rights are traditional. Most rightsholders licence their world wirghts to one Society, which licences other Societies by reciprocal agreements to collect royalties for performances in their States. The effect is that there has been one Society in each State, able to licence users in that State with the world repertoire. Under European competition law, this was thought to be justified because collection of royalties for traditional performances is labour-intensive and each Society wanted to maximize its economies of scale.

It is now coming under pressure for change from at least two different kinds of influences: • The first is, of course, technological, the need to deal with online, cable, and satellite, where the actual uses do not correspond to the national frontiers. • The other pressure for change results from the actions being taken piecemeal by the European Commission applying European competition law. The Pressures for Change Traditional reciprocal agreements now need revision due to : – Technological change (Satellite, cable, online transmission). – European competition law. – Demands by large users for multi-repertoire, Europe-wide licences from single licensors. The Santiago Agreement allowed each Society to grant worlwide online licences to users in its State. It is no longer in force. * Cleary Gottlieb Steen and Hamilton LLP, Brussels and London; Professor, Trinity College, Dublin; Visiting Senior Research Fellow, Oxford.

152 CHAPTER IV: COPYRIGHT LAW There have been a couple of EC Directives,3 which are background, but they have not solved the problems, and the pressures that I just mentioned to you have given rise to an awareness, more pronounced in the case of some societies than others, for a need to change. European Community Directives European directives (cables and satellite, and copyright), made it possible for each Society to license companies in its State to uplink to satellites, even though the footprint was larger than the State. Other legislation dealt with cable transmission. But there is no European legislation enabling a Society in one State to license a user in that State to make music available online in other States.

Basically, there are three scenarios, which I have summarized in this slide. Three Scenarios 1. Reciprocal agreements to let each Society license users anywhere in Europe for online distribution (a series of one-stop-shops, each giving Europe-wide, multirepertoire online licences). 2. A central portal which would arrange for licences to be given by one of the Societies (a single monopoly structure). 3. Each big music Publisher would give a licence of its repertoire to at least one Society for onlien distribution. Users would need licences of those repertoires from each of the Societies chosen (unless each Publisher gave non-exclusive licenses to all the Societies in question).

The first one is closest to the existing situation. There would be modified reciprocal agreements between the societies in question by which they would license one another to sublicense, or to license to users, on a European-wide basis and not just in one particular country, all of the repertoires of the licensor societies. That would give you the benefits of competition between the societies, it would give you a choice of one-stop shops, and it would give you at least pan-European multi-repertoire licenses, which is what everybody says they want to achieve. The second scenario would involve what is called, rather pompously, a “central portal,” which would just be an address, an office, to which users who wanted licenses would apply. The portal organization would have some sort of committee that would allocate the job of granting the licenses to the user who had applied for the license. Obviously, that looks like a monopoly. The details of how it would actually work, as I understand it, haven’t become completely clear. The third possibility is a rather different one. It is one under which the big music publishers would each choose one, or conceivably more than one, licensing society that would handle their repertoires on a pan-European basis. If you needed a license for all the repertoires of the big music companies, you would therefore have to go to several different societies, and there would not be any competition between the societies for those particular repertoires. Most of the rest of the slides looked at the advantages and disadvantages from a competition law point of view, from the point of view of the objectives of providing a one3 See Council Directive 93/83, 1993 O.J. (L 248) 15, The Coordination of Certain Rules Concerning Copyright and Rights Related to Copyright Applicable to Satellite Broadcasting and Cable Retransmission, available at http:// eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=CELEX:31993L0083:EN:NOT; Council Directive 2001/29, 2001 O.J. (L 167) 10, Information Society Directive, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do? uri=CELEX:32001L0029: EN:NOT.

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stop shop, and, in particular, from the point of view of the smaller collecting societies in Europe, which are becoming increasingly concerned about their future — and, obviously, their future is going to look different according to which of these three scenarios is ultimately chosen. I have the impression that in fact we are going to live for the next couple of years with several different solutions, none of them completely satisfactory and none of them comprehensive. But we will have to see whether either the European Commission more actively enforces the existing competition law than it has done so far. It has several opportunities that have been provided to it for doing that. But the Commission seems to be rather unduly conscious of the fact that under competition law it would be troublesome and difficult to so organize matters that a complete solution to all the organizational and administrative problems of licensing music online in Europe would be imposed by the Commission. That’s not the way the Commission works, and it would be genuinely complicated for it to try to do so. So what is happening, as I understand it, is that there are discussions between the societies. The Commission is waiting to see what is going to happen. If no satisfactory solution emerges, then the Commission will be obliged to take action — at least I presume it will be obliged. It can’t go on doing nothing forever — to take such action as it can under Community competition law to chip away at the next brick of the existing edifice and try to bring about a situation, in one way or the other of the ways I have outlined, where there will be multi-repertoire licensing, at least for online purposes, and probably also for cable and satellite, because the Commission is interested in having a solution that applies to all three, although in many ways the most urgent and the most clearly unresolved is online licensing. I think other speakers are going to add something to what I have already said. So I will stop at this point and we can go back over the relevant merits of the different scenarios during the discussion. Thank you. The Statement of Objections to CISAC The European Commission wrote formally to the European Societies in CISAC in 2006 saying that the model agreement and many reciprocal agreements were illegal because they: – prevented rightsholders from joining any Society except the Society of their own nationality (membership limit) – granted “exclusive” rights for each State to the Society in that State (territorial limit). The Societies’ Reactions The Societies agreed to give up these clauses, but some argued that there must be one Society in each State, for effective monitoring. If true, that would mean that dropping the territorial limit would make no practical difference. But it is not true for performances that can be monitored remotely (satellite, cable, online). The Societies have been discussing commitments to offer to the Commission. The published draft was strongly critized by music users. Three possible scenarios for online gave emerged (it is not clear whether the Societies will propose new solutions for satellite or cable, as the Commission wants).

154 CHAPTER IV: COPYRIGHT LAW The “Revised-Reciprocals” and the “Central Portal” Systems Revised reciprocal agreements would cause no competition law problems (the Commission has said that Societies may agree to charge users in each State an agreed royalty, to prevent Societies from price competition for users at the expense of rightsholders). The “central portal” concept would almost certainly be prohibited by Article 81, since it would set up a monopoly, eliminate all competition, and involve unnecessary restrictions of competition.

The Third Scenario –Big Publishers’ Licences to Chosen Societies A series of exclusive licences would mean that there was no one-stop-shop, and no competition between Societies for any big Publisher’s repertoire. (It would clearly be illegal if the Publishers all licensed the same Society). Exclusivity requires justification under Article 81(3). BUMA has filed a complaint against the exclusive EMI-CELAS agreement. There would be no competition constraint on what each chosen Society could charge for its Publisher’s repertoire. Small rightsholders could go to any Society, but it is not clear how far the Societies would find it profitable to collect royalties from them. The Three Scenarios – Relative Merits – “Revised reciprocals” would provide a choice of one-stop-shops for multirepertoire multi-territorial licensing, with competition between Societies for the business of rightsholders. – A central portal would mean no competition between Societies. It would also facilitate preferential cooperation between big Publishers and big Societies, and put the future of small Societies in the hand of the body allocating the granting of licences. – Exclusive Publishers’ licences to big Societies would mean that users would need a series of licences, but there would be no competition from them. (Publishers could grant non-exclusive licences for the same group of big Societies, but that would lose whatever benefits result from exclusivity) . The Smaller Societies’ Problems Small Societies could not hope to be chosen by a big music Publisher, and therefore would lose from a series of exclusive licences. A central portal system (if allowed by competition law) might allocate licensing tasks among the Societies, and so support small Societies. Modified reciprocal agreements would allow each Society to compete, although some small Societies might not consider it worthwhile to set up arrangements for negotiating multi-repertoire, multi-territory online licences. Small Societies will continue to deal with traditional offline performances, but they may do without a cross-subsidy from online, and perhaps from cable and satellite. So the interests of small rightsholders may be less cared for.

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The DG Internal Market Recommendation and Communications The DG Internal Market Recommendation of 2005 advocated a small number of (large) Societies offering Europe-wide licences. It did not consider the future of small Societies, or what structure would be permitted by competition law. A Commission Recommendation has no legal effects and cannot alter European competition law. Tax problems, and the need to safeguard national cultures, arise under all scenarios, but the 2008 Communications did not discuss any of these issues. The Powers of the Competition DG The Competition Directorate General cna prohibit agreements that are contrary to competition law, but cannot impose nay particular structure or solution on the Societies. No legal generally-agreed solution has yet emerged. Two systems may co-exist simultaneously. Big Societies’ Initiatives The UK and German Societies have set up an entity to license EMI’s rights (no licences have yet been granted apparently), and the French, Italian and Spanish Societies have set up another entity. Both agreements are exclusive

MR. SCHWARTZ: Thank you, John. Since this panel is covering digital licensing issues of all types, in addition to music issues, we have next invited David Sweeney to talk about some interactive software licensing issues.

Interactive Software Licensing David Sweeney*

Thanks very much, Eric. First of all, let me introduce the Interactive Software Federation of Europe (ISFE). Sarah was talking about the MCPS-PRS Alliance perhaps not being that well-known over here. Well, there is no chance of my organization being well-known over here. We are the European videogame industry’s trade association. We are a cousin of the equivalent body here, which is the Entertainment Software Association (ESA). Today I am speaking for ISFE. If I get anything wrong, I hope the ESA people won’t beat me up later on this evening. I have, both personally and professionally, some things to say about this particular area. My introduction to Brussels and the world of the European Union was in relation to a case between MTV Europe (we had Michael Fricklas, the General Counsel of Viacom here this morning4) and the record industry, as represented by my then-employer, the International Federation of * Senior Legal Counsel, Interactive, Software Federation of Europe, Brussels. 4 See Chapter I.A, “General Counsels’ Roundtable: A View from the Top”, supra this volume.

156 CHAPTER IV: COPYRIGHT LAW the Phonographic Industry (IFPI). We heard Shira Perlmutter from IFPI speak very ably in this room in the previous session.5 That case was, I suppose, the first big “non-case” involving the interaction of competition law with collective licensing law in the European Union. I say a “non-case” because the file was actually closed before a decision was reached. I know that John Temple Lang will correct me if I am stating something that is wrong, because John was very involved in the case too while he was at the European Commission. It was a very interesting event. There were three different sets of proceedings: there was a Department of Justice investigation here;6 a High Court case based on proceedings issued by MTV Europe in London;7 and a DG-Competition (DG-IV as it was then known) investigation in Brussels.8 So there were a lot of lawyers involved. At one time, we had 100 lawyers in a room in London and only seven left alive! The case was resolved in the short term on the basis of a concept called exclusivity. In other words, the relationship between the record companies and their collecting societies — which were Video Performance Limited (VPL), the U.K. video collection society, and IFPI — was founded on the basis of exclusivity. The Commission found this to be problematic. As a result of that, the exclusivity in the assignment was removed. Now I talk about this case because this all happened a long time ago. I think it was resolved around 1998, which is ten years ago. The situation with licensing today, I think, could be summed up in one short sentence: “It should be much easier than it is.” I am hearing today in various parts of this building the same conversations in relation to licensing that you might have heard in the same place nine years ago. Now one thing to be clear about is that the European Union is not the United States of Europe. We have twenty-eight different Member States, twenty-eight different legal systems, and many more than twenty-eight different collecting societies. Music is a very important aspect of my daily life and, I’m sure, of a lot of people’s daily lives in this room today. It’s funny that we are all focusing on music, because licensing involves a lot of other art forms as well. But, as is usual, music is in the forefront of the commentary. I think that the position of the Interactive Software Federation of Europe, the European video-game industry, in relation to music would be to recognize that everybody wants music in games. The gamers, the people who play games, certainly want the music in the games. The record companies want the music in those games. The game publishers want the music to be included in those games. Last but not least, the artists want music in there too. So it should be in the games, and of course all necessary rights should be cleared. Music is very valuable. I would hope that the good news that was announced by Sarah on my left a few minutes ago, and also the hopes expressed by John Temple Lang, will come through and licensing will become a lot easier. The worst thing, I think, for everybody concerned is to have music out there and undervalued with people enjoying it for free. See Chapter IV.B.1, “Sound Recordings”, supra this volume. See Memorandum of Points and Authorities in Support of Petition to Enforce Civil Investigative Demands, United States v. Time Warner, Inc., No. 1:94-MC-00338 (D.D.C. Nov. 3, 1994), available at http://www.usdoj.gov/ atr/cases/f0000/0052. pdf; Post-Hearing Memorandum by the United States, United States v. Time Warner, Inc., Misc. Action No. 94-338 HHG (D.D.C. Nov. 8, 1996), available at http://www.justice.gov/atr/cases/f211500/211534.pdf. 7 MTV Europe v. BMG Records Ltd., 1993 M No. 5078 (High Court of Justice, Chancery Division); MTV Europe v. BMG Records Ltd. and Ors, [1995] E.C.C. 216. 8 MTV/VPL-IFPI, No. IV/33.366 (Commission of the European Communities) & MTVE/VIVA, No. IV/34-920 (Commission of the European Communities); see also Jeff Clark-Meads, “Mtv Europe, Vpl Resolve Years-long Licensing Dispute”, Billboard, May 16, 1998, available at http://www.allbusiness.com/retail-trade/miscellaneousretail-retail-stores-not/4633329-1.html; IFPI, Digital Music Report (2006), available at http://www.ifpi.org/content/ library/digital-music-report-2006.pdf. 5 6

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I am one of these sad people who has every album they bought when they were a kid on CD, on tape, and also on album so I can look at the sleeve, because the sleeves were an integral part of my teenage years, and they just don’t factor into today’s enjoyment of music. But my kids do not go near my album collection or my CDs. They go to their computers and log on to iTunes and they get their music that way. Music is very important, very central. It should be a bit easier to access than it is. And, unfortunately, as usual, it is in the center of the licensing debate. Just to sum up, given the experience I have had in the music industry, in the motion picture industry, and now in the games industry over the last ten years, it seems that the licensing of music, particularly with regard to the new uses of music that we are considering today, should be a lot easier to use than it is now. Music is important to us all, so I hope that “easy” comes to pass before too long. Thank you, Eric. MR. SCHWARTZ: Thank you, David. Next up is Joe Salvo, who, as an American, has had a bird’s-eye view in Europe of some of the developments there.

Music Licensing on the Internet Joseph Salvo*

I guess I am the only Yank on the panel here, other than Eric. I am essentially a music lawyer. Just by way of background, I started as a composer and performer for a band that sort of bubbled under for a long period of time. I ultimately went to work for the labels for about twelve years, and now I work for a law firm that is viewed with suspicion by the content industry, in that we often represent users. So having spent a little bit of time in all camps, my views here are really more my own, and they are really formulated through the perspective of what I do, which is essentially to try to do deals on behalf of clients in various territories to get legitimate music services up and operating to compete with the pirate services. I do believe in music, and I do believe ultimately that that is where the solution lies, finding good, viable business models. Without pointing fingers or taking sides, I will say that, while I absolutely understand, having lived on the content side, that the content companies do not owe every new digital service with venture capital money in its pocket the right to earn a living, I will also say that if there are going to be these legitimate business alternatives out there, we have to find solutions that (a) allow the music to be licensed in a proper way, and (b) we have to do it in a way that financially makes sense. Given some of the business models that are out there and some of the collective demands, if you will, representing the combination of the label and the music publisher requested licensing fees, in some instances, for some business models, we are looking at well over 70 percent, and sometimes 80 percent, of the revenue stream that the service is earning going towards paying the content licensing fees. That means that with the remaining 20–30 percent or so of revenue left over coming in to those services the users are expected to build accounting systems, * Special Counsel, Intellectual Property & Media Group, Weil, Gotshal & Manges, New York.

158 CHAPTER IV: COPYRIGHT LAW build databases, deal with the content security requirements that the content licensors, not unreasonably, wish to have surround their content, and pay back the venture capital people, etc. So essentially, when you are in an environment where there is a very small pie out of which to do all that, that makes the investment in and operation of legitimate music licensing services very, very difficult. Unfortunately, we are seeing some of that in terms of companies that were first in the market, not just in the United States but outside, such as AOL and Yahoo!, starting to retreat from some of their music offerings. There are a variety of factors that are attributable to some of that. You see a service like Pandora electing not to open shop in the United Kingdom.9 There are, again, any number of reasons that go to that, but I think the thing we need to keep in mind is that we’ve got to find viable commercial deals to strike here to get these services operational so that we do have legitimate alternatives. I think, from a U.S. perspective or from a licensing perspective, the three things that we look for, or my clients certainly look for, are: (1) certainty as to rights, so that we know what rights have to be licensed, where we can get them from; (2) certainty as to rates; and (3) ease of licensing. From a U.S. perspective, assuming that the variety of digital products is on a spectrum — with at one end there being permanent ownership (such as the iPod or iTunes-type model, where you own the track forever and you can play it whenever you want) to the other extreme (essentially a digital radio product) — at the two extremes, I think, you have a fair degree of certainty in the United States as to that. It is as to the middle ground — the ondemand streams and conditional downloads — where we have all sorts of rights issues in the United States. The bottom line is that we in the United States are looking to Europe. Maybe it is a function of just “being down so long it looks like up to me.” But frankly, looking across the pond, looking at the MCPS-PRS Music Alliance and what the Alliance has offered in the United Kingdom by way of a licensing scheme for Internet distribution of music, suddenly we are finding one-stop shopping that we do not have available in the United States. In the United Kingdom, there is an aggregation of both the reproduction right and the distribution right; you can go to one place and get it licensed. A user might not like the rates, or might not like the per-stream minima, and the Alliance might not like the definition of net revenue, but from a certainty perspective we know the rights, we know where to get them, and we know that there are applicable rates for each type of business model on an “all rights included” basis. It helps digital services with their business planning. And certainly, it is a lot easier to license than, for example, in the United States, where reproduction rights, if there are reproduction rights in streaming, are going to be voluntarily licensed pursuant to literally hundreds of thousands of licenses unless we can correct our system here. There are two quick developments that I wanted to mention. One is that this past year there was a tribunal proceeding in the United Kingdom.10 Rates were set for a whole wide variety of digital products for use of music publishing rights — permanent downloads, on-demand streams, limited downloads, Internet radio. So we have certainty as to that. There are a number of issues, as I said, that arise out of that joint online license (JOL), but it does give entities an ability to go forward and license in those territories. Similarly, in Canada there have been a number of tariff decisions that have come down that have started to set rates and have made clear determinations in terms of rights that are 9 See Posting by Scott Gilbertson to the Wired Monkey Bites blog, “Licensing Fees Force Pandora to Shut Down U.K. Music Service”, http://blog.wired.com/monkeybites/2008/01/licensing-fees.html (Jan. 8, 2008, 12:29:05 EST). 10 See Jeremy Reiner, “Royalty Agreement Reached for UK Digital Music Downloads”, Ars Technica, Sept. 28, 2006, http://arstechnica.com/news.ars/post/20060928-7861.html.

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implicated for streaming, for downloading, for on-demand, and for subscription services.11 Again, a welcome result, I think, from the U.S. perspective in terms of certainty of rights and certainty of rates. Again, certain users may take issue with some of the numbers that are in there, but I view the certainty associated with the tariffs that as a step forward. Finally, the last thing, although I understand it undermines some of what is being said about where the collective licensing societies are going, I personally, or my clients, are encouraged by some of the steps that we are seeing from the publishers. Whilst this scenario is playing itself out in the European Union in terms of trying to find ways to cross-border license, a number of the publishers are attempting to set up organizations. Sarah mentioned EMI and CELAS before, which employs the Alliance in the United Kingdom and GEMA in Germany to effectuate its licenses. Warner/Chappell has announced Pan-European Digital Licensing (PEDL),12 which is again a similar type of situation; it will actually run more like a licensing agency, but the bottom line is a user will be able to go to one source, one licensor, and obtain licenses for all of Warner/Chappell’s Anglo-American repertoire throughout the European territories. We expect that Sony/ATV will soon announce a similar initiative, as will Universal. These are all, from a U.S. perspective, very encouraging developments, in the sense that we may be able, from a licensee perspective, to find places to go to get the rights and the rates that need to be obtained. MR. SCHWARTZ: Thank you very much. First, let us get Silke’s and Tilman’s reactions to anything that has been presented by our speakers so far on this panel. Then, I will present a few questions to the speakers, as well as let the other panelists react. PROF. VON LEWINSKI: I want to share with you some information on what happened in the marketplace in Europe within these two-and-a-quarter years after the Commission had adopted the Recommendation.13 In particular, for users, the situation is quite complicated right now, because several systems of rights management are currently coexisting and continue to develop, at least in part, in different directions. Maybe the resulting, somewhat messy state of affairs is normal for a period of transition from one system to another system or several variations thereof. Under the system of reciprocal agreements, the user could (and still can) obtain the world repertoire by territory. Accordingly, a user needs separate licenses for each territory where he wants to use the works, but gets the world repertoire by each of these licenses. Now, following the Recommendation, right owners are encouraged to withdraw their rights from certain or most collective management organizations and to exclusively mandate one or several collective management organizations for either several or all EU Member States. In other words, this system is no longer based on reciprocal agreements. 11 See Paul Audley & Associates Ltd. & Circum Network, Inc., Report Prepared for the: Canadian Music Publishers Association and the Professional Music Publishers Association, A Statistical Profile of The Canadian Music Publishing Industry (Dec. 13, 2005), available at http://www.canadianheritage.gc.ca/progs/ac-ca/progs/pdacpb/pubs/statistical_profile/index_e.cfm. 12 See Press Release, Warner/Chappell Music, GEMA, the MCPS-PRS Alliance and STIM Join Warner/Chappell Music’s Pan-European Digital Licensing (PEDL) Initiative (Jan. 30, 2008), available at http://www.icmp-ciem.org/ PUBLIC/ NewsViews/warner-chappell-PEDL-%20MIDEM%20FINAL.pdf. 13 See Commission Recommendation 2005/737, 2005 O.J. (L 276) 54, on collective cross-border management of copyright and related rights for legitimate online music services, available at http://eur-lex.europa.eu/LexUriServ/ site/en/oj/ 2005/l_276/1_27620051021en00540057.pdf; European Commission, Music Copyright: Commission Recommendation on Management of Online Rights in Musical Works (12 Oct. 2005), IP/05/1261, available at http:// www.ebu.ch/CMSimages/en/INFO_EN_233_tcm6-40326.pdf; Commission Music Copyright Recommendation 2008, supra note 1.

160 CHAPTER IV: COPYRIGHT LAW The user may obtain one license for the entire European Union or several Member States — that is, a multi-territory license— however, such licenses are limited to a single repertoire, namely the repertoire of the right holder who made use of this system. Accordingly, if the user wants to offer its consumers the repertoire of more than one publisher, or of a combination of music which is represented by publishers that have exclusively mandated different collective management organizations, it needs first to find out where the relevant repertoire is managed and, then, to conclude contracts with the various organizations. Thus, the user still needs to conclude several contracts: Instead of obtaining the world repertoire in several countries on the basis of licensing contracts per country, it may obtain a multi-territory license (for the European Union or only several Member States) but has to conclude several single-repertoire or limited repertoire contracts, if it is interested in more than the limited catalogue managed in this way. Where only some countries are covered by the multi-territory license, it may, in addition, have to conclude separate contracts regarding the other Member States, possibly according to the traditional system. One example of an entity that was established following the Recommendation was already mentioned: CELAS. It is the first joint venture of this kind and was established by MCPS-PRS and GEMA. It administers the Anglo-American repertoire of EMI Music Publishing. After it had been announced in January 2006, it issued its first license two years later: a license to Omnifone, a music download service, for (so far) two countries. From a legal point of view, there are still open questions, at least according to a number of academics, who tend to consider CELAS as a collective management organization (which would, therefore, need a license to work under German law and to comply with the rules on collective management organizations, such as transparency rules), while CELAS does not consider it to be bound by such rules. Second, Warner/Chappell Music Publishing, which has granted non-exclusive licenses to MCPS-PRS, GEMA, and STIM. Also, as was mentioned already, an example for a Europeanwide license is the SACEM and Universal Music Publishing Group Agreement;14 this Agreement is supposed to be operational in mid-2008, so it is still in the process of being worked out. Then we have the French Société des Auteurs, Compositeurs et Éditeurs de Musique (SACEM), the Spanish Sociedad General de Autores y Editores (SGAE), and the Italian Società Italiana degli Autori ed Editori (SIAE), which announced the common platform Harmonia for online and mobile uses of their own joint repertoire on the basis of an exclusive mandate to this joint venture as a one-stop shop. There are some others also, like the Alliance Digital, which was mentioned by Sarah. If you look at all of them, you can see that what critics have said about the Recommendation at the beginning largely came true: • First, those who have primarily benefited from the Recommendation are the major publishers — EMI, Universal Music Publishing, Warner/Chappell as the most important examples. • Second, they mandated the bigger collective management organizations, like the British, the German and the French ones, for European-wide licenses; it seems that the envisaged competition is not necessarily or in the first place service-related (there are quite efficient, smaller organizations), but size-related. • Third, what is being licensed in this way is mainly the Anglo-American repertoire. So again, Europe has done a favor to those who are already big on the market, and especially 14 See Press Release, SACEM, Universal Music Publishing Group and SACEM Sign Agreement for Online and Mobile Licensing in Europe (Jan. 28, 2008), available at http://www.sacem.fr/portailSacem/jsp/ep/contentView. do;jsessionid=IS9xg9m6Bq5w2vPatN5pRPMuCulB6ycRbXKLJaRjRe8DkpwYVfK6!5051542?channelId=536882061&position=4& contentId=536896000&programId=536886985&programPage=%2Fep%2Fprogram%2Fe ditorial.jsp&contentType= EDITORIAL& offset=0.

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for Anglo-American right owners. We seem to be very generous to those. One might question whether this is in the best interest of Europe, or whether it would not be more appropriate for Europe to promote its own unique and distinct interests, in particular its cultural diversity, which is rather threatened by the Recommendation. These are some of the results so far. In any case, new models are continuously being developed in practice, and one may observe a strong push towards models based on reciprocal agreements — a welcomed development that will, hopefully, gain strength. MR. SMITH: Can I ask Tilman now to comment briefly? We have about seven minutes remaining before we have to switch over to the U.S. panel. Tilman, do you want to defend the Recommendation or comment on something John said? MR. LÜDER: Yes. I just have three principal messages here. First, no compulsory licenses in the Internet. Whatever we do, at least as far as copyright policy is concerned, we will never be in favor of a licensing model where somebody has to choose a licensing agency, an agent, or a society that he does not want to deal with. So no elements of compulsion in the system. Second, we are aware that the system and the adaptations are very difficult. But we do see the clarity of a repertoire-specific license, at least for certain uses. Certainly, there is a big distinction between a download-to-own service, a subscription service, on the one side of the spectrum, and, on the other hand, digital radio. For the former type of services, it is an improvement if you know where to get which repertoire if you want to sell that repertoire. So we are aware that you might think that the adaptation is very difficult, but at the end I think it is actually not that difficult, if you look at the licensing structures that we have in place. The second remark, still as an add-on, is I think we are sitting here a bit fiddling while Rome burns. There is a peer-to-peer phenomenon out there. Most music is consumed in a non-licensed way. So while we are discussing the fine details about how to license services, I think we have to speed it up a bit, because most of the peer-to-peer users should be licensed, as opposed to those few iTune services that everybody is focusing on. The third message is one of conciliation. If you find all of this very difficult and if you are worried about the survival of smaller collecting societies in a publisher model, as it has been described here, then we are willing to mediate and we are willing to sit down with you and see what we can do about this. The last time I checked, STIM, the Swedish performing rights society, was not yet a big collecting society. So there are some medium-size collecting societies that are catching on to this model. But we are, of course, sensitive. If somebody believes that these models somehow unfairly exclude them from the process, then we are going to going to sit down and we are going to try to sort this out with everybody around the table. That is the new regulatory approach at the European Commission: You have a high-level working group, you sit with the industry, and you see what can be done. In summary: • No compulsory licensing. Everybody should still be free to choose, even if we are conscious of some societal aspects, societal in this sense collecting societies. • Secondly, let’s be aware that peer-to-peer is actually the big phenomenon, not the fine point of how we are licensing Apple iTunes. • Third, accept our offer of good services. Thank you. MR. SCHWARTZ: Thank you, Tilman. First I have a question, and then I will kick it open to our audience for the remaining time for their questions. My question is this: notwithstanding all the good news in the discussion about pan-European licensing today on copyright issues, I understand that it is tax issues that are thwarting the development of pan-European licensing services — true or false?

162 CHAPTER IV: COPYRIGHT LAW MR. LÜDER: There is an issue of tax, which is so mind-bogglingly complicated that I fail to understand it. That is why I am doing copyright. MR. SCHWARTZ: I understand that we do not want to delve into the complexity of the tax issues, but is it true or false that the tax problems are thwarting development of the digital services in Europe? MR. LÜDER: It is just inconceivable that you have these kinds of issues, that when you have a pan-European license that is granted on behalf of a particular music publisher, that all these revenue streams, which originate with authors in different states, are taxed in a way that does not consider the taxation that takes place at the pan-European level. We have given this file to our friends in the taxation department to sort out. But it is absolutely outrageous that, with all these different models, we are coming up against an issue that you are disfavored in your business if you do it on a pan-European basis as opposed to on a territorial or national basis. MR. SCHWARTZ: Thank you. Sarah, do you have an additional comment? MS. FAULDER: We are addressing the withholding tax issue and getting a very sympathetic hearing from the Commission. But tax is very much a Member State issue, so the Commission is trying to encourage Member States to work together to resolve this. At the moment, it is a bit of a deterrent, as Tilman has pointed out, for pan-European licensing. So it is defeating the object that the Commission is trying to achieve. MR. SCHWARTZ: David? MR. SWEENEY: I just want to point out something that I think may be relevant. In the area of off-line licensing — in other words, when you get a mechanical license for the manufacture of a CD – there has been a central licensing facility available for quite some time. Tax does not play a role there. I just wonder if anybody can shed light on why the central licensing of off-line proceeds without a problem in relation to tax but central licensing of online has tax problems. MR. SCHWARTZ: Does our audience have questions for our panelists? QUESTION [Jerker Edstrom, Bird & Bird, New York]: This is to Sarah Faulder from the MCPS-PRS Alliance. You said there is a right holder’s option. But that is not necessarily true. As I understand it, the 2005 Recommendation from the Commission did not provide a duty to contract on behalf of the collecting societies. To the extent that you applied that, that’s fine. But I am just making that remark because there is a fear that this will lead to the situation where we will have collecting societies specializing in and working with the big publishers, that they will reject smaller right holders because they are not lucrative enough. MS. FAULDER: We actually have over 800 small right holders who signed up to our online licensing. There is no discrimination between large and small. It is open to everyone to choose where they go. They can choose to go to their local society if they prefer, for language reasons, everything else; or they can go to anywhere else they choose. There is no discrimination at all. MR. SCHWARTZ: Other questions or comments? John? MR. TEMPLE LANG: I think there is a problem, and I don’t think that the answer that you have just given resolves it. Suppose that any given society, big or small, decides that it is going to handle online, and it is going to handle online and cable and satellite for the whole of Europe. It is going to be profitable. It can operate in an efficient way because it can monitor all that with a relatively small staff, and a lot of it can be monitored electronically. Now, that means that it is going to be much less interested in enforcing the rights of small right holders whose rights are not necessarily enforceable electronically, and it is certainly going to be less interested in the labor-intensive and not-very-profitable job of enforcing traditional off-line all around, with little discotheques, hotels, and bars, and so on, in back streets all over Europe.

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So whatever is done does involve certain risks, not only for the small societies, but also for the small right holders, simply because of the economies of scale and efficiencies of operations of the societies. MS. FAULDER: But of course, that is the meat and drink of collecting societies. That is what they do day in and day out, monitor small venues, small uses, small rights. That is their business, off-line or online. MR. SCHWARTZ: We will let you have the last word. With that, let’s thank our panelists.

CHAPTER IV

Copyright Law Part B: Copyright and Music Section 2(b): Digital Licensing Issues in the United States Moderator ERIC SCHWARTZ

Mitchell, Silberberg & Knupp (Washington, D.C.) Speaker HON. MARYBETH PETERS

Register of Copyrights, U.S. Copyright Office (Washington, D.C.) Commentators SANDRA AISTARS

JOAN M. MCGIVERN

Assistant General Counsel for Intellectual Property, Time Warner, Inc. (New York)

General Counsel & Senior Vice President, ASCAP (New York)

KATHRYN E. WAGNER

Vice President & Counsel, National Music Publishers Association (New York) Panelists SARAH FAULDER

TILMAN LÜDER

Public Affairs Director, MCPS-PRS Alliance (London)

Head of Unit, Copyright and KnowledgeBased Economy, DG Internal Market and Services, European Commission (Brussels)

JOSEPH SALVO

Special Counsel, Intellectual Property & Media Group, Weil, Gotshal & Manges (New York)

166 CHAPTER IV: COPYRIGHT LAW MR. SCHWARTZ: We are now going to turn our discussion from European to U.S.-based digital delivery issues. Our first speaker needs no further introduction: Marybeth Peters, the Register of Copyrights. Before Marybeth begins, let me introduce the other speakers on our U.S. panel: Sandra Aistars, Assistant General Counsel for Intellectual Property from Time Warner; Joan McGivern, General Counsel and Senior Vice President of ASCAP; and Katie Wagner, Vice President and Counsel, National Music Publishers Association. Also, we have several panelists from our European-based panel, just completed, who will join us now for our discussion of U.S. issues. They are: Sarah Faulder, Tilman Lüder, and Joe Salvo. Let me also bring to your attention an article in this past Sunday’s New York Times. The article, by recording artist and songwriter Billy Bragg, is called “The Royalty Scam,” and is about the Bebo.com sale to America Online for $850 million.1 In short, Bragg asked “what about the artists?” as the sale price of $850 million did not include the payment of any monies to the musicians and composers whose works make the service that valuable. A valid point, and something for consideration in our discussion today. Let’s start then with Marybeth Peters’ overview of digital delivery issues in the United States.

Digital Licensing Issues — The U.S. Perspective Hon. Marybeth Peters* Let’s turn to the situation in the United States. It is very interesting. Mostly I walk around with the U.S. copyright law, but I am walking about with the WIPO Copyright Treaty (WCT), which was concluded in 1996.2 A typical bureaucrat who works in the field of copyright. Obviously, there is a preference in the United States for exclusive rights. When those exclusive rights really cannot be practically, economically, or feasibly administered by individuals, then collective management is critical. The United States also has another piece in the pie when you look at licensing in the online environment, statutory licenses, which are not really so predominant in other parts of the world. As David Carson pointed out, we have Section 115,3 which deals with musical compositions embodied in sound recordings, the mechanical reproduction right, and digital phonorecord * Register of Copyrights, U.S. Copyright Office. 1 Billy Bragg, “The Royalty Scam”, N.Y. Times, Mar. 22, 2008, available at http://www.nytimes.com/2008/03/22/ opinion/22bragg.html. 2 World Intellectual Property Organization (WIPO) Copyright Treaty, Apr. 12, 1997, 2186 U.N.T.S. 152, 36 I.L.M. 65(entered into force Mar. 6, 2002) [hereinafter WCT], available at http://www.wipo.int/ treaties/en/ip/wct/pdf/ trtdocs_wo 033.pdf. 3 17 U.S.C. § 115 (scope of exclusive rights in nondramatic musical works: compulsory license for making and distributing phonorecords), available at http://www.law.cornell.edu/uscode/17/usc_sec_17_00000115----000-. html. Section 115 provides a statutory license for the making and distribution of phonorecords of nondramatic musical works. Historically, the statutory rates have established the ceiling for the mechanical licenses issued in the marketplace. In 1995 Congress passed the Digital Performance Right in Sound Recordings Act, Pub. L. No. 104-39, 109 Stat. 336 (1995), which amended Section 115 to include the right to distribute a phonorecord by means of a “digital phonorecord delivery” (DPD). The statute includes a definition of a DPD and explains the process for establishing rates for these phonorecords. In addition, it acknowledges the existence of additional DPDs “where the reproduction or distribution of the phonorecord is incidental to the transmission which constitutes the [DPD],” 17 U.S.C. § 115(c)(3)(D), and requires that a separate rate be set for these phonorecords. However, the law does not...

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deliveries. That plays into licensing. Even if nobody uses it, there is a set rate and it sets a ceiling. We also have a Section 114 license for sound recordings.4 It is digital transmissions. Hopefully, if it is radio broadcast, it will be analog. That plays into some of the online transactions. We have a lot of other compulsory licenses — cable, satellite, low-power television — and a statutory obligation in certain circumstances. I am focusing again, as most people have, on music, because that is where the battles have arisen. It probably is because I think the biggest issue we face — and it was said in the General Counsels’ Roundtable earlier (see Chapter I.A, supra this volume) and also alluded to today — is that in the United States, depending on what the activity is, there will be different rights implicated; and depending on who you are, you may or may not agree with a particular interpretation as to what rights are implicated. So when you are in the online music environment, the question is: If you have a musical composition and it is downloaded, what rights are implicated? If you have streams, what rights are implicated? And does it matter if the stream is interactive? The three rights that come up are reproduction, distribution, and public performance. Most people like to say that all three rights are implicated with every activity that takes place. I will leave it at that for the moment. I think I ought to put it in context. The United States amended its law in 1976, and it thought it was being very modern and up-to-date.5 It had a reproduction, distribution, and a very broad public performance right. When the WIPO Copyright Treaty was entering into force — and I’m looking at Mihály — there was an amendment dealing with communication to the public that encompassed what in Europe you all call the making-available right.6 It basically required that countries that would adhere to the Treaty would have an exclusive right for the making available to the public of their works in such a way that members of the public may access those works from a place and a time individually chosen by them. You have to realize that there is a distribution right here, and the distribution right does not limit it to all countries. It basically says, under the Treaty, that the distribution right can be limited to fixations of works in tangible copies. So it is not necessarily the transfer of a digital file. Most of the world went one way and the United States went another. The way that we went was that the making-available right is mostly complied with through the distribution right, not through a performance right or a communication-to-the-public right. identify which DPDs can be classified as incidental or provide any guidelines for making this decision. See also Section 115 Reform Act of 2006, H.R. 5553, 109th Cong. (introduced June 8, 2006) (bill to amend Section 115 of Title 17, United States Code, to provide for licensing of digital delivery of musical works), available at http:// www.govtrack.us/congress/bill.xpd?bill=h109-5553; Reforming Section 115 of the Copyright Act for the Digital Age: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the H. Comm. on the Judiciary, 110th Cong., 1st Sess. (Mar. 22, 2007) (Statement of Marybeth Peters, Register of Copyrights), available at http:// www. copyright.gov/docs/regstat032207-1.html. 4 17 U.S.C. § 114 (scope of exclusive rights in sound recordings), available at http://www.law.cornell.edu/uscode/7/ usc_ sec_17_00000114----000-.html. 5 Copyright Act of 1976, Pub. L. No. 94-553, 90 Stat. 2541 (Oct. 19, 1976) (codified at 17 U.S.C. § 101 et seq.), available at http://www.copyright.gov/title17/92chap1.html. 6 See WCT, supra note 2, art. 8 (right of communication to the public); see also WIPO Performances and Phonograms Treaty arts. 10 & 14, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 245, 36 I.L.M. 76 (Geneva, 1997) (entered into force May 20, 2002), arts. 10 (right of making available of fixed performances) and 12 (right of making available of phonograms) [hereinafter WPPT], available at http://www.wipo.int/treaties/en/ip/wct/ pdf/trtdocs_wo034.pdf.

168 CHAPTER IV: COPYRIGHT LAW Having said that, the big issue in the United States is of course online services. You want them to be licensed and you want them to be legitimate. The online services’ biggest complaint is what rights are implicated in what we are doing and who are the owners of those rights. And certainly, they want — and I’ll go back to what Joe Salvo said in the previous panel (see Chapter IV.B.2(a), supra this volume) — certainty as to rights, but they also want ease of licensing. So they really also want a one-stop shop. When it gets to collective licensing, there are three performing rights societies. If you are involved with making a reproduction and a distribution, then you have to deal with the Harry Fox Agency, or someone who plays that role. The fight goes on. The rights are not clear. I will just mention, because we will get into it, that there are three places in which these rights are being played out. One was a proceeding over rates that were sought by online companies. There is a decision in what I call the “ASCAP case,” which was decided in the Southern District of New York by the “ASCAP rate judge,” Senior Judge Conner, in April 2007.7 He was looking at what rights are implicated in a pure download. The argument of ASCAP is that every transmission is a public performance, and the way you get the download from one computer to the other is by transmission; ergo, public performance. Judge Conner said: “No. That is a transfer of one copy to the other. In order to have a public performance, you have to have the rendering, the hearing, of the performance in public. In this case, all we have is a reproduction.” We have a proceeding that is now going on before copyright royalty judges, which really has to do with setting rates under Section 115.8 One of the questions that was raised is: What about an interactive stream? What rights are implicated in an interactive stream? There was a question that was given to the Copyright Royalty judges by the Digital Media Association (DiMA).9 They said, “This is a novel question of law on whether or not you have a digital phonorecord delivery, whether it is an incidental digital phonorecord delivery or a general one, and we think it is a novel question of the law that the Copyright Office should answer.” The judges, after hearing from the parties, decided that it was a question of fact. I do not agree with that, but it doesn’t matter. So this will be played out in that proceeding, whether or not there is a digital phonorecord delivery that is compensatable under Section 115. And last, you heard from David Carson that there is a rulemaking that has been reinvigorated because of this issue that has arisen with regard to the copyright royalty judges.10 7 United States v. Am. Soc’y of Composers, Authors & Publishers (ASCAP), 485 F. Supp. 2d 438 (S.D.N.Y. Apr. 25, 2007) (In the Matter of the Application of AOL, LLC, Yahoo! Inc., and RealNetworks, Inc. for the Determination of Reasonable License Fees). Rates are set by the court, acting as a rate court under the antitrust consent decree that was originally imposed on ASCAP in 1941, pursuant to Section IX of the Second Amended Final Judgment, entered June 11, 2001 in United States v. ASCAP, Civ. No. 41-1395 (WCC), 2001 WL 1589999 (S.D.N.Y. June 11, 2001). 8 United States v. Am. Soc’y of Composers, Authors, & Publishers (ASCAP), 559 F. Supp.2d 322 (S.D.N.Y. Apr. 30, 2008), available at http://www.ascap.com/press/2008/pdf/ratecourtdecision.pdf. The rates to be paid to ASCAP for the use of their composers’ music by Yahoo!, AOL, and RealNetworks were set at 2.5 percent of the revenues that were received by these services in connection with the music portions of their Web sites. Id. 9 See Press Release, Digital Media Ass’n, DiMA Requests that Copyright Office Clarify if Section 115 Mechanical License Applies to Internet Streaming (Jan. 7, 2008), available at http://www.digmedia.org/content/release. fm?id=7232& content=pr. DiMA’s Motion to the Copyright Royalty Board to formally request the U.S. Copyright Office resolve this issue is available at http://www.digmedia.org/docs/Motion%20of%20the%20Digital%20 Media%20Association%20 Requesting% 20Referral.pdf. 10 See remarks by David Carson, Chapter IV.B.1, supra this volume; see also Library of Congress, U.S. Copyright Office, Docket Nos. RF 2006-2 & RF 2006-3, Designation as Preexisting Subscription Service, 71 Fed. Reg. 64,639 (Nov. 3, 2006); Copyright Office Notice of Roundtable Regarding the Section 115 Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Deliveries (the roundtable, which is an adjunct to the comments filed in the current rulemaking exploring these issues, will also address the statutory requirement to provide...

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I do think that what is absolutely clear is that we have to clarify the rights; we have to make sure that people know what rights are implicated. It matters to the people who are seeking those rights. Whether you clarify them through regulation or you clarify them through the law, I don’t really care, but I think we really need to clarify them. I think we will hear a lot more about the issues, rights, organizations, and ease or non-ease of licensing as we move forward. Thank you very much. MR. SCHWARTZ: Thank you, Marybeth. We have talked a lot about music. We have talked a little bit about interactive software. Sandra, do you want to talk a little bit about audiovisual works and digital licensing of those? MS. AISTARS: Sure. As Eric said, I am here to address online licensing of audiovisual works. As I listen to the presentations today and over the course of the conference, I think I sometimes find myself sympathetic with the views of the user community and other times sympathetic with the views of the collecting societies. So we come out somewhere in the middle, just because of the nature of our businesses. I think, unlike the labels and unlike the services that are trying to launch licensed online music services, we do not have the same uncertainty with respect to audiovisual works as to who owns the rights or who the likely owner of the rights is with whom you can begin negotiations. The services that are launching seem to find us pretty well, and we have been doing a good job, I think, working collectively with our partners in the Internet space, to license broadly, whether it is electronic sell-through models or mobile or Internet rental or video-on-demand or subscription video-on-demand. So I think that may be less of a problem. But thinking of this from the perspective of a company that is trying to enable these services, we sometimes run into roadblocks of our own based on two things. First, obviously, sorting through the rights issues. Audiovisual works are composed also of soundtracks, and so we have to clear those rights if we are going to put them online, or at least convince ourselves that we have those rights in our existing license agreements. But that aside, I think there are also different historical issues that we face with overlapping contractual obligations or periods of exclusivity that we may have licensed to partners, or just overwhelming business reasons with a particular retailer that has been distributing your DVDs forever and ever, not to put them in a position where they feel like you are cannibalizing their market. So there are those sorts of considerations that we deal with. There are also issues that arise from the way that films are financed. Those are very important to us, even in the large studio system, but I would venture to guess they are even more important for independent filmmakers and those who do not have access to the big studios’ resources to distribute movies. In those instances, you may very well have somebody who has financed their film by selling territorial rights that they can no longer get back. So when it comes time to put that film online, they may be able to offer you the rights to do it in the United States but they cannot offer you the rights to do it in all the jurisdictions that Internet service providers would like to reach. I will stop and answer questions or participate in the dialogue as it goes on. MR. SCHWARTZ: Thank you. notice of intention to obtain the compulsory license. 72 Fed. Reg. 30,039–042 (May 30, 2007); Library of Congress, U.S. Copyright Office, Docket No. RM-2000-7, 37 C.F.R. Pts. 201 & 255, Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Devices, Notice of Proposed Rulemaking, 73 Fed. Reg. 40,802 (July 16, 2008), available at http://www. copyright.gov/fedreg/2008/73fr40802.pdf.

170 CHAPTER IV: COPYRIGHT LAW Next we will hear from Joan McGivern, who will add the perspective of the performing rights organizations. MS. McGIVERN: That’s a scary thought. Hugh Hansen said, “Try to think of something that people don’t know.” At this stage in the game today, you’ve probably heard a lot of what you already know, which is that there is a lot of lack of clarity. I will start with something that maybe some of you do not know. While ASCAP operates under a consent decree,11 which you probably do know, we are obligated to issue to users what is called a “through-to-the-audience” license. This means that presently, unlike our European colleagues, we have licensed most of network television to all platforms — mobile, cable, online. So in that way, we are very different than the European picture, which licenses online rights in silos. On the other hand, the challenge that we are facing is — and I will read you the sentence from our consent decree — “The fee for a user for through-to-the-audience license shall take into account the value of all performances made pursuant to the license.”12 Well, how do you figure out what the value is in the online world as opposed to the old media world? That has been a terrific challenge for us. We have case law that is largely revenue-dependent, revenue-music-use-dependent, except, as most of you also know, the new models are free. In fact, I brought a copy of an article on these models that I highly recommend, from Wired magazine, called “Free!” It is written by Chris Anderson, who wrote a book on the long tail phenomenon.13 In sum, one of our challenges is that, unlike Europe, we are licensing virtually all of broadcast media on all platforms, but we are struggling with how to appropriately value it so that songwriters and our music publishers are appropriately compensated as more and more old-media move onto these new online platforms. Another challenge, which again touches valuation, is social networking sites. They are also a huge challenge for us. It is not really a solution for us to send notices to take down songs. Many of the people who are posting their works are actually posting their own works. In fact, these sites, whether it’s MySpace or Bebo (which was just sold to AOL for $850 million, with no compensation to any of the artists whose music created that site), are encouraged through the terms of use of these sites to post their music for free. What do we tell songwriters? How do they make a living if they are literally giving their music away for free? To the extent that they happen to be posting other people’s music, then I am back to the point I made earlier, which is: How do you value it? We are required to license a public performance right in music. And, as I said, notice-and-takedown really is not a solution. I want to briefly comment on Marybeth’s comment on the pending ASCAP proceeding. The decision she referred to is a pre-trial decision.14 We clearly do not agree with the judge’s view of the law. I hear Marybeth laughing. MS. PETERS: Not surprising. MS. McGIVERN: No, of course not. The judge did say that a public performance right might be implicated, so we hold out a candle of hope there. 11 United States v. Am. Soc’y of Composers, Authors, & Publishers (ASCAP), Civ. No. 41-1395 (WCC), 2001 WL 1589999 (S.D.N.Y. June 11, 2001) (Second Amended Final Judgment), available at http://www.usdoj.gov/atr/ cases/ f6300/6396.htm. 12 Id. at § V. 13 Chris Anderson, “Free! Why $0.00 Is the Future of Business”, Wired, Feb. 25, 2008, available at http://www. wired.com/techbiz/it/magazine/16-03/ff_free?currentPage=all; see also Chris Anderson, The Long Tail: Why the Future of Business Is Selling Less of More (2006). 14 See supra notes 7 & 8.

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We do think the recent CRB decision, finding that actually maybe two rights could coexist in a stream and limited download, to be a heartening development.15 I don’t really see any reason why the United States needs to take a contrarian position to the rest of the world. There was a recent Canadian online decision that similarly found that two rights, a mechanical right (or, as much of the world calls it, a reproduction right) and a public performance right, could coexist and that it was for the court in an adjudicatory fashion to value how those rights would be compensated.16 Whether it is from a pure stream or a download, it was important to recognize there were two rights. I think that within the U.S. system we have mixed up rights and values. I think we should recognize under the copyright law that two rights can coexist in the online world and let the courts or private negotiations or the CRB decide how to value those rights. This brings me to my last point, which is largely personal. I am continually mystified at what I call American exceptionalism and hypocrisy. There are certain digital service providers that want platform parity with old media. They do not want to pay for a public performance in the digital world, but they do want old media to pay for the public performance in sound recordings, because that is platform parity. On the other hand, there are groups that argue that the reason you should not recognize a public performance right in a download is that it would result in double payment. But the whole debate — even though Marybeth said there were three rights implicated: musical composition, interactive, and reproduction — is a completely song-centric debate. What happened to the public performance right in an audiovisual work? There is no sound recording in an audiovisual work. All our composers who write for film and television are seeing their works, for which they get a small up-front fee, with the rest of the fee to come from the back end — and this goes to Sandra’s point about film financing — wait for the back end; they wait for the public performance right royalties, which is what they are entitled to collect. There are decades of contracts that are structured this way. The producers of the films do not pay composers. The users pay composers. That is the way it has been structured. To take the position that there is no public performance right in an audiovisual work when it is downloaded basically cuts off their right to “platform parity.” I just find it very difficult to believe that the drafters of the 1976 Act could have intended the utter disruption of longstanding contracts and how composers and people who write for film, or even songwriters who irrevocably contract their works to be synchronized, who are intended to be compensated by back-end payments, could be cut off from such payments merely by reason of the delivery platform. MR. SCHWARTZ: Thank you very much, Joan. Just one comment before turning to Katie Wagner and the music publishers’ point of view. On the point you made about the reproduction and public performance rights, the legislative history is relatively clear that these rights (and all of the exclusive rights) are not mutually exclusive. I see that Marybeth is nodding in agreement. That is always a good sign for me, when I am the speaker. Next, let hear from Katie Wagner and the perspective of the music publishers. MS. WAGNER: The music publishers and songwriters. As we like to remind people, the music publishers represent songwriters’ interests. 15 U.S. Copyright Royalty Board, Docket No. 2006-1, CRB DSTRA, Final Determination of Rates and Terms for Preexisting Satellite Digital Audio Radio Services (Jan. 24, 2008), available at http://www.loc.gov/crb/ proceedings/2006-1/sdars-final-rates-terms.pdf. 16 Copyright Board Canada, SOCAN–Tariff 22.A (Oct. 18, 2007), available at http://www.cb-cda.gc.ca/decisions/ m20071018-b.pdf; see also Copyright Board Canada, Public Performance of Musical Works—Tariffs Proposed by SOCAN, available at http://www.cb-cda.gc.ca/tariffs/proposed/music-e.html.

172 CHAPTER IV: COPYRIGHT LAW Currently, we are busily trying to actually get rates set in a rate-setting proceeding so that we can even get paid for online uses. I think music publishers and songwriters have always been, in this online environment, very willing to work with the new digital services to try to get them up and running, but we do not want to give our music away for free. Most songwriters rely on one or two hits in their entire lifetime to support themselves and pay their bills. We feel very strongly that the content is what is driving every one of these businesses and we should be paid properly. That brings us to the CRB. We are currently in a proceeding that is going to be two years in length when it finishes.17 It is going to set not only rates for physical and digital phonorecord delivery (DPD) full downloads, which currently are 9.1 cents, as opposed to the, perhaps, 70 cents that record labels get for certain of their licenses. Because we are subject to the compulsory license, that serves as a ceiling for us, so we cannot negotiate above that. We could try, I suppose, but I do not think anyone would be willing to pay us more than that. So we find ourselves at a very critical point, trying to not only get a fair rate for the physical and full download world, but also we have no rate for on-demand or interactive streams or limited downloads. This will be the first time that a rate is set. You ask: Well, how were we able then to get some of these digital services up and running? We actually did something that I think most people would find quite crazy. We entered into “use now, pay later” deals in 2001, agreeing that when a rate is set you will pay us. We have now had some pushback on that, unfortunately, in the CRB because the digital services are now claiming that they do not really need to pay us for all those rights. That is something that is subject to debate in the CRB. Let me just tell you where we are. For those of you who might be federal litigators, you would find this procedure quite confusing. You start out with a written direct statement, which is your testimony. You must stick to your testimony. You have very abbreviated discovery (sixty days) of the other side, at which point you can amend your statement, but you cannot change it very much from what you said in your statement. At that point, and what happened in February of this year, we had a month-long testimony before three judges who were appointed pursuant to Section 115. Section 801 actually is the proper section. Their task is to set the rates, with four different objectives set out in 801, which are to reflect not only fair market but to manage business developments in the economic environment in which we are living. We feel strongly that we gave a good presentation to the Copyright Royalty judges. Our view is that, as I said, songs are the most important part of any music. Without our songs you cannot have your service. That needs to be compensated. We have not been paid fairly. Our rates compared to other content providers are very small. We believe that that needs to increase, certainly in the digital world, where we are moving to singles and away from full albums, where we might get compensated for more than one song at a time. We feel like the cost to the other digital providers is decreasing because they do not have the packaging. Now that they have it up and running, they can pretty easily increase their margins without much trouble. Not surprisingly, the Recording Industry Association of America (RIAA), the record labels, and the Digital Interactive Media Association (DiMA) are arguing quite the opposite: “We can’t get our businesses off the ground unless you take a huge cut in the mechanical, the 9.1 cents.” I think DiMA is offering four cents for some of the limited downloads or on-demand streams, and I think the RIAA is saying that six cents is really the fair rate for a single. They are claiming that they are just impoverished, that piracy has hurt them. We have been fighting that fight with them right along the way. 17

See supra note 14.

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We feel strongly — and we are putting in a rebuttal case that will be heard in May — that we need to raise the rates for the songwriters and music publishers. MR. SCHWARTZ: Thank you. I have one comment that your presentation prompts, and that is calculating royalties in a free market versus a compulsory licensed royalty. The example I am thinking of is the ringtone license, the difference between the Royalty Board rate, set at 9.1 cents for now, versus the free-market rate for ringtones, which was roughly three times the compulsory rate.18 I mention this as an example, even though I probably agree with the decision as a statutory construction matter, which the Copyright Office weighed in on, that ringtones do fit within the mechanical license (and leaving aside the question about whether public performance rights should also apply). The Copyright Office decision was to apply the mechanical license, and thus a 9.1 cents royalty, while the free market was charging about twenty-five cents. Now it will be up to the ratemaking proceeding to set the new compulsory rate for mechanicals, including ringtones. One question that they will answer is: Should there be one mechanical rate for all mechanicals or multiple rates for various types of uses? As Marybeth described it, the hornet’s nest of rights is really at the heart of the problems for delivery services in the United States. Regardless of the delivery service, these questions arise. For example, in the case of DPDs, the question is: Should in any particular technological delivery or service, the cache copies be covered by mechanical? Similar questions arise for the server copy. And then, of course, there are the related questions discussed in this and the prior panels on public performance rights. Joe, you have more experience in this area than anyone I know. Would you like to begin the discussion on how this issue is being handled in the United States and in Europe? And, more precisely, how do we get ourselves out of this hornet’s nest in the United States as a regulatory matter, as a business matter, and as a legislative matter? MR. SALVO: Good news and bad news. Obviously, outside the United States rights certainty is less of an issue. I look at some of the puzzled looks on some of the non-U.S. panelists here, in terms of “What are you guys talking about?” In Canada, of course, a digital transmission, whether it results in a download or a stream, implicates a communication to the public right.19 It is the same issue in the United Kingdom. It is essentially open and shut. So you do not have the same types of issues outside of the United States because you have the rights certainty resolved. In the United States it is a much, much tougher row to hoe, in the sense that, as Marybeth alluded to, you have the open issue from the ASCAP Rate Court, in terms of whether or not there is a public performance right implicated by a download; you have the CRB 115 issue, in terms of whether there is a reproduction right implicated by a stream; you have, as Eric alluded to, the decisions that issued out of the Copyright Office in terms of is a ringtone a DPD and, therefore, does it qualify for compulsory; whether or not there is a public performance implicated by that. MS. PETERS: And the pending Cablevision case.20 I forgot to mention that. 18 In the Matter of Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, Before the U.S. Copyright Office, Library of Congress, Docket No. RF 2006-1 (Memorandum Decision, Oct. 16, 2006), available at http://www. copyright.gov/docs/ringtone-decision.pdf; see also Order Granting in Part the Request for Referral of a Novel Question of Law, Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, Docket No. 2006-3 R DPRA (Aug. 18, 2006). 19 Copyright Board Canada, SOCAN–Tariff 22.A (Oct. 18, 2007), available at http://www.cb-cda.gc.ca/decisions/ m2007 1018-b.pdf. 20 On Aug. 4, 2008, the Second Circuit ruled that Cablevision’s remote DVRs, which work like off-site TiVos, did not infringe copyright. Cartoon Network LP v. Cablevision Sys. Corp. Holdings, Inc., 536 F.3d 121 (2d Cir. 2008). The decision, which overturns an earlier district court opinion from Mar. 22, 2007, Twentieth Century Fox Film Corp....

174 CHAPTER IV: COPYRIGHT LAW MR. SALVO: So it is great news for IP lawyers in the United States. We’ve got a practice set out for us. The tough part, when you are advising clients who want to operate in this space, is: Guess what? You guess wrong, statutory damages in the United States. You do not necessarily have the same issues outside the United States, with the exception of Canada — Canada has, obviously, some enhanced damages — but basically, it is less of an issue ex United States. The rights issues are very, very difficult. The good news is that what I am seeing in my practice is a willingness on the part of certainly ASCAP, the Harry Fox Agency, the publishers individually, to come to the table to find commercial solutions. As we were talking about during the break, the bottom line is that if we do not figure it out, we will have no legally licensed services, and then we are opening the door to pirates. If we cannot resolve the rights issues, we are basically encouraging a situation where services go live without licenses, wait until they get enough eyeballs or traffic, and then either sell themselves or go back and do their licenses after the fact. I do not think you want to encourage that sort of behavior. Unfortunately, that is the paradigm that we are stuck with in the United States at this point. MR. SCHWARTZ: Sarah, any thoughts from the U.K. perspective on this chaotic U.S. system and this problem? MS. FAULDER: I am very glad we don’t have the same problems. MS. PETERS: I don’t want yours either. [Laughter] MS. FAULDER: On the rights issue, it boils down to much more a discussion behind the scenes about how you divide up the revenue as between the mechanical right and the performing right. That is where the discussion is. MR. SALVO: The only other thing I will add to that is that it is also important from a publisher perspective, because typically mechanical royalties will be offset against advances that are given by the publishers to the writers, whereas public performance rights are not. There is also that interplay as well. MR. SCHWARTZ: Tilman, do you want to comment? MR. LÜDER: We might not have the same legal issues, but I think fundamentally we have the same economic issues. There isn’t the possibility to just go out and say, “I am licensing the Internet as such.” The Internet as a medium for a license just simply does not exist. You have different services on the Internet that fulfill different customer expectations. I think Joe made it very clear that we have the spectrum of a download service. Is it download-to-own, or a subscription to have downloads “all you can eat?” Ultimately, you have some bitstream that remains on your computer. That is a kind of sales-type service. That is the functional equivalent to a sale. I think that is where our recommendation is heading. We need to license those. Otherwise it is just going to give the entire field to the peer-to-peer. Then, on the other hand, you have streaming-type services or digital radio. That is a totally different animal. That is the functional equivalent to broadcasting. That might be licensed differently. I think that ultimately, whether it is a question of which rights apply or how do we license it — do we have publisher-specific models or do we have blanket licenses? — my rough guess is that the publisher-specific model is perfectly suitable to license a download-to-own service or a subscription service that is the functional equivalent to a sales service, because that is basically what you are doing. You are buying music to own it and play it ad infinitum on your computer. Maybe the recommendation is less tailored to digital radio service, where you can play any kind of music. But, of course, as soon as you have stream-ripping possibilities or authorized v. Cablevision Systems Corp., 478 F. Supp.2d 607 (S.D.N.Y. 2007), stated that there was no significant legal difference between the remote DVRs and a VCR.

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stream-ripping, where you can take out from the digital radio some songs and own them permanently, I would argue it is again the functional equivalent to a sale and it needs to be licensed according to the model in our Recommendation.21 It is simply just not an argument to say that every single sales service needs to have the world repertoire. You can have a repertoire from wherever you want it, and you have the visibility, you can get it there. I would say that a radio service needs the world repertoire. If you are offering radio without any kind of implications that you can stream-rip or get ownership of any of the songs played, then I think you have a good case to get a world repertoire and to just do it in one transaction on a blanket license basis. I think that is where Europe and the United States are facing exactly the same issues: Where do we make the money? Do we have transactional services that we license in a transactional way? Where music is maybe not the principal driver and where are we not selling music — that is, where it is incidentally used —that is where we need to have another licensing model that is more suitable to that kind of service. MR. SCHWARTZ: Thank you. Joan, you mentioned the film composers’ issues and concerns, which piques my interest. So let me put a scenario out there for discussion and ask you and Marybeth to comment. MS. PETERS: I went and visited with these film composers. MR. SCHWARTZ: The scenario is this: most feature films in the United States are works for hire. This would include the contributions of most of the composers’ works, unless their work was done previously or on “spec.” One additional consideration is the Itar-Tass case in the Second Circuit.22 Applying the holding of that case to foreign works and composers results in the exclusion of some works as “for hire.” My question then under this scenario is: Do we end up with foreign composers being paid for the performance and use of their works when American composers are not paid for their works? MS. PETERS: Well, you still have the issue of the rights. What the film composers are very upset about is that they do work made for hire, and they tell me they have no choice; it is a nonnegotiable issue. Therefore, they fight for what they can get. What they have managed to get is a public performance right on the back end. They have made their money from television, from 21 See European Commission, Recommendation on EU-wide Online Licensing (Feb. 2008), available at http:// ec.europa. eu/internal_market/copyright/management/management_en.htm; see also European Commission, Music Copyright: Com-mission Recommendation on Management of Online Rights in Musical Works (IP/05/1261) (Oct. 12, 2005), available at http://www.ebu.ch/CMSimages/en/INFO_EN_233_tcm6-40326.pdf; Commission Recommendation 2005/737, 2005 O.J. (L 276) 54 (on collective cross-border management of copyright and related rights for legitimate online music services), available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2005/ l_276/l_27620051021en00540057.pdf. At a public debate hearing held by the Commission in Brussels on May 27, 2008, representatives of both collecting societies and the electronics industry backed proposals to harmonize the methodology for collecting levies. See Commission Resumes Copyright Levy Talks, MANAGING INTELL. PROP., June 2, 2008, available at http://www.managingip.com/Article/1940371/Commission-resumes-copyright-levy-talks.html. Note: Subsequent the Conference, the European Commission adopted two initiatives in the area of copyright. Press Release, European Commission, Intellectual Property: Commission adopts forward-looking package (IP/08/1156) (July 16, 2008), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/1156 (“First, the Commission proposes to align the copyright term for performers with that applicable to authors, in this way bridging the income gap that performers face toward the end of their lives. Secondly, the Commission proposes to fully harmonise the copyright term that applies to co-written musical compositions. In parallel, the Commission also adopted a Green Paper on Copyright in the Knowledge Economy. The consultation document focuses on topics that appear relevant for the development of a modern economy, driven by the rapid dissemination of knowledge and information. Both of these initiatives comprise a unique mix of social, economic and cultural measures aimed at maintaining Europe as a prime location for cultural creators in the entertainment and knowledge sectors.”); see also European Commission, Green Paper, Copyright in the Knowledge Economy, COM (2008) 466/3 (July 2008), available at http://eur-lex. europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:0466:FIN:EN:PDF. 22 Itar-Tass Russian News Agency v. Russian Kurier, Inc., 140 F.3d 442 (2d Cir. 1998).

176 CHAPTER IV: COPYRIGHT LAW cable, from satellite. If we go to a download model, so you do not hear it when you tune in but rather it comes to you on your cell phone as a download — and the interlocutory decision in the ASCAP case would say that that is not a public performance23 — then, in essence, the substitute, which is instead of looking at it on television you now look at it on your mobile device — one they get paid for and one they do not. That is not fair. And this is the only way that they make extra money. I understand that argument, I am sympathetic to that argument, but we still have the issue of what is the definition. I don’t know. Canada has a communication of the work to the public. My question is: Is there a distinction between public performance of the work, where you actually render the performance, and communicating the work to the public? Can communication be transmission and actually, in the making-available context, having it come up on your device? MR. SCHWARTZ: Howard Knopf, you have a question? QUESTION [Howard Knopf, Macera & Jarzyna, Ottawa]: The decision that three of you have referred to — Joe, Joan, and now Marybeth — the Ringtones decision,24 held that the delivery of a ringtone to somebody’s computer or cell phone was a “communication to the public by telecommunication.” It is a very awkward phrase in our statute that some of us resisted. MS. PETERS: But it talks about “the work,” right? QUESTIONER [Mr. Knopf]: Yes, “the work.” If you parse that, there are really two parts to it, as you say, “communication” and “to the public.” Now, my understanding — I am no longer involved; I was initially involved in that case a long time ago — is that leave to appeal to the Supreme Court is being sought from the latest court decision. That is like your certiorari. The Supreme Court may hear this case. My guess is they probably will. They have been hearing about one case a year for the last five or six years. If they hear a case this year, it probably should be this case. I quickly looked at some of the material. I think that both issues are being argued: that it is not a communication; and, even if it is a communication, it is not to the public, because it is one at a time — you get it personally; it is one at a time, on-demand. I think at one point there was a silly argument being made that if your cell phone goes off on Broadway and somebody hears it, that is the public. MS. McGIVERN: Actually I wasn’t referring to the Ringtones decision. I was referring to the October Internet Online Music Services Tariff 22 case.25 QUESTIONER [Mr. Knopf]: But they are tied in together, because if the Ringtones decision gets overturned by the Supreme Court of Canada, there is a domino effect, and that decision and a whole bunch of other cases will fall over. MS. McGIVERN: I was specifically referring to the fact that the court did not find that attempts to distinguish streams from downloads were based on correct assumptions. Basically, 23 United States v. Am. Soc’y of Composers, Authors & Publishers (ASCAP), 485 F. Supp.2d. 438 (S.D.N.Y. 2007) (In the Matter of the Application of AOL, LLC, Yahoo! Inc., and RealNetworks, Inc. for the Determination of Reasonable License Fees). 24 See Canadian Wireless Telecomms. Ass’n v. SOCAN, Docket No. A-391-06, [2008] F.C. 6 (Oct. 22, 2007) (reviewing the Copyright Board of Canada’s Ringtone decision, SOCAN Tariff No. 24 – Ringtones (2003–2005), [2006] C.B.D. No. 5 (QL)), available at http://www.copyright.gov/docs/ringtone-decision.pdf. The court upheld the decision, marking a big win for SOCAN and a loss for the wireless providers (CWTA, Bell Mobility, Telus) that had challenged the Board’s decision. The court addressed two primary issues: (1) whether the transmission of a ringtone to a cell phone is a “communication” under the Copyright Act, and (2) whether it is a “communication to the public.” While the wireless carriers argued that a communication must only include a transmission that is intended to be heard simultaneously or immediately upon transmission, the court disagreed, ruling that “the wireless transmission of a musical ringtone to a cell phone is a communication, whether the owner of the cell phone accesses it immediately in order to hear the music, or at some later time.” [2008] F.C. 6. 25 Copyright Board Canada, SOCAN–Tariff 22.A (Oct. 18, 2007), available at http://www.cb-cda.gc.ca/decisions/ m2007 1018-b.pdf; see also cases cited supra note 24.

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they said: Neither is audible during the communication. Both must be stored, even if only temporarily, before they can be played. The only difference is that a stream is programmed to appear to be erased as it is played, while a permanent download is not. If the transmission of a download does not involve a communication, then neither does the transmission of a stream. MR. SCHWARTZ: Other questions? QUESTION [Richard Pfohl, Canadian Recording Industry Association, Toronto]: Just one point. On that case, which came from the Copyright Board in October, actually there have been five appeals, including by the Society of Composers, Authors and Music Publishers of Canada (SOCAN), the equivalent of ASCAP, on a particular issue.26 Among the issues that have been appealed is the issue of whether there is indeed a communication to the public by telecommunication. So again, the fundamental question is not actually settled in Canada at this point, although the Federal Court of Appeal, as Howard mentioned, did rule that there is a communication to the public. I agree with Howard. I think the Supreme Court will probably hear it. MR. SCHWARTZ: I want to conclude by thanking all of our panelists and you in the audience. Thank you.

26

See http://www.cb-cda.gc.ca/decisions/index-e.html.

CHAPTER IV

Copyright Law Part B: Copyright and Music Section 3(a): The Role, Effectiveness and Issues in Infringement Actions Against Individual P2P Downloaders — The “Making Available” Right What is the effect in the United States of the “making available” right? Comparative approaches in Asia, interpreting the “making available” right, and also the intersection with secondary liability Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker MICHAEL SCHLESINGER

Greenberg Traurig LLP (Washington, D.C.) Panelists RAY BECKERMAN

PROF. BRIAN FITZGERALD

Vandenberg & Feliu LLP (New York)

Queensland University of Technology Law School (Brisbane)

DAVID CARSON

PROF. JANE GINSBURG

U.S. Patent and Copyright Office (Washington, D.C.)

Columbia Law School (New York)

PROF. MARY WONG

Franklin Pierce Law Center, (Concord, NH)

180 CHAPTER IV: COPYRIGHT LAW PROF. HANSEN: Welcome. We will be looking at the role, effectiveness, and issues in

infringement actions against individual downloaders. We are dealing with making available, the individual lawsuits, tactics, strategy, statutory damages, and privacy issues that are involved. We will start off with the “making-available” right, which until recently was unknown to most copyright practitioners in the U.S. Now, because of its practical potential value in infringement actions against individual downloaders from peer-to-peer software, it has become an issue. We have a very good panel. Michael Schlesinger who is very knowledgeable in international copyright will give us a comparative look at the applicable law. Our panelists include Ray Beckerman, of Vanderberg & Feliu, who is litigating this issue on behalf of individual defendants; Prof. Brian Fitzgerald, from Queensland University of Technology Law School in Brisbane, who many know in the U.S. from his writings and this and other conferences; Prof. Jane Ginsburg, who doesn’t need an introduction but we will say that she is from Columbia Law School and has written on this topic a while back; and Prof. Mary Wong of Franklin Pierce Law Center who has spoken on this topic a number of times. Michael, please proceed. [The following text has been substituted for Michael Schlesigner’s oral presentation.]

The Right Of Making Available and its Implementation in National Law and Case Law Michael Schlesinger*

I. IMPLEMENTATION OF THE PROVISIONS OF THE WCT AND WPPT ON THE “MAKING AVAILABLE” RIGHT IN NON-U.S. AND NON-E.U. NATIONAL LAWS; RECENT CASE LAW DEVELOPMENTS

A. The Emergence of Implementation Strategies Unquestionably, one of the most important results of the adoption of the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT) was the recognition of an exclusive right to “make available” protected works or objects of related rights in an interactive context. They achieved this through the adoption of an exclusive “communication * International Intellectual Property Alliance, Greenberg Traurig LLP. Michael Schlesinger’s practice focuses on intellectual property with an emphasis in international copyright law and trademark law. Michael represents the International Intellectual Property Alliance (IIPA), a coalition of seven major trade associations (comprised of 1,900 companies), in worldwide copyright legislation and enforcement reform efforts, as well as government affairs and trade-related aspects of intellectual property rights. Michael works extensively with U.S. government officials and foreign government counterparts on negotiating and implementing global IP agreements. Michael’s regional focus is on Asia, the Middle East, and Africa. Michael works with foreign governments on implementing emerging standards of IP protection, as well as compliance with international intellectual property and trade agreements, and engaging in capacity building in the area of IP and trade. Michael has spoken on copyright issues around the world. Michael has made recent media appearances on Voice of America, WorldNet, and PBS’ Nightly Business Report, and has lectured at George Washington University School of Law, Georgetown University Law School, Columbia University School of Law and George Mason University. Since 2002 Michael has spoken at many high schools in the Washington region to raise students’ “copyright awareness.” Michael was a Fellow of the Sorensen Institute for Political Leadership (housed at the University of Virginia) in 2002.

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to the public” right, including an exclusive “making available” right in Article 8 of the WCT,1 and an exclusive “making available” right in Articles 10 and 14 of the WPPT (as to performers and producers of phonograms, respectively).2 Simply put, these rights ensure that authors of copyrighted works and related rights holders can authorize or prohibit transmissions of their creative products — whether transmissions over the Internet, wire or wireless transmissions, and including transmissions over peer-to-peer networks and (increasingly) over mobile devices. One reason the adoption of such rights in the WCT and WPPT was important was that existing conventions and treaties had some gaps in coverage (either as to certain acts or as to certain subject matter). The treaties sought to close these gaps. The delegates at the Diplomatic Conference sought a flexible approach owing to the differences in national legislations and approaches at the time. The WCT and WPPT approach — namely, adopting a technologyneutral “making available” right — ensured that countries could accomplish adequate protection of these rights in a flexible way that suited their national systems. Dr. Mihály Ficsor has dubbed the adoption of a broad exclusive “making available” right in the WCT, which also appears in the WPPT as applied to sound recordings and performances fixed in sound recordings, as the “umbrella solution” — crafted to give national legislatures considerable flexibility in labeling or characterizing the exclusive rights involved, so long as the act of making works, sound recordings, and performances available interactively is covered by one or more exclusive rights. The “making available” right is characterized in what Dr. Ficsor calls a “neutral, legal-characterization-free description of interactive transmissions … [that is] included in Article 8 [of the WCT] in the following way: ‘making available to the public of … works in such a way that members of the public may access these works from a place and at a time individually chosen by them.’”3 While the treaties do not require that the “distribution” right extend beyond the distribution of tangible copies, the “umbrella solution” does permit signatories to implement the communication to the public/making available right through applying the exclusive distribution right to electronic transmissions of works, sound recordings, and performances fixed in sound recordings. Most countries, however, have opted for adapting other existing rights, most commonly the “communication to the public” right, to ensure that interactive transmissions are covered (as to related rights, most countries implementing have added a standalone “making available” right, or have subsumed the interactive right within a concept of “communication” or sometimes “broadcast”). B. U.S. and EU Implementation Compared The U.S. concluded that a “distribution” approach more closely approximates the real market impact of on-demand and other online transactions, in which the recipient of the transmission often ends up with a copy of a work that he or she did not have before. Thus the United States relied upon the distribution right to cover distributions/transmissions beyond just physical distribution of tangible copies.4 When the issue of whether U.S. law needed to be amended 1 World Intellectual Property Organization (WIPO) Copyright Treaty art. 8, Apr. 12, 1997, S. Treaty Doc. No. 10517, 2186 U.N.T.S. 152, 36 I.L.M. 65 (Geneva, 1997) (entered into force Mar. 6, 2002) (“Right of Communication to the Public”) [hereinafter WTC], available at http://www.wipo.int/treaties/en/ip/wct/pdf/trtdocs_wo033.pdf. 2 WIPO Performances and Phonograms Treaty arts. 10 & 14, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 245, 36 I.L.M. 76 (Geneva, 1997) (entered into force May 20, 2002) (Art 10: “Right of Making Available of Fixed Performances”; Art 12: “Right of Making Available of Phonograms”) [hereinafter WPPT], available at http:// www.wipo.int/treaties/ en/ip/wct/pdf/trtdocs_wo034.pdf. 3 Mihály Ficsor, The Law of Copyright and the Internet: The 1996 WIPO Treaties, Their Interpretation and Implementation § C.8.06 (2002). 4 See, e.g., Playboy Enters., Inc. v. Frena, 839 F. Supp. 1552 (M.D. Fla. 1993).

182 CHAPTER IV: COPYRIGHT LAW to implement the “making available” right, the drafters (and those advising them) determined this in the negative, since the broad reading of the distribution right, in conjunction with the reproduction right (which would protect against someone making an illegal copy when “uploading” it to a server, or when an end-user “downloads” it from a place and time of his choosing) would cover the act of “making available” as that is defined in the WCT (and WPPT). Unlike the United States, the European Union opted for a “communication to the public” approach to adopting a “making available” right.5 C. Global Implementation of Article 8 of the WCT and Articles 10, 14, and 15 of the WPPT Globally, the number of implementations, by changes to domestic legislation (or proposed changes), by commitments through bilateral agreements (most notably through Free Trade Agreements entered into between several countries and the United States), by interpretation, and by self-implementation (i.e., through accession to the treaties as “superior” law), has grown markedly in the past several years. As of November 2007, at least ninety-six countries/territories have, are committed to have, or are in the process of legislating to add, interactive rights of communication to the public/making available, or provide such rights by interpretation. Of those ninety-six countries/territories, seventy-seven provide WPPTcompatible making-available rights for producers of sound recordings and/or performers, or had draft legislation providing such rights.6 There are several other countries/territories that have broad interpretations consistent with the treaties or that implement the treaties provisions through self-execution (e.g., Ghana, Guinea). Specifically, the following eighty-two countries/territories have an express, or by interpretation, treaties-compatible “making available” right in their law: Australia, Brunei Darussalam, Cambodia, Hong Kong, Indonesia (no WPPT), Japan, Macau (not sound recordings), Malaysia, Palau (WPPT but not WCT), Papua New Guinea, People’s Republic of China (but broad WPPT reservation), the Philippines (WCT only), Samoa (WCT; WPPT for performers but not sound recordings), Singapore, South Korea (WCT, and bill would provide WPPT-compatible rights), Sri Lanka (not sound recordings), Taiwan; Antigua and 5 See European Parliament and Council Directive 2001/29, Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (167/10), art. 3 [hereinafter Copyright Directive]; see also Mihály Ficsor, The Right of Communication to the Public and the Making Available Right (on file with author). Art. 3(1) of the Copyright Directive, in a way, is only a slightly adapted version of Art. 8 of the WCT, since it reads as follows: “Member States shall provide authors with the exclusive right to authorise or prohibit any communication to the public of their works, by wire or wireless means, including the making available to the public of their works in such a way that members of the public may access them from a place and at a time individually chosen by them.” The recitals concerning this provision clarify that it includes two elements. Recital (23) refers to the need for harmonizing the provisions on communication to the public in general: “This Directive should harmonise further the author’s right of communication to the public. This right should be understood in a broad sense covering all communication to the public not present at the place where the communication originates. This right should cover any such transmission or retransmission of a work to the public by wire or wireless means, including broadcasting. This right should not cover any other acts.” Recital (25) addresses the issue of on-demand trans-missions in respect of copyright: “The legal uncertainty regarding the nature and the level of protection of acts of on-demand transmission of copyright works and subject-matter protected by related rights over networks should be overcome by providing for harmonised protection at [the] Community level. It should be made clear that all rightholders recognised by this Directive should have an exclusive right to make available to the public copyright works or any other subject-matter by way of interactive ondemand transmissions. Such interactive on-demand transmissions are characterised by the fact that members of the public may access them from a place and at a time individually chosen by them.” 6 Draft legislation: Oman (legislation awaits signature by the Sultan), Swaziland, the Philippines, Thailand, Macedonia (Former Yugoslav Republic of), and Kuwait have draft legislation that, if enacted, would provide an interactive “making available” to the public right. India’s 2006 HRD draft would provide such a right. FTAs: Panama (once FTA goes into force) and Colombia (if approved) would be obligated to provide “making available” rights as to works and objects of related rights.

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Barbuda (not performers), Brazil (not express for performers or sound recordings), Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Trinidad and Tobago, Uruguay, United States of America; Belgium, Bulgaria, Cyprus (reportedly), Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Iceland (unconfirmed), Ireland, Italy, Latvia, Lithuania, Luxembourg (WPPT unconfirmed), Malta, Norway, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, United Kingdom; Andorra, Belarus, Bosnia Herzegovina (no performers or sound recordings), Croatia, Moldova (Republic of), Republic of Montenegro, Republic of Serbia, Russian Federation, Ukraine, Uzbekistan; Bahrain, Egypt, Iraq, Jordan, Lebanon (no WPPT), Morocco, Turkey, United Arab Emirates. Botswana, Burkina Faso, Cameroon, Ghana (express for performers, may be implied for works and sound recordings), Namibia, and Tanzania. Armenia, Chile, France, The Netherlands, Peru, and Vietnam provide such rights by interpretation. D. Anecdotal Implementation Data (Keying on Asia) Anecdotally, there seem to be four different situations arising at present, now almost eleven years after the date the WCT and WPPT were concluded: • Countries that provide fully or nearly fully treaties-compatible rights as to works and objects of related rights (examples in Asia are Australia, Brunei Darussalam, Cambodia, Hong Kong,7 Japan, Malaysia, Papua New Guinea, Singapore, and Taiwan).8 • Countries that provide WCT-compatible rights but not WPPT-compatible rights, or vice versa (only Nepal from Asia falls into this category) (or for which the implementation of either is problematic or in question in some way) (examples in Asia are Indonesia, the Philippines, the People’s Republic of China, Republic of Korea, Samoa, Sri Lanka, and Vietnam). • Countries that provide broad exclusive rights for works and/or objects of related rights (e.g., communication to the public and broadcast rights), but no express interactive “making available” right (examples in Asia include Bangladesh, Bhutan, Fiji, Mongolia, New Zealand, Pakistan, Thailand). • Countries that provide no comparable rights to those in Article 8 of the WCT and Articles 10/14/15 of the WPPT (examples in Asia include Laos, Myanmar). 7 Hong Kong, on the other hand, begins with the concept of distribution (similar to the United States) but also includes express language that largely mirrors the treaties. Copyright Ordinance, (2001) Cap. 528, § 26. (H.K.). Section 26 of the Ordinance provides as to works (including sound recordings): (1) The making available of copies of the work to the public is an act restricted by copyright in every description of copyright work. (2) References in this Part to the making available of copies of a work to the public are to the making available of copies of the work, by wire or wireless means, in such a way that members of the public in Hong Kong or elsewhere may access the work from a place and at a time individually chosen by them (such as the making available of copies of works through the service commonly known as the Internet). (3) References in this Part to the making available of copies of a work to the public include the making available of the original. (4) The mere provision of physical facilities for enabling the making available of copies of works to the public does not of itself constitute an act of making available of copies of works to the public. The provision for performers is essentially the same. Id. 8 Taiwan has taken the approach of creating a new “public transmission” right to satisfy the WIPO treaties. Copyright Law (1993) (Republic of China), Faigui Huibian, art. 3(10) [hereinafter Taiwan Copyright Law]. Taiwan’s approach appears to adopt the broad “communication to the public” approach, but given the various exclusive rights in Taiwan’s draft law that together provide treaties-compatible coverage, it can be said that Taiwan’s approach may be closest to Dr. Ficsor’s “umbrella solution,” and may be an indicator that the notion of an “umbrella solution” remains viable.

184 CHAPTER IV: COPYRIGHT LAW E. Implementation of Related Rights Under the WPPT — “Making Available” but an Incomplete Resolution Leads to Some Incomplete Solutions in Domestic Legislation One problematic aspect in implementation of the communication to the public/making available right in the new digital environment is the treatment of related rights. For some of these countries, there is a total failure to modernize their protections for performers and producers of sound recordings to meet the emerging global norms of the WPPT. For others, incomplete or improper scope of rights mars implementation with respect to related rights.9 In particular, it should be noted that the 1996 Diplomatic Conference did not result in a complete resolution of all the issues related to rights to be afforded to producers of phonograms and performers in the networked (e.g., Internet) environment. The delegates at the Conference adopted an agreed statement in connection with Article 15 of the WPPT. It reads as follows: “It is understood that Article 15 does not represent a complete resolution of the level of rights of broadcasting and communication to the public that should be enjoyed by performers and phonogram producers in the digital age. Delegations were unable to achieve consensus on differing proposals for aspects of exclusivity to be provided in certain circumstances or for rights to be provided without the possibility of reservations, and have therefore left the issue to future resolution.” This agreed statement reflects the discussions and negotiations, inter alia, about the socalled “near-on-demand” forms of broadcasting and communication to the public by cable, such as subscription services. In respect of such services, it could hardly be said that they only involve “secondary” uses. The demand of owners of rights seems to be quite justified that at least a right to remuneration should be granted, but, in those cases where such services most seriously conflict with a normal exploitation of the rights in phonograms, more preferably an exclusive right should be granted.10 What is clear is that the “making available” right in Article 14 is to be considered a starting point for countries’ implementation approaches, not an end point. It would be unfortunate if, by taking such an approach, it would stifle the deployment in those countries of new ways of distributing copyright materials, including subscription services, interactive or on-demand services, or near-on-demand services. Other countries have simply failed to implement the WPPT at all. For example, while Indonesia’s prompt ratification of the WCT (Indonesia was the first country in the world to ratify the WCT, on June 5, 1997) set an excellent example, its 2002 Copyright Law failed to implement an interactive and exclusive “making available” right as to sound recording producers and performers. While Indonesia has since joined the WPPT (in 2005), it has yet to consider or draft implementing regulations for the WPPT. Unfortunately, Indonesia is not alone in its failure to properly implement the WPPT. Express rights for record producers and performers in the online environment (as for other right holders) are important to provide economic rationales for investment in the creation of recorded music (and other subject matter). In an environment increasingly dominated by digital transmissions rather than product delivery, and by an increasing variety of methods 9 For example, some African countries that have implemented provide broad exclusivity for communications to the public (including “making available”) for works, but provide an incomplete approach to related rights, affording exclusivity only with regard to “making available” for producers of sound recordings and performers, and creating a right to a single remuneration for “other” communications to the public and broadcasts. See, e.g., Botswana, Copyright and Neighboring Rights Act (2000) (A. 19), § 26(1); Tanzania, The Copyright and Neighbouring Rights Act, No. 6 (1999), § 33; Burkina Faso, Law No.032-99/A Law for the Protection of Literary and Artistic Property (1999), § 79. 10 An example of existing legislation trying to respond to such a demand may be found in the U.S. Copyright Act, at 17 U.S.C. §§ 106(6), 114(a), 114(d)–(j).

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of distribution, it is important for record companies and performers to have the ability to control the interactive transmissions of their recordings and performances — uses that are fast becoming the central economic uses of their recordings and performances. Another area in which implementation strategies differ, but in which mistakes can be very costly to the system and leave countries out of compliance is in the area of exceptions and limitations on the rights granted in the WCT and WPPT with respect to communications to the public and the “making available” of works or objects of related rights. II. CASE LAW INTERPRETING A RIGHT OF COMMUNICATION TO THE PUBLIC/MAKING AVAILABLE RIGHT

The number of cases and the number of jurisdictions in which courts have been asked to grapple with infringement issues involving the communication to the public and making available of works and other objects of protection has steadily grown over the past several years. The following is a brief but non-exhaustive survey description of the variety of cases and the trends in interpreting the “making available” right in several jurisdictions. A. United States The case law thus far in the United States has confirmed the validity of the “umbrella solution,” in what is a developing story. In Motown Records Co. v. Theresa DePietro,11 for example, a case involving a downloader using the Kazaa software, Judge Cynthia Rufe of the Eastern District of Pennsylvania opined, “A plaintiff claiming infringement of the exclusive distribution right can establish infringement by proof of actual distribution or by proof of offers to distribute, that is proof that the defendant ‘made available’ the copyrighted work. [38]”12 Footnote 38 continues: “While neither the United States Supreme Court nor the Third Circuit has confirmed a copyright holder’s exclusive right to make the work available, the Court is convinced that 17 U.S.C. § 106 encompasses such a right based on its reading of the statute, the important decision in A&M Records, Inc. v. Napster, Inc.,13 and the opinion offered by the Register of Copyrights, Marybeth Peters, in a letter to Congressional hearings on piracy of intellectual property on peer-to-peer networks, Letter from Marybeth Peters, Register of Copyrights, to Rep. Howard Berman, from the 28th Dist. of Cal. (Sept. 25, 2002) (‘[M]aking [a work] available for other users of [a] peer to peer network to download … constitutes an infringement of the exclusive distribution right, as well as the reproduction right’).” Other litigation has thus far led to similar results.14 Civ. No. 04-CV-2246, 2007 WL 576284 (E.D. Pa. Feb. 16, 2007). Id. at *3; see Posting of William Patry to http://williampatry.blogspot.com/2007/03/making-available-right.html (Mar. 2, 2007, 11:39 EST). 13 239 F.3d 1004 (9th Cir. 2001). 14 On Oct. 4, 2007, in the case Capitol Records v. Thomas, Civ. No. CV 06-1497 MJD/RLE, 2007 WL 2826645 (D. Minn. 2007), a federal jury in Minnesota awarded the plaintiffs $220,000 in damages caused by Thomas’ downloading 1,702 songs through the Kazaa network (though only twenty-four were at issue in the case). A federal jury sided with the RIAA and returned a verdict of $222,000. See, e.g., Posting of David Kravets to Wired Threat Level Blog, RIAA Jury Finds Minnesota Woman Liable for Piracy, Awards $222,000, http://blog.wired.com/27bstroke6/2007/10/riaajury-finds.html (Oct. 4, 2007, 17:34 EST). The case has garnered wide attention because of the RIAA’s involvement, Thomas’ decision to wage a spirited defense, and because of Jury Instruction Number 15, in which Judge Davis of the United States District Court for the District of Minnesota instructed the jury that “The act of making copyrighted sound recordings available for electronic distribution on a peer-to-peer network, without license from the copyright owners, violates the copyright owners’ exclusive right of distribution, regardless of whether actual distribution has been shown.” Jury Instructions at 18, Capitol Records v. Thomas, No. 06-CV-1497, 2007 WL 2826645 (D. Minn. Oct. 1, 2007). This case is being reconsidered pursuant to a motion for a new trial. 11

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186 CHAPTER IV: COPYRIGHT LAW Not much has been written about the MGM v. Grokster litigation in the United States in this context. In one sense this is natural since, at its core, the case focuses on secondary liability.15 The case is worthy of note because, in describing the infringement claims, the court expressly says that the users of the Grokster and Streamcast service “reproduced and distributed copyrighted works in violation of the U.S. Copyright Act” [emphasis added]. Later in the opinion, the court focuses on what files were “available” on the networks for download. The court uses the term “distribution” regardless of the fact that the peer-to-peer system described did not involve anything more than users opening up their folders for sharing, i.e., “making available” the files, without onward distribution. B. Hong Kong The Hong Kong “BitTorrent” case is instructive as to how courts outside the United States are dealing with the “making available” issue.16 On May 18, 2007, the Hong Kong Court of Final Appeal affirmed the conviction of Chan Nai Ming for “attempted distribution” of illegal copies of copyrighted works. In the decision, one of the key points of discussion (both at the trial court level and on appeal) was whether there was any distribution, or any possibility of a distribution, since all Mr. Chan was alleged of having done was “seed” the files so that they could be downloaded using the BitTorrent method of file sharing.17 The court had no trouble holding that uploading files through the “seeding” process and making them available for others to download constitutes “distribution” under the Hong Kong SAR Copyright Ordinance.18 Specifically, Mr. Justice Rubeiro PJ said, “Distribution in its ordinary meaning, is clearly capable of encompassing a process in which the distributor first takes necessary steps to make the item available and the recipient then takes steps of his own to obtain it. A simple example involves distribution of soft drinks or other consumer items by means of coinoperated vending machines.” C. Republic of Korea The various Soribada decisions are likewise instructive as to how communication to the public rights and “making available” rights become vital for right holders in practice.19 In 15 Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913 (2005), in which the Supreme Court of the United States held unanimously that “one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.” 16 HKSAR v. Chan Nai Ming, T.M.C.C. 1268/2005, [2005] 4 H.K.L.R.D. 142 (C.F.I.), available at http://legalref. judiciary.gov.hk/lrs/common/ju/ju_frame.jsp?DIS=46722. 17 Indeed, Chan’s defense was that “seeding” the files on Torrent was not “distribution” under Section 118 of the Hong Kong Copyright Ordinance, but rather, “what it amounts to, it is said, is no more than sharing or making available the films in question to those who wanted to download them.” Id. at ¶ 5 (emphasis added). 18 One of the key defense points was that, while the statute provided for civil remedies for “making available” as defined in Section 26 of the Ordinance, for criminal liability to attach, the prosecutor needed to show “distribution” which is nowhere defined in the Ordinance (and is not therefore defined to subsume the concept of “making available”). Id. 19 See Korean Ass’n of Phonographic Producers v. Soribada Co., Ltd., Case No. 2001 Kahab 3491 (Seoul Cent. Dist. Ct., 50th Civ. Div., Aug. 29, 2005). The Soribada cases have gone on for years, being dubbed Soribada 1, Soribada 2, and Soribada 3, based on the differing technologies employed by the defendant(s), each less centralized and, so the defendants hoped, less culpable than the one before it. The saga has played out like an insufferable set of motion picture sequels. In Soribada 1 the defendants were found contributorily liable for the infringements of their third party customers; the service they provided was a website in which thousands of songs were indexed and hyperlinked to IP addresses at which the various files could be downloaded. See Korean Ass’n of Phonographic Producers v. Soribada Co., Ltd., Case No. 2002 Kahab 77, Suwon Dist. Ct., July 9, 2002, aff’d Seongnam Branch...

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the latest chapter, an injunction was issued against Soribada, ordering it to cease allowing users of Soribada 3 to “upload or download” illegal MP3 files of the right holders as well as other relief. The key finding of fact in the case by the court was that for “making any MP3 file available for downloading … no separate transmission is necessary.”20 In the key legal holding in the case for our purposes, the court found that “providing copyright material for use through wire communication for receipt or use by other users who interface to the network of the Soribada server anytime, anywhere … [falls] under the infringement of the transmission right under Section 1, Article 91 of the Copyright Act.”21 D. Australia In Cooper v. Universal Music Australia Pty Ltd.22 the Federal Court of Australia found a Web site operator, host, and a director liable for “authorizing” infringement by third parties of other third parties’ infringing files. While essentially a secondary liability case involving the Web site MP3s4free.net, the court did find that “[a] recording is communicated within the meaning of § 85(1)(c) if it is made available online or electronically transmitted (§ 10).”23 In this case, the Web site in question provided “deep links” to infringing files located at a remote third parties’ IP address. Because of this, the court characterized the activity as providing “ready access” to the files, but nonetheless stopped short of concluding that the defendants themselves had “communicated” the files. Rather, it was the third parties who had communicated (by uploading and making the files available). In order to find the defendants’ liable, therefore, the court looked to the statute and found that the defendants were liable for “authorizing” [§ 110] infringement taking place between third parties.24 In the lower court decision, Judge Tamberlin noted that “communicate” under the Australian law points to “both limbs of the definition of ‘communicate,’ namely, ‘to make available on-line’ and ‘to electronically transmit the subject matter.’”25 In Universal Music Australia Pty Ltd. v. Sharman License Holdings Ltd., the Federal Court of Australia (Judge Wilcox) held several defendants liable for authorizing the “communicating … to the public” of various sound recordings using the Kazaa peer-to-peer file-sharing network.” 26

Ct. (Feb. 14, 2003), aff’d in part, Seoul High Court (June 12, 2005), Case No. 2003 11a2 1140). In Soribada 2 (the sequel!) the defendants removed the hyperlinks to the IP addresses, but still retained an index on the site (resembling the architecture and business model that was struck down as illegal in the U.S. Napster litigation). 20 Soribada 3, § 1(a)(2)(a). 21 Id. § 2(b)(2)(b). 22 Cooper v. Universal Music Austl. Pty Ltd. [2006] F.C.A.F.C. 187. 23 In the lower court decision, Judge Tamberlin discussed the meaning of “make available online,” citing the Australia law which almost exactly mirrors the WCT definition. Universal Music Austl. Pty Ltd. v. Cooper [2005] F.C.A. 972. 24 One very interesting aspect of the Cooper case is its posture as to extraterritorial acts of infringement. Essentially, the phrase “or authorizes the doing in Australia of” an act which constitutes an infringement was interpreted to include cases in which the authorization took place in Australia, but the actual infringement took place outside of Australia. This holding is in contrast with the U.S. case of Subafilms, Ltd. v. MGM-Pathe Communications Co., 24 F.3d 1088 (9th Cir.) (en banc), cert. denied, 513 U.S. 1001 (1994), in which the U.S. court held that the mere authorization of an act occurring outside the United States, which, if it had occurred in the United States, would have been an infringement, is not actionable in the United States. Id. at 1090–91. 25 Universal Music Austl. Pty Ltd. v. Cooper [2005] F.C.A. 972. Judge Tamberlin also held that the remote Web sites had infringed as they had “made available … the recordings,” not the one providing the deep link. Id. 26 [2005] F.C.A. 1242 (Sept. 5, 2005).

188 CHAPTER IV: COPYRIGHT LAW E. Japan In what has become known as the “File Rogue” case, JASRAC (Japanese Society for Rights of Authors, Composers and Publishers) v. MMO Japan Ltd.,27 the Tokyo District Court found MMO Japan Ltd. (based in Hachioji-city, Tokyo), and its representative Michihito Matsuda, who administers the peer-to-peer file sharing service called “File Rogue,” liable for copyright infringement of the rights of “making copyrighted works transmittable” and “public transmission of copyrighted works.”28 One of the issues the court considered was whether a sender who stores an MP3 file in a share folder on his or her PC and connects to the defendant’s server infringes the plaintiff’s right of “making copyrighted works transmittable.” The court held that “the defendant’s service provides its users with an opportunity to exchange MP3 files, which are reproductions of commercially available recordings (CDs)” [emphasis added]. More specifically, the court said, “as far as the exchange of MP3 files is concerned, the defendant’s service, in effect, enables its users to freely send and receive MP3 files” [emphasis added]. Another P2P case in Japan worthy of note involved the file-sharing service called “Winny.”29 On December 13, 2006, Isamu Kaneko, the developer of the “Winny” peer-to-peer (P2P) file sharing system in Japan, was found guilty of aiding and abetting the infringement of Japan’s Copyright Law by the Kyoto District Court.30 Kaneko was fined 1.5 million yen (US$12,832). F. China In January 2007, the International Federation of Phonographic Industries (IFPI) filed eleven separate claims for an injunction and damages against the Chinese Internet search engine Yahoo! China on behalf of local and international record companies after the service walked away from talks regarding its alleged infringement of the record companies’ rights. On April 24, 2007, Beijing’s No. 2 Intermediate Court ruled that the search engine was responsible for the copyright violations since it enabled Web surfers to find the illegal music.31 Similar to Cooper, the case involved deep links, but the court had no problem finding Yahoo! China liable for linking to Web sites that offered illegal downloads of copyrighted music.32 Yahoo! China was ordered to pay a fine of 200,000 yuan and to remove the links. The case is under appeal.33 27 JASRAC v. MMO Japan Ltd. (Tokyo Dist. Ct., Jan. 29, 2003), H17.3.31, Tokyo Dist. Ct. No. 16 Ne 446, available at http://www.jasrac.or.jp/ejhp/release/2003/0129.html (English-language summary) (awarding preliminary injunction against distribution of FileRogue file-sharing program). 28 Id. The case was continued to determine the scope of the injunction and the amount of damages to be paid. In a provisional injunction applied by JASRAC in 2002, the Tokyo District Court ordered MMO Japan not to allow the transmission of musical works administered by JASRAC. 29 Press Release, Motion Picture Association of America, Japanese File-Sharing System Developer Guilty of Abetting Copyright Infringement (Dec. 13, 2006), available at http://www.mpaa.org/press_releases/2006-12-13a.pdf. 30 See id. The “Winny” P2P file-swapping system came to prominence in Japan on Nov. 27, 2003 when police raided the home of Kaneko, known to “Winny” users as “Mr 47,” and shut down his Internet home page. On the same day, in separate raids, police arrested two men for illegally distributing the Universal Studios film “A Beautiful Mind” and for illegally distributing game software via “Winny.” See id. 31 See Press Release, IFPI, Statement from John Kennedy, Chairman and Chief Executive of IFPI, on today’s Yahoo! China ruling (Apr. 24, 2007), available at http://www.ifpi.org/content/section_news/20070424a.html. 32 Mike Rosen Molina, “China Court Rules Yahoo! China Violated Copyright by Linking to Filesharing Sites”, Jurist Legal News & Research, Apr. 24, 2007, available at http://jurist.law.pitt.edu/paperchase/2007/04/china-courtrules-yahoo-china-violated.php. 33 It should be noted that Since the Yahoo! China judgment was made under the new Internet regulations in China, it is in stark contrast with several litigations brought against the major Chinese search engine Baidu under the law in existence at the time of decisions in similar cases involving deep-linking brought by record labels in China against Baidu. In one case, in November 2006, the court found no liability for copyright infringement as the search engine’s deep links “did not constitute an infringement [by Baidu] as all the music was downloaded from webservers of third parties.” See Posting by Grant Robinson to the Digital Music Weblog, Baidu off the hook in copyright infringement…

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G. Taiwan In the major case involving P2P file-sharing in Taiwan, on September 9, 2005, the Taipei District Court convicted three executives of Kuro, Taiwan’s largest file-sharing service.34 The court spokesman indicated, “Kuro had violated copyright law in offering its members programs to download MP3 music.” The service was run as a commercial subscription business, with an estimated 500,000 registered users in Taiwan and mainland China, causing enormous losses to the music industry in both placed.35 The court reportedly found that Kuro ran advertisements that had encouraged members, who pay a monthly fee of NT$99, to swap copyrighted music files via its Web site, and reportedly said Kuro was therefore party to infringement of the Copyright Law.36 PROF. HANSEN: Thank you very much, Michael.

Just a show of hands — How many think that under U.S. law that downloading content from a peer-to-peer network, in a way that without any additional effort allows others to take that content from the computer is a violation of U.S. law? [Show of hands.] Jane? PROF. GINSBURG: Absent the applicable exceptions. At least prima facie. PROF. HANSEN: Prima facie. A good point. Thank you. How many would say it is not a violation? [Show of hands] Significantly fewer. I think that at least in this room the ayes have it. Ray Beckerman, you have been litigating this. You heard what Michael said, that he thinks the case law up until now has gone one way. He does say that there are other cases in which it has been disputed. Give me your take on the current state of U.S. law. MR. BECKERMAN: Michael’s whole discussion of U.S. law was extremely biased, onesided, and incorrect. case, http://digitalmusic.weblogsinc. com/2006/11/20/Baidu-off-the-hook-in-copyright-infringement-case/ (Nov. 20, 2006, 13:11 EST). A similar case brought by Hangzhou-headquartered online music service 5fad was likewise unsuccessful. See Gareth Powell, “5fad Loses Copyright Case Against Baidu”, China Econ. Rev., Jan. 13, 2007, available at http://www.chinaeconomicreview.com/it/2007/01/13/5fad-loses-copyright-case- against-baidu/. 34 Sentences ranged from two to three years in jail and fines for criminal copyright infringement. In addition, one of Kuro’s 500,000 paying members was sentenced to four months imprisonment for making 900 songs available for upload. 35 In a subsequent development, the Taiwan International Federation of the Phonographic Industry (IFPI) and Kuro reached a settlement on Sept. 14, 2006, whereby Kuro agreed to discontinue its file-sharing function by Oct. 15, 2006, and would cease distribution of P2P software, as well as pay NT$300 million (approx. US$9 million) in damages to record businesses. Kuro has approximately 5 million members in China and Taiwan. Without obtaining distribution rights, Kuro collected a monthly fee from its members for use of P2P software for illegal file sharing; it was the largest Web site of its kind in Taiwan, and caused enormous financial damage to rights holders. In August 2003, IFPI Taiwan filed for a preliminary injunction against Kuro, prohibiting the illegal file sharing of the 105 songs owned by member rights holders; then, on December 4 of the same year, the Taipei District Prosecutors Office brought charges against Kuro for copyright infringement and commenced public prosecution. See, e.g., Press Release, IFPI, Taiwan’s Kuro in Substantial Settlement with Recording Industry (Sept. 16, 2006), available at http://www.ifpi.org/content/ section_news/20060914.html. The Kuro case contrasted with an earlier case in which the Shihlin District Court found Weber Wu (吳怡達), president of Ezpeer, a peer-to-peer (P2P) file-sharing service, not guilty of criminal copyright infringement. See Jessie Ho, “Ezpeer Found Not Guilty in Landmark Copyright Verdict”, Taipei Times Online, July 1, 2005, http://www.taipeitimes.com/News/front/archives/2005/07/ 01/2003261705. 36 See Posting by Rik Lambers to CoCo blog, “Taiwanese Criminal P2P Convictions Set the Example”, http:// constitutional code.blogspot.com/2005/09/taiwanese-criminal-p2p-convictions-set.html (Sept. 11, 2005).

190 CHAPTER IV: COPYRIGHT LAW The Hotaling case37 was a very distinguishable case in which a library failed to keep circulation records. The court held that it was not going to reward a library for failing to keep circulation records. The issue is before the courts now. The cases upon which Mr. Schlesinger relied are ridiculous. DePietro38 was a pro se case, where the defendant did not have an attorney and was not able to brief the issue. Atlantic v. Andersen39 was a case where the defendant had an incompetent attorney who never briefed the issue at all. The Capitol v. Thomas case was a jury instruction, which is not a judicial precedent.40 PROF. HANSEN: I thought the Electronic Frontier Foundation was helping in that case. MR. BECKERMAN: The Capitol v. Thomas case is not a judicial precedent. In fact, what happened in that case was that when they briefed the issue, the judge adopted an instruction that said that in accordance with the U.S. Copyright Act, there has to be an actual dissemination of copies to the public by a sale or other transfer of ownership or license, lease, or lending, which is the law.41 Then, during the trial, he entertained oral argument. The lawyer who was representing the defendant, who had not been paid and who had made a motion to withdraw from the case, which the judge denied, was asked by the judge: “So what do you have to say about the Hotaling case?” which was the RIAA’s only authority. In response to that, he said, “I have nothing to say about the Hotaling case.” Now, in the cases where it has been fully litigated, where parties have litigated, you have six cases that declined to decide the issue and you have several motions that are pending. That was another pro se case, just like DePietro, Atlantic v. Howell,42 where there was no attorney. The judge ruled in favor of the RIAA. Then, when the pro se litigant submitted copies of the briefs from Elektra v. Barker to the judge, the judge granted a reconsideration motion and vacated his earlier decision. Meanwhile, Mr. Schlesinger left out the recent decision from Connecticut, Atlantic v. Brennan, decided by Judge Arterton, which specifically held in no uncertain terms that there is no such thing as a making-available right, that there has to be a physical distribution of copies to the public.43 This was a case where the judge rejected a default judgment application by the record industry. There wasn’t even a defendant’s lawyer there to present a brief. But the judge familiarized herself with the law and made the correct decision. PROF. HANSEN: So why didn’t the judges in the other cases familiarize themselves with the law and make the right decisions? MR. BECKERMAN: The defendants were not adequately represented. PROF. HANSEN: In Atlantic v. Brennan you say the defendant wasn’t represented at all. MR. BECKERMAN: Because that judge did the research to find out what the law was. PROF. HANSEN: Okay. Hotaling v. Church of Jesus Christ of Latter-Day Saints, 118 F.3d 199 (4th Cir. 1997). Motown Records Co. v. DePietro, Civ. No. 04-CV-2246, 2007 WL 576284 (E.D. Pa. Feb. 16, 2007). 39 Atlantic Recording Corp. v. Andersen, CV 05-933-AS2008, U.S. Dist. LEXIS 3460 (D. Or., Jan. 14, 2008). 40 Capitol Records v. Thomas, Civ. No. CV 06-1497 MJD/RLE, 2007 WL 2826645 (D. Minn. 2007). 41 Jury Instruction No. 15 read: “The act of making copyrighted sound recordings available for electronic distribution on a peer-to-peer network, without license from the copyright owners, violates the copyright owners’ exclusive right of distribution, regardless of whether actual distribution has occurred.” See Jury Instructions at 18, Capitol Records v. Thomas, No. 06-CV-1497, 2007 WL 2826645 (D. Minn. Oct. 1, 2007), available at http://blog.wired.com/27bstroke6/ files/ jury_instructions.pdf. 42 Atlantic Recording Corp. v. Howell, No. CV06-2076-PHX-NWB, 2008 WL 1927353, at *8 (D. Ariz. Apr. 29, 2008) (holding that merely making a work available on a peer-to-peer network did not constitute a distribution). 43 Atlantic Recording Corp. v. Brennan, 534 F. Supp. 2d 278, 281–82 (D. Conn. 2008) (describing the “making available” theory as “problematic”). 37 38

PART B: COPYRIGHT AND MUSIC 191 MR. BECKERMAN: Now meanwhile, of those cases that have been fully briefed, the Elektra v. Barker is the most fully briefed because that attracted a few amicus curiae. It has been pending for two years. The judge heard oral argument. It was briefed in the spring of 2006. It was argued in January of 2007. We are all awaiting the decision. But I’m confident that he will agree with Atlantic v. Brennan. Unlike the raising of hands by Professor Hansen, this is not a super-Congress here. We are not the United States House of Representatives or the Senate or the president or all three combined, which are required in order to enact a law in the United States. The law in the United States says that a distribution requires a dissemination of “copies or phonorecords to the public by a sale or other transfer of ownership or by license, lease, or lending.”44 That’s it. PROF. HANSEN: Thanks, Ray. Jane? PROF. GINSBURG: Let’s go back to the so-called “umbrella” solution, whose author is in the room. When the WIPO Copyright Treaty put in the making-available right as part of the right of communication to the public — a right which does not exist in those words in the U.S. Copyright Act — the theory was that Member States could achieve the making-available right through either or both of the public performance right or the distribution right.45 The United States, I imagine, thought that it qualified on both counts. But now we are in kind of an interesting position, because maybe our umbrella is sort of a naked shaft. The public performance right as a form of making available for a download that is not also a stream is now coming into some question. I think Marybeth Peters referred to this yesterday. In the ASCAP “rate court” proceeding, the district judge has taken the position that a download, at least a straight download (reserving judgment, I suppose, on the universe of limited downloads) is not a public performance.46 So that one route to making available has come under some question. That is not to say that the rate court is the last word, but it certainly raises the issue. What about the distribution right? Well, Ray is quite correct to quote the language of Section 106(3). I suppose the question is whether “to distribute copies … to the public by sale or other transfer of ownership, or by rental, lease, or lending” means that the only type of distribution that our copyright law recognizes as triggering an exclusive right is a distribution that occurs by means of the transfer of ownership of a copy or by rental, lease, or lending. We are not talking about rental, lease, or lending when we are talking about file sharing. 17 U.S.C. § 106(3), available at http://www.copyright.gov/title17/92chap1.html. WCT, supra note 1, art. 2(g): “‘communication to the public’ of a performance or a phonogram means the transmission to the public by any medium, otherwise than by broadcasting, of sounds of a performance or the sounds or the representations of sounds fixed in a phonogram”; WCT, supra note 1, art. 10, Right of Making Available of Fixed Performances: “Performers shall enjoy the exclusive right of authorizing the making available to the public of their performances fixed in phonograms, by wire or wireless means, in such a way that members of the public may access them from a place and at a time individually chosen by them”; WCT, supra note 1, art. 12, Right of Distribution: “Authors/ producers of phonograms have exclusive right to authorise making available to the public of the original and copies of their phonograms through sale or other transfer”; WCT, supra note 1, art. 14, Right of Making Available of Phonograms: “Producers of phonograms shall enjoy the exclusive right of authorizing the making available to the public of their phonograms, by wire or wireless means, in such a way that members of the public may access them from a place and at a time individually chosen by them.” 46 United States v. Am. Soc’y of Composers, Authors, & Publishers (ASCAP), Civ. Action 41-1395 (WCC), 2008 WL 2433835 (S.D.N.Y. Apr. 30, 2008), available at http://www.ascap.com/press/2008/pdf/ratecourtdecision.pdf. The rates to be paid to ASCAP for the use of their composers’ music by Yahoo!, AOL and Real Networks at 2.5 percent of the revenues that were received by these services in connection with the music portions of their Web sites. Id. These rates were set by the court, acting as a rate court under the antitrust consent decree that was originally imposed on ASCAP in 1941, pursuant to Section IX Second Amended Final Judgment entered June 11, 2001 in United States v. ASCAP, Civ. Action 41-1395 (WCC), 2001 WL 1589999 (S.D.N.Y. June 11, 2001). 44 45

192 CHAPTER IV: COPYRIGHT LAW And we are not exactly talking about transfer of ownership of a copy because it is not the same copy in the digital context. It is much easier to talk about transfer of ownership of a copy in the hard-copy context. But what is happening in the digital context is that you are creating ownership of a copy in the hard drive of the recipient but you didn’t transfer ownership of your copy. That might leave one in something of a quandary. But that is not all there is in the Copyright Act about distribution. There are the arguments from the definition of “publication,” and then there are other parts of the Copyright Act, notably the definition of a “digital phonorecord delivery,” that call into question the theory that the only kind of cognizable distribution that occurs in the Copyright Act is by a transfer of physical copies, a transfer of ownership of a copy.47 I think we can have interesting discussions about whether the amendments to Section 115 and to Section 112 and other bits and pieces in the Copyright Act effectively enlarge the definition of distribution. I think it is also fair to say that the courts have been fairly nonrigorous about this. Those courts that have found that there has been a distribution, going back to the Playboy and Playmen case,48 which is a trademarks case but which addresses the concept of distribution in the digital environment, have taken the common-sense position that if the recipient ends up with copies and the recipient got those copies because of a process that was triggered by the defendant, that is a distribution. But I think we do have to answer the question whether, common sense or not, the actual words of the Copyright Act taken together — not just Section 106(3), but Sections 115, 112, et al. — gets you to that common-sense point of view, or whether in fact we don’t have an umbrella, we have just some tatters and we have a gap. PROF. HANSEN: So what is your prediction, Jane? In the six vigorously defended cases with expert attorneys on both sides, what do you see the courts doing? Are they going to take a strict, literal approach, or are they going to take a commonsensical approach, or what? PROF. GINSBURG: I actually think Section 115, the definition of a “digital phonorecord delivery,” and Section 112 pretty much get you there. I suppose I would also cite my co-author Jessica Litman, who has pointed out that the courts have done quite a job of interpreting the Copyright Act while ignoring the text.49 So in that case, common sense might prevail. PROF. HANSEN: Mary? PROF. WONG: I just want to make a couple of quick comments on the “BitTorrent” case from Hong Kong50 and also on some of the U.S. cases that are going through the courts. First of all, I am not sure that everybody in the world, or at least maybe the non-intellectual elite, is on the same page when we talk about making available. For example, sometimes people talk about Article 8 of the WCT,51 which is actually a right of communication to the public including the right of making available by certain kinds of transmissions; or Article 6 of the same treaty, which is in many countries called the distribution right, which is the making available of physical copies. 47 Compare 17 U.S.C. § 101 (defining both copies and phonorecords as “material objects,” and also stating that “[t] o ‘transmit’ a performance or display is to communicate it by any device or process whereby images or sounds are received beyond the place from which they are sent”), with 17 U.S.C. §§ 112(e)(8), 115(a)(1), 115(d) (referring, for purposes of certain exceptions relating to ephemeral recordings and to nondramatic musical works, to distributions by means of a “digital phonorecord delivery”) . 48 Playboy Enters., Inc. v. Chuckleberry Publ’g, Inc., 687 F.2d 563, 569 n.3 (2d Cir. 1982). 49 See, e.g., Jessica Litman, Digital Copyright (2000). 50 HKSAR v. Chan Nai Ming, TMCC 1268/2005, 24 Oct. 2005. 51 WCT, supra note 1, art. 8 (Communication/Making Available): “Authors have the exclusive right to authorise any communication to the public of their works by wired or wireless means, including making available by ondemand, interactive means.”).

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Here are a couple of interesting things about the “BitTorrent” case. The court did talk about “for purposes of criminal distribution,” which is the wording used in the Hong Kong statute,52 and they did talk about the civil liability provisions. But they talked about the civil liability provisions in the Hong Kong statute not in terms of the distribution right, which is the right to issue copies to the public in the Hong Kong Act, but in terms of the Hong Kong equivalent of Article 8, the Hong Kong equivalent of the public communication right, which is the making available of copies. So just some fuzziness, I think, around the language of a lot of national implementations, which might lead to a number of inconsistent decisions and results in the courts. Secondly, on the American cases, I think it would be interesting to see — and we are all waiting for the Barker case53 and a number of the appeals, like in Jammie Thomas,54 for example, to see if the U.S. district courts are going to do anything about the deemed distribution rule, which was talked about a little bit by the Ninth Circuit in the Perfect 10 case55 in describing the Hotaling case.56 I have not gone through all the briefs of all these cases, but it will be interesting to see if the courts actually decide to take on that issue and to see whether or not they apply it, limit it, or what they do with it. PROF. HANSEN: David? MR. CARSON: Let me respond to a couple things. Jane pointed out that if you look at the literal words of the statute, maybe you get into some trouble, even with the notion that transmission on the Internet is a distribution. I think we are past that point because we have two fairly recent Supreme Court cases where the Court stated unambiguously that transmission on the Internet is distribution. We have the Tasini case,57 where the Court mentioned in the context of databases like the NEXIS database that that was distribution. We have the Grokster case,58 where the Court said what was going on in the peer-to-peer file-sharing context is distribution. So at least we know this much. We know that when the file is in fact transmitted to somebody else, you’ve got a distribution. The more interesting question, and one on which I think reasonable minds can differ, is whether the making available in that shared file folder without more constitutes distribution. I think there are a number of arguments that you can make which suggest that it is sufficient. The Register of Copyrights several years ago, in response to a question from the Chairman of the House Intellectual Property Subcommittee, opined that that was the case. You can go back to the Napster case in the Ninth Circuit, where the court said that when you make those files available in at that time the Napster system, you were in fact infringing the distribution right.59 You have the Ninth Circuit more recently in the Perfect 10 case,60 which in fact was cited in a recent amicus brief61 in one of these peer-to-peer cases as rejecting Hotaling62 and as stating that you have to have an actual distribution, where the Ninth Circuit seemed to suggest that the Hotaling-deemed distribution notion may well be an acceptable notion. I think you can read the Ninth Circuit Perfect 10 v. Amazon opinion as quite possibly endorsing the notion of See discussion accompanying note 18, supra. Elektra Entm’t Group, Inc. v. Barker, Case No. 05-C-7340 (KMK), 2008 WL 857527 (S.D.N.Y. Mar. 31, 2008). 54 Capitol Records v. Thomas, Civ. No. CV 06-1497 MJD/RLE, 2007 WL 2826645 (D. Minn. 2007). 55 Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007). 56 Hotaling v. Church of Jesus Christ of Latter-Day Saints, 118 F.3d 199 (4th Cir. 1997). 57 New York Times Co. v. Tasini, 533 U.S. 483 (2001). 58 Metro-Goldwyn-Mayer Studios v. Grokster Ltd., 545 U.S. 913 (2005). 59 A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001). 60 Perfect 10, 508 F.3d at 1146. 61 Brief of Copyright Law Professors as Amici Curiae in Support of Defendant, Capitol Records v. Thomas, Civ. No. CV 06-1497 MJD/RLE (D. Minn. 2007), at 7, available at http://www.eff.org/files/filenode/capitol_v_ thomas/20080613 LawProfsAmici.pdf 62 Hotaling, 118 F.3d at 199. 52 53

194 CHAPTER IV: COPYRIGHT LAW deemed distribution, at least when the person who was deemed to have distributed actually has a copy of the work, which in fact was the case in Hotaling, which was not the case in Perfect 10, which is the case in the peer-to-peer context. PROF. HANSEN: So what is your prediction of the six cases? MR. CARSON: You never know how an individual judge is going to react. I think, once it goes up to the courts of appeal, there are these arguments, and there are some other arguments as well, which I think are likely to persuade thoughtful judges in concluding that the mere offering in this context constitutes distribution. PROF. HANSEN: Okay. Brian? PROF. FITZGERALD: Just some quick comments. Our definition of “communication” includes making available and electronic transmission. We draw that definition from the WCT and the WPPT. The Cooper case63 was about a sound recording, so for us that’s a WPPT issue. In Cooper the judge said that creating a hyperlink is not in itself a communication because, under our Act,64 Section 22(6), the person who determines the content is the person who makes the communication. Interestingly enough, when we introduced the criminal provisions, we introduced a distribution offense that includes communication, but seems to be broader than that, potentially putting ISPs in this limbo-land of actually being potentially liable for distribution even though they haven’t made the communication as defined under our Act. For us I would say that we haven’t had as many cases, but communication is regarded as a pretty broad right. At the time it was introduced, the examples given were people who were putting unauthorized software up on Web sites. That was probably before the P2P era, but that sort of scenario, putting something up on a Web site, would certainly be taken in Australia, I think, as making available for access, without more, as Jane says, without exceptions or other circumstances coming into it. PROF. HANSEN: Okay. Ray, if you are right that making available in the broad sense is not part of U.S. law, is there any way then to sue a downloader in a peer-to-peer case? MR. BECKERMAN: Of course. You would use traditional copyright law principles. If you could prove that someone copied something through a peer-to-peer file-sharing network other than from an authorized user with a proper license, then that would probably be a violation of the reproduction right. And possibly disseminating a copy could trigger a violation of the distribution right, if the requirements of a distribution were met. It would probably also be a violation of the reproduction right. PROF. HANSEN: How would you prove that? MR. BECKERMAN: The reason I say “possibly” is because there’s one issue that the Electronic Frontier Foundation65 and the U.S. Department of Justice squared off on in Elektra v. Barker.66 It was a position on which my client took no position. The Electronic Frontier Foundation took the position that under the 1976 Act no ephemeral transmission could actually be a violation of the distribution right even if it did result in a physical copy. The U.S. Department of Justice disagreed with that. Cooper v. Universal Music Austl. Pty Ltd. [2006] F.C.A.F.C. 187. Australia Act Copyright Act 1968, available at http://www.austlii.edu.au/au/legis/cth/consol_act/ca1968133/. 65 See Amicus Curiae Brief of the Electronic Frontier Foundation in Support of Defendant’s Motion to Dismiss the Complaint, Elektra Entm’t Group, Inc. v. Barker, Case No. 05-C-7340 (KMK), 2006 WL 738703 (S.D.N.Y. filed Feb. 23, 2006), available at http://www.ilrweb.com/viewILRPDF.asp?filename=elektra_barker_effamicusbrief. 66 See “Statement of Interest” of U.S. Department of Justice, Elektra Entm’t Group, Inc. v. Barker, Case No. 05-C7340 (KMK), 2006 WL 5721794 (S.D.N.Y. filed Apr. 21, 2006), available at http://www.ilrweb.com/viewILRPDF. asp?filename =elektra_barker_usstatement. 63 64

PART B: COPYRIGHT AND MUSIC 195 PROF. HANSEN: What do you think? MR. BECKERMAN: I take no position on it. I think the Electronic Frontier Foundation’s

argument is probably true. But the Second Circuit, which is the law as far as I am concerned, had a very difficult time with that issue. They suggested that there was a possibility, but they ran away from it. So I consider it a very tough, very difficult issue. I think they are probably right, but I don’t want to argue that issue. PROF. HANSEN: We have twelve seconds. Unfortunately, we don’t have time for any questions. Thank you very much members of the panel.

CHAPTER IV

Copyright Law Part B: Copyright and Music Section 3(b): The Role, Effectiveness and Issues in Infringement Actions Against Individual P2P Downloaders — Statutory Damages Should new limits be placed upon statutory damages? Did the supporters of P2P software and the individual defendants miscalculate the reaction of juries? A review of case law, e.g., Capitol Records v. Thomas (D. Minn. 2007).

Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker KENNETH DOROSHOW

Senior Vice President of Litigation and Legal Affairs, Recording Industry of America (Washington, D.C.) Commentator RAY BECKERMAN

Vandenberg & Feliu LLP (New York) Panelists PROF. PETER BLACK Queensland University of Technology Law School (Brisbane, Australia)

PROF. PAMELA SAMUELSON Berkeley Law School University of California

TED SHAPIRO Deputy Managing Director, Vice President & General Counsel Europe, Music Publishers Association European Office (Brussels)

198 CHAPTER IV: COPYRIGHT LAW PROF. HANSEN: We are going to start the second segment now. We are looking at litigation strategy, damages, juries, et cetera, involved in suing individual downloaders. We have another excellent panel: Kenneth Doroshow is Senior Vice President of Litigation and Legal Affairs, the Recording Industry of America; our commentator will be Ray Beckerman, whom you’ve just heard in the “making available” session (see Chapter IV.B.3(a), supra this volume), then, we have Peter Black, Professor at Queensland University of Technology in Brisbane; Professor Pamela Samuelson, Berkeley Law School; Ted Shapiro, Deputy Managing Director, Vice President, and General Counsel–Europe, Motion Picture Association, in Brussels. We will start off with Ken.

Statutory Damages Capitol Records V. Thomas Kenneth Doroshow* Thank you, Hugh, for inviting me here. I wish I could have been here for all of the sessions. It sounds like it was an interesting series of discussions. I hope this one will be too. I will try to keep my remarks short so there can be some Q&A, because there are a lot of bright minds with good questions out there. I think this is a good segue to the question of statutory damages. As phrased in the agenda papers, it seems prompted by the Capitol Records v. Thomas jury verdict that was referenced in the previous discussion.1 I am sure most of you know of this case, but for those of you who don’t, it was so far the only case that we have had in our litigation against individual downloaders that has gone to trial, yielding a finding of willful infringement and a damages award of $9,250 per work infringed. There were twenty-four works at issue in that case, so the total award was $222,000. Now the way the issue was presented in the agenda, one of the questions is: “Did the supporters of individual downloaders and P2P companies miscalculate the reaction of juries?” Based on the reaction in the popular media and elsewhere, I think it is a safe answer to say yes, they grossly miscalculated. I have a lot to say on the making-available issue, especially after the last presentation. I will note that Ray and I, before we got here, stipulated that we will disagree with everything the other says. I am going to make that stipulation public, because there was a lot that Ray said about the other cases, some of which were in Michael’s presentation, and the nature in which the issues were presented to the court that I simply disagree with. However, I will note that no fair-minded person sitting in that courtroom who watched the evidence unfold, listened to the testimony, was at all surprised by the outcome. So why the disconnect? I think this has a lot to do with pretty much all the issues that we talk about in the context of these cases. There is a huge amount of misinformation floating around on the Internet about the facts of the cases, the strength of our cases, the actual law that applies to the cases, and, as the Thomas verdict indicates, the reaction of juries, the moral sense of right and wrong, how a fair-minded jury when presented with these facts and evidence in an unfiltered and unbiased manner views it. I offer that for your consideration. * Senior Vice President of Litigation and Legal Affairs, Recording Industry of America (Washington, D.C.). 1 Capitol Records v. Thomas, Civ. No. CV 06-1497 MJD/RLE, 2007 WL 2826645 (D. Minn. 2007).

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Maybe I have a skeptical eye about some of what you read in terms of the accounts of these cases. The sensationalism that surrounds panels like this one I think really clouds the debate and in many ways provokes legal discussions that, while certainly interesting to have, may not be as necessary as they appear. I think this is one such issue. No doubt there is a lot of concern about the excessive nature of statutory damages awards. But it is predicated on a misunderstanding of the way in which those awards are made in individual cases. In the interest of time, I think my best and highest use here is to summarize what really happened in the Thomas trial, and then perhaps we can have a discussion about whether the result is “unconstitutionally excessive,” which is the claim in that case. Like just about all these other cases, the facts involve an individual user whom we identified online who was sharing over 1,700 music files, sound recordings, using the KaZaA peer-topeer software program. The evidence in the case showed conclusively that, at the precise moment of the evidence capture, this individual was making those 1,700 sound recordings available to several million people simultaneously. Those were simultaneous users. We gathered evidence of twenty-four actual downloads. So the whole making-available issue that people are talking about is actually irrelevant in the case, because the works at issue were actually disseminated. So we will set aside the making-available issue for now. The evidence of this individual’s liability was overwhelming. The IP address, of course, matched her user account. The MAC address of the devices that she had connected to the Internet was clearly hers. The defendant had a unique KaZaA user name of “tereastar.” It so happens that she used “tereastar” for every Internet account that she had (her email, her MySpace page), so there was no denying the connection there. She was an experienced computer user. A lot of the popular media portrayed her as a naïve “soccer mom.” I can assure you that was not the case. In fact, while in college, she wrote a paper on Napster that, while noting that it was illegal to download on Napster, argued that it should not be. This was salient information for the willfulness finding. I think what may have aggravated the circumstances for this woman, apart from the unambiguous evidence of her responsibility here, was the nature of her defenses. She advanced — there is no other way to characterize it — a catalog of wholly unbelievable defenses, most of which were inconsistent with one another. When we polled the jury afterwards, they were all outraged that she had baldly lied to them, in their view. Among the defenses was that some unknown third-party hacker was spoofing her account, again notwithstanding the fact that her user name matched all of the other Internet accounts that she had. She argued that someone was logging onto her wireless network, when in fact the evidence showed she didn’t have a wireless router; it was in fact a hardwired connection. Then she said that she had a computer party at her house where all the guests were plugging their various computers into the modem, so this is what accounted for the downloading, which of course was readily disproved as well. And then she claimed that she ripped all of the songs from her own CD collection, which is actually a common defense we are seeing in a lot of these cases, whereas the metadata of the files showed that they all came from Warez sites, known piracy sites, or at least different places than her CDs. All of these different defenses were regarded by the jury as wholly incredible. The jury had little difficulty in finding willfulness. The range of statutory damages was agreed to. In fact, the very jury instruction that was relied upon to define the range of available damages was submitted by Ms. Thomas’s lawyer himself. We, in submitting the case to the jury, did not ask for a specific number. We left it to the jury to decide what they thought was fair and reasonable under the circumstances. They came

200 CHAPTER IV: COPYRIGHT LAW back with the award of $9,250 per work, which, like in all jury determinations, is a bit of a compromise. There were competing views. There were some people who wanted it higher, some said that was the right number, and others wanted it lower. That’s what really happened in the case. As I say, any fair-minded person who was sitting there wasn’t the least big surprised by the outcome. What was surprising to us, frankly, was the way it was spun and mischaracterized in the press. That’s a bit of a backdrop for this discussion. Now there is a question — again, I speak only as a U.S. lawyer — of: By what standard does one evaluate the excessiveness (or not) of a statutory damages award? There is a good bit of debate going on now about whether or not the Supreme Court’s line of cases in the punitive damages context and the due process standard applied there should apply to awards of statutory damages as well. We think the law here is actually fairly well settled. Since 1919, when the Supreme Court first ruled on this question, they noted that the standard to be applied in reviewing statutory damages awards is even more deferential than the due process standard by which you would analyze a punitive damages award.2 The reason for that is quite simple. This has been affirmed more recently. In fact, the Sixth Circuit had a case on this just last year.3 In the punitive damages context, where a jury goes in to deliberate without any guideposts whatsoever, one can imagine that the possibility for mischief or miscarriage of justice is heightened. Whereas in the context of a statutory damages award, where Congress has specifically outlined the range of damages that are available, the due process needs are much more attenuated, because notice has been given up-front. You know, by virtue of the statutory language itself, what the available scope of damages could be. So we think, as a matter of U.S. law anyway, this is not a controversial position to be taking. Now I think there is common ground, even among our critics and us, that it is not unconstrained. Due process applies to all aspects of the judicial process. There are bounds that must be recognized. The question is: By what standard do you apply those requirements? We think, as I said, that the law is quite clear that the standard is “exceedingly deferential.” As one court characterized it, appellate review of an award of statutory damages for copyright infringement “is even more deferential than [review for] abuse of discretion.”4 It is virtually an unreviewable authority in the fact finder. That is, we think, the appropriate standard, given the difference between statutory damages and punitive damages. The purposes of statutory damages versus punitive damages make that appropriate. One last point in defense of the statutory damages regime, particularly in the context in which we are using it in these P2P cases. A lot of people talk about evaluating the excessiveness of the damages in terms of: “Well, you sell these songs for 99 cents on iTunes. How can you justify a $9,000 award for a single download? Aren’t your damages really less than 99 cents?” The answer to that is in the context here, where you have viral distribution to millions of users — set aside the difficulty of proof, which the statutory damages are intended to address — you have the potential for millions of copies being distributed out there. So our actual damages, even if they were relevant, which they are not, would be massive. When one looks at the facts and circumstances of the Thomas case, there is nothing at all excessive about the jury’s award. In fact, a $9,000 award per work probably understates the amount of damage that actually occurred by the use of this system. St. Louis, Iron Mountain & S. Ry. Co. v. Williams, 251 U.S. 63 (1919). Zomba Enters. v. Panorama Records, Inc., 491 F.3d 574 (6th Cir. 2007). 4 Superior Form Builders, Inc. v. Dan Chase Taxidermy Supply Co., 74 F.3d 488, 496 (4th Cir. 1996). 2 3

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I see that my time is up, so I will simply thank you all once again for the opportunity to speak, and I look forward to a spirited discussion of the issues.

PROF. HANSEN: Ken, what are you going to do about collecting that money? Are you trying to collect the money? MR. DOROSHOW: Well, the case is still pending. Ms. Thomas has a motion for a new trial or for remittitur. PROF. HANSEN: But at the end of the case, would you be seeking the full extent of damages and attorney’s fees from Ms. Thomas? MR. DOROSHOW: I hope you’ll forgive me for not commenting on legal strategy on a pending case, as much as I would like to answer that question. PROF. HANSEN: Ray, you have five minutes for comments. MR. BECKERMAN: In the first place, Mr. Doroshow’s comment on why statutory damages should not be subject to constitutional scrutiny is interesting. The law is in flux. Unfortunately, when his lawyers made that argument in November 2006, it was rejected in the Eastern District of Brooklyn5 on the strength of a decision of the Court of Appeals for the Second Circuit,6 a decision of the Northern District of California,7 and two excellent law review articles.8 The judge said: “How can you say that this constitutionality argument has no merit and doesn’t belong in the statutory damages area when Ms. Lindor has two cases saying that it does and two law review articles saying that it does and you don’t have a single authority saying it doesn’t?”9 As of this date, Mr. Doroshow still has no authority for it. Now as to the principle that he is arguing, that a jury trial is different than statutory damages, I agree with that idea. It certainly is different. However, if you were to look at the decisions of the United States Supreme Court that evolved the principle of constitutional evaluation of punitive damages awards of juries, the primary basis for their reasoning was statutes. The Supreme Court did a survey of statutes.10 It found that statutes often penalize someone two or three or even four times the amount of the actual damages but rarely go beyond that. So they said: “If the jury is going to come in with something that is more than nine times the amount of the actual damages, that is going to trigger constitutional scrutiny.”11 UMG Recordings, Inc. v. Lindor, 05-CV-1095 (DGT), 2006 WL 3335048 (E.D.N.Y. Nov. 9, 2006). Parker v. Time Warner Entm’t Co., 331 F.3d 13, 22 (2d Cir. 2003) (statutory damages are subject to constitutional review for excessiveness). 7 In re Napster Inc. Copyright Litig., 2005 WL 1287611 at *10–11, 77 U.S.P.Q. 2d 1833, 2005 (N.D. Cal. June 1, 2005) (“an award of statutory damages may violate due process if the amount of the award is ‘out of all reasonable proportion’ to the actual harm caused by a defendant’s conduct”). 8 J. Cam Barker, “Grossly Excessive Penalties in the Battle Against Illegal File-Sharing: The Troubling Effects of Aggregating Minimum Statutory Damages for Copyright Infringement”, 83 Tex. L. Rev. 525 (2004); Draeke Weseman, “Future Shock and the Copyright Act of 1976: Is Merely Making a Copyrighted Work Available for Digital Transmission a Violation of § 106(3)?”, available at http://blog.wired.com/27bstroke6/files/future_shock_making_ available.pdf. 9 Lindor, 2006 WL 3335048, at *3 (“[P]laintiffs can cite to no case foreclosing the applicability of the due process clause to the aggregation of minimum statutory damages proscribed under the Copyright Act. On the other hand, Lindor cites to case law and to law review articles suggesting that, in a proper case, a court may extend its current due process jurisprudence prohibiting grossly excessive punitive jury awards to prohibit the award of statutory damages mandated under the Copyright Act if they are grossly in excess of the actual damages suffered ….”), available at http://info.riaalawsuits.us/umg_lindor_ 061109Decision2006WL3335048. 10 See BMW of N. Am., Inc. v. Gore, 517 U.S. 559. 11 See State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003) (Justice Kennedy, on behalf of the majority, suggested that, except in highly unusual cases, punitive damages awards should not exceed a “single digit ratio” visà-vis the compensatory award in the case). 5 6

202 CHAPTER IV: COPYRIGHT LAW So it is a question that remains open. It has not been decided. Does anybody really think that it is okay that a verdict in Minnesota was returned against a woman for twenty-four song files that had a retail price collectively of $23.76, where the wholesale price to Mr. Doroshow’s clients was about $16.00, and when you take out the royalties that they would have had to pay for those files, the actual damages were about $8.00? If there is anybody who thinks that $220,000 is okay against $8.00 in actual damages sustained by the plaintiff and that is constitutional, I really have no basis for dialogue with such a person. It has to do with personal values. You have to have a sense of outrage at the disproportionality. We are a laughingstock to the rest of the world because of that jury verdict. Mr. Doroshow has the temerity to say, “Well, 23,000 times the actual damages was within a range. The range was $150,000 per song file, so that would be 450,000 times the actual damages. For the record companies, 450,000 times the actual damages is not enough to deter copyright infringement.” PROF. HANSEN: Ray, is every plaintiff against downloader the scum of the earth? MR. BECKERMAN: No. But the Recording Industry Association of America, yes. I wouldn’t have said that, but you asked the question and you put it in those terms. Absolutely, yes. Now as far as Mr. Doroshow’s statement about actual dissemination, that is a very misleading statement he made, because he failed to tell you to whom it was disseminated. It was disseminated to the Recording Industry Association’s own agent. I am sure that any of you who have litigated copyright cases are familiar with the principle that you cannot rely on an infringement where the copy goes to your own agent. They actually had no proof whatsoever that the defendant disseminated a file to anyone other than their own agent, and that just doesn’t count. As to the facts of that case, obviously Mr. Doroshow knows more about the facts than I do. I was not there. I don’t know. I can tell you that they sent in a huge team of lawyers and they smelled blood in Duluth, Minnesota. The woman was from out of town. She was a Native American. Well, if they could prove that she downloaded 1,700 songs without permission, I would say that is a violation of reproduction right, and that it is actionable, and that she could be liable for statutory damages up to about $10 a song — $17,000. Go for it. They couldn’t prove 1,700. They arguably proved twenty-four. PROF. HANSEN: What if she downloaded 1,700 songs? Would you feel any different about it? MR. BECKERMAN: The Supreme Court has said ten times the actual damages is about the cutoff, but they didn’t say it is absolutely impossible. So an argument could be made that maybe with 99-cent songs it has to be twelve times or fifteen times. PROF. HANSEN: Actually, in punitive damages you are allowed to do things that would deter future activity, which is not actually tied to economic harm. If you are going to use punitive damages type of theory, you can’t just say at 70 cents or at 90 cents or anything else. It is what does it take to deter someone like this from doing it in the future. MR. BECKERMAN: Well I’m sure it is not 23,000 times. PROF. HANSEN: How likely in your view is it that the positions you have taken today are going to prevail in court? MR. BECKERMAN: On all my theories? PROF. HANSEN: On what you put forth today. MR. BECKERMAN: On the making-available right, I would definitely bet that we will win on that. PROF. HANSEN: By the way, I think you’re the only panel member that I failed to ask this question: Of these six pending cases, what do you think is going to happen?

PART B: COPYRIGHT AND MUSIC 203 MR. BECKERMAN: Well, there aren’t six pending. There are two pending that have been fully briefed, Warner v. Cassin12 and Elektra v. Barker.13 Those are both in the Southern District of New York, both litigated by my firm. I am certain that the judges will rule that there is no making-available right under the U.S. Copyright Act. PROF. HANSEN: Did I previously mishear how many cases there are? Where did I get the six cases from? MR. BECKERMAN: No. I said that there were six cases in which the issue was fully briefed and the judges did not decide the question. In the first one the judge ignored it. In five of them they said they couldn’t decide it at this time. And not all of them are pending. I do not know if any of them are pending. For the two that are fully briefed we are awaiting decision. PROF. HANSEN: What is your prediction in the Eighth Circuit appeal? MR. BECKERMAN: There may not be an Eighth Circuit appeal, because if the motion for remittitur is granted and the verdict is set aside and a new trial is ordered, there may never be an appeal. PROF. HANSEN: What is your prediction on whether that remittitur and new trial will be granted? MR. BECKERMAN: I think the motion for remittitur will be granted. But there is a wide variety of shapes that that could take, some that would leave her still wanting to appeal and able to appeal. PROF. HANSEN: So you think the future looks good for your side legally? MR. BECKERMAN: Well, of course. You said “my side.” I am on the side of copyright law, of the law being followed as it is written. If you are talking about the RIAA-versus-consumer cases, they are going to end. They are going to end when the shareholders realize they have been taken for a ride. That is when it is going to end. MR. BECKERMAN: I think these cases are a blight on our judicial system. PROF. HANSEN: All right. Pam? PROF. SAMUELSON: I honestly think that you asked us to talk about statutory damages, and I think we have ended up with you fighting with this other person. I think that, if not today, then at another time we could have a serious conversation about statutory damages. When statutory damages were put in the 1976 Act, they did not have in contemplation the kind of situation that we are dealing with right now. At least the research that I have been able to find suggests that statutory damages were really intended to be compensatory, they were intended to be adopted when it was difficult to prove what the actual damages really were, and it was an effort to provide some measure of relief in cases where it is difficult to prove or where it is too expensive to prove how difficult it is. It was not supposed to be a penalty, except in situations where there is willfulness. Now, I have to say that what the courts have been doing since then has actually been to add more punitive, punitive, punitive aspects to statutory damages, even in cases where there is not a finding of willful infringement. I do think that there is a serious due process question posed here. I suggest to all of you, if you haven’t taken a look at Bridgeport Music v. Justin Combs,14 you might want to do that. The Sixth Circuit Court of Appeals relatively recently struck down 12 Warner Bros. Records, Inc. v. Cassin, 06-cv-3089 (SCR) (S.D.N.Y. voluntarily dismissed June 11, 2008 by the RIAA without prejudice). 13 Elektra Entm’t Group, Inc. v. Barker, 551 F. Supp. 2d 234 (S.D.N.Y. 2008) (Judge Karas, denying defendant’s motion to dismiss on March 31, 2008, rejected the RIAA’s “making available” argument as well as the argument that § 106(3) included an independent right “to authorize” distribution, finding that “to authorize” was included in § 106 to cover secondary liability and requires an infringing act to occur after the authorization). 14 Bridgeport Music, Inc. v. Justin Combs Publ’g, 507 F.3d 470, 493 (6th Cir. 2007).

204 CHAPTER IV: COPYRIGHT LAW a $3.5 million punitive damage award as unconstitutional under Gore15 and the like for a common-law copyright infringement. The actual damages in the case were $43,000. There was a compensatory award under federal copyright law for $366,000. The court basically looked at the guidepost in the Gore decision and asked “How reprehensible was the conduct here?” and found only one reprehensible thing, which was willfulness. The court said that would allow a range of one-to-one or two-to-one, that is all that due process would allow; 9.5-to-one was too much, which is what was here. When we are talking about the multiples in the Jammie Thomas case, you have to actually understand the United States is way out of whack with the whole rest of the world on the extent of statutory damages. I think that the Gore principles really will apply. The disparity between the harm to the plaintiff and the actual award is another factor again in the Combs case. The compensatory award already included some punitive element. So putting a punitive on top of a punitive seemed excessive. A comparison of the award to ordinary civil penalties also is to be taken into account. PROF. HANSEN: Pam, our jury damages are way out of whack with the rest of the world. So should we reexamine and hone down personal injury awards because they’re way out of whack with the rest of the world. Is that the standard? PROF. SAMUELSON: I am only getting started in this, but I think that statutory damages along with other kinds of damages should comply with due process limitations and that it is time for a real serious conversation, because the notion that a jury could go in and say, “Anything between $750 per infringed work to $150,000 per infringed work” — no guidelines, no criteria — I think that’s actually not due process. I don’t care whether Congress passed it. They intended for it to be compensatory. They did not intend for it to essentially turn into the biggest kind of punitive damage award. There is nothing elsewhere that is excessive in the way that this is. PROF. HANSEN: Do you think there is any real chance that the defendant in Thomas will pay anything? PROF. SAMUELSON: I don’t know. If I were her lawyer, I would try to settle this now. If she gets a new trial, I would try to settle this and just get over it. But I think you have done a great job in scaring the bejesus — not out of file sharers, by the way — out of documentary filmmakers and other people who say, “I go into any kind of case and I feel like I can’t take three clips from these little things because the next thing I know I can’t get errors and omissions insurance, even though it’s totally a fair use. But I’m a good guy, I’m trying to make use of this, and I am deterred by those outrageous and unpredictable kinds of awards.” That is the person who is getting chilled, not the file sharers. PROF. HANSEN: Would you say, Pam, that this was the correct jury verdict? PROF. SAMUELSON: For sure. In terms of liability, I have no problem. I think file sharers are infringers. PROF. HANSEN: Ray, what do you think about the jury verdict on just liability? MR. BECKERMAN: They were given an instruction that allowed them to take away any burden of proof the plaintiffs had. PROF. HANSEN: On your instructions, whatever they would be, should she have been held liable in this case? MR. BECKERMAN: No. There was a failure of proof. PROF. HANSEN: Peter, what do you have to say about these things? PROF. BLACK: The comment has been made a few times that America is out of whack and you are a laughingstock in the rest of the world. As the only non-American on the panel, that is true. We do see the cases like Thomas in our newspapers, and we think: “Wow, those crazy 15 BMW of N. Am., Inc. v. Gore, 517 U.S. 559 (1996) (setting a limit, for the first time, under the Due Process Clause of the 14th Amendment, on the size of the punitive damages award a state court could grant to a plaintiff).

PART B: COPYRIGHT AND MUSIC 205

Americans, what are they up to now?” This whole notion of statutory damages is not something that we have within our Copyright Act. You actually have to be able to prove damage for you to be able to be compensated for that. PROF. HANSEN: So you are against the whole idea of statutory damages? PROF. BLACK: Absolutely. PROF. HANSEN: How do you prove copyright damages in Australia? Give me an idea how you do it. PROF. BLACK: You either can get damages or an account of profits. PROF. HANSEN: No, not account of profits, but damages. How do you prove damages? Tell me exactly what proof you do in Australia to do that? PARTICIPANT [Prof. Anne Fitzgerald, Queensland University of Technology, Brisbane]: It is calculated in various ways. There are a number of bases of calculating damages. PROF. BLACK: There is not one set way that is going to fit every case where you are going to have to prove damages. PARTICIPANT [Prof. Anne Fitzgerald]: It is set by the judge, not by the jury. PROF. HANSEN: I would think most of the types of proof would be speculative and very difficult to prove in copyright. That is why we have statutory damages. I think Pam is absolutely right for two reasons. It is expensive; and usually the plaintiffs are small, can’t afford an expert, let alone an expert that goes through depositions and everything else; and then, if you have those, it’s very speculative, and we are against speculative damages in this country. So basically the copyright plaintiff is not going to get damages. Statutory damages was the solution to that situation. PROF. BLACK: But as Pam said, the idea behind it was for it to be compensatory. PROF. HANSEN: Well, the increase in statutory damages for “willful infringement” is not compensatory. PROF. BLACK: No. But as a general rule, statutory damages seems to be being used really to punish and to deter. I wonder if it is even being successful when you’re doing that. PROF. HANSEN: Well, would you think twice about this activity if you actually thought the RIAA and their nefarious agents were going to get you, or possibly get you without a damage award? PROF. BLACK: I might, but it doesn’t seem to be deterring people generally. PROF. HANSEN: Okay. MR. DOROSHOW: Can I ask a question: For those who would have us prove our actual damages, rather than statutory damages — and I gather you are saying license fees and such would be a good proxy — I wonder what people think a license would go for that permits the user to take a copyrighted work and distribute it to tens of millions of people. We are talking about the actual damages here. We are not talking about a single song download for 99 cents. We are talking about the distribution that is impossible to prove. That is the whole point of the statutory damages. It is impossible to prove, unless we had wiretap authority on the entire U.S. network, which I suppose you would not want us to have. I just want to draw the contrast. Where I operate in Europe, we are dealing with a lot of very complex cases and we are operating largely without a statutory damages regime. I think the Lithuanians have them.16 The chance to adopt them in some form was not taken up in the Enforcement Directive.17 You can see the relevant provision in Article 13. 16 Civil Code of the Republic of Lithuania and the Law on Trademarks of the Republic of Lithuania. For a discussion of IP-related statutory damages in Lithuania, see Skaiste Granickiene, “Lithuania: Enforcement of Intellectual Property in Lithuania According to the Directive 2004/48/EC”, Mondaq Intell. Prop., Apr. 25, 2006, available at http://www. mondaq.com/ article.asp?articleid=39292. 17 Council Directive 2004/48, Enforcement of Intellectual Property Rights, 2004 O.J. (L 195) 16, 32–36 (EC), available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_157/l_15720040430en00450086.pdf.

206 CHAPTER IV: COPYRIGHT LAW We are dealing with cases of large-scale facilitation, not just end-users. It is an unreasonable burden on the rights holder to prove actual losses, prejudice. It is really hard, particularly for infringements that are occurring online, which are often viral. In the film sector, how do we estimate the impact of something that is not yet out in the cinemas somewhere? Are we looking at the DVD window? Do we look at video-on-demand? Do we look at electronic sell-through? We also have the problem of later impact on TV by cannibalization. So it is an unfair apportionment of the burden of proof. I am talking about largely willful cases, so there should be some kind of deterrent effect. So maybe there is a happier medium, but in the place where we are now there is none, we have a real problem in dealing with cases. I am not just talking about end-users. I am talking about facilitators that are making a lot of money. PROF. HANSEN: In Thomas, what would be wrong with the RIAA agreeing to a remittitur? You are not going to get anything in the end from the defendant. But why wouldn’t you agree to remittitur? I happen to think the damages are pretty darn high, myself. What do you lose in this particular case agreeing to a remittitur? MR. DOROSHOW: I would rather not comment on a pending case. PROF. HANSEN: I understand. I think it is a good idea. Maybe you should think about it. MR. DOROSHOW: We will take it under advisement. Questions from the audience? QUESTION: Thank you. I can’t resist, because Kenneth asked the question: What do you think a license to put a song available for billions of people to download would go for? In my answer I also want to bridge that with Ted’s point. There is a huge difference in my mind between somebody who takes a camcorded copy of a movie that is still in theaters and puts it on the Internet for everybody to download — and that might very well be something that is worth thousands of dollars or tens of thousands of dollars in damages. But the answer to the other question is if the work is otherwise available on legal servers, the answer is about 60 cents per song. That’s what the license goes for. MR. DOROSHOW: Why not 60 cents per copy? QUESTIONER: It seems to me that you are all talking about statutory damages like there is one type of damage that happens. It seems to me the damage is very different between the case that Ted explained and the situation of somebody who makes a song available. Now if you can prove that this song has been downloaded 500 times — I agree that is the evidentiary issue that Pam was referring to. But there has got to be a difference in the order of magnitude of the damage, it seems to me, between the two cases — or am I missing something? — between something that’s officially, legally available for download somewhere already, as opposed to something that undercuts an entire series of markets. MR. DOROSHOW: I think the difference is that these works that you are talking about are available for individual purchase. We sell each one of them. If the copy is made 10 million times and we are not compensated for that, then we are out 10 million sales. Of course, the difficulty of proving this is why we have a statutory damages regime as a proxy. PROF. HANSEN: Let’s leave it at that. Time is up. Thank you all for a very interesting session.

CHAPTER IV

Copyright Law Part B: Copyright and Music Section 3(c): The Role, Effectiveness and Issues in Infringement Actions Against Individual P2P Downloaders — The Interaction with Privacy Law What role should privacy play in learning the identities of downloaders? A look at recent case law in the United States and the European Union (e.g., Promusicae in ECJ) Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker DR. VOLKER KITZ

Max Planck Institute for Intellectual Property (Munich) Panelists RAY BECKERMAN

EDDAN KATZ

Vandenberg & Feliu LLP (New York)

International Affairs Director, Electronic Frontier Foundation (San Francisco, CA)

BARBARA NORCROSS-AMILHAT

Principal Administrator, Copyright and Knowledge-Based Economy, DG Internal Market and Services, European Commission (Brussels)

TED SHAPIRO

Deputy Managing Director, VP & General Counsel Europe, Music Publishers Association, European Office (Brussels)

FABIENNE BRISON

Howrey LLP, Free University of Brussels

208 CHAPTER IV: COPYRIGHT LAW PROF. HANSEN: We are going to start the last session, which is on privacy. Our speaker is

Dr. Volker Kitz from the Max Planck Institute for Intellectual Property and also in practice in Germany. We have an outstanding group of panelists: Ray Beckerman an IP litigator is back, perhaps the leading litigator on behalf of downloaders of copyrighted works from P2P software; Fabienne Brison, Howrey and the Free University of Brussels; Eddan Katz, the International Affairs Director of the Electronic Frontier Foundation in San Francisco; Barbara NorcrossAmilhat, the Principal Administrator, Copyright and Knowledge-Based Economy, Copyright Unit of the Commission; and Ted Shapiro, Deputy Managing Director, Vice President, and General Counsel–Europe, MPA. Richard Pfohl had to leave, but he did say that Canada has a similar statutory damages scheme to the United States and I should pass that on. And he hates Australia.

Private Peers — What Role Should Privacy Law Play in Learning the Identities of P2P Users? The European Case Dr. Volker KITZ, LL.M.*

I. FROM IP ADDRESS TO IP ENFORCEMENT

Tracking down individual peer-to peer (P2P) users who infringe copyrights can be a tough game. In most cases, a right holder does not have more than a screen name and an IP address. The screen name will not get the right holder very far: P2P users do not use their real names as screen names, and a screen name like tereastarr@KaZaA1 is not a name one can easily take to court. The IP address is oftentimes a dynamic one: It is allocated to the Internet user only for a limited online session. If a right holder wants to know the name of the user who was allocated a certain IP address at a certain time, e.g., when the user was offering a protected work for download on a P2P file sharing system, he needs to get this information from someone who keeps track of the IP addresses allocated over time. This might be the access provider of the user because the access provider allocates IP addresses to users. But the way from IP address to IP enforcement can be burdensome in Europe. To learn the identity of an Internet user from his dynamic IP address, three preconditions must be fulfilled: (1) The dynamic IP address and the matching user name must have been stored by the access provider and not yet been erased. If the data do not exist, a right holder will never be able to get them, no matter how nicely he asks or how well he litigates. (2) The access provider must be legally obliged to disclose the data to the right holder. The access provider has, like anyone doing business, an interest in protecting his customers’ privacy. Only a legal obligation to disclose the information will help the right holder in court. (3) Finally — and this is a point European right holders had to learn the hard way — privacy law must not prohibit the disclosure of the data. As recent European case law * © 2008 Dr. Volker Kitz, Senior Research Fellow, Max Planck Institute for Intellectual Property, Competition and Tax Law, Munich, Germany; Attorney at Law, Hoecker, Cologne, Germany. Dr. iur., University of Cologne, 2004; LL.M., New York University, 2002; J.D., University of Cologne, 2000. The author can be reached at [email protected]. 1 As used by the defendant in Capitol Records Inc., et al. v. Jammie Thomas, No. 06-CV-1497 (D. Minn. 2007).

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shows,2 even if the data exist and if the provider has a legal obligation do disclose the information to the right holder, privacy law can still be in the way. A. Storage of IP Addresses Until recently, the legal way3 to obtain the identity of a user in exchange for a dynamic IP address was bound to fail because not even the first of these three preconditions was fulfilled: there were no data stored. Under Article 6 of the Directive on Privacy and Electronic Communications,4 traffic data5 had, in principal,6 to be erased or made anonymous when they were no longer needed for the purpose of the transmission of a communication or for the purpose of subscriber billing and interconnection payments. And with the advent of flat rates for Internet access, dynamic IP addresses had generally lost their relevance for subscriber billing services. As a consequence, under the old regime, a dynamic IP address had to be erased immediately upon the termination of the Internet connection. 7 However, the European legislature decided to make a 180-degree-turnaround: The socalled Data Retention Directive8 was passed. Its objective is to combat “serious crime.”9 The term “serious crime” is to be defined “by each Member State in its national law.” The German legislature, e.g., generally classified, inter alia, crimes committed by means of telecommunications as serious.10 The original proposal of the European Commission had, much more narrowly, focused on organized crime and terrorism to justify the legislative action;11 but these narrow justifications are, in the final version of the Directive, only referred to incidentally.12 The Directive had to be transposed in Member States by September 15, 2007.13 Basically, the new law obliges communication service providers to store the following information: Who communicated with whom, when, how long, and from where? Data must be stored and kept available for at least six months, but no longer than two years from the date of the communication.14 Article 5 of the Directive specifies the categories of data to be stored and explicitly refers to IP addresses.15 As a result, a record of IP addresses allocated to users See Chapter II.B, “Developments in European Union IP Law, ECJ and IP Law”, supra this volume. Some access providers used to store dynamic IP addresses without a legal basis. These data were even used by criminal prosecution officials, see Volker Kitz, Die Auskunftspflicht des Zugangsvermittlers bei Urheberrechtsverletzungen durch seine Nutzer, 12 Gewerblicher Rechtsschutz und Urheberrecht, [GRUR] 1015 (2003). 4 Directive 2002/58/EC of the European Parliament and of the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector, 2002 O.J. (L 201) 37. 5 Traffic data is defined in Art. 2 (b) of Directive 2002/58/EC as “any data processed for the purpose of the conveyance of a communication on an electronic communications network or for the billing thereof”. 6 With the user’s consent, the traffic data may, under Art. 6 (3) of Directive 2002/58/EC, also be used for the purpose of marketing electronic communications services or for the provision of value-added services. 7 See 1 Multimedia und Recht [MMR] 37 (2007), for Germany BGH (German Supreme Civil and Criminal Court). 8 Directive 2006/24/EC of the European Parliament and of the Council on the retention of data generated or processed in connection with the provision of publicly available electronic communications services or of public communications networks and amending Directive 2002/58/EC, 2006 O.J. (L 372) 32. 9 Art. 1 of Directive 2006/24/EC. 10 See § 100g (1) German Rules of Criminal Procedure (Strafprozessordnung – StPO), BGBl. I 2614 (2007). In a preliminary judgment, the German Federal Constitutional Court has already restricted the application of the new law, see infra, footnote 23. 11 See Francesca Bignami, “Privacy and Law Enforcement in the European Union: The Data Retention Directive”, 8 Chi. J. Int’l L. 233 (2007). 12 See Directive 2006/24/EC, recitals 8 & 9. 13 See Directive 2006/24/EC art. 15. However, Member States could declare upon adoption of the Directive to postpone the application of the Directive to the retention of communications data relating to Internet access, Internet telephony and Internet e-mail until March 15, 2009. Several Member States made this reservation. 14 See Directive 2006/24/EC art. 6. 2

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210 CHAPTER IV: COPYRIGHT LAW at a certain point in time now generally exists with European access providers, at least for a limited period of time. B. Obligation to Disclose User Identity Also fulfilled is the second precondition for the right holder to obtain the information he needs: Article 8 (1) of the IP Enforcement Directive16 obliges the Member States to ensure that, in the context of proceedings concerning an infringement of an intellectual property right, courts may order that information about the identity of the infringer be provided by any person who, inter alia, provides on a commercial scale services used in infringing activities.17 This aims at access providers who would, under this rule, have to disclose to right holders the identity of infringing users. C. Permission Under Privacy Law to Use IP Addresses for Disclosure However, the European Court of Justice (ECJ) now decided, in a preliminary ruling under Article 234 EC, that Article 8 (1) of the IP Enforcement Directive does not suffice to force access providers to disclose the identity of an infringing user.18 The reason is Article 8 (3) (e) of the same Directive, which declares that the obligation to provide information is without prejudice to other statutory provisions that govern the protection of confidentiality of information sources or the processing of personal data. In other words: If IP enforcement law says “You must disclose the data” and, at the same time, privacy law says “You must not disclose the data,” privacy law will prevail in this conflict. For the right holder’s right to information to work effectively, privacy law must explicitly allow the use of the data necessary to provide the information owed under the IP Enforcement Directive. Otherwise privacy law will render ineffective the obligation to disclose information laid down in Article 8(1) of the IP Enforcement Directive. In the case before the ECJ, Spanish law19 provided that the IP addresses could not be used for purposes other than criminal investigation or safeguarding public security and national defense. As a consequence, the access provider, Telefónica, did not have to — or, more precisely, was not even allowed to — use the IP address in order to provide information for civil proceedings. 15 See Directive 2006/24/EC art. 5(c)(2)(i) (“[T]he date and time of the log-in and log-off of the Internet access service, based on a certain time zone, together with the IP address, whether dynamic or static, allocated by the Internet access service provider to a communication, and the user ID of the subscriber or registered user”). 16 Directive 2004/48/EC of the European Parliament and of the Council on the enforcement of intellectual property rights, 2004 O.J. (L 195) 16. 17 Art. 8 (1) of Directive 2004/48/EC reads: “Right of information – 1. Member States shall ensure that, in the context of proceedings concerning an infringement of an intellectual property right and in response to a justified and proportionate request of the claimant, the competent judicial authorities may order that information on the origin and distribution networks of the goods or services which infringe an intellectual property right be provided by the infringer and/or any other person who: (a) was found in possession of the infringing goods on a commercial scale; (b) was found to be using the infringing services on a commercial scale; (c) was found to be providing on a commercial scale services used in infringing activities.” 18 Case C-275/06, Promusicae v. Telefónica (Gr. Ch. Jan. 29, 2008.), available at http://eur-lex.europa.eu/ LexUriServ/ LexUriServ.do?uri=CELEX:62006J0275:EN:HTML The Austrian Supreme Court brought a similar case before the ECJ which is still pending, see Oberster Gerichtshof, No. 4 Ob 141/07z. 19 Article 12 of Law 34/2002 on information society services and electronic commerce (Ley 34/2002 de servicios de la sociedad de la información y de comercio electrónico) of 11 July 2002 (BOE No 166 of 12 July 2002, p. 25388,) (LSSI), headed “Duty to retain traffic data relating to electronic communications” reads: 1. Operators of electronic communications networks and services, providers of access to telecommunications networks and providers of data storage services must retain for a maximum of 12 months the connection and traffic data generated by the communications established during the supply of an information society service, under the … conditions established in this article and the regulations implementing it.

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The ECJ decided that privacy law prevailed over IP enforcement law in this case. The ECJ also decided — and this is the more important point — that a Member State does not even have to match its privacy law with IP enforcement law to make the latter work on the Internet. On the other hand, the ECJ found that privacy law does not hinder a Member State to make IP addresses available for civil proceedings in copyright infringement cases. To find this, the ECJ looked a bit more deeply into the complex European privacy law: Article 15(1) of the Directive on Privacy and Electronic Communications20 refers to Article 13(1) of the Data Protection Directive.21 And Article 13 (1) (g) of the Data Protection Directive provides that Member States “may” adopt legislative measures to restrict the scope of data protection to safeguard, inter alia, “the rights and freedoms of others.” An intellectual property right, the ECJ found, can be such a right. And “may” means “may” — not “must” and not “must not.” In other words: It lies within a relatively broad discretion of each Member State to strike a fair balance between IP protection and privacy. II. CAN THE “NO, NO, NEVER” APPROACH STRIKE THE RIGHT BALANCE?

Spain22 and other Member States (e.g., Germany23 and Austria24) have struck this balance completely in favor of privacy: Dynamic IP addresses must generally not be used for private law enforcement. The main reason for this political decision in Germany, e.g., was a strong public pressure to restrict the use of the communication data retained under the new data retention obligation. The data retention obligation has been highly controversial and is currently subject to more than 30,000 constitutional challenges.25 Facing strong public protest already,26 the national legislature would not allow the use of data originally stored to combat organized crime and terrorism27 to enforce private intellectual property rights in the end. While this can be seen as an important victory for privacy, it also has its downsides: Such a legislation renders the IP Enforcement Directive entirely ineffective in Internet 2. The operators of electronic communications networks and services and the service providers to which this article refers may not use the data retained for purposes other than those indicated in the paragraph below or other purposes permitted by the Law and must adopt appropriate security measures to avoid the loss or alteration of the data and unauthorized access to the data. 3. The data shall be retained for use in the context of a criminal investigation or to safeguard public security and national defense, and shall be made available to the courts or the public prosecutor at their request. Communication of the data to the forces of order shall be effected in accordance with the provisions of the rules on personal data protection. 20 Directive 2002/58/EC of the European Parliament and of the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector, 2002 OJ (L 201) 37. 21 Directive 95/46/EC of the European Parliament and of the Council on the protection of individuals with regard to the processing of personal data and on the free movement of such data, 1995 O.J. (L 281) 31. 22 Article 12 of Law 34/2002 on information society services and electronic commerce (Ley 34/2002 de servicios de la sociedad de la información y de comercio electrónico) of 11 July 2002 (BOE No 166 of 12 July 2002, p. 25388, ‘the LSSI’). 23 § 113 b German Telecommunications Act (Telekommunikationsgesetz – TKG), BGBl. I 3198 (2007). Just last week, on Mar. 19, 2008, the German Federal Constitutional Court even decided in a summary judgment that the data may not be used for the general purpose of criminal prosecution, but only for the prosecution of a defined list of very serious crimes, see BVerfG, No. 1 BvR 256/08. 24 Austrian Telecommunications Act (Telekommunikationsgesetz — TKG), BGBl. I 983 (2003) § 99. 25 See Verfassungsbeschwerde (constitutional complaint) of Dec. 31, 2007, 1 BvR 256/08. In a preliminary judgment, the German Federal Constitutional Court has already restricted the application of the new law, supra note 23. Apart from that, the legal basis for the Data Retention Directive itself is contested before the ECJ. See pending Case No. C-301/06. 26 See Stoppt die Vorratsdatenspeicherung, http://www.vorratsdatenspeicherung.de (organized protest against data retention). 27 See Chapter II.A, supra this volume.

212 CHAPTER IV: COPYRIGHT LAW cases. Arguably, no “balance” is struck at all here. Right holders have already approached the European Commission with the issue of ensuring that the public interest in an adequate level of data protection “is properly reconciled with other important public policy objectives such as the need to combat illegal activities and to protect the rights and freedoms of third parties.”28 At the same time, the “no, no, never” legislation adversely affects the legal awareness of Internet users. Because their identity is difficult to learn, they will, in a lot of instances, not get involved in individual litigation. They might not have and never get the awareness of acting illegally. Their sense for right and wrong continues to impair. III. CAN THE “PROVIDER DOES IT ALL” APPROACH STRIKE THE RIGHT BALANCE?

Because IP enforcement against individual infringers becomes difficult if their identity is virtually impossible to obtain, the debate has now focused on installing filtering and blocking obligations for access providers.29 The European Commission sympathizes with such obligations.30 In France, filtering mechanisms are part of the so-called Olivennes Memorandum of Understanding.31 In Sweden, a government report recommends to oblige access providers to block the access of certain file sharers upon the request of right holders.32 Similar discussions are currently taking place in other countries, e.g., in Japan33 and in the United Kingdom.34 However, this solution also seems inadequate if one looks at the original conflict and at the parties involved in it: The original conflict lies between the person who infringes and the person whose rights are infringed, i.e.: between the individual user and the right holder. Under the “provider does it all” approach, the right holder has to argue with the access provider about the extent and implementation of filtering and blocking instruments. The access provider, on the other hand, has to argue with its client whose content is monitored and, if necessary, filtered or blocked. This solution makes two conflicts out of one, and it shifts these conflicts from the parties originally involved to a third party that is only remotely involved: to the access provider. In addition, filtering solutions always imply some kind of monitoring of data traffic. This, again, brings up privacy issues. In Germany, e.g., the “secrecy of telecommunication” is a strongly protected constitutional right35 the violation of which constitutes a criminal offense.36 Last, but not least, this solution may arguably pose an undue burden upon the access providers: They are not involved in the original conflict between right holder and infringer, and filtering and blocking illegal content is a complex exercise given the huge amount of 28 See Communication from the Commission on Creative Content in Online the Single Market, COM(2007)836 final at 7. 29 See IFPI Digital Music Report 2008 (Making ISP Responsibility a Reality in 2008), available at http://www.ifpi. org/content/library/DMR2008.pdf. 30 See Communication from the Commission on Creative Content in Online the Single Market, COM(2007)836 final at 7. 31 In France, a Memorandum of Understanding between music and film producers, Internet service providers, and the government was signed on Nov. 23, 2007. Under the agreement, France is to set up a new Internet authority with powers to suspend or cut access to the Web for those who illegally file share, and access providers are to implement filtering and blocking instruments. See Accord pour le développement et la protection des oeuvres et programmes culturels sur les nouveaux réseaux, available at http://www.culture.gouv.fr/culture/actualites/index-olivennes231107. htm [hereinafter Olivennes Agreement]. 32 See http://www.regeringen.se/sb/d/8588/a/86944. 33 See http://www.yomiuri.co.jp/dy/national/20080315TDY01305.htm. 34 See http://www.ft.com/cms/s/0/26765228-e0c0-11dc-b0d7-0000779fd2ac.html?nclick_check=1. 35 See Art. 10 (1) GG (Grundgesetz, Federal Constitution). 36 See § 206 StGB (German Penal Code).

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traffic providers have to handle every day. For these reasons, Article 15 (1) of the E-Commerce Directive37 clearly prohibits general monitoring obligations for service providers.38 IV. PROPOSAL FOR A TWO-TIERED SYSTEM

In my view, a two-tiered system could strike a better balance. A two-tiered system would distinguish between first-time infringers and infringers who act repeatedly. The access provider would not be obliged to monitor data traffic generally, but would, upon the request of a right holder providing the IP address of an infringer, have to determine internally if the user is a first-time infringer or if the user has infringed repeatedly. Depending on the result, the further actions would be as follows: The first stage would be applied to first-time infringers: In this case, the access provider would not be allowed to use the IP address to disclose the identity of the infringing user to the right holder or to any other external entity, be it private or governmental.39 The access provider would, however, be obliged to send a warning notice to the infringing user. Because user data would stay with the access provider and not be disclosed externally, this would maintain a high level of privacy at first. At the same time, it would raise the legal awareness of the user: The user learns that her actions have been noticed and that a right holder sees his copyright infringed by these actions.40 The user will be informed that in the case of repeated copyright infringement her identity will be disclosed to the right holder, which may result in civil proceedings. Since most infringers, once caught, never infringe again, the right holder will also profit from this warning message. If the access provider finds in his records that the user does infringe repeatedly, stage two would commence. Instead of obliging the access provider to block the user, the conflict should now be brought between the two parties who are really involved in it and who should settle it: between the right holder and the individual user. In stage two, the provider would have to — and, under privacy law, would be allowed to — disclose the identity of the user to the right holder. Even a traditionally strong privacy law cannot prevail over IP enforcement if the user has been warned and has intentionally continued to infringe copyright. Such a two-tiered system would maintain a high level of privacy without making IP enforcement ineffective. It would raise the legal awareness of users without burdening access providers unduly. It would, finally, be in line with the proposal of the European Commission to instigate cooperation procedures between access providers and right holders.41 PROF. HANSEN: Thank you. A nice presentation of the issue. Who would like to go first? 37 Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market, 2000 O.J. (L 178) 1. 38 Art. 15 (1) of the Directive reads: “No general obligation to monitor — Member States shall not impose a general obligation on providers, when providing the services covered by Articles 12, 13 and 14, to monitor the information which they transmit or store, nor a general obligation actively to seek facts or circumstances indicating illegal activity.” 39 This makes it different from the new Internet authority discussed in France. See Accord pour le développement et la protection des oeuvres et programmes culturels sur les nouveaux réseaux, supra note 31. 40 Because such a warning notice would come on an individual basis, it would be more effective than the general notice provided in Art. 20 (6) of the legislative proposal to amend the Universal Service Directive (COM(2007) 698 final). Art. 20 (6) proposes a general obligation for access providers to inform subscribers in advance of the conclusion of the contract and regularly thereafter of their obligations to respect copyright and related rights. 41 See Communication from the Commission on Creative Content in Online the Single Market, COM(2007)836 final at 8.

214 CHAPTER IV: COPYRIGHT LAW MS. NORCROSS-AMILHAT: In fact, I was very relieved to hear what Dr. Volker was saying. I was always a bit worried. We have been attacked so much, because I was very much involved in the Enforcement Directive,42 which has been greatly criticized, and criticism that the right of information was terrible because we were trying to allow people to get the identities of infringers on the Internet. When this Promusicae case43 came up, we all thought: “Oh no, here we are, this is it.” We had, I have to admit, internally within the Commission, discussions with the data protection people. I will not go into the details of the law. We don’t have time. In fact, the end result of this Promusicae case is actually quite a good thing. The judge was very reasonable. I think right holders can benefit from it. In fact, the judges said they don’t have to provide data, allow IP addresses to go out, identity, etc., but they say you have to think about a fair a balance and you have to, when you are interpreting your law, also think about fundamental rights and proportionality. So basically they are saying yes, there is actually a balance between IP rights and data privacy. Now what I would say is that it has also brought the whole problem out into the air. The good thing is that, in the Commission, we now have a telecom package going through. This telecom package is updating telecom directives. There are about four of them. In these directives, in a similar way to that in the Enforcement Directive, there is now a reference to the Enforcement Directive in the telecom package,44 plus the Copyright in the Information Society Directive,45 referring specifically to the articles that allow injunctions for right holders against intermediaries. I think people will be going through the European Parliament to perhaps try to put more things in, in a similar vein that was introduced into the Enforcement Directive, which said we have to look out for data privacy. There will perhaps be additions that say we have to be mindful of IP rights. So I think that is a good opportunity. I think there would have been perhaps not so much movement in the telecom package if people had not had the opportunity to discuss the Promusicae case. Now, in fact it is not finished, because there is a new request for a preliminary ruling that has been sent to the European Court of Justice very recently, in December 2007.46 This is from an Austrian Supreme Court, where at first instance and on appeal the Internet identity was given out. Here they are asking the ECJ now: Is the court not allowed in civil cases to give out the name? So in fact, it is a question coming from the other way around from the Spanish case. It will be interesting to see what the Court does. It will give it another opportunity to follow up on what it has already said in the Promusicae case. I should inform the audience that we have a new unit in the Internal Market Directorate General of the European Commission specifically dedicated to enforcement because they have 42 Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 195) 32–36, available at europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_157/ l_15720040430en 00450086.pdf. 43 Case C-275/06, Promusicae v. Telefónica (Gr. Ch. Jan. 29, 2008.), available at http://eur-lex.europa. eu/ LexUriServ/Lex UriServ.do?uri=CELEX:62006J0275:EN:HTML. 44 Proposal for a Directive of the European Parliament and of the Council amending Directives 2002/21/EC on a common regulatory framework for electronic communications networks and services, 2002/19/EC on access to, and interconnection of, electronic communications networks and services, and 2002/20/EC on the authorisation of electronic communications networks and services. All documents related to the European Commission’s “telecommunications package” are available at http://ec.europa.eu/information_society/policy/ecomm/library/proposals/index_en.htm. The European Parliament committees responsible for the telecoms package vote on July 7 and the Parliament as a whole will vote on September 2. 45 European Parliament and Council Directive 2001/29/EC of 22 May 2001 on the Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (167/10). 46 Oberster Gerichtshof, No. 4 Ob 141/07z.

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realized that the big issue is piracy. This new unit is up and running: they are soon to have a conference and a hearing. They want to put ISPs together with right holders, to get them together to talk. I think that is probably the best way: get them talking and trying to agree on something. But certainly the issue of IP infringers’ identity versus data privacy is out in the open. From a copyright point of view, I think it is good, because it was like an abscess that had to be burst. I think it is probably going to go in the right direction finally, after a bit of difficulty. PROF. HANSEN: Thank you. Fabienne, you wanted to comment? MS. BRISON: Yes, thank you. One thing. There is nothing anymore like absolute rights and we need to seek a balance, that’s for sure. So I am particularly interested in that criterion of proportionality. Now, as Barbara mentioned, the Promusicae ECJ case law might be a good thing. But I think the abscess is still there. I think it is, frankly, a rather disappointing judgment. Why? Because they do not apply the test of proportionality in this case. Now we might like it or dislike it, but I prefer to read something like the conclusions of Advocate General Kokott, who at least tries to do something.47 I am going to skip all the national case law. In the Promusicae decision, the ECJ actually rephrased the conflict between copyright and data protection as a conflict between the right of protection to property and the right to privacy. I am personally much more charmed by the case law of the European Convention of Human Rights that we also have in Europe.48 I would like that we might just have a look to the case law, which is very interesting, very dynamic, and much more courageous than the ECJ case law so far. The European Court of Human Rights is experienced in trying to find balances. They look to Article 8 on the right of privacy and look to Article 10 on the freedom of expression. They just try to find the right balance. Sometimes they do, sometimes they don’t, but I think it is more courageous and I prefer that. PROF. HANSEN: Ted? MR. SHAPIRO: Privacy and the rights and freedoms of others, this is what it is all about. It is quite clear from the Court’s decision. There is no question that privacy is essentially in a democratic society, but there are a lot of other rights and freedoms out there that need to be balanced. And there is a broader context to this. What about civil enforcement overall on the Internet? What about online fraud, defamation, phishing, identity theft? What if the criminal authorities aren’t interested in going after someone? What if someone defames you in a chat room and you lose your livelihood, you lose millions, and you want to sue that person; you want to have civil redress, but you can’t find out who it is? There is no way to redress civil wrongs if taken to the extreme in this case, and that’s part of the problem. In the copyright sector, this lack of balance can permit infringers to get away — and I’m not just talking about end-users. From the film perspective, we have not been going against endusers. But we are worried about the impact of such decisions on cases against facilitators and another form of the graduated response different than the one that was just presented. 47 Opinion of Advocate General Kokott, Case C-275/06, Promusicae v. Telefónica de España, European Court Reports 2008, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62006C0275:EN:NOT. 48 The protection of intellectual property is recognized by art. 1 Protocol 1 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (see, e.g., Anheuser-Busch Inc. v. Portugal (73049/01) [2006] E.T.M.R. 43; (2007) 44 E.H.R.R. 42 at [72]) and art. 17 of the Charter of Fundamental Rights of the European Union, while data protection rights are recognized in art. 8 of the European Convention on Human Rights (see, e.g., Rotaru v. Romania (28341/95) 8 B.H.R.C. 449 at [46]) and art. 8 of the Charter of Fundamental Rights of the European Union, Charter of Fundamental Rights of the European Union, 2000 O.J. (C 364) 1.

216 CHAPTER IV: COPYRIGHT LAW I do agree with Barbara that the decision is an invitation to the legislators to look at this issue once again. I would note also that filtering does not necessarily equal monitoring, and perhaps the Belgian Court of Appeal in Brussels will tell us more about that in 2009. PROF. HANSEN: Thank you, Ted. Dr. Katz, Are you going to speak on the United States or international perspectives? DR. KATZ: On the issue of right and wrong, perhaps. I think that actually some of the decision really illuminates that we do need some sort of proportionality. If we are going to apply a harsh judgment, it should be within the criminal context, within the kind of due process allowed there. I think going beyond that actually begins to tilt the imbalance towards those who are trying to intimidate users in a disproportionate way. PROF. HANSEN: Ray? MR. BECKERMAN: The two foreign nations that I am familiar with are Canada and The Netherlands. They do not have the cases against individual alleged file sharers that we have in the United States because, at the first stage, when they tried to get subscriber information, the courts actually evaluated the quality of the evidence that the recording industry was presenting and came to the conclusion that the evidence was defective, that proper safeguards had not been taken that would be normal for an antipiracy investigation, and that the information, at best, would lead to the person who paid for an Internet access account, but that none of the possible error rates and other things were taken into account. The United States has not been so discriminating. The thing is, in the United States the law of privacy just has not been litigated. The problem is that there are important privacy statutes out there involving the three classes of ISPs that I can think of. You have the cable companies, which are under the Telecommunications Act,49 and arguably it is illegal for them to be providing this information. You have similar laws involving the telephone companies that are ISPs. You also have laws regarding colleges and universities that are ISPs disclosing the identity of their students. The thing is these issues are not really getting litigated. The recording industry embarked on a procedure of doing these cases ex parte. No one receives notice. The ISP receives no notice and the people whose privacy rights are at stake receive no notice. The only time they ever learn of it is after the case was commenced, after a motion was made, after the motion was granted and the judge signed an order. Even then, they usually receive only a few days’ notice that the subpoena is about to be complied with and they receive none of the underlying documents, so that they couldn’t even get legal counsel as to whether they have a right to vacate the ex parte order or to quash the subpoena. Now at least in one jurisdiction the college issue is being litigated right now, which is in Oregon. In Oregon they went in, they made their ex parte application, and the judge signed the order, but the Oregon Attorney General, on behalf of the University of Oregon, has made a motion to quash the subpoena and to vacate the ex parte order.50 Among other things, he points out that the record industry’s investigation tactics are illegal in themselves on several grounds: (1) the investigators they use do not have a license to investigate; (2) it appears that they actually invaded the privacy of people’s computers by actually accessing their hard drives remotely; and (3) they also point out that the university would be violating laws protecting the privacy of college students were it to comply with the order. Telecommunications Act of 1996, P.L. No. 104-104, 110 Stat. 56 (1996) (codified at 43 U.S.C. § 252). Arista Records LLC v. Does 1–17, Case 6:2007cv06197 (Or. Dist. Ct. filed Aug. 8, 2007); see Tony Green, “Oregon Attorney General Says No to RIAA; Files Motion to Quash on Behalf of University of Oregon; Says RIAA Evidence Doesn’t Identify Infringer”, Oregonian, Nov. 1, 2007, available at http://recordingindustryvspeople. blogspot.com/2007/11/ oregon-attorney-general-says-no-to-riaa.html. 49 50

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So at least we have one jurisdiction. Of course they have an uphill fight because the judge already signed the order. Every litigator knows it is much harder to get a judge to undo something he or she has done than to decide it correctly in the first place. It requires them to admit they were not discriminating and they were not careful and they had not really thought about all the possibilities. So we’ll see how that turns out. But generally it is not being litigated in the United States. I am hopeful that the courts will be more vigilant. In the Eastern District of Virginia, in Interscope v. Does 1–7,51 the judge took the ex parte application and said: “Whoa. I am reading the statutes. I just do not see it.” The judge just denied the application and said, “They have no right to this kind of discovery; there is no law that authorizes them to get this information.” This involved students at the College of William and Mary. The judge said, “There is no law that authorizes them to get this information,” and denied their motion. In New Mexico, the University of New Mexico case,52 the judge said, “Well, why is this being done ex parte? At least give notice to the university and at least make sure that the students get forty days to deal with this motion after they receive notice.” In Rhode Island the judge said, “I don’t see why this is being done ex parte. Let’s have a conference and make sure that the College of Rhode Island is brought into it.”53 So I am hopeful that the issues will get litigated in a proper forum so that we will find out what the law really is in the United States. But I can say generally that there is a general attitude in the U.S. courts, and it has a constitutional dimension and it’s also common law, that if you are seeking identification of an anonymous person, you have to prove that you have a cause of action against that person and you have to do it by competent evidence that would be admissible at trial. That’s the general rule, and it will probably wind up being the rule here as well. PROF. HANSEN: Ted, do you want to say something? MR. SHAPIRO: Even if that comes to pass, that will not mean that the RIAA cannot necessarily do what they are doing. They will merely have to alter their tactics, if you will. What we are talking about in Europe is not even being able to do anything to redress certain civil wrongs. It’s another matter as to whether the way that the RIAA actually may or may not be violating the very limited data privacy rules in the States. They will not be stopped from bringing their actions. They will just have to do it in a different way, since there are no limitations along the lines that were outlined in the ECJ that have to be balanced against different fundamental rights. PROF. HANSEN: Ted, what do you predict about what’s going to eventually happen in Europe? MR. SHAPIRO: There is going to be a huge debate, as Barbara suggested, in the European Parliament about whether or not the E-Privacy Directive,54 which is part of the telecoms package, needs to be amended to do something about clarifying the situation following the ECJ decision. The decision is good and is relatively welcomed by rights holders. The problem is — and it is a bit strange to hear it from the Commission, but I understand where you are coming from — that the harmonizing directive now leads to twenty-seven different results. So they may have to amend it to repair that. Interscope Records v. Does 1-7, 494 F. Supp. 2d 388 (E.D. Va. 2007), vacated on reconsideration June 20, 2008. Capitol v. Does 1-16, 2007 WL 1893603. 53 Arista Records, Inc. v. Does 1-22, Case 1:2008cv00066 (R.I. Dist. Ct. filed Feb. 27, 2008). 54 Directive 2002/58/EC of the European Parliament and of the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector, 2002 O.J. (L 201) 37. 51 52

218 CHAPTER IV: COPYRIGHT LAW PROF. HANSEN: Let’s turn to the audience. Are there any thoughts or comments? Howard,

go ahead. QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa]: Further to what Ted said and Ray said, I think Ray pretty well described quite accurately what is happening in Canada, and Ted’s follow-up. We have been there and we have done this four years ago in Canada. I fought this case.55 We have a strong privacy statute in Canada. The Canadian counterpart of the RIAA, CRIA, lost that case quite badly. They lost it on appeal, although they were given a very specific roadmap by the court of appeal. The court of appeal said, “If you’ve got a bona fide case and you can bring good admissible evidence, then we’ll give you the names.” But they never did come back, because the evidence, frankly, was terrible. They were either unwilling or unable, or both, to come forward with the kind of evidence that any decent court, any intelligent judge, would accept. They never did do it. The other dimension to this — it’s not just bad enough that maybe somebody’s name will be handed over and they’ll end up losing their house, like Jammie Thomas — is that once that name is handed over — and I’m sure Ray can tell us more — the hard drive is going to be handed over and everything that is on the hard drive, from somebody’s income taxes to pictures of their girlfriend and their dog and their cat and whatever. It is going to be in the hands of some unlicensed RIAA investigator and a bunch of lawyers gawking around at it. It’s a pretty gruesome thing. Judges are right to be protective. PROF. HANSEN: Thanks, Howard. Brian? QUESTION [Prof. Brian Fitzgerald, Queensland University of Technology, Brisbane, Australia]: In Australia, the recording industry hasn’t pursued smaller individuals. We’ve had three major cases in which the evidence has been collected. I think the court has felt that the evidence-gathering in those cases has been pretty good. There were the KaZaA case,56 the Cooper case,57 and another one against universities that didn’t go further. I think that the evidence-gathering in those bigger cases was done very professionally and largely to the court’s liking, although privacy interests in one of the cases was a significant issue. I still am wondering whether pursuing the smaller individuals, hearing all of this discussion, is the viable alternative or whether the bigger parties or the new business models really are the way to get the better solutions out of this. It seems to me that on this panel and the panel before there is a lot of angst over chasing these very small individual players, and people seem to be very upset that they are penalized to such a large extent. PROF. HANSEN: Thanks, Brian. Any final comments? Thank you very much, members of the panel and audience.

55 BMG Can., Inc. et al. v. John Doe et al., 2004 FC 488, (2004), 32 CPR (4th) 64 (FC), aff’d in part [2005] 4 FCR 81, 2005 FCA 193 (FCA). 56 Universal Music Austl. Pty Ltd. v. Sharman License Holding Ltd., [2005] FCA 1242 (Sept. 5, 2005). 57 Cooper v. Universal Music Austl. Pty Ltd., FCAFC 187 (18 Dec., 2006).

CHAPTER IV

Copyright Law Part C: Copyright in a Web 2.0 World Section 1: The Challenges and Opportunities of Copyright in the Web 2.0 — Panel 1 Moderator MORTON DAVID GOLDBERG

Cowan, Liebowitz & Latman, PC (New York)

Speakers MARTY HANSEN

ALEXANDER MACGILLIVRAY

Covington & Burling (Washington, D.C.)

Intellectual Property & Product Counsel, Google, Inc. (Mountain View, CA)

PROF. BRIAN FITZGERALD

DONALD B. VERRILLI, JR.

Queensland University of Technology Law School (Brisbane)

Jenner & Block (Washington, D.C.) Panelists

PROF. R. ANTHONY REESE

THOMAS C. RUBIN

New York University School of Law (visiting)

Associate General Counsel, Microsoft Corp. (Redmond, WA)

PROF. MARY WONG

Franklin Pierce Law Center (Concord, N.H.)

MR. GOLDBERG: Good morning once again. I’m Mort Goldberg, Cowan, Liebowitz & Latman. I am your moderator for the forthcoming sessions of the program until we go to lunch.

220 CHAPTER IV: COPYRIGHT LAW More important are the people who will be giving you their wisdom: Marty Hansen, with Covington & Burling in Washington; Brian Fitzgerald with Queensland University of Technology Law School in Brisbane; Alexander Macgillivray with Google; Don Verrilli with Jenner & Block; Anthony Reese with NYU Law School; Tom Rubin with Microsoft; and Mary Wong with the Franklin Pierce Law Center.

Web 2.0: A Brief Overview of Issues and Challenges Marty Hansen*

We are fortunate in this panel in that, in some sense, I think we had a precursor of the Web 2.0 panel yesterday, with the General Counsels’ Roundtable [Chapter I.A, infra this volume]. I thought it was interesting that most of the issues that the general counsels were focused on and wanted to discuss were really, at the end of the day, Web 2.0 issues. I am going to be providing a short introduction, to sort of set the table for the discussion for the rest of the panelists, talk a little bit about what people think of as Web 2.0,1 what some of the interesting copyright issues are that arise, and then speak a few minutes about some thoughts of how we address some of the copyright challenges that are arising. I. WEB 2.0

“Web 2.0” is a term that is obviously thrown around a lot today. There is remarkable lack of consensus around what exactly it means. I am not going to try to resolve that today. I am going to highlight four attributes that I think are commonly associated with Web 2.0. I pick these out partly because I think they do raise interesting copyright issues, but obviously during the panel discussion we will talk about some additional attributes. A. User-Generated/User-Manipulated Content The first attribute, usually on the top of everyone’s list, is that Web 2.0 is associated with usergenerated content. I think that’s exactly right, although I am not sure the term “user-generated content” really captures what is unique about the Web 2.0 experience, or at least not what is unique and challenging from a copyright perspective. I think maybe a slightly better term would be “user-manipulated content.” It is really the situation of users taking existing content and manipulating it, changing it in various ways. * Covington & Burling, Washington, D.C. 1 See generally Wikipedia—Web 2.0, http://en.wikipedia.org/wiki/Web_2.0. “Web 2.0” is a term describing changing trends in the use of World Wide Web technology and Web design that aim to enhance creativity, information sharing, and collaboration among users. These concepts have led to the development and evolution of Web-based communities and hosted services, such as social-networking sites, video sharing sites, wikis, blogs, and folksonomies. The term became notable after the first O’Reilly Media Web 2.0 Conference in 2004. Tim O’Reilly, “What Is Web 2.0” (Sept. 30, 2005), available at http:// www.oreillynet.com/pub/a/oreilly/tim/news/2005/09/30/what-is-web-20. html. Although the term suggests a new version of the World Wide Web, it does not refer to an update to any technical specifications, but to changes in the ways software developers and end-users utilize the Web. According to Tim O’Reilly: “Web 2.0 is the business revolution in the computer industry caused by the move to the Internet as platform, and an attempt to understand the rules for success on that new platform.” Tim O’Reilly, “Web 2.0 Compact Definition: Trying Again”, O’Reilly Radar, Dec. 10, 2006, available at http://radar.oreilly.com/ archives/2006/12/ web_20_compact.html.

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I think user-generated content or user-manipulated content sites are the ones we quintessentially think of as Web 2.0 sites — sites like YouTube,2 MSN Soapbox,3 Flickr,4 DailyMotion.5 Obviously, the social networking sites, which are also quintessentially Web 2.0, have a healthy dose of user-generated content. B. Device Independence The second attribute that one could associate with Web 2.0 is device independence. This has really been the “Holy Grail,” I think, of IT companies for many years. We are getting closer to it all the time. It really just means the ability to access all of your data, all of your applications, anywhere, anytime, and from any device. All of us experience that to some extent already, to the extent you use a Web-based email service. But the idea is really that this would take that experience and expand it to all different kinds of application services. When you talk to content owners, obviously one of the big benefits of this device independence is going to be multiple access. That really is an area that I think a lot of companies are focused on. C. Cloud Computing To achieve this device independence, you need another factor, and that’s the third attribute I will mention, which is sometimes referred to as “cloud computing”6 — yesterday it was referred to as “online services” — server-based computing, software as a service. There are lots of variations and lots of different conceptions of how this is going to take shape. Basically, the idea is that to the extent today you rely on your PC to store your data, to run your applications, in the future that data will be stored on remote servers in the cloud and you will also run your applications in the cloud. The way you will access all of that is through a browser. There are already, of course, lots of examples of this — Yahoo! Briefcase,7 Microsoft Slide services,8 Google Apps.9 All of these are examples of this move towards cloud computing. D. Ad-Funded Business Models As you start to experience content and run applications as a service rather than as a product, that also brings up the fourth attribute I will mention, which is the use of ad-funded business models. There are lots of different models of this. It is an area that is developing quickly, and it does raise, I think, some challenging copyright issues. II. COPYRIGHT ISSUES

Those are just some of the attributes I wanted to briefly mention. They all raise lots of copyright issues. There is no way any of us could do an exhaustive survey here. I just want to mention a few of them. YouTube, http://www.youtube.com. MSN Soapbox, http://video.msn.com/video.aspx?mkt=en-us&tab=soapbox. 4 Flickr, http://www.flickr.com. 5 DailyMotion, http://www.dailymotion.com. 6 See generally Wikipedia—Cloud Computing, http://en.wikipedia.org/wiki/Cloud_computing. 7 Yahoo! Briefcase, http://www.briefcase.yahoo.com. 8 Slide, http://www.microsoft.slide.com. 9 Google Apps, http://www.google.com/a/help/intl/en/index.html. 2 3

222 CHAPTER IV: COPYRIGHT LAW A. User-Manipulated Content Taking user-manipulated content, the most obvious one, one of the challenging questions is: How are courts going to handle this, either from the perspective of what the user is doing or the services that are, in some sense, hosting the third-party content? Courts could look at it in two different ways, and have looked at these types of issues in two different ways. If you look at it as a derivative work, courts tend to be fairly solicitous of the original copyright owner in the derivative-work cases. Take out of that for right now the parody cases, the 2 Live Crew and “Pretty Woman”10 types of cases, where that clearly falls within the core of the fair-use exception.11 But if you view these works as derivative works, then courts are probably going to have a tendency to be fairly protective of IP rights. However, if you look at some of the search engine cases, like the recent Ninth Circuit case,12 there has been more of a tendency to see these as transformative uses under the fair-use exception. Probably these user-generated content cases are going to be somewhere in between those two and are, obviously, pretty fact-dependent. B. Cloud Computing Cloud computing is going to bring up another set of interesting issues. Obviously, if you are storing all your data in the cloud and only you have access to it, there are not that many challenging issues. But what happens if you start providing access to that content to a limited group of people, if you are having almost a virtual private network? You are effectively allowing people to access your files and your content. Obviously, if that is somebody else’s content, that raises challenges. In the Web 1.0 world, if you wanted to provide access to your content that is located on your PC, one of the mechanisms you could use to do that is peer-to-peer file sharing, which obviously has not gotten a terrifically warm reception in the courts. The question is: How are courts going to look at this once it is no longer access through peer-to-peer, but it is really stored on remote servers? C. Ad-Supported Business Models Ad-supported business models also raise a lot of issues. What happens when intermediaries display ads alongside user-manipulated content that infringes copyright? They, obviously, in those cases will be receiving a financial benefit, to some extent. The question is, how does that Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994). 17 U.S.C. § 107, Limitations on Exclusive Rights: Fair Use: Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include — (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors. 12 Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007). 10 11

PART C: COPYRIGHT IN A WEB 2.0 WORLD 223

play out in the copyright analysis? It comes up in lots of different areas — in eligibility for a Digital Millennium Copyright Act (DMCA) defense under Section 512,13 the fair-use defense, whether it evinces a commercial purpose or supplants the commercial market for the work, and also secondary-infringement analysis, both contributory and vicarious liability. So that is one area where copyright issues arise. There is another, somewhat separate issue: What happens when these intermediaries actively go out and solicit advertising and display advertising from companies that are infringing copyright? To what extent is that actionable as contributory liability? D. Policy Questions The question is: How should we handle these issues as a policy matter? I think what became clear in the panel session yesterday is that there really are compelling interests on all sides. There is compelling interest on the sides of consumers in getting access to the content — and, obviously, these developments are providing much greater consumer access. There is compelling interest on the side of IT owners, who are doing tremendous innovations in this Web 2.0 area in allowing this greater access. But also, it is vital that in promoting this consumer access and promoting this innovation, we maintain the incentives for the creation of content and do not undermine the incentives for such creation or making that content available online. III. INTERESTS OF COPYRIGHT OWNERS

Briefly, given the makeup of the panel, I think we are going to have some eloquent speakers here to support the interests of innovators, technology innovators, the intermediaries, and we are going to have some eloquent speakers on the user side. I want, therefore, to focus a little bit on the interests of copyright owners here. There is no lack, as we all know, of quantity on the Internet. The real challenge is to ensure and promote the continuation of real high quality. To maintain this, creators of high-quality content really need to have confidence that they will, in this new Web 2.0 environment, be able to capture whatever economic value their works have. Copyright law has traditionally provided that kind of confidence for copyright owners by providing clear market-based rules. My point is that it is not just that copyright law provides a means of payment for copyright owners. Copyright provides the legal foundation for a market in creative works to exist. If you do not have these property rights that are clearly defined and clearly exploitable, you do not really have the legal foundation for a market to emerge at all. Like all different kinds of property markets, copyright laws can have some sharp edges. I think that is why it is extremely important to maintain robust fair use. But we still have to make sure that copyright laws are expressible and maintained on the Internet. What does that mean? From my perspective, it does mean that we need to be very thoughtful and very careful before we begin advocating rules that would significantly reduce the existing scope of IP rights, or that would inject uncertainty or unpredictability into the ability of authors and creators in this Web 2.0 environment to commercialize their creative works. The broader we expand the exceptions to copyrights on the Internet, and the more we shrink the scope of the ability of copyright owners to protect their works, the more we undermine the ability for a market in creative works to emerge. If there is no way to assert property rights, you do not have the foundation for a market in creative works to exist. 13 Digital Millennium Copyright Act of 1998, Pub. L. No. 105-304, 112 Stat. 2860 (codified at 17 U.S.C. § 512 (Oct. 28, 1998)) [hereinafter DMCA], available at http://www.copyright.gov/title17.

224 CHAPTER IV: COPYRIGHT LAW That being said, I don’t want to come across as blatantly just pro-IP rights. I think it is really important that, as we maintain this ability for a market to emerge in creative works, copyright’s impact does not pose an impediment to an innovation or an impediment to consumer interests. The real question is: How we are going to balance these? That will be, I know, the basis for the discussion on the panel today. I am going to just throw out two quick thoughts. A. Digital Rights Management First, I think the technology can provide at least part of the solution. Digital rights management (DRM) also came up yesterday in the General Counsels’ Roundtable. I think two of the speakers said, “We don’t see digital rights management as restricting access; it is really enabling access.” I think that is exactly right. The way I think of it is, digital rights management is really the technology tool through which copyright rules and copyright rights are expressed in digital works and in an online environment. If you take away that ability to express and enforce those rights, you really cannot have a true online market develop. So I think digital rights management is going to be a big part of it. There have obviously been missteps in applying DRMs. I think some of it has not been as consumer-friendly as it needed to be. On the other hand, if you look at the success of things like the iPod and iTunes, which is all based on a DRM system and the consumer acceptance of that, I think it shows that there have been tremendous strides made. B. Filtering and Fingerprinting Filtering and fingerprinting technologies we will discuss some more. I know there is going to be a separate panel on that. I think it also holds tremendous promise as a tool to address infringement, especially in the user-generated content scenario. The potential — and, I think, the promise — of filtering and fingerprinting is demonstrated, to some extent, by the fact that the User Generated Content Principles,14 which were recently agreed upon by a bunch of companies — again, they were referenced yesterday — really shows that there is promise here. The fact that two of the world’s leading user-generatedcontent sites, MySpace and Dailymotion, both signed onto these Principles15 really, I think, demonstrates the confidence that companies have that filtering and fingerprinting technologies are scalable, that they are implementable, and that they really are feasible at a practical level. So technology, I think, is a big part of the solution. I do not think it is ever going to provide the entire solution. As many have pointed out, technology has a tendency to be over-inclusive. You cannot really have a technology solution that does all the fine weighing that needs to be taken into account in a fair-use analysis. Obviously technology is under-inclusive as well. Minor modifications to infringing content can make it very tough to use, for instance, fingerprinting and filtering. But the technology solutions can at least help where there are exciting new Web 2 technologies that are being misused. I think technologies need to be supplemented by industry and multi-stakeholder negotiations and solutions. I think, again, the User Generated Content Principles are a good example of those kinds of negotiations and how they reach positive results.

14 See, Principles for User Generated Content Services, available at http://www.ugcprinciples.com [hereinafter User Generated Content Principles]. 15 See Press Release, Internet and Media Industry Leaders Unveil Principles to Foster Online Innovation While Protecting Copyrights (Oct. 18, 2007), available at http://www.ugcprinciples.com/press_release.html.

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IV. CONCLUSION

There is obviously a great deal of litigation going on to determine how to apply things like fair use and the DMCA in the Web 2.0 environment. That is going to be necessary sometimes. Hopefully, that litigation is going to provide some additional clarity. But on the other hand, I think a lot of parties are feeling a certain ambivalence: Yes, we will get greater clarity, but as we get that greater clarity, we might not always like what we see. So I think litigation will always have its role. But to the extent that these issues can be resolved through industry negotiations, it is certainly something that needs to be pursued. MR. GOLDBERG: Thank you, Marty. Now we’ll hear from Brian Fitzgerald, who will be talking about three alternatives.

Web 2.0: Creator Utopia: Platform Owners’ Paradise, or Still the Same? Prof. Brian Fitzgerald* Thank you very much. It’s a pleasure to be here. I. INTRODUCTION

I would like to move a little bit away from the arguments about enforcement and piracy that we have heard a lot about. I certainly do not subscribe to the view that convenience regarding DRM is the only type of convenience that you can visualize. In fact, I think we are seeing a prototype for another model of convenience wrapped around access, reuse, and new business models — very much a story of innovation and, more importantly, productivity — that I want to focus on today. I really do want to focus in on the role of the creator, the role of the access corporation or the platform provider, and, to a lesser extent, the place of the traditional copyright industries. One is the idea of the “long tail.”16 Does Web 2.0 allow the creator greater autonomy and ability to earn revenue? It is very much an issue for the moment. Does it allow more creators in this long tail to earn revenue? What relationship does it have to Creative Commons,17 which has been a central part of some of the new models that are emerging that I will talk about? What responsibilities do commercial Web 2.0 platform owners have? For a number of years, there have been businesses that have encouraged the development of communities and seek to leverage profit from the existence of those communities. How should * Queensland University of Technology Law School, Brisbane, Australia. See Brian Fitzgerald, “Copyright 2010: The Future of Copyright”, 30 Eur. Intell. Prop. Rev. 43 (2008). 16 See Chris Anderson, The Long Tail (2006). 17 Creative Commons (CC) is a non-profit organization devoted to expanding the range of creative works available for others to build upon legally and to share. The organization has released several copyright licenses known as Creative Commons licenses. These licenses allow creators to easily communicate which rights they reserve, and which rights they waive for the benefit of other creators. See Creative Commons, http://www.creativecommons.org; see also Intrallect Ltd. (E. Barkerand & C. Duncan) & AHRC Research Centre (A. Guadamuz, J. Hatcher C. Waelde), “Creative Commons Licensing Solutions for the Common Information Environment, Final Report”, Ch. 3.6 (Oct. 10, 2005), available at http://www. intrallect.com/cie-study.

226 CHAPTER IV: COPYRIGHT LAW that profit be shared, and to whom? MySpace,18 Facebook,19 and so on — it’s a concept that has been around now for some time. I want to look at five models that have emerged: The Star Wars MashUp model, with basically no return in revenue; the Flickr/YouTube model; the Revver model; the CC+ Magnatune model; and the Nine-Inch Nails model. II. THE STAR WARS MASHUP MODEL

The Star Wars MashUp site, mashup.starwars.com, is a video-sharing platform, useruploaded video. It has over 250 Star Wars clips. Star Wars clips and user-generated clips can be mashed up. Ad revenue. There is no profit sharing. The idea here was, instead of having people taking Star Wars images in an unauthorized fashion and mashing them up, to put up an authorized site: In connection with the Star Wars MashUp Service Lucas grants you a non-exclusive, non-transferable, revocable, limited right and license to access and use the Star Wars Supplied Materials solely for the purpose of mixing the Star Wars Supplied Materials with Your Posted Material (as such term is defined below) in order to create a Star Wars Mashup Film solely for the purpose of posting your submitted Star Wars Mashup Film on the Site. 20

There are two types of licenses available. (1) In respect of final mashup films — taking material from the site and putting some other material with it — “you hereby grant Lucas, its licensees, successors and affiliates a perpetual and irrevocable, exclusive, royalty free, worldwide license in all rights, titles and interests of every kind and nature, … including but not limited to a) all copyrights therein, b) the right of reproduction of all or part of the mashup film … c) the moral rights of the authors … and d) and all rights of re-production, merchandising, adaptation,, display and exhibition of the Star Wars Mashup Film …”21 So that is all going basically to the site when you engage in this activity. (2) In respect of final user product that is uploaded — material of your own that you just put up there, which is not mashed — “you hereby grant Lucas, its licenses, successors and affiliates a perpetual and irrevocable, non-exclusive, royalty free, worldwide license in all rights, titles and interests of every kind and nature now or hereafter known in any of your Posted Content which is mixed in or incorporated with the Star Wars Mashup Film on the same terms and conditions set forth in the License grant contained in paragraph (i) above (except with respect to exclusivity).”22 They have a nonexclusive license. III. THE FLICKR23/YOUTUBE MODEL

I will skip through YouTube because Alex will talk more about this. Basically, YouTube does get a license to do lots of things with your material.24 Up until this point, there has not been, as far as I understand, a clear policy about sharing revenue with the creators. I think Alex will talk about that in some detail. MySpace, http://www.myspace.com. Facebook, http://www.facebook.com. 20 See Star Wars MashUp Terms of Service, http://www.starwars.com/welcome/about/mashup-copyright. 21 Id. at e.i. 22 Id. at e.ii. 23 Flickr, http://www.flickr.com. Flickr is an image and video hosting Web site, Web services suite, and online community platform. See generally Wikipedia—Flickr, http://en.wikipedia.org/wiki/Flickr. 24 See YouTube Terms of Use, http://www.youtube.com/t/terms. 18 19

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Billy Bragg’s op-ed piece from The New York Times,25 was mentioned yesterday. He basically claims that platforms should share more profit with the actual artist, talking about an artist’s right for the Internet. I think one of the things that he skips over is that the platforms provide anybody a chance to actually profile to an enormous audience. They are much different from radio stations. I think those issues have to be weighed up a bit more. But Bragg is speaking a common sentiment that is expressed by collecting societies and artists. IV. THE SOCIAL NETWORK

The center point of this Web 2.026 style activity is the “social network”27 — a space for making friends and sharing knowledge and creativity.28 The social network is epitomized by wellknown spaces, such as MySpace,29 Facebook,30 Flickr,31 and YouTube,32 but is also evident in the millions of blogs, live chat rooms, and wikis that exist throughout the Internet world. Within the social network, people create things in and provide thoughts from their bedrooms, studies, lounge rooms, cafes and offices, and communicate them via the network to the outside world. Sharing amongst participants within the social network tends to be on a noncommercial basis. In fact that seems to be the unwritten norm underpinning activity within the social network environment — noncommercial use by each other is permitted. However, once the material created and distributed through the social network is deposited into or utilized within a commercial domain or enterprise for financial reward, then this norm subsides and compensation may be sought. Likewise, material utilized or distributed by the social network that is taken from the commercial domain or network (e.g., Hollywood), under current law, will need to be fair use, licensed and/or paid for. More so, the social network is underpinned by a technological platform and the provider of such platforms will often seek “revenue” through advertising and subscription fees. These commercial platform operators, such as Google (YouTube), Yahoo! (Flickr), and News Corporation (MySpace), are some of the largest corporations in the world, and they are profiting handsomely off the social network. It remains unclear to what extent they should be sharing profits with the creatives of the social network (which sites like Revver33 do) or, where commercially released material has been utilized, how much they should be paying the commercial sector from where it is sourced (e.g., Hollywood), the substance of the issue being litigated in Viacom v. YouTube and Google. 34 I have developed this diagram that helps me understand these complex new relationships between the noncommercial and the commercial domains: 25 Billy Bragg, “The Royalty Scam”, N.Y. Times, Mar. 22, 2008, http://www.nytimes.com/2008/03/22/ opinion/22bragg. html; see also discussion in Chapter IV.B.2(a)–(b), Digital Licensing Issues, supra this volume. 26 On this concept, see Tim O’Reilly, “What is Web 2.0?”, O’Reilly Media, available at http://www.oreillynet.com/ pub/a/oreilly/tim/news/2005/09/30/what-is-web-20.html. 27 See generally Wikipedia—Social Network, http://en.wikipedia.org/wiki/Social_network; Wikipedia— Social Network Service, http://en.wikipedia.org/wiki/Social_network_service. 28 See generally Yochai Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom (2006), available at http://www.benkler.org/Benkler_Wealth_Of_Networks.pdf. 29 MySpace, http://www.myspace.com 30 Facebook, http://www.facebook.com 31 Flickr, http://www.flickr.com. 32 YouTube, http://www.youtube.com 33 Revver, http://www.revver.com. 34 Viacom Int’l, Inc. v. YouTube, Inc., No. 2007-cv-02103 (S.D.N.Y. filed Mar. 13, 2007). The Viacom complaint is available at http://www.paidcontent.org/audio/viacomtubesuit.pdf and the YouTube and Google response is available at http://news.com.com/pdf/ne/2007/070430_Google_Viacom.pdf. For a debate between their respective lawyers see Edward Lee, “Viacom v. YouTube/Google: Their Lawyers Debate the Lawsuit”, Utube Blog, http://theutubeblog. com/2007/04/15/ Viacom-v-youtubegoogle-their-lawyers-debate-lawsuit.

228 CHAPTER IV: COPYRIGHT LAW

Commercial Sector Appropriates SN Material

Social Network Independent Creator within SN

Advertising Revenue from SN Operation

Commercial Platform Manager of SN

x x x

No permission given for commercial use; Compensation to creator? User Rights? (Fair dealing, fair use, etc)

Commercial Sector Third Party Copyright Owners

SN Appropriates Commercial Sector Material

Creators Right to Obtain Compensation From Commercial Manager?

x x x

No permission given; Compensation to copyright owner? User rights? (fair dealing, fair use etc)

Licences Between Commercial Platform manages and Commercial Sector for use of SN and Commercial Sector Material

You have the social network, which is the noncommercial sphere, and the commercial platform provided. You have commercial content providers over here — let’s say, Hollywood. You have the interplay of all different types of material that cross over. What licenses apply? What rights need to be cleared? And so on. A lot of this space is very much still undefined. V. THE REVVER MODEL

The third model that I want to talk about is the Revver model.35 It is, once again, a videosharing platform, user-uploaded videos. It embeds advertising in the videos that are put up, about three- or four-minute videos, and uses RevTags tracking software. The Revver upload license allows for redistribution under the Attribution-NonCommercial-NoDerivs 2.5 Creative Commons License.36 Ad revenues are shared 50/50 with the users. The Revver revenue-sharing formula is: 40 percent to Revver, 40 percent to the creator, and 20 percent to the sharer. They do have a revenue stream that they have reported over the last twelve-to-eighteen months. As an example, when you click on an Amazon.com ad that is embedded in one of the Revver videos, you are taken to Amazon.com. By uploading your video to Revver, you are joining a network of sharers — this is their advertisers — and sponsors who are eager to spread your video as far as possible, in order to enable the free and open sharing of Revver videos. We are working with Creative Commons to provide the default video copyright license. We connect video makers and sharers’ responses in a free and open marketplace that rewards them for doing what they do best. Sharing is the key aspect of it. You permit Revver to host, index, case your video content, tag your video content, associate Revver’s insertion software to deliver the ads, ad distribute your video content through the Revver syndication network. You are granting in this agreement that you retain all rights, titles, and interests in copyright to your video content.37 VI. THE CC+ MAGNATUNE MODEL

Moving on to the next model, which I call CC+, it’s the Magnatune model.38 It is a U.S.-based record label. There is a revenue share with the creator: listen all you want for free, then license their music online or buy the MP3. So that’s the marketing. See generally Wikipedia—Revver, http://en.wikipedia.org/wiki/Revver. See supra note 17. 37 See Revver Member Agreement, http://www.revver.com/go/tou/. 38 Magnatune, http://www.magnatune.com. 35 36

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Key points: • You grant Magnatune a nonexclusive license to the original work.39 The artists retain all rights to their music. • Limited to user-submitted music. • 50/50 gross revenue split on music, 50/50 net revenue split on merchandise. • All songs are released under a Creative Commons Attribution-Noncommercial-Sharelike license. Let me take you through this model a little bit. I can select the artist Beat Under Control. I want to either license or buy from Magnatune. There are two revenue streams: (1) I can actually buy to download or buy a compact disc, or (2) I can license. If I choose to license, I get a significant number of choices. If I want to go noncommercial, I want to use it for noncommercial purposes, the Creative Commons license is already there. If I want to use it for TV advertising or radio or so on, I click on the “license” link, which brings up a license and terms. You can calculate the license price. VII. THE NINE INCH NAILS MODEL

The fifth model is Nine Inch Nails. Most of you have heard about this. They recently put out “Ghosts,” which contains thirty-six instrumental tracks. It is an album by Nine Inch Nails, which is a very famous band, packaged in groups of nine tracks. “Ghosts I” is nine tracks released under a CC Attribution-Noncommercial-Share-Alike license. There are various payment options for “Ghosts.” Expansion of this is also going out into the visual world. There are associated services that they have with it. So they have actually used the music as a sort of basis for all kinds of new revenue streams in the Internet world. Part of the music is actually available under Creative Commons license. VIII. CONCLUSION

What role do collecting societies play in this new space? Where unauthorized acts occur, this will be an obvious place and already has been. UGC asks whether there is any value for collecting societies having a role in collection enforcement. It is a very debatable issue. Let’s presume that before Web 2.0, I had no revenue stream. Would I now rely on the direct revenue that the site is going to offer me, or would I be worried about going to a collecting society? It is a very interesting question for collecting societies and their future. Should platform owners share revenue? This is the big issue that Billy Bragg and others are raising. They provide opportunity to anyone at no fee. Reducing their profit could lead to a startup fee. Would that really work or would the whole space die or move to a new competitor? This is a critical issue, and I’m sure Alex will talk a little bit about this. How would copyright reform change the picture? Broader rights for noncommercial and transformative use may see more UGC and new revenue streams. Broader access, particularly outside the United States, to public-sector information, creative content, particularly funded by government, reforming safe harbors, and accessory liability, could be factors as well. So Web 2.0 has not created a utopia — at least just yet — but it does offer some interesting possibilities. Will those opportunities for creators continue to grow, or are we simply reinventing a new form of commercialization in yet another guise? 39

See Music Licensing at Magnatune, http://www.magnatune.com/info/licensing.

230 CHAPTER IV: COPYRIGHT LAW What role could creators play in the development of copyright policy and law? That is a really interesting question. And what role for the platform owners or access corporations in copyright politics, policy, and law? Thank you. MR. GOLDBERG: Thank you very much, Brian. As I think our speakers are demonstrating, wisdom pursues us. But alas, this Conference may sometimes move too quickly. We are now going to turn to Alex Macgillivray, who will talk to us about YouTube’s content identification systems and the new licensing models they enable.

YouTube’s Content Identification Systems and the New Licensing Models They Enable Alexander Macgillivray* I am going to try the trick of talking a little bit slower than Brian just did, but hopefully still being under my time limit, because I am sure there are lots of good audience questions. First of all, of course, I want to thank Fordham and Hugh for having me back here. It is always my privilege to be here and to listen to the great people who talk to us. Certainly, you should not have included me on the eloquent speakers’ list. I. INTRODUCTION

I was very pleased yesterday to hear Don Verrilli’s client say that he had basically gotten what he wanted out of the Viacom v. YouTube suit,40 in terms of us implementing some fingerprinting stuff. We have been doing that for a long time, so I’m not quite sure what he meant by that. But I am happy to hear that he has achieved victory.41 I look forward to getting the papers to withdraw the suit, whenever Mr. Fricklas is ready. Which means that I am not going to spend a lot of time today talking about the lawsuit. What I am going to talk about instead is a revenue model for creators that I think YouTube is the only place in the world that exists. We do some things that other people do as well. I want to correct something Brian said. We have thousands of partners who are content creators, including some individual users. When you see an ad on the side of the page in YouTube or actually in a video, that is because we have relationships with the content provider and we are sharing revenue with that content provider. While it is true that the vast majority of videos that are on the YouTube site are not currently monetized on the play page, it is not true that we do not offer a way for creators to make money directly from uploading their content.42 YouTube has numerous partnership deals with content providers, such as CBS, BBC, Universal Music Group, Sony Music Group, Warner Music Group, NBA, The Sundance Channel and many more.43 * Intellectual Property and Product Counsel, Google, Inc., Mountain View, CA. Viacom Int’l, Inc. v. YouTube, Inc., No. 2007-cv-02103 (S.D.N.Y. filed Mar. 13, 2007); see also supra note 34. 41 See remarks by Michael Fricklas in Chapter I.A, “General Counsels’ Roundtable: A View From the Top”, supra this volume. 42 See YouTube Terms of Use, http://youtube.com/t/terms. 43 See YouTube Partners Directory, http://www.youtube.com/members?s=al&t=a&g=5&bc=1&to=1&nb=1. 40

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II. YOUTUBE’S CONTENT ID AND MANAGEMENT

Now on to the more unique thing, which is our content ID and management system. Other people call this fingerprinting. I don’t really like the word. “Fingerprint” is a little bit of a misnomer, given that fingerprints either match identically or not. If I am mostly the same as Don Verilli, except that we have some differing views on copyright law, our fingerprints will actually be extraordinarily different. The whole goal of content ID and identification and management systems is to be able to allow you to match content that is the same in substance but not exactly the same bit for bit. Just to put it in context, it is available to all. It is part of our bigger idea of making sure that copyright owners have a way of controlling their content online, including on the YouTube site. We have been doing audio content identification and video content identification for a long time.44 I think we are the only U.S. site that does video content identification, but I could be out of date there. The key here is to allow us to say to copyright holders, to the extent that they know what they own and can tell us, “Here is all the stuff that might match things that you own. Here is a way for you to figure out whether a particular piece of your content is actually also included in a particular piece of the content that has been uploaded to the YouTube site, and to do a bunch of things automatically with that content.” This is very different from is MD5 hashing,45 or what I refer to as fingerprinting. That would match identical copies bit for bit. As Marty said, one of the big problems with that is that if you change it just a slight bit, you end up not being able to find it when searching for the identical copy. What you see on the left is some reference material that the copyright owner believes he owns. It is a very pristine copy that the copyright owner typically has. On the right is somebody taking essentially a camcorder, pointing it at his TV, and recording the same content. This video identification technology that we developed — it took lots of time, money, and engineering time — is able to say “this is the same as that.” “This is the same as that” is one of the major things you need to know under copyright law, of course, but it also is one of the things that the content owners really want to know in making their decisions about what to do with that content. Importantly, the very first thing that has to happen is for the copyright holder to identify the content that they actually own. We give copyright holders two different ways of doing that: (1) They can easily just upload some of this content to our system. We match it for them and create these content-identification strings. There are long numbers that describe the content. We do updates and all the rest of that. (2) If they don’t feel like giving us a copy of their content in order to figure out whether we can match to it, we allow them to download our technology and run it on their own servers. We provide all of that for free to the content holder. Once we have gotten the copyright holder to tell us what is theirs, we generate some ID files, put them into a database, and then match them against the user-uploaded files.

44 See What is YouTube’s Video Identification Tool?, http://www.google.com/support/youtube/bin/answer. py?answer= 83766&hlrm=en-uk. 45 MD5 (Message-Digest algorithm 5) is a widely used, partially insecure cryptographic hash function with a 128bit value. As an Internet standard (RFC 1321), MD5 has been employed in a wide variety of security applications, and is also commonly used to check the integrity of files.

232 CHAPTER IV: COPYRIGHT LAW III. CONTENT HOLDER CONTROL

Finally, we give the content holder a choice of what to do with things that match their files. This choice is really important. We have dealt with lots and lots of copyright holders. The vast majority of them are not people who are suing us. Many, many people out there have very different views about what to do with their content. Some people want the content taken down if it matches their content. Some people want the content left up there to promote it (for example, maybe “Saturday Night Live” is coming out with a new season, and they want it up there to promote). Some people want to not only have it up there to promote it, but they would like to earn some money off it. Of course, YouTube likes that. We like giving people money. The point here is to be able to give folks money. The way we do that — and this is the thing that I think is unique to YouTube — is once you have a match for your content — let’s say a user has uploaded a short clip from “Saturday Night Live” — if you would like us to put ads on that content and to share that ad revenue with you, the originator of that content, we can do that. It is a way to have a content owner, who already needs to come and tell us about which content they own and already needs to manage the use of their content on all of these different Web sites in some way, to actually achieve a benefit. The benefit they want is not what I think a lot of the people that are sometimes grouped with us say, that all the content owners want is for nobody to be able to see their content. Content holders, of course, do not want for nobody to see their content. They created the content. They want people to see it. But they want to be able to manage how that content is displayed. So often they do things for free. TV advertising is a great example, where they put up a preview of their movie for free. Often they do things just for the promotional value, like that TV advertisement. But sometimes they actually do also want to get ad revenue. Sometimes ad revenue is not enough, and then they want it taken down. So the important thing about this is to enable the content holders to really control their content. I am going to reserve the remaining two and a half minutes of my time so that in case Mr. Verilli says something I don’t agree with, which is very unlikely, I will be able to respond.

MR. GOLDBERG: Thank you, Alex. Don Verrilli now will be talking to us, and we’ll see the extent to which he does and does not agree with what Alex has just told us.

Web 2.0: Perspective of Content Owners Donald B. Verrilli, Jr.* I. INTRODUCTION Three points by way of introduction. First, in case it isn’t clear, I am counsel for Viacom in the litigation against YouTube and Google.46 So I am obviously coming to this with the biases of anybody litigating a case like that. Second, I am speaking here today for myself, * Jenner & Block, Washington, D.C. 46 Viacom Int’l, Inc. v. YouTube, Inc., No. 2007-cv-02103 (S.D.N.Y. filed Mar. 13, 2007); see also supra note 34.

PART C: COPYRIGHT IN A WEB 2.0 WORLD 233

not for the client. Third, we thought it would be more productive to have a conversation that wasn’t back and forth about the YouTube litigation, along the lines of what Alex and I had last year.47 Therefore, I’m going to resist the temptation to respond to a couple of the more barbed comments and try to talk at a higher level of generality about the issues involved here. I think, looking at where we are now as compared to where we were a year ago when we were discussing these issues, there has been a very positive evolution from the perspective of the content owners that I represent. I think one can see that manifest itself in at least three ways. The first, as we heard in the introduction this morning, is that several of the user-generatedcontent sites have moved to a pre-upload filtering system in order to protect the interests of content owners. That would include Microsoft, MySpace, DailyMotion and others. The second, at a more generalized level, has been the development of the User Generated Content Principles for user-generated-content services that were signed onto by a broad segment of copyright owners, UGC operators, and IT companies.48 I think that was a very positive coming-together to try to identify how we can move forward in a way that allows the promise of the Web 2.0 technology to be realized, at the same time protecting the legitimate interests and claims of copyright owners. The third positive development we just heard Alex describe. I think the reason that Viacom’s general counsel, Mike Fricklas, said yesterday that he thought that in some significant measure he had achieved victory is that we have moved the discussion forward considerably.49 Without going into the details, we are not thrilled with the system that Alex just described, but it does have benefits and it does represent a genuine advance from where we used to be. II. WEB 2.0 BUSINESS MODELS AND LIABILITY RULES

Why are we having this conversation now and why is it a different conversation than we were having a year ago? I think the answer to that is inextricably linked to the question of what the liability rules are in copyright. Of course we want to enable successful business models that allow everybody to thrive. But I think, to be able to do that, we have to do it against a backdrop of enforceable property rights and copyright. Therefore, I think it is significant to look at the way the liability rules are intersecting with the Web 2.0 business models. In that regard, I think there are a couple of points of real salience and importance that are actually driving the positive developments and the coming-together that I described a minute ago. A. Web 2.0 Business Models The first one is this: I think that the Web 2.0 business models that predominate now, even in the variety that was so effectively described earlier, share common features that create a level of increased copyright vulnerability. There is a difference between a peer-to-peer kind of model that was dominant in the Napster/Grokster era and these current models. One key difference is that there is a much more significant degree of engagement with the content. These are really entertainment destinations. They are media sites. They are built 47 See Session III, Part A, “Legality of Unauthorized Use”, in 10 Intellectual Property Law and Policy 67 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham Conference on Intellectual Property Law and Policy, Apr. 12–13, 2007). 48 See User Generated Content Principles, supra note 14. 49 See remarks by Michael Fricklas in Chapter I.A, “General Counsels’ Roundtable: A View From the Top”, supra this volume.

234 CHAPTER IV: COPYRIGHT LAW around the availability of particular content, and they are designed to make profit on the basis of the availability of particular content. That makes it much more difficult, it seems to me, as a general matter, for Web 2.0 platforms to portray themselves as mere passive intermediaries that are not responsible for direct acts of copyright infringement by way of reproduction, display, public performance, distribution. For a similar set of reasons, I think it makes more problematic the invocation of the Section 512 safe harbors to try to immunize these business models from damages liability. Now, those issues obviously remain to be sorted out in the courts. I am not going to try to give a disquisition on my own view of how those ought to come out, but I do think it is hard to deny that those features of the business model make the question of potential legal liability a more pressing one and a more direct one. B. Liability Standards Relatedly, it seems to me, with respect to the inducement standard that the Supreme Court articulated in the Grokster case50 three years back, these business models, to some significant measure, are operating in the danger zone, because, particularly with respect to the availability of filtering technology, the decision to use it or not to use it can have significant implications in terms of an inference as to whether you are intending to allow and promote infringement. The fact that these are ad-driven business models seems to me to put you in the danger zone there, too. I think, whatever might have been the case a few years back, it is difficult now to suggest that these business models are not, in some measure at least, satisfying a known demand for infringing activity out there — again, not to say that that issue is going to come out definitively one way or the other. It remains to be resolved in the courts. But it seems to me we are in the danger zone. Those realities, I think, are what are driving us to the emerging common ground. I would suggest that that is as it should be. Copyright law, after all, is a codified form of tort law. What you are seeing is the emergence of a set of best practices in the marketplace that are being driven by some understanding or some prediction on the part of the market actors about what the standard of care is ultimately going to be and what standard of care is ultimately going to be prescribed by the law. You are seeing, I think, a natural kind of evolution of business practice to bring itself into conformity with, essentially, tort law standards of liability. The bottom line here is that what you are seeing is a recognition that, because the significant amount of the value of these Web 2.0 business models is tied up in the exploitation — for better or for worse, lawfully or unlawfully — of copyrighted content, the cost of ensuring that the rights of copyright owners are respected is a cost that ought to be allocated into the cost of doing business of the business model, as opposed to shifting it entirely onto the copyright owner. It seems to me that is where we are moving in the marketplace. I think it is a pretty good prediction of where the law is likely to move in this area. III. CONCLUSION

As I said, I think all of that is a good thing. The bottom line for us is that the reason it is a good thing is because it is founded on the recognition that you do have business models here where actors are making rational decisions about not merely how to create something cool, but how to maximize their profits. In making those kinds of decisions, they ought to be in the position of having to factor in the need to respect the rights of copyright owners, just like anybody else who runs any other business in the world has to respect the rights of others as they prepare and execute their business models. 50

Metro-Goldwyn-Mayer Studios v. Grokster Ltd., 545 U.S. 913 (2005).

PART C: COPYRIGHT IN A WEB 2.0 WORLD 235 MR. GOLDBERG: Thank you, Don. Let me exercise the moderator’s prerogative and make a comment here. Since the legal changes are among the alternatives to be discussed both now and later on, when we evaluate the conflicting views as to whether technological changes require an overall revision of our bodies of copyright laws or just what some have called incremental changes in the body, let me just remind the group of some of the past history that is really a prologue here. The overall revision of the body of U.S. copyright law in 1909 took years. The 1976 overall revision — still in medieval times technologically — took decades. Now, of course, technological change is significantly more rapid. Now, when there are problem areas in the body, it is my view that you cannot change the overall body, but it is necessary to make some changes with sufficient frequency, just like diapers. Now we turn to our panelists for very brief comments from Tony Reese, Tom Rubin, and Mary Wong before we open it for discussion with the audience as well. Tony, do you have something you want to say? PROF. REESE: Yes. I would just like to follow up on Marty’s presentation. I had a couple of additional Web 2.0 characteristics that I think are relevant. Web 2.0 also involves things like mass collaboration, things like Wikipedia, and also things like mass open licensing, the Creative Commons dimension. So the kinds of challenges that will come up involve some things other than those that have been talked about here. In the interest of brevity, I will just say one of them is the public/private distinction that Marty pointed to. I think it is not clear under U.S. law that even if you are only accessing your own data remotely that you are going to be okay. The Cablevision remote DVR case points to that set of issues.51 But also, when we are talking about things like Wikipedia,52 massive collaboration, and Creative Commons licensing,53 I think aspects of the body that may need to be revised are things like the joint work doctrine,54 which it is not at all clear is designed well to handle ten — let alone twenty, 100, 1,000 — authors of a combined work, and copyright licensing law, which is not all that developed a body in the first place and is not clearly all that well suited to something like a mass market license that hundreds of thousands of people are going to take under the Creative Commons. Those are some of the additional kinds of features of Web 2.0 and some of the legal challenges that I think they are going to pose. MR. RUBIN: Just following up on a couple of comments made before, I think that there have been tremendous developments over the past year that really demonstrate that, having an ecosystem that supports a broad range of rights for content owners to use and apply and business models for online services to use, we have seen real development in that area that demonstrates that we can have very robust encouragement of creativity and technology solutions. A couple of examples I would point out. Obviously, there is a place in the future for both DRM and for Creative Commons. It is important to remember this is not an either/or proposition, but there is a spectrum of opportunities that content creators should and can use. 51 On Aug. 4, 2008, the Second Circuit ruled that Cablevision’s remote DVRs, which work like off-site TiVos, did not infringe copyright. The Cartoon Network LP v. Cablevision Sys. Corp. Holdings, Inc., 536 F.3d 121 (2d Cir. 2008). The court, which overturned an earlier district court opinion, Twentieth Century Fox Film Corp. v. Cablevision System Corp., 478 F. Supp. 2d 607 (S.D.N.Y. 2007), found no significant legal difference between a remote DVR and a VCR. 52 Wikipedia, http://www.wikipedia.com. 53 See supra note 16. 54 A “joint work” is a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole. 17 U.S.C. § 101; see David P. Dowling, Bruce P. Keller & Jeffrey P. Cunard, Copyright Law: A Practitioner’s Guide § 3.2.2 (2001)

236 CHAPTER IV: COPYRIGHT LAW For business models, there is a spectrum, from ad-supported to for-pay download-type business models, that can and should persist in the future. I would point out that we have not really seen a viable ad-supported solution that actually benefits content creators yet in a way that enables them to make a living. I think that is what Billy Bragg’s op-ed55 was all about, and there is a lot of other discussion along those lines. The last thing I would quickly point out is that there is a way to prevent blatant infringement in online services and allowing creativity to flourish. As Don and others pointed out, I think that was really the primary motivation behind the User Generated Content Principles,56 which show that there is a way of using the content identification technology and preventing infringement content from being uploaded and seen on the sites before the infringement ultimately occurs. Microsoft and Disney led this effort, which included other leading members of the technology and content industries. So it is great that we have seen a lot of developments in this area. But this technology can be used even further, not only to enable some small content owners to find ways to monetize their content, but also to protect the interests of large content owners who do not want to see their content posted in the first place. That has been deployed by several leading content sites, and that has been a good development over the past year. PROF. WONG: Moving right along, I would like to focus on the point made by Marty earlier and yesterday in the General Counsels’ Roundtable — the need for clarification of secondary liability contours, boundaries, issues, and laws — with just a reminder, that it is not just the need for clarification in the United States of contributory infringement and vicarious liability, but internationally as well, where there really isn’t the kind of uniformity or consistency that we would like to see. Just one example. In common law countries outside the United States, the concept of secondary liability is based on infringing authorization. There have been a couple of interesting cases, for example the KaZaA case in Australia,57 which referenced the Grokster decision in the Supreme Court58 and ultimately said, “That’s not entirely helpful.” So there is a need for clarification across the board in the United States and elsewhere. The other reason for that is also that, as Marty pointed out earlier, there is some overlap, and that needs to be sorted out, between the boundaries of secondary liability and the ISP safe harbor provisions, whether it is Section 512 of the U.S. Copyright Act or in some other legislation. To the extent that there are a number of countries that have gotten safe-harbor legislation of one form or another for various reasons, there are still countries that are reviewing and considering whether to have them, and if so in what form. I am thinking particularly of Hong Kong, for example, which is a common-law-based jurisdiction with a U.K. heritage. They just had a copyright review and reform as of last year.59 We are apparently expecting a revision to be proposed any minute now.60 Maybe someone in Bragg, supra note 25. See User Generated Content Principles, supra note 14. 57 Universal Music Austl. Pty, Ltd. v. Sharman License Holdings, Ltd., [2005] F.C.A. 1242, available at http:// www. austlii.edu.au/au/cases/cth/federal_ct/2005/1242.html. 58 Metro-Goldwyn-Mayer Studios v. Grokster Ltd., 545 U.S. 913 (2005). 59 On July 5, 2007 the Copyright (Amendment) Ordinance 2007 was enacted. In December 2006 the Commerce, Industry and Technology Bureau [now CEDB] issued its consultation paper on “Copyright Protection in the Digital Environment,” available at http://www.cedb.gov.hk/citb/ehtml/pdf/consultation/Consultation_document.pdf. In 2007 CEDB issued a Consultation Paper on Media Shifting Exception (2007), available at http://www.cedb.gov.hk/citb/ ehtml/ConsultationDocument MediaShiftingEng_(full).pdf. CEDB was scheduled to release legislative proposals in March 2008; see also International Intellectual Property Alliance (IIPA), 2008 Special 301, Special Mention, Hong Kong (Feb. 11, 2008), available at http:// www.iipa.com/rbc/2008/2008SPEC301HONGKONG.pdf. 60 In July 2008 the CEDB issued Proposing Additional Exemptions on Circumvention of Technological Measures Guidance Note for Proponents, available at http://www.ipd.gov/hk/eng/intellectual_property/copyrght/Note_for_... 55 56

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the audience has an update. Last I checked two weeks ago, it was still “any minute now.” They are looking at whether to have safe harbors of, say, the notice-and-takedown or notice-andnotice sort. The other comment I want to make is slightly different. With respect to the solutions that could be proposed to deal with at least some of these legal issues, we have talked a little bit about technology and we have highlighted perhaps the use of contracts and licenses, Creative Commons being the most common example. I just want to point people to something that I think is quite interesting. I have no connection with them whatsoever. Those of you familiar with the work of Terry Fisher61 and the Berkman Center may know about this. Noank Media,62 has started an initiative in China, and I believe in Canada, and they are trying to expand that to other countries in Asia and elsewhere, where it seems to me it is more like an intermediary of intermediaries. The content owners in the room may know a little bit more about this. Apparently, they contract with the content owners, the rights holders, and they take that arrangement to the ISPs and get the ISPs to contract with them such that the cost, for example, is borne by the ISPs and that in some way shields the ultimate downloaders or users from liability. That is the essential idea insofar as I understand it. They have launched an initiative in China with the biggest college ISP of all, SUrNET, which is the university network.63 That is just something to bear in mind. MR. GOLDBERG: Maybe we can explore that a little bit further, Mary, during the discussion period. We are in the discussion period, which means that we have time for questions to the speakers and the panelists and we have time for comments, etc. QUESTION [Richard Pfohl, General Counsel, Canadian Recording Industry Association, Toronto]: I just want to pick up on Professor Wong’s comments with respect to the need for clarification of secondary liability in countries around the world. I think that that is particularly true in common-law jurisdictions, where you have Australia and England coming to completely different viewpoints on that. Canada is somewhere in the middle maybe, although now maybe leaning one way. But one solution to that is, I think, what they did in Australia. They actually imported directly into their statute some of the factors that they looked at in Grokster.64 So you are correct that they did not look at the Grokster case per se, but they said the statute lays out these particular factors, and that provided the courts the guidance they need. I think that is a good approach in terms of providing the clarity that everyone needs, both the ISPs and the content providers. PROF. BRIAN FITZGERALD: Just a point of clarity. Those factors have been in there for some time. They were not imported from Grokster. But there are factors in the legislation. MR. GOLDBERG: Further comments or questions? Do the panelists want to comment further? Alex? MR. MACGILLIVRAY: We get excited about technology changing, but we do have to remember that the DMCA actually is not that old a law.65 It’s not the 1909 Act. It was a law that was around when a lot of the things that are coming back into vogue now were around then. Proponents_ Circumvention_e.pdf. Additional 2008 CEDB proposals are available at http://www.cedb.gov.hk/ctb/ submission/ HKGCC1. pdf. 61 See, e.g., William W. Fisher III, Promises to Keep: Technology, Law, and the Future of Entertainment (2004). 62 See Noank Media, http://www.noankmedia.com. 63 For additional information, see NoankMedia, In the News, http://www.noankmedia.com/news.html. 64 See Copyright Amendment Act 2006, available at http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/0/ E53C3691BD9BAA0ACA257307001B2EC7/$file/1582006.pdf; see also Copyright Amendment (Digital Agenda) Act 2000, available at http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/0/62531F2C39469329CA2574340 0200798/$file/1102000.pdf. 65 DMCA, supra note 13.

238 CHAPTER IV: COPYRIGHT LAW Don talked a little bit about how we had this era of P2P, which has given way back to an era of more server-side technology. That was also true when the DMCA was being enacted. There were a whole bunch of people who had servers. Yahoo! is a good example. Geocities is the one I like to think about, which I’m not sure any of you remember. Geocities was a Web site where you could post whatever content you wanted. Yahoo! monetized it, with ads across the top. That was something that was around and perfectly okay during the time that the DMCA was being negotiated and enacted. The other thing that has not changed is the ad model. Like I say, Geocities was an ad model. Then, finally, another thing that has not changed is spotlighting of content. Yahoo! was one of the technology companies — Google didn’t even exist at the time — at the negotiating table. They wanted to make sure that their view of search, which if you all remember was directories, people actually choosing “this site is good/this site is bad,” was okay under the law and that the DMCA would protect them from liability when they couldn’t know whether the licenses that those sites had with their copyright holders were in force or not. MR. VERRILLI: Could I just follow up on that? Good luck with that in court, Alex. The statute says “infringement by reason of the storage.”66 It doesn’t say anything like what you’ve just described. But those are arguments that will get hashed out in court. MR. GOLDBERG: Mary Wong, did you want to finish the thought that was truncated before? PROF. WONG: I think the point was probably made, so I will cede the time to other people. MR. GOLDBERG: Howard Knopf. QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa]: Mary, I may be wrong, but I don’t think Noank is going anywhere in Canada. There has been a similar proposal recently, where the Songwriters Association of Canada that wants to impose a $5.00 tax on every Internet account in the country and basically legalize all downloading.67 But that is not going to go anywhere, obviously. As far as the authorization business goes in Canada, I think that it is probably generally agreed that, for example, the Grokster case, had it played out in Canada, would not have played out the way it did here under our doctrine of authorizations, even if Mr. Verrilli had argued it. MR. GOLDBERG: Any comments from the panel? Do we have further questions or comments? QUESTION [Steve Metalitz, Mitchell Silberberg & Knupp LLP, Washington, D.C.]: I just wanted to pick up on Don’s observation about perhaps this law of secondary liability will follow the path that we expect tort law to follow generally. Of course, one way in which businesses that engage in activities that might expose them to tort liability manage the risk of that exposure is through insurance. This has been an issue that has kind of dipped in and out of the whole online environment over the years. I just wonder, in some of the models that Brian was talking about, what is the possibility of development of a market for insurance against these risks, and what, if anything, could be done at the public policy level to stimulate that? MR. GOLDBERG: Anyone want to respond to that? MR. RUBIN: I’ll take a quick stab at an aspect of that. Just referring back to User Generated Content Principles,68 this inter-industry agreement, built into that is the fact that if the sites adhere to the principles and engage in the pre-upload filter and all of that, for any remaining infringement on the site basically the content owners have agreed that they will not assert a claim of liability in those situations for remaining infringement. So that is something different 17 U.S.C. § 512(c). See Songwriters Association of Canada, A Proposal for the Monetization of the File Sharing of Music from the Song-writers and Recording Artists of Canada, available at http://www.songwriters.ca/studio/proposal.php. 68 See User Generated Content Principles, supra note 14. 66 67

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than what you are talking about, but in a sense it is privately negotiated insurance. It gives the technology companies the platforms, the ability, the certainty, of what legal rules will apply and what liability will exist if they make their best efforts to remove infringement, yet some remains. MR. GOLDBERG: Go ahead, Brian. PROF. BRIAN FITZGERALD: I think one of the things about this idea of Web 2.0 being some sort of Web-created Utopia, what Bragg69 and others have really highlighted, is this is a new opportunity for people who are creators who are not necessarily corporations, who are not necessarily holding lots of money. Jane Ginsburg, speaking here last year on the future of copyright,70 said one of the possibilities of the future of copyright is that it comes back to be more like something around the creator. I think what insurance would add to this dimension is just one more layer of that individual creator having to bear a cost, because ultimately I think the site would make the creator somehow pay for that. One of the things that I didn’t want to get drowned out by all of the discussion here and the discussion yesterday is: Are there real possibilities here for individual creators — kids in their bedrooms — to find new revenue streams that aren’t available to them at the moment? I think that is what Bragg is talking about a little bit, and what other people, like Fred von Lohmann71 and Jane Ginsburg, were mentioning here at the conference last year. MR. GOLDBERG: Daniel Gervais? QUESTION [Prof. Daniel Gervais, Acting Dean of Common Law, University of Ottawa]: Thank you, Mort. Just a follow-up on Howard’s points. The Canadian authorization standard is the traditional British standard of “sanction, approve or countenance.” Whether Grokster countenanced the infringement by people who used the software is something we could debate. It is not clear that it would have gone the other way. What thing is clear: it’s not the inducement standard; it’s a different standard. But that really is not the main point I wanted to make. I wanted to say something about the monetization proposals in Canada. I don’t hear much from, or about Noank, at least for now.72 I think the songwriters’ proposal is not an open filesharing in exchange for a $5.00 “tax,” to use Howard’s term, but rather a license that would allow people to share music, but as I understand it only with people who have paid the same license fee.73 So I resist the idea of calling that a tax and open file sharing. Whether the songwriters themselves are the best people to establish such a system is obviously something we can debate, but as a business model I find it interesting. MR. GOLDBERG: Michael Einhorn. QUESTION [Michael Einhorn, Ph.D., Senior Consultant; Advisor, CONSOR Intellectual Asset Management]: In connection with Steve Metalitz’s point and Tom’s response, in calling something a tort, one of the distinctions in law regarding damages for a tort is distinguishing between a trespass and a nuisance. We are seeing that with orphan works.74 We are having a graduated response to orphan works. We are calling it “liability,” but we are not necessarily putting damages on it. See Bragg, supra note 25. See remarks of Prof. Jane Ginsburg in Session I, Part C, “The Next Ten Years in Copyright”, in 10 Intellectual Property Law and Policy 31 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham Intellectual Property Law & Policy Institute, Apr. 12–13, 2007). 71 See remarks of Fred von Lohmann, id. at 32. 72 For more information on Noank’s activities, see http://www.noankmedia.com. 73 See Songwriters Association of Canada Proposal, supra note 67. 74 See U.S. Copyright Office, Report on Orphan Works, A Report by the Register of Copyrights (Jan. 23, 2006), available at http://www.copyright.gov/orphan/orphan-report-full.pdf; Orphan Works Act of 2006, H.R. 5439, 109th… 69 70

240 CHAPTER IV: COPYRIGHT LAW Is there any way we can think about a category of works where people still may assert liability but they may agree that the penalties that should be associated with liabilities should be a modified form of damages where you would not necessarily call it a trespass, you would not be responsible for full damages, but rather some kind of just reasonable royalty? Can we put a certain category of works within that protected group, where we are sure that we are going to have a payment but not necessarily the full damages amount that we would have under the normal copyright standards? Is it meaningful to talk about that? MR. RUBIN: My answer to that is that the orphan works proposal carves out exactly what that category is and should be. QUESTIONER [Mr. Einhorn]: I understand. That is orphan works; that is not Web 2.0. Do we want to extend the paradigm here by modifying the orphan works and extending the frame of thinking by bringing this step approach over into another domain? MR. GOLDBERG: You would make the distinction, Michael, based on the work? QUESTIONER [Mr. Einhorn]: And the nature of the use. Hypothetically, if you want to do something with transformative works and you think the current standard for transformative use is too narrow and you want people to be able to make a wider group of transformations, you might be able to say: “Okay, if you make a transformative work and it is not fair use, you are liable for it, but the damages associated with that will not be all profits made by the infringer. Rather, you can say the profits will be based on a modified form of damages, where you only will be assessed a reasonable royalty, provided you can demonstrate that the work is transformative and that it really adds new meaning.” So, therefore, even if The Wind Done Gone lost the case,75 there would be no injunction, number one. MR. GOLDBERG: Anyone want to respond to that? PROF. REESE: In the fair use context, there is already the possibility of some of that. In Judge Laval’s keystone article on transformative use,76 another point in that article is that injunctions should not be so routinely granted in fair use, which would be the kind of transformative use that you’re talking about. Certainly, the Campbell Court77 has a footnote about that, which lower courts haven’t followed up. We will have to see, after eBay,78 whether or not there is any more interest in that. On the Web 2.0 approach, Section 512 is in fact a step down that road. Section 512 does not say “this conduct is non-infringing”; it says “there are these limitations on liability.” Now, the scope of the limitations on liability are essential limitations only to limited kinds of injunctive relief, not damages at all. But it certainly would be a first step down that road. QUESTIONER [Mr. Einhorn]: And it’s not about the user. It’s about the intermediary. PROF. REESE: Right. But it certainly would be a step down the road to saying we could expand — we could imagine 513, 514, whatever the next available section is — where we could have a limitation of liability that applies to a different kind of entity for a different kind of use, still allowing some kind of monetary relief. PROF. BRIAN FITZGERALD: Why not just a transformative use right? PROF. REESE: I think we already have that. PROF. BRIAN FITZGERALD: Are you sure? MR. RUBIN: One other thing to keep is mind is you have fair use on one end of the spectrum and you have licensed use on the other end of the spectrum. What I hear large content owners Congress, 2d Sess., available at http://thomas.loc.gov/home/gpoxmlc109/h5439_ih.xml; see also discussion in Chapter IV.A.3, “Orphan Works Legislation in the U.S. and Around the World”, supra this volume. 75 Suntrust v. Houghton Mifflin, 268 F.3d 1257 (11th Cir. 2001), 136 F. Supp. 2d 1357, 1363 (2001). 76 See Judge Pierre N. Laval, “Toward a Fair Use Standard”, 103 Harv. L. Rev. 1105 (1990). 77 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, n.11 (1994). 78 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

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talking about is how essentially there is this middle ground where they are providing much more latitude — not necessarily license, but tacitly allowing a lot of the kinds of transformative uses that you are referring to — so that ultimately they don’t become fodder for litigation. So I’m just not sure if your proposal is a solution in search of a problem or not. QUESTIONER [Mr. Einhorn]: It’s not even my proposal. I am just talking about the idea. PROF. WONG: I am going to jump in here on my international clarification hobbyhorse again. I think there still is a question in certain jurisdictions as to the extent to which transformative use will actually be either a fair use or some other kind of limitation or exemption. There may be some encouraging signs in a couple of jurisdictions — I am thinking, for example, of the Canadian CCH case79 — where that might happen. But in a number of jurisdictions, obviously, the scope for fair use, and transformative use accordingly, might be much more limited. MR. GOLDBERG: Do we have further comments from the panel or from the audience? Howard? QUESTION [Mr. Knopf]: Just a quick response to Mary. Unfortunately, in Canada we have a dreadful case on the books involving the “Michelin Man.”80 You may have heard about it. A trade union did a caricature of the nice “Michelin Man” stomping on all those nice little unionized workers. The judge said that was actionable copyright infringement and issued an injunction. Until we get rid of that, we have a problem in Canada that the CCH case does not solve. MR. GOLDBERG: I want to thank our present panel. We will now change part of our panel. I would ask Tony Reese, Tom Rubin, and Mary Wong to stay and Michael Einhorn and Ted Shapiro to come in.

Canadian Ltd. v. Law Soc’y of Upper Can., 2004 SCC 13. Compagnie Générale des Établissements Michelin-Michelin & Cie v. National Automobile, Aerospace, Transp. and Gen. Workers Union of Can. (CAW-Can.), [1997] 2 F.C. 306, available at http://www.canlii.org/ca/cas/ fct/1996/1996fct 10133.html. 79 80

CHAPTER IV

Copyright Law Part C: Copryright in a Web 2.0 World Section 2: The Challenges and Opportunities of Copyright in the Web 2.0 — Panel 2 Moderator MORTON DAVID GOLDBERG

Cowan, Liebowitz & Latman, PC (New York) Speaker MICHAEL EINHORN

Ph.D., Senior Consultant; Advisor, CONSOR Intellectual Asset Management Professor of Corporate Entrepreneurship, Rothman Institute, Fairleigh Dickinson University, (Madison, N.J.) Panelists PROF. R. ANTHONY REESE

TED SHAPIRO

New York University School of Law (visiting)

Deputy Managing Director, Vice President & General Counsel Motion Picture Association (Brussels)

THOMAS C. RUBIN

PROF. MARY WONG

Associate General Counsel, Microsoft Corp. (Redmond, WA)

Franklin Pierce Law Center (Concord, N.H.)

244 CHAPTER IV: COPYRIGHT LAW MR. GOLDBERG: Moving right along, we have now changed our panel in part, and we have Michael Einhorn, Senior Consultant and Advisor with CONSOR Intellectual Asset Management; and we have Ted Shapiro, the Deputy Managing Director, VP, and General Counsel for Europe of the Motion Picture Association in their European office in Brussels. We continue to be graced by Tony Reese, Tom Rubin, and Mary Wong. Now, Michael Einhorn, you have the floor.

A Year to Remember? Or a Time to Forget? Michael A. Einhorn, Ph.D.* I. INTRODUCTION

The last twelve months saw two critical changes in the United States and Europe that may forever change the landscape in media law. In the United States, the four major record companies actually came to eliminate all DRM protections for downloaded music sold through several competing online stores, including the ubiquitous Amazon.com. The sea change came after the majors grew increasingly disappointed with the ability of digital sales to recapture revenues lost in the previous decade for a number of contested reasons. In Europe, the French government participated in a landmark deal that would widen online catalog while getting the ISPs to participate in online content identification. The events of the last year merge with the critical changes of the past three — the development of social networking and the reemergence of online advertising — to continue what we can reasonably describe as a perfect storm. II. DRM AND INTEROPERABILITY

While legal scholars may debate the connection of TCP/DRM and fair dealings and other user exemptions, I shall, as an economist, confine my attention to actual market events alluded to above. Before DRM is pronounced dead, we acknowledge that the present difficulties of DRM in the download market face two critical complications that interfere with any direct test of the technologies. First, TCP/DRM-protected music tracks now compete with engrained file-sharing networks where tracks are downloaded free of charge, often illegally. Second, consumer acceptance of protected downloads flagged due to the limited compatibility of different playing devices and online services. Neither consideration necessarily reflects the inherent tastes of consumers or the controls of technological content protection. Indeed, viewers at academic and research libraries have no large argument with online catalogs of databases and journals that allow viewers to safely access vast amounts of information from their desktops. There is no additional allowance in these catalogs to allow viewers to “rip, mix, burn” reports from online copyrighted materials, And while additional user rights in online libraries might be attractive, users would reasonably forgo such options if the financial integrity of the services were to decline, thus jeopardizing their existence. Concerns regarding monetization are then antecedent to the user rights that follow. * Michael A. Einhorn is a testifying economic expert active in media and technology, and a professor of Corporate Entrepreneurship at the Rothman Institute of Entrepreneurial Studies, Fairleigh Dickinson University, Madison, N.J. Dr. Einhorn can be reached at 973-618-1212, [email protected].

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As the market’s leading portable device for music downloads, the Apple iPod now accommodates iTunes tracks protected by the company’s Fairplay DRM technology as well as unprotected MP3s that users have ripped from personal collections or downloaded from the Internet. According to Piper Jaffrey, Apple’s iTunes now account for 90 percent of all tracks sold in the legitimate à la carte download market;1 second place eMusic does not carry tracks from major labels. However, while MP3s can be played on any device, Apple’s Fairplay protection can play only on iPods, and iPods admit no other protected DRM technology. Consequently, each potential buyer of an iTunes download faces the future possibility that collections of purchased tracks will become useless if another music player otherwise becomes preferred.2 The evidence confirms the predictable consequences of the market lockup. Steve Jobs himself admitted, in February 2007, that the average iPod has only twenty-two tracks purchased directly from iTunes; the remainder were MP3s ripped or downloaded from elsewhere.3 Moreover, a full 83 percent of iPod owners do not purchase digital music regularly.4 Apple’s iPod devices have sold well primarily because they allow fans carry their MP3 collections everywhere. And iTunes has gained market share primarily because the base of iPods has increased, not because each iPod users stocks up on iTunes.5 To no practical avail, major content owners had tried since 2004 to resolve these compatibility problems by coming forth with a standards interface, named Coral, that might have accommodated interoperability among different DRMs.6 Under pressure from European regulators to implement compatibility in some manner, Apple, in February 2007, instead rejected all forms of accommodation for its DRM. Rather, Jobs asserted the importance of maintaining the company’s trade secrets regarding DRM while simultaneously calling upon the record labels to abandon DRM altogether.7 Faced with a market impasse and the unabated use of free file sharing, the four major record companies (Universal Music Group, Warner Music, EMI, and Sony BMG) came in the next months to sell DRM-free tracks in online stores. While EMI, in April 2007, was the first to offer through iTunes and Amazon unprotected MP3 tracks encoded in a higher-resolution format,8 the market-leading Universal Music Group (UMG) in August priced unprotected MP3s at 99 cents at Amazon, Wal-Mart, Rhapsody, Google, Best Buy, Trans World Entertainment, PassAlong Networks, and Puretracks; UMG did not sign a similar contract with iTunes. Warner Music began to offer DRM-free downloads through Amazon.com in December,9 and Sony BMG did so in the first quarter of 2008.10 The move by Sony BMG is especially noteworthy, as the venture had aroused some controversy in 2005 by embedding CDs with a surreptitious Posting of Macenstein to iPod Hacks, “iTunes Store Still Dominates with 90% Market Share”, http://www.ipodhacks. com/article.php?sid=2191 (Apr. 15, 2007, 10:07:46). 2 Steve Jobs, “Thoughts on Music”, Feb. 6, 2007, Apple.com, http://www.apple.com/hotnews/thoughtsonmusic; see also Posting of Cory Doctorow to Boing Boing, “What Steve Jobs’s DRMAnnouncement Means”, to http://www.boingboing.net/ 2007/02/22/what_steve_ jobss_drm.html (Feb. 22, 2007, 8:12 p.m.). 3 Jobs, supra note 2. 4 Id. 5 Id. 6 Bill Rosenblatt, “Coral Consortium Aims to Make DRM Interoperable”, DRM Watch, Oct. 7, 2004, http://www. drmwatch.com/standards/article.php/3418741; see also http://www.coral-interop.org. 7 See supra note 2. 8 Caroline McCarthy, “EMI, Apple partner on DRM-free premium music”, CNET News, Apr. 2, 2007, http://news. com. com/EMI,+Apple+partner+on+DRM-free+premium+music/2100-1027_3-6172398.html. 9 Cassimir Medford, “Amazon, Warner Rock MP3s”, Red Herring, Dec 27, 2007, http://www.redherring.com/Home/ 23366. 10 Catherine Holahan, “Sony BMG Plans to Drop DRM”, BusinessWeek.com, Jan. 13, 2008, http://www.Business week.com/technology/content/jan2008/tc2008013_398775.htm?chan=top+news_top+news+index_businessweek +exclusives. 1

246 CHAPTER IV: COPYRIGHT LAW DRM that was transferred and buried in user personal computers when the tracks were ripped and stored in a hard drive.11 With all four labels offering unprotected MP3s of most music catalog, it may be true that DRM is finished in the U.S. download markets. However, there are two areas in the music sector where technological content protection must yet bear proper scrutiny — subscription services and advertising-supported content. Greater applications, like in television, movies, photography, art, and textual work. Regarding subscription services, Rhapsody, Napster, etc. now offer to listeners the attractive option of unlimited streaming and temporary downloads of millions of catalog tracks priced at a monthly fee of $15. Nonetheless, streaming services have disappointed artists and labels; subscription now accounts for a modest 5 percent of world revenues in digital markets, while downloads and mobile (i.e., ringtones) notched market shares of 48 percent and 47 percent, respectively.12 The growth of streaming is hurt by two additional impasses. First, subscribers fear that playlist details may be lost if they migrate to a rival service. This compatibility problem could be resolved if competing services would agree to standards to memorialize playlists for crossovers, much as competitive banks accommodate one another’s customers at ATM machines. Second, licensors of any record track must also contract with the song publisher for the rights to use the underlying composition upon which the track is based. The matter is a nonissue for the download services, where rights for musical compositions have been made available through compulsory licenses.13 However, streaming and limited download providers in the United States do not have statutory guarantees and are, thus, lacking substantial amounts of publisher catalog. Indeed, the Digital Media Association claimed in 2007 that subscription services lacked rights to some 50 percent of the compositions that its members now seek.14 Senior executives at RealNetworks and Napster agreed also that licensing difficulties for publisher catalog — not piracy — represented the single biggest business problem that limits the uptake of their subscription services.15 The fragmentation of rights has then created an anti-commons that hinders the market uptake of one of the most attractive online services — subscription music. III. THE FRENCH CONNECTION

The United States and Europe may now have embarked on two different courses to engage ISPs to participate in the war against illegal file sharing. The media industry faces a critical experiment that should affect future tactics in the enforcement of legitimate rights. Content owners in the United States continued in the past year to bring actions against serial uploaders and Web sites that made available software used predominantly in the unauthorized redistribution of copyrighted material. Content owners also continued to press for mandatory use of filtering technologies through litigation — e.g., Viacom v. YouTube16 — and for Steve Hamm, “Sony BMG’s Costly Silence”, BusinessWeek.com, Nov. 29, 2005, http://www.businessweek. com/ technology/content/nov2005/tc20051129_938966.htm. 12 Int’l Fed’n of Phonographic Indus. (IFPI), IFPI Digital Music Report (2008). 13 Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39, 109 Stat. 33 (codified at 17 U.S.C. § 115), available at http://www.copyright.gov/legislation/pl104-39.html. 14 “Oversight Hearing on “Digital Music Licensing and Section 115 of the Copyright Act,” United States House of Representatives Subcomm. on Courts, the Internet and Intellectual Property, Comm. on the Judiciary”, Mar. 8, 2005, (Testimony of Jonathan Potter, Executive Director, Digital Media Association (DiMA), available at http://judiciary. house. gov/OversightTestimony.aspx?ID=300. 15 Id. 16 Viacom Int’l, Inc. v. YouTube, Inc., No. 2007-cv-02103 (S.D.N.Y. filed Mar. 13, 2007), available at http://news. justia. com/cases/featured/new-york/nysdce/1:2007cv02103/302164. 11

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voluntary adoption of content identification technologies through the User Generated Content Principles.17 Neither of these activities implicated the ISPs. While ISPs historically avoided any additional role beyond compliance with the notice-andtakedown provisions of the DMCA,18 several ISPs in the U.S. and Canada (including AT&T,19 Shaw, and Rogers) now appear willing to voluntarily filter traffic for infringing works. To do this, a cooperating ISP would install network devices that would extract audio fingerprints or watermarks from transmitted files and compare the extracted information with identification data that rights owners may catalog online. Nonetheless, voluntary filtering of online transmissions lacks universal appeal among U.S. ISPs. For example, Verizon does not “want to get into the business of inspecting the bits and figuring out what is and is not appropriate traffic.”20 The company may reasonably fear the legal complications that could arise from its refusal to handle all traffic, thus presenting a potential loss of status as a common carrier. These common carriers are also major beneficiaries of the broadband extension that free media encourages. While Capitol Hill has stayed out of the issue, Europe has recently considered more direct legislative approaches to bring about ISP involvement. In November 2007 the Sarkozy government announced the Agreement for the Development and Protection of Cultural Works and Programmes on New Networks, (a/k/a the Olivennes Agreement), which advocated a warning and sanction mechanism aimed at deterring copyright infringement.21 This sanction mechanism is legally based on the responsibility of the subscriber to deter fraudulent use, currently found under Article L. 335-12 of the Intellectual Property Code.22 Jean Berbinau, general secretary of French regulatory body Autorité de Régulation des Mesures Techniques (Regulatory Authority for Technical Measures), said that legislation will pass by summer 2008.23 Some considerable action is forthcoming. 17 See User Generated Content Principles Foster Innovation, Encourage Creativity, Thwart Infringement, available at http://www.ugcprinciples.com; Press Release, Internet and Media Industry Leaders Unveil Principles to Foster Online Innovation While Protecting Copyrights (Oct. 18, 2007), available at http://www.ugcprinciples.com/press_ release.html. The companies supporting these principles include CBS Corp., DailyMotion, Fox Entertainment Group, Microsoft Corp., MySpace, NBC Universal, Veoh Networks Inc., Viacom Inc. and The Walt Disney Company. Id. 18 That is, the name, address, and electronic signature of the complaining party [§ 512(c)(3)(A)(i)]; the infringing materials and their Internet location [512(c)(3)(A)(ii–iii)], or if the service provider is an “information location tool,” such as a search engine, the reference or link to the infringing materials [512(d)(3)]; sufficient information to identify the copyrighted works [§ 512(c)(3)(A)(iv)]; a statement by the owner that it has a good-faith belief that there is no legal basis for the use of the materials complained of [§ 512(c)(3)(A)(v)]; a statement of the accuracy of the notice and, under penalty of perjury, that the complaining party is authorized to act on the behalf of the owner [§ 512(c)(3) (A)(vi)]. Available at http://www.chilling effects.org/dmca512/faq.cgi#QID130. 19 Posting by Brad Stone to the N.Y. Times Bits Blog, “AT&T and Other I.S.P.’s May Be Getting Ready to Filter”, http:// bits.blogs.nytimes.com/2008/01/08/att-and-other-isps-may-be-getting-ready-to-filter (Jan. 8, 2008, 07:07 PM). 20 Mike Masnick, “ISP Copyright Filter Debate Continues: Verizon Stays Away, While Rep. Bono Is All For Filtering”, Techdirt, Jan. 30, 2008, available at http://techdirt.com/articles/20080130/15263129.shtml; see also Posting of Rich “vurba” Fiscus, “AfterDawn, Verizon VP Says No Plans to Examine Customer Traffic”, http://www.afterdawn.com/ news/ archive/12762.cfm (Jan. 30, 2008, 22:17). 21 Posting by Stevie Smith, “French Reveal Anti-piracy Plans for Online media”, to http://tech.monstersandcritics. com/news/ article_1376389.php/French_reveal_anti-piracy_plans_for_online (Nov. 26, 2007, 11:27 GMT); Bobbie Johnson & Emile Boyer, “Pirates Face Crackdown Over Movie Downloads”, Guardian, Nov. 24, 2007, available at http://www.guardian.co.uk/technology/2007/nov/24/crime.france. 22 Agreement for the Development and Protection of Cultural Works and Programs in the New Networks, Nov. 23, 2007, available at http://www.popolodellarete.it/showthread.php?t=6010. 23 In France, a Memorandum of Understanding between music and film producers, Internet service providers, and the government was signed on Nov. 23, 2007. Under the agreement, France is to set up a new Internet authority with powers to suspend or cut access to the Web for those who illegally file share, and access providers are to implement filtering and blocking instruments. See Accord pour le développement et la protection des oeuvres et programmes culturels sur les nouveaux réseaux, available at http://www.culture.gouv.fr/culture/actualites/index-olivennes231107. htm [hereinafter Olivennes Agreement]; Eric Bangeman, “France’s Plan to Turn ISPs into Copyright Cops on Track”,...

248 CHAPTER IV: COPYRIGHT LAW Under the terms of the Olivennes Agreement, a participating ISP would send out in its name electronic warning messages to any network subscriber alleged to have downloaded infringing work. Repeat infringers will be referred to judges or to appointed officials for sanctions ranging from temporary suspension to complete termination (hence the name “three strikes and out”). As a public guidepost to discourage later infringers, the government authority will publish monthly statistics on its enforcement activities. The same authority may request that ISPs impose additional protection measures and sanction those who fail to respond to injunctions. France’s deal represents a considerable social compact, having attracted more than forty signatories, including three ministers (finance, justice, and culture), five Internet service providers,24 and the country’s content providers. To sweeten the financial attraction, content owners also agreed to drop within one year all non-interoperable DRM on permanent downloads, and so allow compatibility of online purchases with any sort of computer or digital player. The French film industry also agreed to move post-cinema release dates from seven and a half months to six months, which would match the rules established for DVDs.25 The general appeal of the French approach varies elsewhere. With no direct government intercession, the four major ISPs in Japan apparently agreed to a similar approach.26 Less warm to the idea, the British government recently issued a white paper that included a vague call for “voluntary, preferably commercial solutions” by April 2009.27 For its part, the Swedish government explicitly rejected “three strikes and out”, noting that shutting down an Internet subscription was “a wide-reaching measure that could have serious repercussions in society.”28 And in Ireland, the major record companies actually sued the largest ISP, Eircom, in an attempt to force it to block illicit downloads.29 A somewhat different initiative appeared in Brussels in November 2007, when the European Parliament’s Committee on Industry, Research and Energy (ITRE) issued a report that called upon ISPs “to apply filtering measures to prevent copyright infringements” in order to “rethink the critical issue of intellectual property.”30 Under the proposed filtering system, ISPs Ars Technica, Jan. 28, 2008, http://arstechnica.com/news.ars/post/20080128-frances-plan-to-turn-isps-into-copyrightcops-on-track.html. 24 Free, Noos, Club Internet, Wanadoo, and Tiscali. See “France Takes on Net Pop Pirates”, BBC News, July 29, 2004, available at lhttp://news.bbc.co.uk/1/hi/technology/3935675.stm. 25 See Bill Rosenblatt, “New French Law Threatens ISP Access for Illegal Downloaders”, DRM Watch, Nov. 28, 2007, http://www.drmwatch.com/legal/article.php/3713551. 26 Posting of Danny O’Brien to Electronic Frontier Foundation Deeplinks Blog, “Three Strikes, Three Countries: France, Japan and Sweden”, http://www.eff.org/deeplinks/2008/03/three-strikes-three-countries (Mar. 18, 2008). 27 U.K. Department for Culture, Media and Sport (DCMS), “Creative Britain: New Talents for a New Economy” 51 (Feb. 2008), available at http://www.culture.gov.uk/images/publications/CEPFeb2008.pdf [hereinafter DCMS White Paper]. 28 See O’Brien, supra note 26. 29 Posting of Soulxtc to ZeroPaid, “Record Labels Sue Irish ISP, Demand Music Piracy Filtering”, http://www. zeropaid. com/news/9323/Record+Labels+Sue+Irish+ISP,+Demand+Music+Piracy+Filtering (Mar. 24, 2008). 30 “Internet service providers [would] cooperate in the fight against internet piracy by enforcing their contractual terms and conditions, which permit them to remove or block access to infringing material and to suspend and terminate accounts with subscribers who infringe intellectual property rights; [and would] apply filtering measures to prevent copyright infringements.” Guy Bono Report on the Cultural Industries in Europe — CULT Amendments, ITRE ¶ 9, available at http://www.eff.org/issues/eff-europe/bono-cult-amendments#ITRE_Paragraph_9. Information about and links to the ITRE Draft Opinion of the Committee on Industry, Research and Energy for the Committee on Culture and Education in Cultural Industries in Europe (Sept. 20, 2007); Amendments to the opinion—ITRE Committee (Oct. 31, 2007), and Draft Report – Guy Bono – Cultural industries in the context of the Lisbon Strategy (Nov. 26, 2007) are available at http://www. edri.org/edrigram/number5.24/internet-filtering-music. Following the ITRE report, EDRI-member Electronic Frontier Foundation Europe sent a letter to the members of the Culture and Education Committee, showing how damaging Internet filtering would be from several points of view. See http://www.eff. org/files/filenode/effeurope/CULT-filtering-letter.pdf. [Note: Subsequent to the Conference, on Apr. 10, 2008, the European Parliament rejected the Guy Bono proposal. See “European Parliament Rejects Proposal to Make ISPs Shut Off Suspected Pirates”, IP Watch (Apr. 10, 2008), available at http://www.eff.org/press/mentions/2008/4/10];...

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would automatically read fingerprints or watermarks and move directly to disable download transmissions found to infringe copyright. The ITRE proposal seems to have been withdrawn in January 2008. European officials in France and elsewhere seem to have focused on the download and, thus, place the costs upon ISPs (and presumably their subscribers) rather than content owners themselves Video filtering technology is not nearly as sophisticated as audio, leaving the possibility of a vast number of false negatives and false positives in this growing area. Any undue reliance upon fingerprinting could be problematic, as infringers may use encryption software to avoid central detection by the ISPs. Indeed, in sworn testimony in June 2007 before the U.S. Congress, a critical academic witness (University of Utah) testified that the fingerprinting technology of Audible Magic was critical in combating infringement on his university’s computer network.31 However, the same authority acknowledged that the fingerprinting operation could be defeated entirely by end-to-end encryption, which is made possible through online software. Yet another authority (Arizona State University) also reported considerable success with Audible Magic, but simultaneously feared a technology arms race that would soon result once fingerprintings were defeated.32 If content filtering is defeated, protocol filtering could be installed to slow or eliminate packets headed by p2p protocols.33 Independent of concern for copyright protection, ISPs can now use protocol filtering to control high-bandwidth traffic on many former illegal networks as well as the unencrypted BitTorrent handshake. Due to the video-handling capabilities of` newer software versions, ISPs will increasingly attempt to use protocol filtering to eliminate congestion. However, protocol filtering too presents its concerns. First, content can again be encrypted, and traffic monitoring thus avoided.34 An arms race may then be beginning between users and their ISPs. Second, while protocol filtering can discern certain P2P protocols, it would have no ability to determine whether a particular transmission actually infringes copyright. Here, the BitTorrent protocol now gathers appeal for a number of noninfringing uses related to cooperative research, software upgrades, library digital files, and distance education requirements. Indeed, all major studios have signed deals with Joost, a legitimate distributor see also Leigh Phillips, “Music Firms Want EU to Cut Off Pirates”, Business Week.com, Jan. 28, 2008, available at http://www.businessweek.com/globalbiz/content/jan2008/gb20080128_493404.htm; Dan Mitchell, “Piracy and Privacy”, N.Y. Times, Dec. 29, 2007, at C5, available at http://www.nytimes.com/2007/ 12/29/technology/29online. html. 31 The Role of Technology in Reducing Illegal File-sharing: A University Perspective, Hearing before the Comm. on Science and Technology, U.S. House of Representatives, 110th Cong. (2007) (testimony of Charles Wight, Associate Vice President for Academic Affairs and Undergraduate Studies, University of Utah), available at http://democrats. science.house. gov/Media/File/Commdocs/hearings/2007/full/05june/wight_testimony.pdf (noting that since deploying the Audible Magic software two years ago, the university found that complaints from the RIAA and MPAA dropped by 90 percent). 32 Id. (testimony of Adrian Sannier, University Technology Officer, Arizona State University), available at http:// democrats.science.house.gov/Media/File/Commdocs/hearings/2007/full/05june/sannier_testimony.pdf. 33 ISPs — Technical options for addressing online copyright infringement, Letter from IFPI to European Policy Makers, Dec. 7, 2007, available at http://www.eff.org/files/filenode/effeurope/ifpi_filtering_memo.pdf. 34 “When these devices see a certain usage pattern, they will send ‘TCP RST’ packets to disrupt the communication between a Comcast user and a peer elsewhere. They only seem to do this when the Comcast user is uploading, not when they’re downloading. Even though ADSL, cable and wireless broadband all have much lower upload speeds than download speeds, the uploading can still be the problematic part. Being a good citizen in the BitTorrent world means uploading as much as you download. So BitTorrent and other peer-to-peer file sharing applications use the upload capacity to the max. However, cable networks have very limited return channel capacities, because they were originally designed for one-way distribution of TV signals. So even though Comcast’s connections to the rest of the internet can easily carry the peer-to-peer uploads, it’s the local cable infrastructure that gets into trouble with too many peer-topeer uploads: this will delay the traffic of other users.” Iljitsch van Beijnum, “P2P BitTorrent Filtering by Comcast & Verizon”, Ipv6.com (undated), http://www.ipv6.com/articles/blog/Comcast-Verizon-Filtering-P2P-Traffic.htm.

250 CHAPTER IV: COPYRIGHT LAW of content based on the BitTorrent protocol,35 and MPAA members have spoken generally of the possible efficiencies.36 The combined parties of Europe here may be emphasizing the harms of downloading without considering equally the upload. In this respect, Bill Rosenblatt of DRM Watch writes: “[T]he Olivennes Agreement does nothing to help stem the supply of unauthorized content. Ironically, far from eliminating DRM in France, it may well shift DRM usage to that most ironic of purposes: to aid pirates in uploading content so that users can download it without being detected. All but the most trivial encryption schemes would suffice for this purpose, because they would foil finger-printing and watermarking technologies.”37 The policy vector in Europe is evidently directed differently than in the United States, where uploaders appear to be the prime target. If Mr. Rosenblatt is correct, this apparent emphasis may be misfocused. As the RIAA has evidently proven, major uploaders (who apparently did not encrypt) can be identified without the use of filtering technology.38 As a jurisprudential matter, it would then be interesting to learn if the litigation war against piracy can be made more cooperative, more automatic, and possibly more conciliatory. This may be possible if ISPs and court administrators are made part of the process. In this regard, electronic warnings, ongoing human oversight, and temporary suspensions have some higher moral appeal, at least compared to lawsuits and financial settlements, particularly when combined with DRM interoperability and expanded catalogs for online use. There would also be some apparent moral advantage if court administrators could use the authority of the government to publish activities in a public forum. Relatively speaking, an even-handed administrative approach to the upload may prove to be a more effective and somewhat gentler option than the present litigation battles that now consume the American landscape. III. ADVERTISING AND SOCIAL NETWORKS

The events of the last year merge with the critical changes of the past three — the development of social networking and the reemergence of online advertising. Social networking is the touchstone technology of Web 2.0, a highly interactive “metadomain” involving virtual clubs where content can be shared and redacted with extended network interactions and user editing rights. To allow social networks to eliminate user transactional fees, financing for social networks may presumably come from the pockets of advertisers that would be attracted to the growing numbers and specific demographic natures of interconnected audiences. Joost, http://www.joost.com. Indeed, Fritz Attaway of the Motion Picture Association of America — certainly not a copyright minimalist — would come, in July 2006, to term the joining of Hollywood and peer-to-peer networking as a “marriage made in heaven.” Marc Freedman, “Confusion from ‘Grokster,’ Other Suits Slows Legitimate P2P Deals, Players Say”, Warren’s Wash. Internet Daily, June 23, 2006, http://diariaa.com/article-warrens-legal-confusion.htm. His colleague Dean Garfield aptly made the point: “The challenge with p2p is not the technology, but the business model of those who have chosen to use the concepts … for their own illicit purposes.” Letter from Dean Garfield, Vice-President and Director of Legal Affairs, World Wide Anti-Piracy, Motion Picture Association of America, Inc. to Deborah Platt Majoras et al., FTC Commissioners (Nov. 18, 2004); Press Release, Federal Trade Comm’n, Public Comments, PeerTo-Peer File-Sharing Technology: Consumer Protection and Competition Issues: Announcement of Public Workshop and Request for Public Comment and Participation, FTC File No. P03 4577 (Nov. 18, 2004), available at http://www. ftc.gov/os/comments/p2pfileshare/OL-100030.pdf. 37 See Rosenblatt, supra note 25. 38 While the RIAA has threatened or taken action against some 20,000 suspected file sharers since the inception, the market-research firm NPD Group reports that some 41 million users downloaded music illegally last year. Eric Garland, Chief Executive of Big Champagne, reports that file-sharing among the infringing population remains at historic highs. Eric Garland, “Internet Piracy: Recording Industry Lawsuits”, Wash. Post, Jan. 22, 2004, available at http://www.washington post.com/wp-dyn/articles/A36356-2004Jan21.html. 35 36

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Social networks — such as Myspace, YouTube, LiveJournal, Friendster, and Facebook — now allow people with common personal interests to post or exchange blogs, instant messages, music recommendations, photos, classifieds, event notices, and other items of personal interest. As a signal event in the past two years, News Corporation acquired the Web site, MySpace. With over 100 million viewers,39 MySpace now is the world’s sixth most popular Web site, and the third most popular Web site in the United States.40 Another social networking site, YouTube, now may include some 72.8 million videos and some 2.8 million user channels.41 YouTube was launched in February 2005 with an initial investment of $12.5 million, and was bought out by Google in October 2006 for $1.65 billion.42 Now a target of a lawsuit from Viacom for unauthorized use of copyrighted material, YouTube now accommodates the insertion of rich media banner ads that can monetize Google’s investments in the social network.43 Regarding online advertising, the recent history of two digital companies — Google and America Online — should tell us how the market now views the future. The leading search engine, Google accounts for over 50 percent of searches on the Internet and derives some 98 percent of its annual revenues from the sale of advertising to online sponsors. Since 2002, the company has seen advertising revenues increase from $439 million to 16.6 billion and net earnings per share increase from $0.86 to $13.53.44 By contrast, the former online bellwether AOL, in September 2006, abandoned its subscription model and made its search engine and accompanying software freely available to all broadband users.45 AOL expected that the lost subscription fees will be compensated by the gain in advertising dollars expectedly arising from its larger viewing audience. Online advertising continued the uptrend in the year 2007, as companies spent a record $31 billion on Web sites, search engines, social networks, and blogs.46 Forrester Research predicted in 2007 that this amount would double to $61 billion by 2012.47 For its part, ZenithOptimedia predicted in 2007 that Internet ad spending would overtake radio spending by the end of 2008 and, thus, become soon the fourth most popular advertising medium in global spending (behind television, newspapers, and magazines).48 39 Yinka Adegoke, “MySpace to Sell Music from Nearly 3 Million Bands”, Yahoo! News, Sept. 3, 2006, available at http:// news.yahoo.com/s/nm/20060903/tc_nm/media_myspace_songs_dc; see also Dan Smith, “Online Social Networks & Communities Are Here to Stay”, Knowmoremedia.com, Sept. 22, 2006, http://www.knowmoremedia. com/2006/09/online_ social_networks_communi.html. 40 See generally Wikipedia—Myspace, http://en.wikipedia.org/wiki/MySpace. 41 See generally Wikipedia—YouTube, http://en.wikipedia.org/wiki/YouTube#Copyright. 42 Andrew Ross Sorkin & Jeff Leeds, “Music Companies Grab a Share of the YouTube Sale”, N.Y. Times, Oct. 19, 2006, at C1. 43 Erik Sass, “YouTube Partners with Ad Networks”, Aug. 10, 2006, Online Media Daily, available at http:// publications.mediapost.com/index.cfm?fuseaction=Articles.san&s=46629&Nid=22401&p=204029. 44 Google, Inc., Annual Report (Form 10-K) (Consolidated Statements of Income, For the Fiscal Years Ended December 31, 2006 and December 31, 2007), available at http://www.sec.gov/Archives/edgar/data/1288776/000119 312506056598/ 0001193125-06-056598-index.htm. 45 Electronic mail, security software, instant messaging, social networking, and parental controls. 46 Reuters News, “Too Many Hands Grabbing for Online Ad Dollars?”, Red Herring, Oct. 12, 2007, http://www.red herring.com/Home/22968. 47 Kristina Knight, “Forrester: Online Ad Spend to Hit $61 Billion by 2012”, BizReport, Oct. 29, 2007, http//www. bizreport.com/2007/10/forrester_online_ad_spend_to_hit_61_billion_by_2012.html. Forrester’s expected breakdown in 2012 is search marketing ($25 billion), display advertising ($14 billion), social networking ($10 billion), video ($7.1 billion), e-mail ($4 billion), and mobile ($2.5 billion). Id. The comparable breakdown in 2006 was display ads (35 percent), search (43 percent), classified (19 percent), and email/mobile (3 percent). See also David Kaplan, “Internet Ad Spend Set to Overtake Radio Next in ’08, Magazines by 2010: Report”, PaidContent.org, Dec. 2, 2007, http://www.paidcontent.org/entry/419-zenithoptimedia-amid-growing-pressures-on-total-ad-growth-in-08-online-/ (reporting ZenithOptimedia’s outlook); Fred Aun, “ZenithOptimedia: Internet Ad Spending Will Overtake Radio Next Year”, ClickZ, Apr 3, 2007, http://www.clickz.com/ showPage.html?page=3625467 [hereinafter ZenithOptimedia]. 48 See ZenithOptimedia, supra note 47.

252 CHAPTER IV: COPYRIGHT LAW The nexus of networking and advertising will advance further through the development of massive multi-player distributed games (or virtual worlds), such as Second Life.49 Virtual worlds now offer to users the potential for networked engagements that combine problemsolving, cooperation, and competition in gamed situations. In virtual space, users can create second selves, called avatars, which can visit, make friends, build homes, buy virtual items, and run businesses in online universes. As the appeal grows, virtual worlds will increasingly accommodate themes with merchandising, entertainment, or cultural venues; e.g., avatars may engage one surrounding by the characters, places, and songs of Disney World, National Geographic, or ancient Greece. There is clear potential for advertising and social networking to help out the media industries. For the besieged music industry, this author calculates label profits could double if as little as 2.5 percent of broadcast radio advertising in the United States could be diverted to the revenue line of record labels.50 As an enabling instrument to engage fans and widen advertising bases, Web 2.0 then offers great potential for the industry to monetize investments. A great potentiality is demonstrated by News Corp.’s MySpace, which announced in January 2007 a deal to integrate SNOCAP into a “Mystore” widget and, thus, allow bands to make licensed MP3 tracks directly available to MySpace audiences.51 Listeners may then exchange or recommend their downloads with one another, thus build their appeal through recommendation and social networking Now ranked as the top social music site, Imeem is a social networking site where music fans engage one another with shared blogs, photos, audio, and video.52 The company has more than 25 million visitors per month and attracts over 65,000 new users every day.53 Nonetheless, analysts must yet be cautious before claiming advertising to be the magic bullet that can lead content owners and service providers to entirely abandon the transactional and subscription charges that have been the incumbent means of financing content. At present, advertising in the United States has not reached the narrow tail of the Web site universe. Indeed, the top ten Web sites accounted for more than 70 percent of online advertising revenue in the first half of 2007, while the top fifty sites accounted for 90 percent.54 As advertisers attach a premium for integrated buys and one-stop shopping, it remains to be seen whether niche markets can cut the mustard. Indeed, Beth Comstock, former head of NBC Universal’s Integrated Media Fund (an investor in media and digital companies), phrases the caution: “I’m getting to the point where I feel like every answer to every business development pitch is ‘We’re going to be advertiser supported.’ … It’s just not going to be possible . … There are not going to be enough advertising dollars in the marketplace. No matter how clever we are, no matter what the format is.”55 Even ZenithOptimedia is cautious: “the [growth rate of 29 percent] will start to slow naturally. It can’t continue to grow explosively forever. It’s quite possible that new formats will arrive, but looking at the existing formats, they are starting to mature.”56 Visionary Strategies, http://www.visionarymms.com. At present, no amount of the total $20 billion spent in broadcast radio advertising is diverted to record labels and performing artists (other than the songwriters). The four major record companies (which may account for 75–80 percent of the industry total) now earn annual revenues of some $10 billion per year for sale of label product. Assuming a very generous profit rate of 5 percent for these labels, this amounts to some $500 million in profits, or 2.5 percent of the radio advertising total. Label profits could then double if as little as 2.5 percent of broadcast radio advertising could be diverted, presumably through the shift of listeners to advertising-based services made available through the Internet. 51 Kate Holton, “Independent Record Labels Sign MySpace Deal”, Wash. Post, Jan. 21, 2007, available at http://www. washingtonpost.com/wp-dyn/content/article/2007/01/21/AR2007012100286.html. 52 See generally Wikipedia—Imeem, http://en.wikipedia.org/wiki/Imeem. 53 Id. 54 See supra note 50. 55 Id. 56 See ZenithOptimedia, supra note 47. 49 50

PART C: COPRYRIGHT IN A WEB 2.0 WORLD 253 MR. GOLDBERG: Thank you, Michael.

We will have comments first from our panel. Ted? MR. SHAPIRO: From our point of view, we very much support the developments in France, and indeed in other countries in Europe, and even at the European Union level, where this is about promoting more cooperation with ISPs. There are a lot of details to be worked out in the Olivennes legislation57 and a lot of difficult issues. A lot of them are being litigated in the context of the SABAM v. Tiscali (Scarlet) case.58 But it is really about trying to educate consumers about legal alternatives. We have over 300 legal services — video-on-demand, broadly defined — in the European Union, of which about 75 percent are online. ISPs are more and more in our business. When you sell cinema tickets up-front, you don’t want to leave the backdoor open. Through this graduated response of one form or another, a warning and limitation on service does not necessarily have to be suspension/termination — there are other things that could be envisioned as well — as well as the use of commercially available content-recognition technologies. This is not about mandating any particular technology. These things can work in combination or separately, despite the growing use of encryption on the networks. As was suggested by Michael, this is a lot more proportionate response to mass infringement on the Internet. There have also been a lot of criminal actions brought in Europe. No civil suits. No disclosure of data about end-users, so respect for privacy. Not about gaining personal knowledge of communications. Not about affecting the liability of ISPs. There are still a lot of open issues about the liability of other facilitators of piracy, ones that are making money, particularly in the Nordic region. We could talk about damages later. This has also been recognized by the European Commission in its telecoms package.59 We wish the French luck with their proposal. One slight qualification. The DRM-free requirement relates only to music, but there were concessions by the film side regarding windows and other matters. So it really was meant to be something with give/give. MR. EINHORN: Music downloads only. Only downloads, nothing else. MR. SHAPIRO: Yes. I would mention also that there is going to be a consultation in the United Kingdom. The U.K. government is looking at this also, following the Gowers Review.60 And there are discussions about this in many other European countries. MR. GOLDBERG: Thank you, Ted. Tony? PROF. REESE: I’ll be very brief so we have time for questions. As somebody who was a co-author of a proposal a number of years ago for administrative alternative dispute resolution in peer-to-peer file-sharing cases instead of going to court, I can’t See supra notes 21–25, 27, and accompanying text. SABAM v. S.A. Tiscali (Scarlet), Dist. Ct. of Brussels, No. 04/8975/A, Decision of 29 June 2007 (English trans. by Fran Mady, Julien Bourrouilhou & Justin Hughes, Cardozo Arts & Ent. L.J., CAELJ Translation Series #001, available at http://www.cardozoaelj.net/issues/08/case001.pdf). 59 Proposal for a Directive of the European Parliament and of the Council amending Directives 2002/21/EC on a common regulatory framework for electronic communications networks and services, 2002/19/EC on access to, and interconnection of, electronic communications networks and services, and 2002/20/EC on the authorisation of electronic communications networks and services. All documents related to the European Commission’s “telecommunications package” are available at http://ec.europa.eu/information_society/policy/ecomm/library/proposals/index_en.htm. The European Parliament committees responsible for the telecoms package voted on July 7 and the Parliament as a whole voted on Sept. 2, 2008. 60 See DCMS White Paper, supra note 27; U.K. Treasury, Gowers Review of Intellectual Property (2006), available at http://www.hm-treasury.gov.uk/media/6/E/pbr06_ gowers_report_755.pdf. 57 58

254 CHAPTER IV: COPYRIGHT LAW object to the potential desirability of a graduated response.61 But, of course, the devil is in the details. One of those details, which I will just point out can be more troublesome than it might otherwise seem, is the “three strikes you’re out” notion. We have something like that provided for in Section 512 of U.S. law. It is not three strikes, but it is somebody who is a repeat offender, though it is entirely unclear whether that means somebody who has had a notice filed against them or somebody who has been adjudicated to have infringed after a notice has been filed against them. But somebody who has been a repeat offender has to be excluded from the network if the ISP wants to continue to enjoy the benefit of a safe harbor. So there are questions about what invokes that. But there are also some questions that I think we have not quite figured out about the consequences. Are we actually contemplating permanent exile from any connection to the Internet for the rest of your life if you have twice been held to engage in infringing conduct online? In a world where increasingly commerce and citizenship and other kinds of responsibilities and opportunities are moving online, and moving more and more exclusively online, it is not at all clear that permanent exile will be desirable or seen as a smaller piece of a graduated response than lawsuits or other kinds of penalties. So there is some attraction to that, but I think we need to figure out exactly how it would be implemented to get a better sense of whether it is more graduated and makes sense. MR. RUBIN: Just briefly, I certainly think that having a cross-industry agreement between ISPs and content owners that brings benefits both to the content owners and to consumers is a very good thing, of course. As explained on the earlier panel, we have seen that fingerprinting and filtering technology can be used in certain circumstances to identify and remove infringing content or find a way to monetize it. However, I do want to caution that extrapolating from that use of fingerprinting and filtering to the ISP context, I think it is a little bit too soon to draw any conclusions that it can work and that the solution should be implemented. I think there are, very briefly, three categories of things that I just raise questions about in this context. Technologically, there are still the questions: How well would this work? What is the impact on the network? What is the impact on the user experience? In fact, as mentioned earlier, can this filtering just simply be circumvented by the use of encryption? Second, there are a lot of implementation details to be worked out. What does “three strikes and you’re out” mean? How will that work in practice? Third, just to highlight the ISP context, there is the question of discrimination and the concern about what role is the ISP being put in. As recently as yesterday, there are reports about Comcast and BitTorrent,62 which we don’t need to get into here. But look at that closely because I think what you will see is that this is an area that the solution is not yet clear. What we need to do is make sure that any solution to this issue, this problem, of course must be effective, but it also must be something that doesn’t discriminate against legitimate uses. Along those lines, I’d only mention briefly that yesterday during the General Counsels’ Roundtable [Chapter I.A, infra this volume] Howard Knopf raised a question about the CBC and distribution of a show using a peer-to-peer network. Mr. Cappuccio said: “Well, why does the CBC even need to distribute its content via peer-to-peer? It could get a Web site and just have it available for streaming or downloading from its Web site.” See Mark Lemley & Anthony Reese, “Reducing Digital Copyright Without Restricting Innovation”, 56 Stan. L. Rev. 1345 (2004). 62 See Eric Bangeman, “Comcast-BitTorrent Pact Not a Substitute for Net Neutrality”, Ars Technica, Mar. 27, 2008, http:// arstechnica.com/news.ars/post/20080327-comcast-bittorrent-pact-not-a-substitute-for-net-neutrality.html. 61

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I don’t think that is an adequate answer to the problem. If a content owner wants to use the great benefits of peer-to-peer for legitimate distribution of its content, we need to make sure that any kind of ISP filtering mechanism allows for that. MR. GOLDBERG: Thank you, Tom. Mary, do you have comments? PROF. WONG: Yes. Just so that you’ll not ban me from being on a panel with you ever again, Mort, I really will keep this brief. Just two short comments. One, we seem to agree, at least most of us on the panel, that the law is unclear in many respects and that we need to look for other solutions that will work in tandem or in parallel with whatever legal clarifications might come from the courts or the legislature, always bearing in mind, as someone said yesterday, that litigation is a very blunt instrument. With respect to the litigation part of it, just a reminder that a lot of the lawsuits that are going on are not just against downloaders or the ultimate end-users, however you want to characterize them, but also, and particularly in terms of some of the cases going on in the United States right now, with people who make available, for example, infringing copies of copyrighted works for others to download. There is a very interesting legal question there as to which of the exclusive rights under the U.S. copyright law that falls under. I don’t want to talk about that because I think we have a panel on that this afternoon.63 But again, not just downloaders, but the making available of those recordings. Secondly — and this goes back slightly to the Noank Media question64 — just a reminder that again in different markets there may be different solutions, whether legal or otherwise. In China, for example, by partnering with SUrNET, the thinking was that there are four large ISPs in China and there are countless hundreds of smaller ones. If you start at the top and you get the top to contract with the middle and the smaller ones, maybe that kind of solution could work in that market, but not in others. MR. GOLDBERG: Thank you, Mary. Do we have comments or questions from our audience? QUESTION [Daphne Keller, Google, Inc., Mountain View, CA]: Following up on the comparison to the DMCA and the “three strikes you’re out” privately administered terminations there, another thing that DMCA bakes in that I think is very useful is the counter-notice process, for the person who has been accused of infringement to come back. In the Web search context, you see them coming back and saying things like, “This was a misidentification; I have totally different content” or “This was a misidentification; I’m a licensee” or, more contentiously, “I think this is fair use; let’s go to court” — whatever the response is. That is really useful in the DMCA context. I am curious whether in the French example that was considered, and, more broadly, whether people think there is a reason not to be using that, because to me it seems extremely useful. MR. SHAPIRO: They are considering that in the French instance. It is one of the issues that they are struggling with. They are concerned about termination, a due process issue, why they want to bring in a judge or another administrative official. And they do want to take into account the possibility that there might be an excuse. But they also have in French law, in the Copyright Directive implementation, a notion of a statutory duty of care for making sure that your Internet subscription is not abused by infringing the law.65 MR. GOLDBERG: Thank you. Mihaly, you had a question? 63 Chapter IV.B.3(a), “The Role, Effectiveness, and Issues in Infringement Actions Against Individual P2P Downloaders — The ‘Making Available’ Right”, supra this volume. 64 See NoankMedia, “In the News”, http://www.noankmedia.com/news.html.

256 CHAPTER IV: COPYRIGHT LAW QUESTION [Mihály Ficsor, CITIP, Budapest]: I have just noted that, as it happens quite frequently nowadays, reference was made to a “DRM-free system” which is not really DRMfree. Perhaps I should speak about these French ideas in French. MR. GOLDBERG: But he can’t speak Hungarian or a few other languages. QUESTIONER [Mr. Ficsor]: Actually, President Sarkozy is 50 percent Hungarian. However, it is not the reason for which I like the Olivennes/Sarkozy proposal66 about “gradual response” and the related ideas. My problem, as I have mentioned, is that I have heard again about a DRM system that in fact is not DRM-free. It was said that, according to the French proposal, sound recordings would have to be made available, after a certain period, DRM-free. You seemed to agree about this description. However, as the speakers at the General Counsels’ Roundtable pointed out — and I think this is quite important — what is referred to so often as “DRM-free distribution” is in fact DRM-controlled distribution, since usually there is some kind of access-control mechanism. Without this, there would be not only DRM-free but free-of-charge distribution, which could hardly be regarded as a “business model,” since, in general, there would be no business in it.67 Therefore, in such a case, we should not speak about DRM-free distribution but only about copy-protection-free distribution, in the sense that, after getting access in a controlled way, there is no control of further reproduction; it is allowed also under the law for certain purposes (such as for “private copying”). MR. SHAPIRO: First of all, it relates, fortunately, only to our colleagues in the music sector, and it relates to French catalog. The idea is that it would be MP3. But yes, you could have it on a service where you might be a subscriber to that service. So there might still be a form of DRM in there, but there would be no copy controls on what you downloaded. MR. GOLDBERG: Brian? QUESTION [Prof. Brian Fitzgerald, Queensland University of Technology Law School, Brisbane]: This issue about the role of ISPs is a big issue in Australia. It is a big issue in many jurisdictions. I suppose one of the difficulties we have with it is that we already have struck a legislative bargain to some extent between content owners and ISPs. The more you actually put regulation on ISPs, the more you threaten the dynamic nature of the Net. What the current safe harbors provide — under Safe Harbor 1, for instance, routing and transmission and so on — is that you have to have a repeat infringer, and then you have to do something about the repeat infringer. Because P2P doesn’t fit neatly into that framework, we are now saying, “Let’s go outside the safe harbors and let’s create some other form of regulation.” I really don’t see why we have to actually do that. We already have in legislation a clear bargain. So what is the difference that you are articulating here? MR. SHAPIRO: The clear bargain in the legislation, in the safe harbors that you refer to, at least in Europe and in the United States, was the notion that in return for these safe harbors there would be ISP cooperation. That has not come to pass. In fact, the difficulty is the language in Section 512, which was cited. In the language about termination of repeat infringers, it refers to something like “under appropriate circumstances.” But those were not defined. Graduated response defines those appropriate circumstances. MR. GOLDBERG: Thank you, Ted. QUESTION [Patrick Gruter, The Walt Disney Company]: I will answer, partly building on what Ted just said. In Europe, at least, we have had legislation since 2000 on the question of LOI n° 2006-961 du 1er août 2006 relative au droit d’auteur et aux droits voisins dans la société de l’information (1), J.O. no. 178, du 3 août 2006 page 11529. 66 Olivennes Agreement, supra note 23. 67 See Chapter I.A, “General Counsels’ Roundtable: A View from the Top”, supra this volume. 65

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what ISPs have to do and do not have to do. That legislation foresaw a code of conduct. This was in 2000. There is no code of conduct. So the legislation is incomplete. The picture that was supposed to be painted is still only just an outline. Olivennes in France, the efforts in the United Kingdom, the Renfors Report in Sweden,68 efforts in Germany — I think all are efforts to put some color to the picture. MR. GOLDBERG: Thank you. Howard? QUESTION [Mr. Knopf]: I want to thank Tom for his considered comment on my question yesterday during the General Counsels’ Roundtable about the Copyright Board Canada. I appreciate your comment a few minutes ago. I think it was a very correct and very appropriate comment. Michael, I think you have posed a totally, frankly, with respect, false dilemma. Choosing between lawsuits and this “three strikes and you’re out” thing is like choosing between capital punishment and life in prison for something that could be quite trivial. A very large number of DMCA notices are totally spurious or trivial. I think everybody probably knows about the Chilling Effects Web site69 and all of that stuff. There is going to be an enormous amount of fair use going on here. To take somebody’s Internet privileges away because some computer has decided that they have been a bad person three times is, I think, frankly ridiculous. I don’t think it is a particularly good alternative. Canada has a very good system right now, which is notice and notice. It works really well. MR. GOLDBERG: Howard, let me get some more views. QUESTIONER [Mr. Knopf]: This is another view, Mort. MR. GOLDBERG: I think we’ve got the gist of your view on that. Michael? MR. EINHORN: Here we go once again. I didn’t say anything about taking someone’s Internet connection away after the third time. They have to work this out. First of all, the first time nothing spits out from a filter. You are going to have a judge with human oversight here, who is an administrator, who is an arbitrator, who is appointed here to act. So this is not an automatic machine here that’s going to clamp and cut people off like we’re on an assembly line. Second of all, I didn’t say anything about what you are going to do after the second or third time or whether I want to close off anybody’s account. They are going to have to work that through. What they can do is say, “After the first or second or third time, we’ll cut you off for a month; we’ll cut you off for two months.” There is a way to escalate up here before immediately going out and going nuclear. What I like about this approach is the philosophy of it. We know enough about law, and our thinking about law is that law is best when it is engaged as part of norms. Legislation can be very good when we have it encoded with wider norms that we become conscious of. In my lifetime, one of the most successful pieces of legislation, if not the most, was the Civil Rights Act of 1965. But the major reason why the Civil Rights Act of 1965 was successful is not because people really became afraid of breaking the law, although that certainly was part of it. It’s that they were able to define that legislation within a greater awareness in the norms of the system around it, so that when the president of the United States could put the moral authority of the presidency behind the law, people could grasp that dimension as well. Swedish Justice Department, Cecilia Renfors, Music and Film on the Internet — Threat or Opportunity (2007). See Press Release, IFPI, IFPI Welcomes Swedish Report Calling on ISPs to Tackle Copyright Infringement (Sept. 5, 2007), available at http://ww.ifpi.org/content/section_news/20070905.html. 69 See “Chilling Effects Clearinghouse”, http://www.chillingeffects.org. 68

258 CHAPTER IV: COPYRIGHT LAW What I like about this particular approach is that there also is an awareness of wider norms. The ISPs are buying into it. They are buying into the consciousness of it. People are conciliatory. Government is now a part of it and reviewing here to reduce the tension. So I look at this thing not so much as an idea of “three strikes and you’re out.” MR. GOLDBERG: Let me get some further comments, Michael. Justin Hughes. QUESTION [Prof. Justin Hughes, Benjamin M. Cardozo School of Law, New York]: Just some quick comments. Michael, one thing that we didn’t say was that you could not just be off the system permanently or off for one month or two months. You could be off and pay your way back on, which would produce a damage system in effect. I wanted to address something Brian said before. I do think that in the Electronic Commerce Directive70 there was a kind of compromise and an understanding that ISPs would engage or develop a code of conduct. But in the case of the DMCA,71 it wasn’t that kind of compromise. Frankly, Section 1201 was held hostage to 512. That’s the bottom line. If that is your compromise — and the ISPs want to say there was a political settlement — if it is that kind of political settlement, the other side gets to come back when they can come back. The bottom line here, which is the most interesting thing, is that what happened from 1998, through the Electronic Commerce Directive and then the permutations in other states, is that wave of legislation represented a technological state of affairs.72 What we have been seeing in the discussion here today is that a fundamental shift in the technological state of affairs puts the players in different positions to make different demands. I think that’s the answer to your point. MR. SHAPIRO: The E-Commerce Directive was adopted the day after peer-to-peer.73 QUESTION [Mario Bouchard, General Counsel, Copyright Board of Canada]: I suspect the move towards “three strikes you’re out,” as it is I think mistakenly called, is that we don’t want users to abuse the network. At the same time, Howard is indirectly expressing a preoccupation about the possibility that copyright owners might abuse the process, which raises the question: Would it be reasonable to limit the access to the process of copyright users who are proven to have abused it? MR. SHAPIRO: In the French context — and, indeed, in the negotiations that happened between ISPs and rights holders — ISPs are obviously very concerned about that. They do not like getting notices that don’t have appropriate time stamps, or that have time stamps for the West Coast and not Greenwich Mean Time, and things like that. So all of that is very much argued about and tried to take into account. We do have some experience with graduated response. There are deals in the United States and in the United Kingdom between private parties. There have recently been reports in some of the U.K. newspapers that it is very, very effective and that termination is very, very low. So that is why we are so encouraged about it. But yes, we do have to be careful about abuse of the process. Particularly, the ISPs are concerned about it. And don’t get me wrong. The ISPs do not like this. MR. GOLDBERG: Another question? QUESTION [Prof. Anne Fitzgerald, Queensland University of Technology Law School, Brisbane]: One of the issues that we have been looking at concerns the kinds of notices that an Council Directive 2000/31/EC, Electronic Commerce Directive, 2000 O.J. (L 178) 1. Digital Millennium Copyright Act of 1998, Pub. L. No. 105-304, 112 Stat. 2860 (codified at 17 U.S.C. § 512 (Oct. 28, 1998)) [hereinafter DMCA], available at http://www.copyright.gov/title17. 72 See IViR Report, Implementation of Information Society Directive (Feb. 2007), available at http://www.ivir. nl/files/ implementation_2001_29_EC/index_eng.html. 73 Council Directive 2006/24/EC, E-Commerce Directive, 2006 O.J. (L 372) 32 (amending Directive 2002/58/EC). 70 71

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ISP would give to people who are allegedly infringing copyright on the Net. The mere fact of issuing that kind of instruction or representation, “We believe that you are infringing,” will, if done on a massive scale — and obviously it will be done on a machine-generated basis — have the effect of chilling commerce. This has long been recognized in our legal system. I do not know if other legal systems are the same in this respect, although there may be equivalent provisions in operation in the United Kingdom. But whether there is an equivalent in the United States or Canada, I don’t know. What we have throughout all of our statutory intellectual property systems are well-defined unjustifiable threats provisions. In fact, essentially making a threat and telling someone that you believe that they are infringing copyright — a lot of the notices that we see that are given to alleged infringers in the United States would come within the scope of these unjustifiable threats provisions under the Australian legislation for copyright, patents, and trademarks. They are there in much the same form in all the statutory IP regimes. Is anyone on the panel aware of any equivalent in the United States or other jurisdictions? MR. GOLDBERG: Anyone on the panel want to comment? Tony? PROF. REESE: Specifically in the context of ISP notice-and-takedown regimes, one of the questions talked about the possibility to respond to notice and takedown. One other feature that is in Section 512 is the possibility of going after a copyright owner for material misrepresentation in the filing of a notice. What exactly that standard covers and whether or not it is a material misrepresentation if you should have known that it was likely to be fair use, there is not a lot of case law out there. There is some uncertainty about that. So there is that specifically directed to the ISP, as opposed to a more general, in any context, unjustifiable infringement. QUESTIONER [Prof. Anne Fitzgerald]: Is there a general principle outside the safe harbors provisions, like as a general rule? There is no equivalent? PROF. REESE: There are threats of frivolous lawsuits. PROF. BRIAN FITZGERALD: This is not a notice-and-takedown issue. This is a P2P issue. So it is outside the safe harbors. So if you are going to issue these notices, the ISPs are going to have to be indemnified somehow, because there is plenty of law around. That is an issue. I am not sure if that is happening or not. PROF. WONG: Can I follow up on that? Going back to the ISP issue, just picking up on some others’ comments, in addition to Professor Reese’s point about misrepresentation, within Section 512, the safe harbors themselves, there is this question of what is substantial compliance on the part of the rights holders with the notice-and-takedown procedure. On that there has been some discussion in some of the case law, for example in last year’s CCBill case.74 MR. GOLDBERG: Another question? QUESTION [Tamir Afori, Israel Ministry of Justice, Jerusalem]: I think this French proposal raises some serious questions of privacy. I think the idea of someone collecting a lot of personal information, what kind of contacts private citizens hold on their computers, raises some worries. The idea is that a judge — or I don’t know who exactly — is going to be the authority that handles this mechanism. But if it is a part of the government, one could think of “Big Brother” problems. Not all the countries in the world are democracies. One could wonder, in places where democracy is not strong enough, whether putting such strong tools in the hands of the government is not a very big risk to the freedom of citizens. 74 Perfect 10 Inc. v. CCBill, LLC, 481 F.3d 751 (9th Cir. 2007), available at http://www.scribd.com/doc/ 267076/ Perfect-10-v-CCBill-488-F3d-1102-9th-Cir-2007.

260 CHAPTER IV: COPYRIGHT LAW MR. SHAPIRO: Leave aside the part about totalitarian regimes having tools or not to do things that they are already doing. With respect to the question of data protection law, the French have very, very strict data protection rules that go back even before the European Data Protection Directives75 that they now have to abide by. One of the reasons why the French proposal is so complex and is going through so much difficulty is that they are working very, very hard to make sure that it complies with French data protection law, because they know for sure that the law will be subject to constitutional review by the Conseil Constitutionnel almost immediately after it is adopted by Parliament. One of the ways that they are dealing with that is creating this independent authority. The French love to create independent authorities, because governments, whether you want to call them “Big Brother” or not, are subject to more exceptions under data protection rules than the nasty right holders that are out prowling the Internet. MR. GOLDBERG: A follow-up question from Justin, then we’ll have Michael Einhorn. QUESTION [Prof. Hughes]: I just want to say on the privacy issue that I think that is a very real problem. At least one U.S. judge has discussed that, and I think his discussion was right.76 When you install a peer-to-peer system and knowingly have a shared file directory, it is really hard to make a privacy argument for the content of your shared file directory that you have opened up to the entire world. The fact that the prosecutor happened to see what was there does not strike an American as a deep privacy problem. MR. GOLDBERG: Michael? MR. EINHORN: I don’t want to waste any time saying anything because you said exactly what I was going to say. MR. GOLDBERG: In trying to accelerate the discussion, I have brought it to a sudden stop. As you may be aware, further discussion is what stands between you and lunch. I gather you have expressed a vote. I want to thank you all, and especially our panel. Thank you very much.

See Council Directive 95/46, Data Protection Directive, 1995 O.J. (L 281) 31; Council Directive 2001/29, The Harmonization of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 10; Council Directive 93/83, The Coordination of Certain Rules Concerning Copyright and Rights Related to Copyright Applicable to Satellite Broadcasting and Cable Retransmission, 1993 O.J. (L 248) 15. 76 Theofel v. Farey Jones, 341 F.3d 978 (9th Cir. 2003) (Kozinski, J.) (“We consider whether defendants violated federal electronic privacy and computer fraud statutes when they used a ‘patently unlawful’ subpoena to gain access to e-mail stored by plaintiffs’ Internet service provider.”). 75

CHAPTER IV

Copyright Law Part D: Copyright Exceptions and Limitations Section 1: Copyright Law Exceptions and Limitations

Moderator PROF. JUSTIN HUGHES

Benjamin N. Cardozo School of Law, Yeshiva University (New York) Speakers TAMIR AFORI

HON. MARYBETH PETERS

Deputy State Attorney, Civil Dept., State Attorney General’s Office Ministry of Justice (Jerusalem)

Register of Copyrights, U.S. Copyright Office (Washington, D.C.)

PROF. P. BERNT HUGENHOLTZ

PROF. PAMELA SAMUELSON

Director, Institute for Information Law, University of Amsterdam

University of California (Berkeley)

Panelists MIHÁLY FICSOR

TILMAN LÜDER

Director, Center for Information Technology and Intellectual Property (CITP) (Budapest)

Head of Unit, Copyright and Knowledge-Based Economy, DG Internal Market and Services (Brussels)

PROF. JANE GINSBURG

Columbia Law School (New York)

262 CHAPTER IV: COPYRIGHT LAW PROF. HUGHES: I want to welcome everyone to this part of the conference, Copyright Law. Our session is on “Copyright Law, Exceptions, and Limitations.” A lot of what we have been talking about at this Conference are changes or challenges to copyright law prompted by technological developments, but here in this session we are more discussing potential changes in copyright law prompted by the legal and political infrastructure that we have all experienced in copyright in the past decade. Today, the question of copyright law exceptions and limitations is quite a hot topic. There are many ways you can understand it as a hot topic. One way it is a hot topic is that in the past decade or more we have seen a strengthening of copyright law — many perceive it as an over-strengthening of copyright law — and, in some sense, the discussion about exceptions and limitations can be perceived as a form of political pushback and response to what the tide of strengthened copyright law has been in the past decade-plus. Another very practical argument you hear from some countries is that the question of exceptions and limitations needs to be better explored because, in a world where copyright enforcement is improved, and much improved compared to what it was in the past, people have the right to know exactly when and where they can use copyrighted works; that the work of defining and clarifying exceptions and limitations takes on added importance because of strengthened enforcement. Third, in this discussion about exceptions and limitations, one of the strong currents is the question of whether or not it is time to harmonize, or make an effort at harmonizing, exceptions and limitations in copyright law. Now, a little plug. Hugh and I conspired on this together. For those of you who are in New York or staying in New York, in a way today’s session is the parting shot or the opening shot. There is a two-day conference on “Harmonizing Exceptions and Limitations to Copyright Law,” which will be on Sunday and Monday at Cardozo School of Law. For those of you interested, outside there is the program for this conference.1 The harmonization of exceptions and limitations is a very interesting issue, partly because in the WIPO it is perceived as a possibly viable issue for a new wave of international normmaking in the copyright world.2 WIPO, as everyone knows, has suffered a series of setbacks in copyright in trying to produce increased international norms, setbacks demonstrated by the failure of the Audiovisual Performers’ Rights Treaty,3 the collapse of the efforts on the Broadcast Treaty,4 failures on database protection.5 So there is a perception that if the 1 Program available at http://www.cardozo.yu.edu/uploadedFiles/Cardozo/Profiles/intellectual_prop_program-143/ Program%20v2.doc. 2 See WIPO, Standing Committee on Copyright and Related Rights (SCCR), WIPO Study on Limitations and Exceptions of Copyright and Related Rights in the Digital Environment, 9th Sess., Geneva, June 23–27, 2003 (prepared by Sam Ricketson), WIPO Doc. SCCR/9/7 (Apr. 5, 2003), available at http://www.wipo.int/documents/en/ meetings/2003/sccr/pdf/ sccr_9_7.pdf. 3 See WIPO, Standing Committee on Copyright and Related Rights, Basic Proposal for the Substantive Provisions of an Instrument on the Protection of Audiovisual Performances to be Considered by the Diplomatic Conference, WIPO Diplomatic Conference on the Protection of Audiovisual Performances, at 22, U.N. Doc. IAVP/DC/3 (Aug. 1, 2000); see also Adler Bernard, “The Proposed New WIPO Treaty for Increased Protection for Audiovisual Performers: Its Provisions and Its Domestic and International Implications”, 12 Fordham Intell. Prop. Media & Ent. L.J. 1089 (2002), available at http://law.fordham.edu/publications/articles/200flspub6484.pdf. 4 See WIPO Standing Committee on Copyright and Related Rights, Basic Draft Proposal for the WIPO Treaty on the Protection of Broadcasting Organizations, Including a Non-mandatory Appendix on the Protection in Relation to Webcasting (prepared by the Chair of the Standing Committee on Copyright and Related Rights in Cooperation with the Secretariat), WIPO Doc. SCCR/14/2, 14th Sess., Geneva, May 1–5, 2006, available at http://www.wipo.int/ edocs/mdocs/ sccr/en/sccr_14/sccr_14_2.pdf. Latest developments and documents related to the proposed treaty are available at http:// www.cptech.org/ip/wipo/bt/latest_docs.html. 5 See WIPO, Diplomatic Conference on Certain Copyright and Neighboring Rights Questions, Geneva, Dec. 2–20, 1996, Basic Proposal for Substantive Provisions of the Treaty on Intellectual Property in Respect of Databases to be...

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international norm-making is going to move forward, perhaps the time is now to move forward on exceptions and limitations that are not harmonized, as we have had in the past twenty years, and harmonization of at least minimum standards of protection. Those are the large political dynamics that are at work. But, of course, there are fascinating issues that are sub-issues within this realm of exceptions and limitations. There is increased attention now by scholars on the questions of what constitutes what the three-step test means — how to interpret it, what its limits are, how it could be used, or how it might shape the discussion about limitations and exceptions internationally. There is a fascinating current going on, which is the subject of our first talk, about fair use vs. express exceptions, whether or not it is better to have a system of express, clear, set-out-inadvance limitations and exceptions to copyright law, as one sees in the laundry list of the EU Copyright Directive;6 or whether it is better to have an open-ended system for limitations and exceptions, of which the best example for everyone is the United States’ fair use test.7 Today we have an extraordinary panel. Hugh has done what he sometimes does, puts more people at the podium than there is space. It is hard to imagine an assemblage of greater copyright voices than this one. We have four speakers and a few commentators. considered by the Diplomatic Conference, WIPO Doc. CRNR/DC/6 (Aug. 30, 1996), available at http://www.wipo. int/documents/en/ diplconf/6dc_sta.htm; WIPO, Diplomatic Conference on Certain Copyright and Neighboring Rights Questions, Geneva, Dec. 2–20, 1996, Recommendation Concerning Databases, WIPO Doc. CRNR/DC/100 (Dec. 23, 1996); Memorandum of the Director General, Preparatory Work on a Treaty Concerning Intellectual Property in Databases, ¶ 3, WIPO Doc. AB/ XXX/3 (Jan. 20, 1997). SCCR recommended that the International Bureau of WIPO commission a study on the economic impact of the protection of databases on developing countries, especially lesserdeveloped countries. See Standing Committee on Copyright and Related Rights, Report Adopted by the Standing Committee, WIPO Doc. SCCR/1/9 (Nov. 10, 1998). Three years later, in 2001, WIPO commissioned five studies on the impact on developing countries and the so-called countries in transition. These studies were presented to the SCCR in May 2002. See Standing Committee on Copyright and Related Rights, Economic Impact of Database Protection in Developing Countries and Countries in Transition, WIPO Doc. SCCR/7/2 (Apr. 4, 2002) (prepared by Yale M. Braunstein) (tabled at the Seventh Session of the Standing Committee on Copyright and Related Rights, Geneva, May 13–17, 2002); Standing Committee on Copyright and Related Rights, Study on the Protection of Unoriginal Databases, WIPO Doc. SCCR/7/3 (Apr. 4, 2002) (prepared by Sherif El-Kassas) (tabled at the Seventh Session of the Standing Committee on Copyright and Related Rights, Geneva, May 13–17, 2002); Standing Committee on Copyright and Related Rights, Economic Impact of the Protection of Unoriginal Databases in Developing Countries and Countries in Transition, WIPO Doc. SCCR/7/4 (Apr. 4, 2002) (prepared by Thomas Riis) (tabled at the Seventh Session of the Standing Committee on Copyright and Related Rights, Geneva, May 13–17, 2002); Standing Committee on Copyright and Related Rights, A Study on the Impact of Protection of Unoriginal Databases on Developing Countries: Indian Experience, WIPO Doc. SCCR/7/5 (Apr. 4, 2002) (prepared by Phiroz Vandrevala) (tabled at the Seventh Session of the Standing Committee on Copyright and Related Rights, Geneva, May 13–17, 2002); Standing Committee on Copyright and Related Rights, The Economic Impact of the Protection of Database in China, WIPO Doc. SCCR/7/6 (Apr. 22, 2002) (prepared by Zheng Shengli) (tabled at the Seventh Session of the SCCR, Geneva, May 13–17, 2002). Member countries have been asked to submit new treaty language to WIPO, and a series of regional meetings were held to define the possible content of a new treaty. Updated information on the proposed treaty is available at http:// www.cptech.org/ip/wipo/bt. 6 Council Directive 2001/29, 2001 O.J. (167) 10, Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society [hereinafter Copyright Directive]. 7 17 U.S.C. § 107. Limitations on Exclusive Rights—Fair Use: Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include: 1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; 2. the nature of the copyrighted work; 3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

264 CHAPTER IV: COPYRIGHT LAW Our first speaker will be Tamir Afori from the Ministry of Justice in Israel, who will talk to us about Israel’s new codification of fair use, a test that looks somewhat similar to the American test. Bernt Hugenholtz from the University of Amsterdam will talk to us about the idea of producing a harmonizing instrument for exceptions and limitations to copyright law. Marybeth Peters, the Register of Copyrights — I’m not sure what you are talking about, Marybeth. MS. PETERS: The Section 108 Group report, released today, on how to update the exemptions for libraries, archives, and museums, and its recommendations. PROF. HUGHES: Pam Samuelson from the University of California at Berkeley will discuss the balancing, or the different issues involved between standards and rules; that is, between open-ended tests and having more elaborated exceptions. Then we have an extraordinary group of commentators: Mihály Ficsor, who really wants to talk about WIPO issues and the question that Bernt Hugenholtz will bring to the fore; Professor Jane Ginsburg from Columbia; and Tilman Lüder from the Commission in Brussels. With that, I will turn it over to the first presenter, Tamir Afori from the Israeli Ministry of Justice.

Israel’s New Fair Use Provision Tamir Afori* Thank you. It is a pleasure being here, the first time for me. I would like to talk about the adoption of the fair use doctrine in Israel’s new Copyright Act, which was passed by the Knesset in November 2007 and will enter into force on May 25, 2008.8 Here in the United States fair use is obvious. It has been a part of copyright law for decades. But, as we all know, it is definitely not obvious in European eyes, and certain commentators have expressed the view that it is not compatible with the first step of the so-called “three-step test” embodied in Article 9(2) of the Berne Convention.9 Israel is a small market. It is culturally vulnerable. In some respects, Israel is in a similar position to other countries outside the European Union and the United States. In this respect, Israel’s new Copyright Act may raise a broader interest than the size of the country. It seems that it has already attracted some attention in Canada, and perhaps other countries will follow. Who can tell? Four main points I would like to discuss: some clarification about the context of the fair use clause within the new Act; some political background about the parliamentary process and its limits; some thoughts about fair use being good for the public and for the authors; and some international aspects about the three-step test. * Deputy State Attorney, Civil Dept., State Attorney’s Office, Ministry of Justice, Jerusalem. 8 Copyright Act 2007. Unofficial translation, prepared by the Israeli Ministry of Justice, available at http://www. tau.ac.il/law/members/birnhack/IsraeliCopyrightAct2007. The Law replaces the 1911 Copyright Ordinance inherited from the British, which was replaced in 1956 and again in 1988. 9 Berne Convention for the Protection of Literary and Artistic Works art. 9.2, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 14, 1967, 102 Stat. 2853, 828 U.N.T.S. 221 (Three-part test: “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.”).

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I. ARTICLE 19: FAIR USE Here it is, Article 19 Fair Use: (a) Fair use of a work is permitted for purposes such as: private study, research, criticism, review, journalistic reporting, quotation, or instruction and examination by an educational institution. (b) In determining whether a use made of a work is fair within the meaning of this section, the factors to be considered shall include, inter alia, all of the following: (1) The purpose and character of the use; (2) The character of the work used; (3) The scope of the use, quantitatively and qualitatively, in relation to the work as a whole; (4) The impact of the use on the value of the work and its potential market. (c) The Minister may make regulations prescribing conditions under which a use shall be deemed a fair use.10 Article 67: Implementations and Regulations: (c) Regulations and Orders in accordance with sections 7, 9, 17, 19, 30(c), 31 and 56(d) shall require the approval of the Knesset (Parliament) Economics Committee.11

The new Copyright Act, like its predecessor, is generally based on English copyright tradition. Israeli copyright law gives broad and flexible meaning to terms like “work,” “originality,” “reproduction,” “substantial part,” and “public performance.”12 All these kinds of terms are being interpreted very broadly by courts. On the other hand, the previous Act included a Fair Dealing Section.13 For those of you who are not familiar with the English fair dealing rules, it means that it allowed uses of copyrighted work if they were fair, in a way similar to the American fairness, but only on the condition that they fell within a closed list of purposes enumerated in the English Act.14 With respect to the fairness component, the Supreme Court of Israel has held that it applies the American four-factor test, although it was not in our statute.15 The Supreme Court has further stated that the closed list of purposes enumerated in the English Act is to be interpreted very broadly. Yet, there were significant areas that were not properly covered by this further link, special educational users and library users, but other users as well. So, after an extensive debate, the Parliament adopted the American open-ended fair use doctrine. This is in addition to quite a long list of specific exceptions. Copyright Act 2007, art. 19. Id. art. 67. 12 Copyright Act 2007, supra note 8, ch. 1 (Interpretations), § 1 (Definitions). 13 Copyright Act 1988, § 2(1): Copyright in a work shall be deemed to be infringed by any person who, without the consent of the owner of the copyright, does anything the sole right to do, which is by this Act conferred on the owner of the copyright: Provided that the following acts shall not constitute an infringement of copyright — (i) Any fair dealing with any work for the purposes of private study, research, criticism, review, or newspaper summary. Thus, under the old regime, in order not to be infringing, a particular dealing with a work needed not only to be “fair” but also to be for one of the enumerated purposes mentioned in the Act. 14 Copyright, Designs and Patents Act 1988 (c 48) § 79. 15 See, e.g., C.A. 2790, 2811/93, Eisenman v. Qimron, 54(3) P.D. 817, Supreme Court Aug. 30, 2000 (confirming lower court ruling that the researcher, Professor Elisha Qimron, owns the copyright in the deciphered Dead Sea Scrolls text), unofficial translation available at http://lawatch.haifa.ac.il/heb/month/dead_sea.htm; see Michael Birnhack, “The Dead Sea Scrolls Case — Who is an Author?”, Eur. Intell. Prop. Rev. 128 (2001), available at http://papers.ssrn. com/ sol3/papers.cfm?abstract_id=905114; Lisa Michelle Weinstein, “Ancient Works, Modern Dilemmas: The Dead Sea Scrolls Copyright Case”, 43 Am. U. L. Rev. 1637 (1994); Cindy Alberts Carson, “The Application of American Copyright Law to the Dead Sea Scrolls Controversy”, in On Scrolls, Artifacts and Intellectual Property (Timothy H. Lim, Hector L. MacQueen & Calum M. Carmichael eds., 2001). 10 11

266 CHAPTER IV: COPYRIGHT LAW II. CONTEXT OF ARTICLE 19

A few clarifications about the context of this Article 19. Israeli courts tend to look at the law of other countries. They have always done so. In the case of fair use, courts have already looked at American law, even before the statutory adoption of the doctrine, and there is no doubt that they will look for guidance in American case law in the future. Article 19 is without prejudice to moral rights.16 This is only an exemption to economic rights, which means that the moral rights still stand. And the duty to put the name on the work17 and not to have changes that harm the dignity of the work,18 this kind of stuff that is not really familiar to American lawyers perhaps, is still there and is not affected by the fair use doctrine. The current list of purposes is based on the previous fair dealing list, with the addition of “educational users.”19 Of course, the most significant change is the term “such as” at the beginning of the list of purposes. I have to say that “such as” was a compromise. In the earlier draft, it was something like “including, inter alia,” something completely open. During the discussions in the hearings in the Parliament, it was agreed as a compromise that the term “such as” is somewhat confined and will be able to lead the courts to see some limits to the list of purposes. I know that the U.S. Copyright Law says explicitly that the term “such as” shall not have this meaning in the definitions section.20 But, at least for our purposes in the Israeli law, with these things on record in the Parliament, I think it will be otherwise, and “such as” will be a bit narrower than the American “such as.” IV. POLITICAL BACKGROUND

A few words about the political background. In Israel, unlike in the United States, the government prepares the bills for the Parliament.21 That means that most of the preparatory work is done in the government, in this case in the Ministry of Justice, and only when things are quite ready and quite consensual are they being sent to the Parliament for the rest of the hearings. The hearings in the Parliament are open to anyone. In the committee of the Parliament, usually stakeholders are well represented. Everyone can come. That includes authors and singers. And they do come, many of them. It is often the case that the government represents the interests of the general public in the Parliament. In the case of copyright legislation, at least in Israel, it is hard to see specific bodies that do represent the general public interest in the legislation except for the government. More generally, it is very common in Israel to find some norms in a statute of the Parliament, some other norms in secondary legislation, and some other norms actually in common law, in the case law of the courts. This is part of the common-law tradition. I will get into it in a minute because it has to do with what we did here. The Israeli Parliament consists of 120 members. Normally, as you can imagine, they are quite busy with other stuff, like wars and peace and other things that happen in Israel. I would Copyright Act 2007, supra note 8, ch. 7, §§ 46–47. Id. § 40. 18 Id. § 46(2). 19 Id. §§ 29, 31. 20 See 17 U.S.C. § 101 (Definitions: “The terms ‘including’ and ‘such as’ are illustrative and not limitative.”). 21 It has been estimated that 95 percent of the bills are introduced into the Knesset by the government. Knesset debate on them, both in committees and on the floor, seldom leads to any outcome other than that desired by the coalition members. See generally Gregory Mahler, The Knesset: Parliament in the Israeli Political System (1981). 16 17

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say that the patience they have to hear copyright disputes is somewhat limited. This is another aspect one should bear in mind when talking about what is to be done in a statute and what is to be done elsewhere. Usually, the Parliament looks only for a consensual solution. If there had been a big debate about an issue during the discussion of this Copyright Act, the Parliament would prefer not to take sides until there is some consensus. This has consequences, of course, because when all the parties realize that this is their position, one can imagine that certain parties can hold hostage certain aspects of the law, realizing that without consensus it will not pass. This, again, puts some, I would say, severe obstacles in the way to legislate certain aspects of the new Act. At quite an early stage we tried to reach consensus for educational uses. Very soon we realized that there is no way that there would be consensus because the differences between the parties were great. At this early stage, the interested parties agreed that a better place to set the norms will be the courts, and later on regulations of a ministry if the court would be completely wrong or otherwise if there will be a need to codify court decisions into regulations. This example of educational users we took forward. Actually, this is the position that we took to all the exemptions or limitations on which we could not reach consensus during the debates in the Parliament. Actually, what happened is that there was an agreement between interested parties and members of Parliament that they wanted to avoid taking sides, and they preferred to move it somewhere else to be attacked by the authors or by the other parties. In this case, the final solution that was adopted is the American fair use doctrine, which was codified into our law. There is one change that I think is quite interesting, which is the authority of the Minister of Justice by secondary legislation, by regulations, to regulate specific uses that would be considered fair.22 As I said, this is a way, first of all, to avoid some possible arbitrary results in the Parliament, due to the limits of the type of debate that exists in the Parliament, and to allow the Minister of Justice to have some more detailed, specific, technical rules with respect to specific uses and, as I said, to fix errors in court decisions here and there if they occur, and to set norms in the regulations in other aspects. V. CONCLUSION

I think fair use is good for the public. I think fair use is good for the authors as well, because there is a great pressure against copyright in general nowadays in the public, and I think that there must be a way to take out some steam from this pressure pot. Fair use is, I would say, relatively a low price for the authors to pay to get rid of some of the pressures, especially when fair use is relating to uses that are, I would say, commonly acceptable by the public and by the authors. So I believe it is helpful for them. The other possibility, instead of fair use, would be just to cut rights. This is a risk that must be borne in mind. My time is up now. Thank you very much. I will answer questions later on if you have any. PROF. HUGHES: Thank you, Tamir, for keeping within the time. That is perfect. That is going to be quite interesting. I am sure we are going to have some interesting questions for you. Now Professor Bernt Hugenholtz has the floor for his twelve minutes.

22

Copyright Act 2007 § 19(c).

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Conceiving an International Instrument on Limitations and Exceptions to Copyright Prof. P. Bernt Hugenholtz* Good afternoon. I would like to support Justin’s invitation to his conference on Sunday and Monday. A very interesting program, a very good topic. Come and join us. In the plenary sessions you already heard that the issue of limitations and exceptions is gaining in prominence at the Standing Committee on Copyright and Related Rights (SCCR) that convened about two weeks ago in Geneva.23 A Chilean proposal to put an instrument on limitations and exceptions on the agenda, or to give it at least a higher ranking, was quite warmly received.24 That means that the time is really ripe to start thinking about this. Although the Chilean proposal is quite narrow, at least in its initial scope, it would basically standardize limitations and exceptions favoring the visually impaired. And who would not want to support that? I think, at least as an academic, we should take a somewhat broader perspective. That is what I would like to invite all of us to do in the coming ten minutes. It is the topic of a report that Ruth Okediji of the University of Minnesota and I have prepared, sponsored by the Open Society Institute (OSI).25 It has been online for two weeks. It is fifty-four pages. I have ten minutes and nineteen seconds to summarize it. This will be the quick version. The report is basically about conceptualizing an international instrument. It is not about the substance of such an instrument. Maybe you will be disappointed to hear that. We are not proposing substantive norms. We are looking at preliminary issues, such as conceptualization, institutional home, sustainability, and compatibility with the international acquis. That is what this talk will be about as well. I. ARGUMENTS FOR AN INTERNATIONAL INSTRUMENT

Various good reasons have been advanced in the past, and are being advanced with some more urgency, to support the idea of an international instrument on limitations and exceptions. Many of these arguments actually apply to national law as well. • Promoting creativity and innovation is obviously an important one. • Protecting access to knowledge. • Protecting fundamental freedoms that ought to be reflected in copyright norms also at the international level. • Eliminating barriers in global trade in IP-protected goods and services. I think this is a particularly good argument. Even for those in this audience who might not really favor * Director, Institute for Information Law, University of Amsterdam. 23 See WIPO, Committee on Intellectual Property and Development (CDIP), First Session, Summary by the Chair, Mar. 3–7, 2008, available at http://www.wipo.int/edocs/mdocs/mdocs/en/cdip_1/cdip_1_summary.doc; WIPO, Standing Committee on Copyright and Related Rights (SCCR), Sixteenth Session, Conclusions of the Sixteenth Session of the SCCR, Mar. 10–12, 2008, available at http://www.wipo.int/ edocs/mdocs/sccr/en/sccr_16/sccr_16_ conclusions.doc. 24 WIPO, Proposal by Chile on the Analysis of Exceptions and Limitations, WIPO Doc. SCCR/13/5 (Nov. 22, 2005), available at http://www. wipo.int/meetings/en/doc_details.jsp?doc_id=53350. 25 P. Bernt Hugenholtz & Ruth Okediji, Conceiving an International Instrument on Limitations and Exceptions to Copyright (Mar. 6, 2008) (Final Report), available at http://www.ivir.nl/publicaties/hugenholtz/ finalreport2008.pdf; see also Appendix A infra.

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or cherish the idea of having lots of limitations and exceptions, it is a good idea to start standardizing this at the international level. We all know that trade in copyright goods and services is global, thanks to the Internet, but not only the Internet. We really need standardization here. Whether you are a right owner or a user, both are interested in such standardization. • Promoting legal certainty also works for everyone. • The final argument ties into the Development Agenda issue.26 There is an obvious advantage to developing nations particularly — that is why you see a lot of support in that area — for an international instrument standardizing limitations and exception as a shield, in a sense, against bilateral agreements that, at least in the future, have the potential of eliminating the space for national limitations and exceptions. So there are lots of good reasons. You could summarize them by the word “balance,” creating balance in the international system of copyright. II. THE CURRENT STRUCTURE

The system or structure is slightly unbalanced. That has a lot of reasons, the historical reason, of course, being that these instruments have been initiated by the idea of protecting right holders, authors first,27 and later on right holders in TRIPs.28 That history is reflected in the structure of these treaties, providing for guaranteed minimum rights and only optional freedoms and optional limitations, with one or two very rare exceptions. That structure reflects a perspective on copyright that is a bit different from what is now considered to be quite normal when thinking about the rationales of copyright. When we look at copyright today, we see limitations and exception as an integral part of the copyright equation, not as exceptions to a ground rule of total protection. But that idea has not found its way in the structure of the treaties that originated at the end of the 19th century.29 So that is another good reason for some rebalancing. What we, however, propose in our study is not overhauling the total structure of international treaties.30 In fact, we follow a very pragmatic approach. We take the international acquis as a given and query whether it is possible to frame a meaningful international instrument with meaningful content inside that international acquis.

26 See WIPO General Assembly, Proposal by Argentina and Brazil for the Establishment of a Development Agenda for WIPO, Aug. 27, 2004, available at http://www.wipo.int/documents/en/document/govbody/wo_gb_ga/pdf/wo_ga_ 31_11.pdf [hereinafter WIPO Development Agenda Proposal]; WIPO General Assembly, Decision on a Development Agenda, Oct. 4, 2004, available at http://www.cptech.org/ip/wipo/wipo10042004.html. 27 See, e.g., Statute of Anne pmbl. & art. I, 8 Anne, c. 19 (1710); U.S. CONST., art. I, § 8, cl. 8; Copyright Directive, supra note 6, pmbl. ¶ 3. 28 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm. 29 See Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, as last revised July 24, 1971, 25 U.S.T. 1341, 828 U.N.T.S. 221 [hereinafter Berne Convention]. 30 See Universal Copyright Convention, as revised, July 24, 1971, 25 U.N.T.S. 1341 [hereinafter UCC]; World Intellectual Property Organization (WIPO) Copyright Treaty, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 36 I.L.M. 65 [hereinafter WCT]; World Intellectual Property Organization Performances and Phonograms Treaty, Dec. 20, 1996, 36 I.L.M. 76 [hereinafter WPPT].

270 CHAPTER IV: COPYRIGHT LAW III. “WIGGLE ROOM”

That, of course, then immediately triggers the question: What kind of space is there? Is there enough room? Where is the “wiggle room?” The term “wiggle room” is borrowed from Jerry Reichman.31 I like that. A chapter of our report is about that. What we first note is that when looking for that wiggle room you should not focus too narrowly on what is codified already in the international acquis in terms of limitations and exceptions, but you should also look at the somewhat higher level of the minimum rights. Minimum rights — like the right of reproduction, or the WIPO Copyright Treaty (WCT) right of communication to the public32 — are there, but they are rarely very precisely defined. In fact, many of the legal terms allow a certain discretion at the national level, and therefore also discretion to a subsequent international agreement, to interpret these notions. “Public” can mean a lot.33 “Reproduction” can mean a lot.34 In fact, you already see in national law carve-outs, not limitations or exceptions, based on interpretations of what constitutes “public.” An old example: The rule that you will find in Austrian copyright law allowing cable retransmission to quite a sizable number of subscribers.35 That is not “public,” at least according to the Austrians. It is just an example. You do not have to look for limitations and exceptions proper in the acquis to find wiggle room. That is one of the messages that is in the report. In fact, there are other minimum standards as well that allow for space that could form the basis of a treaty or another instrument: the exclusion of data, news, and ideas; the exhaustion rule; and, of course, on top of that the more familiar terrain of limitations and exceptions proper, the optional exception that you will find particularly inside the Berne Convention.36 I will skip listing these limitations. You will probably be familiar with them. IV. THREE-STEP TEST

The overriding norm, of course, is the three-step test, not just in Berne but particularly in TRIPs.37 A lot has been written about the three-step test. 31 Jerome H. Reichman, “From Free Riders to Fair Followers: Global Competition Under the TRIPs Agreement”, 29 N.Y.U. J. Int’l L. & Pol’y 11, 29 (1997). 32 WCT, supra note 30, art. 8. 33 These rights include: The right of public performance “by any means or process,” Berne Convention, supra note 29, art. 11; the public recitation including the public communication of thereof. Id. art. 11ter; The public performance of cinematographic adaptations. Id. art. 14(1); The rights of broadcasting, rebroadcasting, cable distribution, and public communication by loudspeaker. Id. art. 11bis. 34 The WCT art. 9(1) prescribes the “exclusive right of authorizing the reproduction of … works, in any manner or form.” Id. art. 9(1). Agreed statements concerning art. 1(4): “The reproduction right, as set out in Article 9 of the Berne Convention, and the exceptions permitted thereunder, fully apply in the digital environment, in particular to the use of works in digital form. It is understood that the storage of a protected work in digital form in an electronic medium constitutes a reproduction within the meaning of Article 9 of the Berne Convention.” Id. art. 1(4). Yet, neither the act of “reproduction.” Scholars have convincingly argued that reproduction is basically a normative, not a technical notion, and should therefore be interpreted in the light of its objective. See, e.g., P. Bernt Hugenholtz, “Adapting Copyright to the Information Superhighway”, in The Future of Copyright in a Digital Environment 81–102 (P. Bernt Hugenholtz ed., 1996). 35 Austrian Copyright Act art. 17(3)(b) (permits retransmission of works over community antenna systems (small cable networks) reaching fewer than 500 households). 36 See Berne Convention, supra note 29, art. 2. 37 See id., art. 9.2 [hereinafter Berne three-part test](“The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.”). The test in TRIPs art. 13 reads: “Members shall confine limitations and exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the rights holder.” TRIPs Agreement, supra note 28, art. 13.

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We do not have too much to add about that, except that we reiterate, on the basis of an analysis of literature, of panel decisions, of the history of the three-step test, that there is space, even applying rather conservative interpretations of the three-step test. The three-step test does not preclude a lot of limitations to be codified in such an instrument. The first step allows for possibly even fair-use-type limitations, but certainly a lot of more specific limitations. There is no policy objective justification required, at least according to the TRIPs Panel.38 The second step rules out exceptions that totally annihilate the right, which rob right holders of real or potential sources of income that are substantive but certainly still leave room for a lot of limitations and exceptions. The third step allows some factoring in of the public interest, at least if you read the third step according to prevailing academic doctrine. The three-step test, in fact, in its third step also favors compensated exceptions, leaving more space for such exceptions. In other words, there is wiggle room. V. ORGANIZATION — WIPO/WTO

Now, of course, the question is: How do you frame an instrument that respects the acquis, that doesn’t go lower than the acquis, but still has meaningful content? Where do you organize that? There are basically two candidates — and they will not come as a surprise to you — WIPO and the WTO. They both have their advantages and their disadvantages. On the plus side for the WTO: The fact that you can create a link with enforcement. If you have the TRIPs Council declare perhaps some norms in the field of limitation and exceptions, there is an automatic consequence that a country that abides by these norms is not likely to be sued under a WTO procedure. The downside, of course, is that the WTO has more limited resources and more limited expertise in this specific field. Another downside is that the trade law perspective that dominates WTO is not particularly favorable for limitations and exceptions. That brings us to the conclusion that, particularly in light of the obvious advantages that you can find with WIPO39 — expertise; the traditional historic link with the Berne Convention; the fact that WIPO is actually bound by the UN Charter,40 which of course favors certain freedoms; the link with the Development Agenda — we come to the conclusion that WIPO is the primary place to look for such an agreement. In fact, if we look at what happened two weeks ago, this prediction is already, at least partly, being confirmed. VI. RECOMMENDATIONS

That brings me to our final recommendations: • We advise a multilateral instrument, although some regional experimentation — you could imagine something in Mercosur or in other regions — is the way to go. • We do not believe that a treaty in the short term would be very viable, but a “soft” law version thereof in the form of a declaration, a recommendation, a resolution, what have you, might be the stepping stone to a treaty in the end. 38 See WTO Report of the Panel, US — Section 110(5) Copyright Act, June 15, 2000, WTO Doc. WT/DS/160/R, § 6.33 et seq. 39 See supra notes 2–5 and accompanying text. 40 U.N. Charter (1945), available at http://www.un.org/aboutun/charter.

272 CHAPTER IV: COPYRIGHT LAW • We particularly imagine a joint recommendation, modeled perhaps after the joint recommendation in 1999 on well-known trademarks.41 This is WIPO “soft” law. Such a model could be the way to go for an instrument on limitations and exceptions. • In the ideal scenario, joined in by the TRIPs Council, a cooperative effort would be perfect. Then you would have the enforcement as well. But we would be already very happy if something would be happening along these lines in WIPO. Thank you, Justin, for giving me one more minute, and thank you for your attention. PROF. HUGHES: Thank you, Bernt.

Marybeth?

Section 108 Study Group Report Marybeth Peters* Good afternoon. I was worried that I wasn’t really going to have much to say, but the report of what is known as the Section 108 Group was actually posted at noon today,42 so I can talk about what the recommendations are. I. BACKGROUND

Most of you know that the United States in its copyright law has one major section that grants rights, Section 106 (Exclusive rights in copyrighted works), and there is a slight moral right in 106A (Rights of certain authors to attribution and integrity); but then it has Sections 107–122 (Limitations on exclusive rights) that are exceptions, and there is another exception in Section 10843 (Limitations on exclusive rights: Reproduction by libraries and archives). The focus in the United States at various times has been on our existing exemptions: What has technology done to the balance; and what, if anything, needs to be done to recalibrate the exceptions to bring them into the reality of today’s world? Since the Library of Congress has the Copyright Office in its organization, and since I was the advisor to the Library on all the copyright issues, it seems natural that I would have been a very big critic of the way that technology was changing the way that libraries operated and why the existing Section really was pretty irrelevant, in that new technology was not only changing the way that libraries and archives were doing business, but also the way that publishers and other copyright owners were making works available, and maybe it was time to recalibrate Section 108. 41 WIPO, Joint Recommendation Concerning Provisions on the Protection of Well-Known Marks, adopted by Assembly of the Paris Union for the Protection of Industrial Property & GeneralAssembly of the World Intellectual Property Organization, WIPO Doc. 833(E) (Sept. 1999), available at http://www.wipo.int/aboutip/en/development_iplaw/ pub833.htm. * Register of Copyrights, U.S. Copyright Office 42 Section 108 Study Group Report, available at http://www.section108.gov/docs/Sec108StudyGroupReport.pdf. The Study Group was convened as an independent group by the National Digital Information Infrastructure and Preservation program of the Library of Congress and by the U.S. Copyright Office. The recommendations, conclusions, and other outcomes of the Study Group’s Report are its own and do not reflect the opinions of the Library of Congress or the U.S. Copyright Office. Written public comments are available at http://www.section108.gov/comments.html. Information and transcripts of public roundtables are available at http://www.section108.gov/roundtables.html. 43 17 U.S.C. § 108 (Limitations on exclusive rights: Reproduction by libraries and archives), available at http:// www. law.cornell.edu/uscode/17/108.html.

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At the same time, the Library of Congress had a nationwide preservation program, called National Digital Information Infrastructure and Preservation Program (NDIIPP), that was looking at what it should do nationwide vis-à-vis preservation.44 It identified a major impediment to its work as the copyright law. So I think both the Copyright Office and the NDIIPP program came to the conclusion that we really did need to grapple with the changes that had been made so that we could in fact think about bringing our law up-to-date, to make it relevant to libraries and archives — and, as you will hear very quickly, museums — but also to make sure that changes in technology had not changed the balance such that copyright owners actually were getting harmed more than they should be in today’s environment. II. NDIPP SECTION 108 STUDY GROUP

This group was formed in April 2005. The Copyright Office has a member of the group, June Besek, who played a very critical role. It is a group of nineteen people. They were charged with looking at the law. We have international treaties that we must abide by. The famous three-step test45 would have to be met with whatever exemption they were going to recommend. This group, which was made up of rights owners of all different types of materials and people from the other side (librarians, archivists, and actually somebody from the Getty), could come together and go through the law and look in a scholarly way broadly at what the issues were. I think the task was supposed to be completed in about a year and a half. We are just cutting the three-year mark for when this report is completed. The nineteen people who have been involved spent, I will argue, probably thousands of hours of their time, dedicated to the belief that libraries are important, copyright is important, copyright owners are critical, and that for the benefit of the nation it is appropriate and important to rebalance our exceptions where necessary. This is an independent group. It conducted independent research and study. The report is the group’s; it is not the government’s. Although the Copyright Office was represented in this NDIIPP program in the Library of Congress that was convening the group and supporting the group and cooperating, there is nothing in this report that is ours. So it is totally an independent report. III. SECTION 108 STUDY GROUP REPORT

I’ll quickly say that the report is massive. It has many recommendations. It is divided into three parts: 44 See NDIIPP Mission Statement, http://www.section108.gov/mission.html (“The purpose of the Section 108 Study Group is to conduct a reexamination of the exceptions and limitations applicable to libraries and archives under the Copyright Act, specifically in light of the changes wrought by digital media. The group will study how Section 108 of the Copyright Act may need to be amended to address the relevant issues and concerns of libraries and archives, as well as creators and other copyright holders. The group will provide findings and recommendations on how to revise the copyright law in order to ensure an appropriate balance among the interests of creators and other copyright holders, libraries and archives in a manner that best serves the national interest.”). Various papers and reports discussing copyright issues pertinent to libraries and archives can be found at http://www.section108.gov/papers.html. See also Robert Oakley, Copyright and Preservation: A Serious Problem in Need of a Thoughtful Solution, Council on Library and Information Resources (Sept. 1990); Laura N. Gasaway, “Values Conflict in the Digital Environment: Librarians vs. Copyright Holders”, Colum.–VLA J.L. & Arts (2000); June Besek, Copyright Issues Relevant to the Creation of a Digital Archive: A Preliminary Assessment, Council on Library and Information Resources and the Library of Congress (Jan. 2003). 45 See Berne three-part test, supra note 37.

274 CHAPTER IV: COPYRIGHT LAW • One part deals with where they actually came to agreement that change was needed and they could agree on what the legislative solution should be. • There is another part of the report that looks at what legislative change we think is needed. We cannot agree on what the legislative solution is. • There is a third part of the report that looks at additional issues that are important to copyright owners and to librarians but really do not fall within the Section 108 context. I am going to give you a broad overview of some of the highlights. There are many, many recommendations. I highly recommend that if you are interested in this area that you go online and read the report at www.Section108.gov. Before I go into what they are changing, I should point out that Section 108 as it exists today is a very complicated section. It basically defines who is eligible. It is libraries and archives. The only other recommendation with regard to libraries and archives is that the library is open to the public or to specialized researchers in the field; that the distribution and reproduction is not for any direct or indirect commercial advantage; and this weird provision that basically says when the copy is being made, whether it is for a library or for a patron, it has to include the copyright notice, or, if not, a legend that the work may be protected by copyright. The Section is laid out peculiarly, but what it comes down to are sections that deal with what libraries can do for libraries, for themselves and other libraries, and what libraries can do for patrons, which is much more on the access side. A lot of the focus of the report is on what libraries can do for libraries. When you look at the parts of the law the way it is set up, it makes a distinction between unpublished works and published works. With regard to unpublished works, it essentially says that if you are an eligible library, you have a broad preservation exception for all types of works, and that when a work is lost, stolen, or deteriorating, you have a right to make a copy of that work. You can do this also for another eligible library. There is another provision in there that essentially says that if there is a researcher in a library and that researcher does not have access to an unpublished work in another library, then you can go to the library that has that unpublished manuscript and essentially get it transferred to you. With regard to published work, there is no general preservation provision. It is essentially replacement copies, where you have to find an unused replacement copy at a fair price. The user requirements are much more limited. In fact, the categories of works with regard to the copies that you can make are mostly limited to literary-type works or adjuncts to literary works. IV. RECOMMENDED CHANGES

Let me quickly go through some of the recommended changes. The first question was: Who should be eligible? The first question on top of that was: Should we keep what we have and add museums? The answer is yes, we believe that museums are similar in their mission to what libraries do; and yes, we think that museums in fact should be added. With respect to the unpublished works, there is now a distinction being made between undisseminated works. So a work can be an unpublished work, but if copies have not been disseminated, only then will it be subject to this. If the work is publicly disseminated, it would be treated more like a published work. So it narrows the category of unpublished works. Remember, these are recommendations that are coming to the Library and to me. One of the other interesting questions is: Should there be any other eligibility requirements? The answer is yes, which is interesting. They actually keep what is there, but basically say the

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institution should have a public-service mission and should have trained staff, and basically should possess a collection comprising lawfully acquired or licensed materials. So that is a little bit different. With respect to a question that has been outstanding — a library clearly could do the activities that are provided under the current law, but could they outsource them? — I took the position that you could not. That was an open question. Here they make a decision that outsourcing should be allowed. They provide for outsourcing, but they put in all types of qualifiers, such as that the contractor basically should not be making any additional money and that the contractor cannot keep any copies other than those that are required for what they are doing for the library. With regard to replacement copies and published works, we have a three-limit provision in our current statute, which does not work in the digital environment. The recommendation is to have a limited number of copies. The number is determined by the number “reasonably necessary to create and maintain a single replacement copy.” Let me just mention a couple of other things that might hit you over the head and you might be surprised about. One of the questions has to do with capturing material from the Internet. There is proposed a new addition to the law for online content. This new exception would allow libraries, archives, and museums to “capture and reproduce publicly available online content,” for example, Web sites. Anything that has a restriction, like an access control of a password or any other gateway, would not be included. Once captured, it would be preserved and be viewable on-site. With regard to online access, it would be remote access, but only after a specified time, which is not recommended in the study. There is an opt-out provision for rights holders if they do not want their material to be captured, except for government and political Web sites. There is also a recommendation that even if the copyright owner does not opt out of having his material captured, he could opt out of basically having it made publicly available online. All captured material — and this you are going to see if you read the study with regard to all the preservation copies — is to be properly labeled so that it is shown that it has been captured. It would have the date of capture and it would state something to the effect that it was for a private study. There are many, many other issues that are in this study. We will see in the Copyright Office what we do with it. All I can say is it is a magnificent step forward. I am sure that not everybody will agree with everything. I can say, even when you have dedicated people who really worked with it and wanted to reach consensus, consensus on exceptions is very difficult. I hope that we are able to take this study and make a meaningful change in the law to bring it up-to-date. Thank you. PROF. HUGHES: Our next speaker is Pam Samuelson. We have a nice setup, in the sense of one jurisdiction having embraced fair use, another jurisdiction working hard to clarify, and perhaps update, extremely detailed rules, and those two seem to be a very nice setup for Pam’s talk about rules vs. standards in crafting exceptions and limitations to copyright law.

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Rules vs. Standards in Crafting Copyright Exceptions and Limitations Prof. Pamela Samuelson* There is a well-known literature about the benefits of rules and standards. Rules have a lot of benefits in that they are very precise; you can tell very quickly whether or not you qualify under a particular rule. But, of course, they lack adaptability; they are not flexible. Also, rules work best in a stable situation where things do not change very much. Standards have exactly the opposite set of characteristics: They are open-ended, they are flexible; they offer many benefits to evolve over time. But they are not very predictable. So each of them has pros and cons. When you come to the subject of copyright exceptions and limitations, you see right away that most of the exceptions in most of the national laws, and even most of the exceptions in American law, are very rule-like. They are very precise about what they cover. They identify what the purpose is, who qualifies, what the context is. Those actually work for the kinds of institutions that need to be able to have that kind of precision. I. FAIR USE

Fair use is a kind of canonical standard, in that it is very flexible; it is very adaptable to new circumstances.46 American scholars love fair use, and we talk about it all the time, we write many articles on it. But we also criticize it like crazy. So there is no doctrine in American copyright law that is both most loved and most criticized as fair use. Why is it criticized? It is widely criticized as too unpredictable, too case-by-case, too ad hoc, too unprincipled, too incoherent, too risky, too expensive, and so forth. So there have been a lot of suggestions in the literature in the last couple of years about how to make fair use more like a rule. Some of those suggestions: Mike Carroll47 and David Nimmer48 have both written papers suggesting that maybe what we need is a kind of fair use adjudication process, where you can go to some administrative agency and you can put together a set of papers, and then they can make at least a preliminary determination about whether or not something is fair use. That way, there would be this kind of ability to not have this big risk, and maybe a lot of fair use disputes would be solved thereby. Another suggestion in the literature is to confer more rule-making authority on the Copyright Office so that it can either add new exceptions or refine them in a way that will make them more predictable. Kevin Goldman and Gideon Parchomovsky49 suggest that what we really need is quantitative safe harbors — so many words, so many seconds of video, etc. — and that will give more predictability. I think Peter Jaszi has done a real service in working with documentary filmmakers and other groups to try to develop best practices guidelines to try to make the uses by filmmakers, documentary filmmakers in particular, more predictable from a fair-use standpoint.50 * University of California, Berkeley, CA. 46 See Alan Latman, Fair Use of Copyrighted Works (1958). 47 See Michael W. Carroll, “Fixing Fair Use”, 85 N.C. L. Rev. 1087 (2007), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id= 945194. 48 See David Nimmer, “A Riff on Fair Use in the Digital Millennium Copyright Act”, 148 U. Pa. L. Rev. 673 (2000), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=222370. 49 See Gideon Parchomovsky & Kevin A. Goldman, “Fair Use Harbors”, 93 Va. L. Rev. 1483 (2007), available at http://papers. ssrn.com/sol3/papers.cfm?abstract_id=1014436. 50 See Peter Jaszi, “‘Yes, You Can!’ — Where You Don’t Even Need ‘Fair Use’”, Center for Social Media, May 2006, available at http://www.centerforsocialmedia.org/files/pdf/free_use.pdf; Peter Jaszi, “Fair Use: Its Effects on...

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There are a lot of other things that basically have been suggested, other factors that should be taken into account. Lorraine Weinrib thinks fairness should be taken into account.51 Mike Madison thinks you should pay more attention to what is customary use in certain creative communities.52 Molly Van Houweling, my colleague at Berkeley, says take into account distributive values.53 Several other people have suggested other factors to take into account. So there are lots and lots of suggestions that people have been making about what to do. II. UNBUNDLING FAIR USE

My particular response to this is that fair use in the U.S. law context is being made to do too much work. If you look at fair use case law, what you see is sometimes it is about quotations in new works, sometimes it is about parodies, sometimes it is about time shifting or format shifting, sometimes it is about reverse engineering of software for interoperability or other legitimate purposes, sometimes it is search engines with thumbnails or bots making copies, sometimes it is comparative advertising. When you try to do that much work with one rule that has four factors, you are going to end up with a pretty incoherent and unpredictable body of law. Another thing that I think is very important is this word “transformative,” ever since the Campbell v. Acuff-Rose decision,54 is being given too much weight and is also being twisted all over the place. Everything is “transformative” now. So the word does not have as much meaning as it used to have. I think we need to invent more words. My suggestion is to do what I am calling “unbundling fair use,”55 and to start with an empirical study of existing fair use case law56 and say: You know, fair use actually becomes a lot more predictable if you cluster cases around the policies that they essentially serve. I have got one cluster of cases that are about free expression/free speech-promoting uses. I think within that cluster a lot of things about parodies, critical commentary, and misuses of copyright claims to try to engage in censorship, I think all fit quite nicely. I have a second cluster that I call authorship-promoting fair uses. This to me includes also quotation. It overlaps to some degree with the first category, except that I think not every quotation is necessarily a First Amendment issue. Sometimes it is just good authorship policy. We want authors to be able to quote from preexisting works in order to make new works. But for me also authorship-promoting fair uses include things like being able to make private use copies to study as you are preparing a new work. It includes incidental uses, and possibly things like remixes and mashups, which we frequently see. A third category is information-promoting fair uses. There is quite a cluster of cases, particularly in the Internet age, where we are talking about access to information-promoting fair uses. Those are things like indexing, linking, thumbnails, and snippets. Consumers and Industry”, Testimony before the Subcomm. on Commerce, Trade and Consumer Protection of the H. Comm. on Energy and Commerce, (Nov. 16, 2005), available at http://centerforsocialmedia.org/rock/backgrounddocs/ testimony.pdf; Pat Aufderheide & Peter Jaszi, “Recut, Reframe, Recycle: Quoting Copyrighted Material in UserGenerated Video”, Dec. 2007, available at http://www.centerforsocialmedia.org/files/pdf/CSM_Recut_Reframe_ Recycle_report.pdf. 51 See Lorraine E. Weinrib, “‘This New Democracy …’: Justice Iacobucci and Canada’s Rights Revolution” 57 U. Toronto L.J. 399 (Spring 2007). 52 See Michael Madison, “A Pattern-Oriented Approach to Fair Use”, 45 Wm. & Mary L. Rev. 1525 (2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=442441. 53 See Molly Shaffer Van Houweling, “Distributive Values in Copyright”, 83 Tex. L. Rev. 1535 (2005), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=671044. 54 Campbell v. Acuff-Rose Music, 510 U.S. 569 (1994). 55 See Pamela Samuelson, “Unbundling Fair Uses”, 77 Fordham L. Rev. 2537 (2008) (from the 2008 Robert L. Levine Lecture, Fordham University School of Law, New York (Apr. 30, 2008)). 56 Barton Beebe, “An Empirical Study of U.S. Copyright Fair Use Opinions”, 1978–2005, 156 Penn. L. Rev. 549 (2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=998421.

278 CHAPTER IV: COPYRIGHT LAW A fourth category is innovation policy-promoting uses. Here reverse-engineering to achieve interoperability, add-on software, fixing bugs, integrating with systems, and the like, are things that I think fall into that kind of cluster. I have another cluster for other social policy-promoting fair uses, some of which have to do with education and learning, some of which have to do — actually, there is a remarkable body of cases — with involving copies made for the purpose of litigation. So that has got to be something to be able to adjudicate cases. The Supreme Case put the whole lyrics of the songs in the Campbell v. Acuff-Rose case in the Federal Reporter. That has got to be fair use, right? So there has to be some space for that. Comparative advertising may fit under that cluster too. A sixth category I am calling personal uses in private spheres. A seventh category is market-failure-curing uses, where we are talking about high transaction costs that preclude formation of a market, and maybe also some holdup. Wendy Gordon has recently written an article identifying six different types of market failures.57 She turns everything into market failure, even First Amendment free speech issues. I do not do that. I think within each of those clusters that one of the things that you can do that is very helpful is to identify cases that are canonical. Hopefully, at each cluster you can say: “Here is a canonical fair use, here is a canonical unfair use, in the same space.” Then, when you cluster the cases around those and then examine the cases, I think it helps you make a better analysis about when something should be considered a fair use or not. One of the things I like about these clusters also is I think that there are some issues, some factors, that should be taken into account in some of these clusters that are irrelevant in other clusters. For example, in the free speech cluster I think it is important to consider chilling effects on speech unless a use is fair. So we have to be more concerned in the free-speech-use context about chilling effects.58 There is a lot of literature lately about why that is important in these cases. But I think free speech issues do not appear in all of the clusters. Therefore, saying that everything is presumptively constitutional I think is not the right approach. Within each of these clusters I think there are different factors that might be worth taking into account. I try actually in a paper I am working on to articulate each of those. I think, on the opposite side of the fence, we also need to be concerned about the need for more flexibility with rules. So I was very heartened to hear Marybeth’s report that there is an effort now to update Section 108 and think about it more broadly. One of the things that I fault the U.S. copyright law with is if you look at the exceptions and limitations, you kind of look at them and you go, “What are they talking about? Why did horticultural affairs get an exemption and not Girl Scouts? I don’t get it.” Too often, I think it is who showed up and asked for something. I think we have more responsibility as responsible copyright people to try to figure out what are the exceptions that really need to be in the statute and put them there, whether somebody showed up or not. Also, I think that for Europeans trying to develop a way to create a little more flexibility within their rule-based approach is important because we cannot possibly imagine all the new uses of copyrighted works that technology is going to enable. You need more flexibility, whether that is through an adapted rule-making process or whether it is to say something like: “Gee, here’s the rule that we know we need an exception for, but we should also allow other analogous uses,” and then allow people to essentially argue, “My use is enough like that use that I should be protected under that framework.” That is actually what I had to say. Thank you very much. 57 58

Wendy J. Gordon, “The ‘Why’ of Markets: Fair Use and Circularity”, 116 Yale L.J. Pocket Part 371 (2007). See “Chilling Effects Clearinghouse”, http://www.chillingeffects.org.

PART D: COPYRIGHT EXCEPTIONS AND LIMITATIONS 279 PROF. HUGHES: We now have ten-to-fifteen minutes for discussion. We have three panelists to comment. Mihály Ficsor, you particularly wanted to address Bernt Hugenholtz’s point about the possibility of an instrument. Do you want to take two or three minutes to talk about that? MR. FICSOR: Yes. I’d like to speak about that, although I would be glad to speak also about the three-step test, because I was the member of the WTO panel that first interpreted it, and of course I believe that we were just great in that.59 However, as you have suggested, I speak now about the exceptions and limitations as they are now on the WIPO agenda, and, in connection with it, about the study presented by Bernt. Only four points, very briefly. First, it is important, justified, and timely that exceptions and limitations are now on the agenda of the WIPO Permanent Committee on Copyright and Related Rights.60 Of course, they should be there along with some other similarly important, timely, and justified issues. For example, service providers’ cooperation and liability would be such an issue, and it is a pity that it has not been put on the agenda at the same time. Second, the report prepared and presented by Bernt is a promising contribution in this quite overheated atmosphere where the offer of utopian ideas is very rich.61 Although I don’t agree with all details of the report, it is, in general, sufficiently realistic and reasonable, since it recognizes that it does not suggest a new treaty, but rather some solution within the framework of the existing norms in the form of “soft law.” Third, it is an important question what form this “soft law” may take. I don’t think that it would be realistic to think about a joint WIPO-WTO activity in this field. At WIPO, the traditional “soft” law forms are guiding principles, recommendations, and model provisions. These forms were used during what has been characterized by Sam Ricketson as the “guided development” period in copyright.62 Between 1971 and the end of the 1980s, there were WIPO recommendations, guiding principles, and model provisions also about exceptions and limitations contributing to updating national laws. The difference is that now this is a more concentrated and politically more relevant issue. Finally, fourth, as regards mandatory exceptions, which are also presented as an idea in Bernt’s report, I do not think that soft law and mandatory law could go together. By definition, what is just a soft law cannot be considered to be binding and mandatory. I also think that mandatory exceptions would hardly fit into the present structure of international norms, which is based on the national treatment/minimum obligations dichotomy. In this connection, I do not agree with the suggestion in the report that there are also at present mandatory exceptions or limitations in the Berne Convention,63 the TRIPs Agreement,64 59 United States – Section 110(5) of the US Copyright Act, Panel Report, Attachment 2.3, WTO Doc. WT/DS160/R (June 15, 2000); see also Mihály Ficsor, “How Much of What? The “Three-step Test” and Its Application in Two Recent WTO Dispute Settlement Cases”, 192 Revue Internationale du Droit d’Auteur 173 (2002). 60 See WIPO Standing Committee on Copyright and Related Rights, WIPO Study on Limitations and Exceptions of copyright and Related Rights in the Digital Environment, 9th Sess., Geneva, June 23–27, 2003 (prepared by Sam Ricketson), WIPO Doc. SCCR/9/7 (Apr. 5, 2003), available at http://www.wipo.int/documents/en/meetings/2003/ sccr/pdf/ sccr_9_7.pdf; WIPO, Committee on Intellectual Property and Development (CDIP), First Session, Summary by the Chair, Mar. 3–7, 2008, available at http://www.wipo.int/edocs/mdocs/mdocs/en/cdip_1/cdip_1_summary.doc; WIPO, Standing Committee on Copyright and Related Rights, Sixteenth Session, Conclusions of the Sixteenth Session of the SCCR, Mar. 10–12, 2008, available at http://www.wipo.int/edocs/mdocs/sccr/en/sccr_16/sccr_16_conclusions. doc; WIPO, Proposal by Chile on the Analysis of Exceptions and Limitations, SCCR/13/5 (Nov. 22, 2005), available at http://www.wipo.int/ meetings/en/doc_ details.jsp?doc_id=53350. 61 See Hugenholtz & Okediji, supra note 25. 62 Sam Ricketson, The Berne Convention for the Protection of Literary and Artistic Works: 1886–1986 at 919 (1986). 63 Berne Convention, supra note 29. 64 TRIPs Agreement, supra note 28.

280 CHAPTER IV: COPYRIGHT LAW and the WCT and WPPT.65 For example, facts, ideas, and data are mentioned in the report as covered by mandatory exceptions or limitations, but, in reality, they are no more parts of the copyright paradigm and of the subject matter of copyright protection than, let’s say, clean air, sunshine, or springtime freeze. Even as far as exception for quotations is concerned, I do not share the view that it is truly mandatory under the Berne Convention. I have written about it in my book on the WCT and the WPPT,66 pointing out, inter alia, that Article 19 and 20 of the Convention allow the possibility of granting “greater protection,” and “more extensive rights” than the minimum level of protection prescribed. The fact that, in the French version of Article 10(1) the words “Sont licites les citations” appear only means that the Convention, in this respect, provides for less extensive minimum rights. There is no real contradiction between the French and English texts of Article 10(1). The latter does not begin with the words “It shall be permitted,” which would correspond to the French text,67 but rather with the words “It shall be permissible.”68 That is, it refers to the possibility of Berne Member States to apply this exception rather than an obligation to do so. It, in fact, better expresses what follows from Article 10(1) in the light of Articles 19 and 20. Therefore, for example, the EU Copyright (or Information Society) Directive69 is not in violation of the Berne Convention, the TRIPs Agreement, and the WCT, just because it lists quotation exceptions in its Article 5(3) as an optional exception rather than — along with the exception provided for in Article (1) concerning temporary reproduction — a mandatory exception. It is another matter that no reasonable copyright law may exist without such an exception. However, this is true regarding some other exceptions too. PROF. HUGHES: Excellent. It is always nice when you have voices of experience and professors in the same room to hear that the professors’ proposals are reasonable and in the realm of the possible. Jane, would you like to take a few minutes and offer some comments on any of our principal presentations? PROF. GINSBURG: Yes, all of the above. I would probably disagree with Mihály on mandatory exceptions, so let me use that as my starting point. I think that what Pam has described makes a lot of sense, to go through the fair use cases, figure out what is the normative basis for each type of fair use, then try to derive rules from that. But when we get to seven categories of normative bases, I start getting a little nervous. I do think that less is more. By that I don’t mean fewer exceptions; I mean fewer categories — whether you call them rules, standards, guidelines, signposts, etc. So I want to push for less. The theory is as follows. There are Berne maxima as well as Berne minima. One is a subject matter maximum, as set out in TRIPs Article 9.2: “Copyright protection shall extend to expressions and not to ideas, procedures, methods of operations, or mathematical concepts as such.” The other is, I think, an exception. Mihály referred to Article 10.1, “It shall be permissible.” Does this text mean that Berne does not require Member States to permit quotations? Or rather PCT and WPPT, supra note 30. Mihály Ficsor, The Law of Copyright and the Internet 260–61 (2002). 67 Berne Convention, supra note 29, art. 10(1) (“Sont licites les citations tirées d’une œuvre, déjà rendue licitement accessible au public, à condition qu’elles soient conformes aux bons usages et dans la mesure justifiée par le but à atteindre, y compris les citations d’articles de journaux et recueils périodiques sous forme de revues de presse.”). 68 Id. (“It shall be permissible to make quotations from a work which has already been lawfully made available to the public, provided that their making is compatible with fair practice, and their extent does not exceed that justified by the purpose, including quotations from newspaper articles and periodicals in the form of press summaries.”). 69 Copyright Directive, supra note 6. 65 66

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that quotations shall be permitted? Reference to the French text (which I don’t have to hand) would resolve that question. MR. FICSOR: The Hungarian text will decide. [Laughter] PROF. GINSBURG: I am not trying to be effete by asking what the French test is. But if there is a difference between the English text and the French text, the French text controls. In either event, whether one takes article 10bis as a mandatory exception or instead as an extraordinarily hortatory exception, the text reads in English: “It shall be permissible to make quotations from a work which has already been lawfully made available to the public, provided that their making is compatible with fair practice and their extent does not exceed that justified by the purpose.” Now, that is a pretty good set of guidelines. Arguably, you do not really need the three-step test with that set of guidelines. Would it be possible to have a working system of exceptions and limitations derived simply from those two pieces of text? That would be my proposition. Less is more. PROF. HUGHES: It struck me as you were talking, Jane, that Pam would probably find it appealing that in the United Kingdom there is both fair dealing and public interest,70 and the analysis of public interest is a different normative analysis than Americans fit into fair use. So there is at least one jurisdiction that is already dividing out the normative standards. Tilman, a few minutes to tell us perhaps what you think about the possibility of an international effort, or whether the twenty-six exceptions approach in the Directive is a better approach, or how we should approach the question of exceptions and limitations. MR. LÜDER: Thank you for this opportunity. I would like to go through all the twenty-six exceptions.71 Since I still have seven hours and nine minutes, I would like to go through all the details. [Laughter] We have twenty-five optional exceptions and one mandatory exception.72 I have a lot of sympathy for what Bernt and Professor Samuelson said, that you should probably group a few of these exceptions under general headings and say that those are public-interest exceptions, and those possibly should be made mandatory, at least — and here I qualify — as far as the European Union is concerned, as a test ground. I am not yet talking about international rulemaking. What I would propose is to say that there are knowledge economy inclusiveness-type exceptions that should be mandatory, that goods and services that are produced subsequent to or under those exceptions should be available to all consumers across the European Union, and the goods and the services should be freely circulating in the common market. Now, the inclusiveness knowledge economy exceptions I would say are archiving and reproduction for libraries and museums. That clearly has a knowledge economy component, also an inclusiveness component, because this material is our common heritage. I would also 70 First recognized in England in 1804, the fair dealing defense was one of the earliest ways by which the rights enforceable under copyright could be overridden in certain situations. Although the court did not use the expression “fair dealing,” the judges held that, as long as any infringement was “fairly done … for the benefit of the public,” “a man may fairly adopt part of the work of another.” Cary v. Kearsley, (1804) 4 Esp. 168 (Lord Ellenborough). The Copyright Act 1911 (UK) incorporated the first statutory fair dealing defense and it has been retained in all subsequent Acts. Copyright Act 1956 (UK) and Copyright, Designs and Patents Act 1988 (c 48). In its 1981 Green Paper, which preceded the Copyright Designs and Patents Act 1988 (CDPA), the British Government recognized that “the public interest demands that not every unauthorized reproduction of copyright material should constitute an infringement of copyright.” Green Paper, Reform of the Law Relating to Copyright, Designs and Performers’ Protection, A Consultative Document (1981), Cmnd 8302, ch. 3, ¶ 1. 71 Copyright Directive, supra note 6, art. 5. 72 Id. pmbl. (33) (“The exclusive right of reproduction should be subject to an exception to allow certain acts of temporary reproduction, which are transient or incidental reproductions, forming an integral and essential part of a technological process and carried out for the sole purpose of enabling either efficient transmission in a network between third parties by an intermediary, or a lawful use of a work or other subject-matter to be made.”).

282 CHAPTER IV: COPYRIGHT LAW group the exception for the disabled under this catalog. That has a very strong component of inclusiveness in the digital knowledge economy. Those are the knowledge economy exceptions. Possibly also illustrations for teaching and research. That has a strong component. For all products and services that are supplied under these exceptions, it might be a worthwhile concept to say that they should be available across the European Union. The second group would be the free speech exceptions. Those are quotations, criticism, and review — the press exception. I think this is very important as a safety valve. I do not think that the free movement of these kinds of products that are based on such exceptions should be prohibited if one Member State adopts an exception and another one does not. I think that’s it. Less is more. Those are the two big headings under which I would group them. I think that we should think about making those mandatory across the European Union and see how that works, and then we can move on to the international plain and see whether that could be replicated. In that sense, I am very happy that today I agree with Bernt Hugenholtz and his study. Actually, if Bernt would have taken the pain to come this morning at 8:30, I also agreed with him on orphan works (see Chapter IV.A.3, supra this volume). So we are building slowly bridges again that were destroyed yesterday. PROF. HUGHES: We have just about five minutes before we need to switch panels. Let’s have one or two questions, if there are questions from the audience. QUESTION [Mario Bouchard, Copyright Board, Canada]: The question is for Jane. It truly is a question. In a lot of the debates about exceptions and about the distinction between fair use and fair dealing, it seems to be very often people are taking American fair use, open-ended, as being the paradigm or the template. My question to you is: How many countries in the world have an open-ended fair use exception? PROF. GINSBURG: At the moment two. PROF. HUGHES: I think the panel as a whole could cite the United States and Israel. Singapore has considered it.73 Australia has considered it.74 The Philippines does.75 PROF. GINSBURG: Can I ask you a question, Mario, since it was mentioned? One of the fair use reform approaches that has been suggested, at least in the literature, has been to have the Copyright Office or some administrative agency make fair use rulings. Now, the Copyright Board sort of does that, at least sometimes. So how does it work? QUESTIONER [Mr. Bouchard]: Fair use rulings? Not quite. We may take into account what we consider to be fair use in setting the amount of a tariff.76 For example, we have a very real 73 Singapore’s Copyright Act of 1987 came into force on Apr. 10, 1987. See §§ 51 and 52 (Copyright and the Institute), available at http://www.hyperorg.com/misc/singapore_fair_use.html. 74 Under the Australian Copyright Act 1968 (Cth), the grounds for fair dealing are: research and study (§ 40), review and criticism (§ 41), “reporting the news” (§ 42), legal advice (although the federal Crown is deemed to own copyright in federal statutes, and the Crown in each State in state statutes) (§ 43), and parody and satire (with some exceptions) (§ 41A). The Copyright Amendment Act 2006 (Cth) No. 158, 2006) enabled parody and satire to qualify as fair dealing under federal copyright law in certain circumstances. The 2006 amendmseeeents also added a number of other very specific and quite limited exceptions to copyright for personal use of AV material, including time shifting (§ 111) and format shifting (§ 110AA). 75 Intellectual Property Code of the Philippines, Republic Act No. 8293. Section 185 provides for fair use of copyrighted material (which is based largely or even entirely on the United States fair use doctrine) provided the copyrighted work will be evaluated based on the following: “The purpose of the usage of the copyrighted material to be classified as fair use; The nature of the copyrighted work; The amount or portion of the copyrighted work being classified as fair use; The effect(s) the copyrighted materials has or have on the potential market and the value the item has to enriching the item of which the copyrighted material is being classified as fair use.” 76 See, e.g., Decision of the Copyright Board Canada on SOCAN Tariff 22.A (Oct. 18, 2007), available at http:// www.cb-cda.gc.ca/decisions/m20071018-b.pdf.; Michael Geist, “Copyright Board Rules Music Previews Constitute Fair Dealing”, MichaelGeist.ca, Oct. 18, 2007, http://www.michaelgeist.ca/content/view/2300/125 (offering music previews (i.e., a portion of a song) constitutes fair dealing under Canadian copyright law § 29 as it can be characterized as copying for the purpose of research).

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problem right now when it comes to photocopying in schools.77 One side is claiming that about 10 percent of what goes on in schools is fair dealing for the purpose of research or private study. The other side is saying it is only 1 percent. It is a difference of about $3 million. We are going to have to decide which way to go in that respect. But we do not actually rule on what constitutes fair dealing. It is just an incidental part of our job. PROF. GINSBURG: You have also done it in the context of unlocatable authors. Sometimes you deny a license because you say it’s a fair use, it is not an infringement. QUESTIONER [Mr. Bouchard]: Absolutely, always as an incidental to a principle jurisdiction. You are right. But our determinations in that respect are not final. If we deny a license in a context like that and we are wrong, the person can be sued.78 QUESTION [Howard Knopf, Macera & Jarzyna LLP, Ottawa, Canada]: A very short comment following up on Mario’s comments. The Supreme Court of Canada, of course, in a case that many of you know about, CCH v. Law Society,79 basically created an open-ended category within the specific rubric of research. They said research is your American notion of fair use and then some, with the practical result that there is more scope of research now in Canada than actually there is in the United States. If your Texaco decision80 is good law, we are better off. PROF. HUGHES: I know things are always better in Canada, Howard. Let’s thank our panelists.

APPENDIX A Contours of an International Instrument on Limitations and exceptions P. Bernt Hugenholtz* & Ruth L. Okediji**

I. INTRODUCTION

The issue of limitations and exceptions to copyright (L&Es) figures prominently on the agenda of international lawmakers today. It is one of many items short-listed for action by the Committee on Development and Intellectual Property (CDIP) at the World Intellectual Property Organization (WIPO), which was established to implement the WIPO Development Agenda.81 77 See Copyright Board of Canada, Hearings: Educational Institutions — Access Copyright Tariff (2005–2009), available at http://www.cb-cda.gc.ca/hearings/eie200706-e.html. 78 See Mario Bouchard, General Counsel, Copyright Board of Canada, Unlocatable Copyright Owners: Canada’s Orphan Works Regime, Presentation Before MILE Conference, Malta (June 4, 2008), available at http://www. mileproject.eu/ asset_arena/document/RD/ IPR_CEPIC_JUNE_2008_ORPHAN_WORKS_BOUCHARD.PPT. 79 CCH Can. Ltd. v. Law Soc’y of Upper Can., 2004 S.C.C. 13, available at http://www.canlii.org/ca/cas/scc/2004/ 2004scc13.html. 80 American Geophysical v. Texaco, 60 F.3d 913 (2d Cir. 1994), cert. dismissed, 116 S. Ct. 592 (1995) (holding that companies in the for-profit sector which make copies of copyrighted scientific and technical journal articles violate fair use). * Professor of Intellectual Property Law & Director of the Institute for Information Law (IViR), University of Amsterdam. ** William L. Prosser Professor of Law & Solly Robins Distinguished Research Fellow, University of Minnesota Law School. 81 See World Intellectual Property Organization (WIPO), Committee on Intellectual Property and Development (CDIP), First Session, Summary by the Chair, Mar. 3–7, 2008, available at http://www.wipo.int/edocs/mdocs/mdocs/ en/cdip_1/cdip_ 1_summary.doc.

284 CHAPTER IV: COPYRIGHT LAW More recently, at a meeting of the WIPO Standing Committee on Copyright and Related Rights (SCCR),82 a proposal by the Chilean government to initiate what might eventually become an international instrument on L&Es received broad support and will remain on the future agenda of the SCCR, despite reservations by some developed countries. Thus, the time is clearly ripe to consider the ways in which such an instrument might be legally and institutionally conceived. This chapter suggests various approaches and offers recommendations. As mechanisms of access, L&Es contribute to the dissemination of knowledge, which in turn is essential for a variety of human activities and values, including liberty, the exercise of political power, and economic, social and personal advancement. Appropriately designed L&Es may alleviate the needs of people around the world who still lack access to books and other educational materials and also open up rapid advances in information and communication technologies that are fundamentally transforming the processes of production, dissemination and storage of information. As new technologies challenge copyright’s internal balance, and as the costs of globalization heighten the vital need for innovation and knowledge dissemination, a multilateral instrument that can effectively harness various national practices with regard to L&Es, and that can provide a framework for dynamic evaluation of how global copyright norms can be most effectively translated into a credible system that appropriately values author and user rights, is a necessity. This chapter examines policy options and modalities for framing an international instrument on limitations and exceptions to copyright within the treaty obligations of the current international copyright system. We consider this international copyright acquis as our general starting point, and evaluate options for the design of such an instrument, including questions of political sustainability and institutional home. Part I sketches the rationales for a multilateral approach to the question of limitations and exceptions. In part II, we explore flexibilities inside the international copyright acquis, review the three-step test and assess its import for the validity of a proposed international instrument on L&Es, particularly given the expansion of the test in the TRIPs Agreement and the interpretive jurisprudence of the WTO dispute panels. Finally, in part III we set out in preliminary fashion the basic contours of a multilateral instrument on L&Es. Considerations of feasibility, political sustainability and normative priorities, among others, are briefly explored and then situated along a continuum of possible modalities for such an instrument. We then offer some preliminary recommendations on the way forward. II. RATIONALES OF AN INTERNATIONAL INSTRUMENT

The rights-access balance struck in the current international acquis is largely reflective of the conditions that affected the outcome of negotiations on the initial iteration of the Berne Convention in 1886. Prior to the conclusion of negotiations, the copyright laws of individual European nation States each reflected a balance between the protection of authorial rights on the one hand and access to creative works on the other. To eliminate discriminatory practices commonly employed by national laws with respect to foreign works, the Berne Convention at its genesis sought to serve a coordinative function and correlate existing national norms into a set of minimum, baseline principles acceptable to a broad multilateral membership. There are good historical reasons for the imbalanced treatment of L&Es in the acquis. Since L&Es reflect specific domestic welfare interests ranging from freedom of expression to cultural development, global mandatory obligations in this regard would unduly impose uniformity in a sphere that, at the time of the Berne Convention’s negotiation, was uniquely designed to accomplish wholly domestic goals. Further, as a strategic matter, it can be argued that the 82 See WIPO, Standing Committee on Copyright and Related Rights (SCCR), 16th Sess., Conclusions of the Sixteenth Session of the SCCR, Mar. 10–12, 2008, available at http://www.wipo.int/edocs/mdocs/sccr/en/sccr_16/ sccr_16_ conclusions.doc.

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presumed self-interest of a State in promoting domestic welfare obviated any need to require mandatory global L&Es on the ground that States were sure to enact them as needed over time; no incentive was necessary for States to act in their own interest. In addition, an important structural point should be made. While a global approach to protection ensured a mutually beneficial return for authors’ rights, the same could not be said for L&Es that were directed to the public good. L&Es enacted in one country are intended to address interests, needs and conditions uniquely beneficial to that country and reflective of that country’s markets. The benefits of exercising L&Es in the domestic market, unlike the benefits of reciprocal rights protection, are thus perceived to be of less direct benefit to States. This may explain why an international approach to L&Es has historically never been pursued by developed countries that championed multilateralism in copyright relations; since the distribution effects of gains from global access are not neutral or even, domestic L&Es are sufficient and preferred to an international mandatory approach, for unilateral action in this regard can be successful without any corresponding domestic public loss.83 Today, the vintage preoccupation with competing common and civil law rationalizations of IP protection and the expected gains of strong IP protection have given way to much larger considerations of the global effects of unlimited exclusive rights in knowledge goods.84 From public health to consumer protection, the high social costs of ever-expanding IP protection have compelled a demand from scholars, policymakers, international agencies and civil society groups for accountability in the IP system to the fundamental public purpose that private rewards for innovation and creative works are intended to advance.85 As is widely recognized, the unlimited grant or exercise of rights by copyright holders without corresponding and appropriate L&Es has serious adverse long-term implications not only for development priorities, but indeed for the creative and innovation process itself. It is firmly established that most innovation occurs incrementally by building on preceding technologies or existing knowledge, which underscores the crucial role that access plays in the achievement of copyright’s fundamental goals. On the same note, empirical evidence in some developed countries suggests that in regions where technological developments and know-how have been freely disseminated, there has been corresponding technological growth and innovation. A new international instrument on L&Es would offer a unique opportunity to coordinate, harmonize and balance the heightened (and new) standards of protection set forth in the successive Berne Convention Revisions, the TRIPs Agreement and the WIPO Internet Treaties. International harmonization of L&Es present in national copyright laws would diminish the reliance on national courts for the interpretation of multilateral accords, therefore augmenting the benefits of substantive rights harmonization. For example, a new international instrument on L&Es could help to eliminate diverging interpretations of the three-step test across national jurisdictions. A new international instrument would also offset the TRIPs constriction of threestep test as well as the nascent jurisprudence of WTO dispute panels which prioritizes economic benefits of control over economic benefits of diffusion. A global approach to L&Es would further help: to facilitate transborder trade, both online and in traditional media, by eliminating inconsistency and uncertainty and encouraging uniformity of standards of protection and transparency; to alleviate institutional weakness of States who need diffusion most (DCs and LDCs); and to counteract the recent shift to bilateralism and regionalism in international copyright policymaking and to constrain unilateral ratcheting up of global standards. Finally, a new international instrument with a broad membership offers an opportunity to consolidate recent gains in integrating public interest goals in the international copyright system, as seen 83 See Ronald B. Mitchell & Patricia M. Keilbach, “Situation Structure and Institutional Design: Reciprocity, Coercion and Exchange”, 55 Int’l Org. 891, 892 (2001). 84 Ruth L. Okediji, Intellectual Property and Accountability in the Global Public Legal Order (forthcoming, 2008). 85 Id.

286 CHAPTER IV: COPYRIGHT LAW notably in the Preamble to the TRIPs Agreement, the Preamble to the WIPO Copyright Treaty (WCT) and its Agreed Statements. III. IN SEARCH OF “WIGGLE ROOM”

Ideally, a new international instrument on L&Es should be compatible with the standards set by the international copyright acquis, while optimally exploiting flexibilities that exist within the current multilateral framework. In search of these flexibilities, it is important to understand the mechanics of the copyright system. Statutory limitations and exceptions are but one, albeit important, way of creating balance inside copyright. The tool-box of copyright law consists of several other balancing instruments as well, including, for example, the concept of a “work of authorship,” which features a requirement of “originality”;86 the idea/ expression dichotomy, which delineates the border between protected subject matter and the public domain; the delineation of economic rights of the right holder, such as the right of reproduction and the right of communication to the public; general limits to copyright, such as the exhaustion rule (first-sale doctrine) and the term of protection; and, finally, limitations and exceptions proper. In addition, outside the copyright tool-box, certain limits to copyright can be directly sourced in fundamental rights and freedoms, such as freedom of expression and the right to privacy, and others in competition law, such as the use of compulsory licenses. This part explores the “wiggle room”87 that the main multilateral conventions (BC, TRIPs and the WCT) leave to the contracting States to set limits to copyright and, by implication, to enter into special agreements codifying such limits, without undercutting the acquis. A. Minimum Standards Characteristic of the international copyright regime is a structure of minimum standards which qualified right holders may invoke before the national courts of the contracting States. But these minimum standards need not apply in purely national contexts (BC art. 5.1). States have remained fully autonomous as regards works in their country of origin (BC art. 5.3). At least theoretically, this has left contracting States complete freedom to derogate from the conventional minimum rights as they see fit. Although such derogations do occasionally exist, as a rule, contracting States will shy away from discriminating against national right holders. The main minimum standards set by the Berne Convention and other international agreements concern: (1) protected subject matter (“works of authorship”); (2) economic (patrimonial) rights; and (3) limitations and exceptions subject to the “three-step test.” 1. Limits to Protected Subject Matter Inherent to the minimum rights prescribed by the Berne Convention, and incorporated by reference into TRIPs and the WCT, are certain general limits to copyright protection that could be exploited in an international instrument on L&Es, both as regards the subject matter of copyright and the economic rights defined and prescribed by the Conventions. The notion of a “work of authorship,” codified in BC art. 2(1), includes an implicit requirement of “originality,”88 See P. Bernt Hugenholtz, “Fierce Creatures. Copyright Exemptions: Towards Extinction?”, keynote speech, IFLA/Imprimatur Conference, Rights, Limitations and Exceptions: Striking a Proper Balance, Amsterdam, Oct. 30– 31, 1997, available at http://www.ivir.nl/publications/hugenholtz/PBH-FierceCreatures.doc. 87 The term is taken from J. H. Reichman, “From Free Riders to Fair Followers: Global Competition Under the TRIPs Agreement”, 29 N.Y.U. J. Int’l L. & Pol. 11, 29 (1997). 88 See Sam Ricketson & Jane Ginsburg, International Copyright and Neighboring Rights: The Berne Convention and Beyond 405 (2006). 86

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which rules out, for instance, mere factual accounts. This ground rule is illustrated by BC art. 2(8), which excludes from copyright protection “news of the day or miscellaneous facts having the character of mere items of press information.” Similarly, TRIPs art. 10(2) and WCT art. 5 state that copyright in compilations of data “shall not extend to the data or material itself.” A related balancing tool is the idea/expression (content/form) dichotomy, codified not in the BC, but in TRIPs art. 9(2) and in WCT art. 2. Accordingly, copyright protection extends “to expressions and not to ideas, procedures, methods of operation or mathematical concepts as such.” Note that BC art. 2(8), TRIPs arts. 9(2) and 10(2) and WCT arts. 2 and 5 are phrased as mandatory exclusions from copyright protection. The reasons for these exclusions are, however, not clear from the historic record. Are these objects excluded from copyright protection as a matter of public policy, expressing principles of free speech or freedom of competition? Or are they simply reminders of the general rule that copyright protects original expression?89 If the former interpretation is correct, one could read into these exclusions an actual obligation upon contracting States not to protect these objects. If the latter is correct, the net effect of these exclusions would be more limited; for example, a Union “author” of news items could not invoke minimum protection in another Union country.90 2. Limits to Economic Rights The definition of the economic rights in the Conventions offers additional “wiggle room.” The BC enumerates the minimum rights in a rather haphazard fashion, reflecting the history of the Convention; rights were added incrementally as new modes of exploitation became mainstream. But not all economic rights normally found in national laws have found their way into the international copyright acquis. A display right, for instance, is not recognized in any of the three main Conventions, while a right of commercial rental of films and software may not be required depending on market conditions (TRIPs art. 11; WCT art. 7) and an artist’s resale right has voluntary status only (BC art. 14ter). Such unregulated or optional rights may therefore be subjected to unlimited limitations and exceptions. But even a minimum right seemingly carved in stone, such as the right of reproduction, may leave Contracting States latitude for limitation. While BC art. 9(1) prescribes the “exclusive right of authorizing the reproduction of … works, in any manner or form,” and the Agreed Statements to the WCT confirm its application in the digital environment,91 neither instrument defines the act of “reproduction” as such. Scholars have convincingly argued that reproduction is basically a normative, not a technical, notion and should therefore be interpreted in the light of its objective.92 This line of reasoning leaves room, for instance, for a statutory carveout permitting acts of economically insignificant temporary copying.93 Arguably, such carveSee id. at 498–501. See id. at 499. 91 See World Intellectual Property Organization (WIPO) Copyright Treaty, Dec. 20, 1996, S. Treaty Doc. No. 10517, 36 I.L.M. 65 [hereinafter WCT], Agreed statement concerning Article 1(4): The reproduction right, as set out in Article 9 of the Berne Convention, and the exceptions permitted thereunder, fully apply in the digital environment, in particular to the use of works in digital form. It is understood that the storage of a protected work in digital form in an electronic medium constitutes a reproduction within the meaning of Article 9 of the Berne Convention. 92 See Legal Advisory Board, Reply to the Green Paper on Copyright and Related Rights in the Information Society, Brussels, Sept. 1995 (copy on file with the authors); see also generally P. Bernt Hugenholtz, “Adapting Copyright to the Information Superhighway”, in The Future of Copyright in a Digital Environment 81–102 (P. Bernt Hugenholtz ed., 1996). 93 See, e.g., Dutch Copyright Act (as amended), art. 13, available at http://www.ivir.nl/legislation/nl/ copyrightact1912_ unofficial.pdf (unofficial translation by Ministry of Justice of the Netherlands): The reproduction of a literary, scientific or artistic work will not include temporary reproduction of a passing or… 89 90

288 CHAPTER IV: COPYRIGHT LAW outs need not be subjected to the three-step test.94 Further flexibilities can be derived from the notion of “public,” which determines the scope of several other economic rights codified in the Berne Convention, some of which were eventually absorbed by the general right of communication to the public that was introduced in WCT art. 8.95 Indeed, many countries have taken advantage of such flexibilities by permitting certain de minimis acts of public performance or communication to the public by way of legally defining the contours of these acts around such minimal uses. The Berne Convention also warrants an exclusive right to make transformative uses, in the form of translations (art. 8), adaptations, arrangements and other alterations (art. 12), and cinematographic adaptations (art. 14(1)). Again, in the absence of clear definitions, these provisions leave some room for de facto limitations, for instance by determining in national law the criteria for copyright infringement. The exhaustion rule or first-sale doctrine found in most national laws, and permitted under TRIPs art. 6 and WCT art. 6.2, is another boundary of copyright.96 The same can be said of the limited term (duration) of copyright (BC art. 7). Note that although the minimum Berne term of 50 years p.m.a. (BC art. 7) is increasingly overrun by countries providing “life plus seventy,” the Berne minimum is in itself subject to several exceptions.97 3. Specific Limitations and Exceptions in the BC The Berne Convention recognizes two types of limitations: compensated limitations and uncompensated limitations. The difference is important especially in relation to the three-step test discussed below. The existence of a statutory compensation scheme may avoid causing “unreasonable prejudice” to authors or right holders and thereby makes it easier for limitations of the latter category to satisfy the third step of the test. Uncompensated limitations in the Berne Convention include provisions permitting public speeches (art. 2bis(2)), quotations (art. 10(1)), uses for teaching purposes (art. 10(2)), press usage (art. 10bis(1)), reporting of current events (art. 10bis(2)) and ephemeral recordings by broadcasting organizations (art. 11bis(3)).98 Many of these provisions simply state the purpose of the permitted use and leave a considerable measure of freedom to contracting States for implementation at the national level. In some cases (e.g., arts. 10(1) and 10(2)), the norms of the Berne Convention refer to “fair practice,” a notion which arguably leaves room for an interpretation that takes account incidental nature and forming an essential part of a technical procedure whose sole purpose is to enable a) the passing on by an intermediary through a network between third parties, or b) a lawful use and if it contains no independent economic value. 94 Note, however, that insofar as such carve-outs from the economic rights would fall under the rubric of “minor reservations,” they might still fall within the ambit of the three-step test. See discussion below. 95 These rights include the right of public performance “by any means or process” (BC art. 11); the public recitation including the public communication of thereof (BC art. 11ter); the public performance of cinematographic adaptations (BC art. 14(1)); the rights of broadcasting, rebroadcasting, cable distribution, and public communication by loudspeaker (BC art. 11bis). 96 Note that neither the Berne Convention nor TRIPs prescribes a general right of distribution. 97 The standard minimum term may be reduced to fifty years from first communication to the public or from creation for cinematographic works. Contracting States may also offer shorter terms of twenty-five years from creation for photographic works and works of applied art. However, art. 9 of the WCT reinstates the normal Berne Convention term for photographic works by ruling out the application of Berne art. 7(4). For works in which copyright is initially vested in a corporate entity, minimum terms expire fifty years from first publication or creation (TRIPs art. 12). 98 See WIPO Standing Committee on Copyright and Related Rights, WIPO Study on Limitations and Exceptions of Copyright and Related Rights in the Digital Environment, 9th Sess., June 23–27, 2003, WIPO Doc. SCCR/9/7 (Apr. 5, 2003) [hereinafter WIPO Study], at 11–20. In addition to the limitations and exceptions discussed above, the Berne Convention allows, in a few well circumscribed situations, for statutory (compulsory) licensing, as in the case of the recording of musical works (art. 13(1)) and broadcasting and cable retransmission (art. 11bis(2)). In such cases, right holders have a right to equitable remuneration.

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of local conditions,99 thus creating additional flexibilities. Note that Berne Convention art. 10(1) is phrased as a mandatory user freedom. The reason for this special status, most likely, lies in the exception’s rationale: freedom of expression. Moreover, a right to quote might be considered an essential prerogative for authors, who traditionally occupy centre stage in the Berne Convention. In addition to the specific limitations enumerated in the Convention, art. 9(2) allows unspecified limitations to the right of reproduction, subject to the “three-step test” discussed below. The TRIPs Agreement and the WCT do not contain any additional specific limitations to the rights newly introduced by these Conventions; both extend the rule of the “three-step test” to all rights covered by the respective Treaties. Note however that the contracting parties to the WCT did underscore the importance of retaining a balance in copyright, as is clear from its preamble,100 which may serve as a guideline to interpretation of the norms of the WCT, and arguably the Berne Convention as well. Moreover, as the record of the Stockholm Conference reveals, certain exceptions to particular rights, although not expressed in the international instruments, might be nevertheless implied.101 As their name “minor reservations” indicates, these implied limitations usually concern de minimis uses, such as use of works during religious ceremonies, or use by military bands.102 Such minor reservations might be codified in a future instrument on L&Es. Finally, for developing nations, there exist additional flexibilities in the Berne Appendix. However, due to the complexity of its provisions and the administrative burden that it imposes on its users, the Appendix has largely remained unuse B. Three-step Test 1. Scope and Function of the Three-Step Test At the 1967 Stockholm Conference, the so-called three-step test of BC art. 9(2) was introduced in international copyright law as a companion to the formal recognition of the general right of reproduction in art. 9(1) of the Berne Convention. The three-step test reappeared in TRIPs art. 13 and WCT art. 10. The three-step test has subsequently found its way, via WCT art. 10, into art. 5(5) of the European Copyright (Information Society) Directive of 2001, and from there into the national laws of some E.U. States.104 Under TRIPs art. 13, member States shall confine limitations and exceptions (1) to “certain special cases,” (2) “which do not conflict with a normal exploitation of the work,” and (3) “do not unreasonably prejudice the legitimate interests of the right holder.” Increasingly, variants of the test also appear in various regional instruments, such as the European harmonization directives, or in bilateral treaties, such as the US–Australia FTA (art. 17.4(10)). WIPO Study, supra note 98, at 13. See WCT, supra note 91, pmbl. ¶ 5 (“Recognizing the need to maintain a balance between the rights of authors and the larger public interest, particularly education, research and access to information, as reflected in the Berne Convention. …” (emphasis in original)). 101 WIPO Study, supra note 98, at 33; see also Report of the Panel, US — Section 110(5) Copyright Act, 15 June 2000, WTO Doc. WT/DS/160/R, § 6.33 et seq. [hereinafter US — Section 110(5) Report]. 102 Martin Senftleben, Copyright, Limitations and the Three-Step Test 198–201 (2004). 103 See R. L. Okediji, “Welfare and Digital Copyright in International Perspective”, in International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime (J.H. Reichman & K. Mskus eds., 2005). 104 See Directive 2001/29/EC, on the harmonisation of certain aspects of copyright and related rights in the information society, June 22, 2001, O.J. (L 167) 10 (EC), art. 5.5 [hereinafter Directive 2001/29/EC] (“The exceptions and limitations provided for in paragraphs 1, 2, 3, and 4 shall only be applied in certain special cases which do not conflict with a normal exploitation of the work or other subject-matter and do not unreasonably prejudice the legitimate interests of the rightholder.”). 99

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290 CHAPTER IV: COPYRIGHT LAW The evolution of the three-step test into the overriding norm of international copyright law through its incorporation into the TRIPs Agreement has attracted criticism from scholars and stakeholders alike105 The three-step test apparently negates the balance between exclusivity and access that should be inherent in any mature copyright system. Its focus, as with the entire structure of minimum rights, is geared towards protecting rights of authors or, in the case of TRIPs, “right holders,” not the interests of society or the general public. Cumulative application of the three steps, as its wording requires, heavily tilts the balance in favour of the right holders. Through its incorporation into the TRIPs Agreement, what was essentially a norm of international copyright, has morphed into a norm of international trade law. Finally, the test fails to take into account the justified needs of developing nations. The authors of this paper share much of this criticism. However, as a political reality, the existing acquis, including the three-step test, can hardly be ignored. Fortunately, as the following analysis will reveal, despite its firm wording, the three-step test does still provide members with flexibilities, and leaves sufficient room for States to enter into an instrument on L&Es with meaningful substantive content. The test is often portrayed as imposing a “limit to limitations.” This is indeed what the language suggests. In this vein, the WTO Panel in the IMRO case, which pitted the European Union against the United States in a conflict concerning the interpretation of the so-called “business exemption” (Section 110(5) of the US Copyright Act), notes at the outset of its opinion “that [TRIPs] Article 13 cannot have more than a narrow or limited operation. Its tenor, consistent as it is with the provisions of Article 9(2) of the Berne Convention (1971), discloses that it was not intended to provide for exceptions or limitations except for those of a limited nature.”106 However, the history of the three-step test tells a somewhat different story. As the drafting history of the Stockholm Revision of the BC reveals, art. 9.2 is more akin to a “grandfathering” clause; a purposefully vague reflection of a compromise among States of different copyright traditions,107 which confirms that the broad array of — frequently broadly worded — statutory limitations that existed at the national levels in 1967108 is in conformity with BC minimum standards. The same might be said in respect of art. 13 of the TRIPs Agreement adopted in 1994.109 a. What Are “Limitations and Exceptions?” While BC art. 9(2), TRIPs art. 13 and WCT art. 10 expressly refer to “limitations and exceptions” as the object of the three-step test, surprisingly little has been written, even in the IMRO WTO Panel Report, on what actually constitutes “limitations and exceptions.” In all likelihood, the term applies first and foremost to statutory limitations that curtail the rights of right holders in specific circumstances to cater for the interests of certain user groups or the 105 See, e.g., Rochelle Cooper Dreyfuss, “TRIPs—Round II: Should Users Strike Back?”, 71 U. Chi. L. Rev. 21 (2004); Rochelle Cooper Dreyfuss & Graeme Dinwoodie, “TRIPs and the Dynamics of Intellectual Property Lawmaking”, 36 Case W. Res. J. Int’l L. 95 (2004); Ruth Okediji, “TRIPs Dispute Settlement and the Sources of (International) Copyright Law”, 49 J. Copyright Soc’y U.S.A. 585 (2001); South Centre, “The TRIPs Agreement: A Guide for the South” (Geneva, November 1997), available at http://www.southcentre.org/index.php?option=com_docman&task=doc_download &gid=27&Item id=. 106 See US-Section 110(5) Report, supra note 101, § 6.97. 107 Christophe Geiger, “The Role of the Three-step Test in the Adaptation of Copyright Law to the Information Society”, UNESCO e-Copyright Bull., Jan.–Mar. 2007, at 3, available at http://unesdoc.unesco.org/images/0015/ 001578/157848e. pdf. 108 For an exemplary inventory of limitations and exception existing in national law in a number of contracting States (e.g., Germany, Netherlands, France, United Kingdom and India) prior to the 1967 Stockholm Conference, see M. Senftleben, supra note 102, at 52–81. 109 See id. at 87.

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public at large. Given the structure of the three Conventions, the three-step test need not be applied to codifications of the subject matter of copyright or of the minimum rights as such. According to some scholars, the term also does not encompass provisions that restrict the exercise of economic rights, such as provisions mandating the collective exercise of rights found in a variety of European directives and national laws.110. Whether the compensated limitations permitted under the Berne Convention qualify as “limitations and exceptions” subject to the three-step test under TRIPs art. 13, is an unsettled question.111 But even if they are, such compensated limitations are generally more likely to pass the test given the fact that prescribing compensation to authors or right holders is generally recognized as a crucial factor in assessing ‘unreasonable prejudice’ under the third step. Surely, the term “limitations and exceptions” — and by implication the three-step test — cannot apply to exercises of State discretion that are done pursuant to public policy external to copyright issues, such as freedom of expression and competition law, since this would imply a hierarchy of copyright over other domains of law, which would effectively render the copyright system immune against such external sources. However, as case law from the highest courts reveals, such a hierarchy does not exist.112 b. Scope of the Three-step Test The mother of all three-step tests, BC art. 9(2), applies only to the right of reproduction guaranteed in Berne art. 9(1). Other economic rights guaranteed under the Convention come either with corresponding specific limitations (e.g., quotation), or none at all. In the latter case, the “minor reservations” doctrine may apply. Given the structure of the Berne Convention, the three-step test arguably does not extend to a State exercise of discretion pursuant to those articles where such discretion has explicitly been granted, such as articles 2bis, 10 and 10bis. Thus, States may freely enact legislation with respect to the subjects covered in these provisions without the restrictions of the three-step test.113 TRIPs art. 13 takes the test an important step further. It now applies to all economic rights guaranteed by TRIPs as minimum standards. These include not only the rights newly recognized in TRIPs, such as the right of rental (TRIPs art. 11 ), but also the panoply of rights of the Berne acquis as incorporated into TRIPs (TRIPs art. 9(1)).114 Likewise, TRIPs art. 13 most likely applies not only to express limitations but also to the “minor reservations” implied in the Berne Convention.115 WCT art. 10 appears to be stricter and has a more pronounced dual function than TRIPs art. 13. While WCT art. 10(1) concerns the rights newly granted in arts. 6, 7 and 8 of the WCT, art. 10(2) applies to limitations and exceptions to all the economic rights already recognized by Berne. The potential impact of WCT art. 10(2) on Berne limitations, however, is neutralized by the Agreed Statements concerning art. 10:116 110 See, e.g., Silke von Lewinski, “Mandatory Collective Administration of Exclusive Rights — A Case Study on its Compatibility With International and EC Copyright Law”, UNESCO e-Copyright Bull., Jan.–Mar. 2004, at 5, available at http://unesdoc.unesco.org/images/0013/001396/139656e.pdf. 111 Daniel Gervais, Making Copyright Whole: A Principle Approach to Copyright Exceptions and Limitations (unpublished manuscript, on file with the authors). 112 See, e.g., P. Bernt Hugenholtz, “Copyright and Freedom of Expression in Europe”, in Expanding the Boundaries of Intellectual Property. Innovation Policy for the Knowledge Society 343–63 (Rochelle C. Dreyfuss, Diane L. Zimmerman & Harry First eds., 2001) (demonstrating that European courts regularly subject copyright claims to external freedom expression norms); Lucie Guibault, General Report (ALAI 1998), 46–48 (external limiting of copyright by competition law well established in various national and supranational courts).. 113 WIPO Study, supra note 98, at 21; Ricketson & Ginsburg, supra note 88, at 763. 114 US - Section 110(5) Report, supra note 101, § 6.80. 115 Id., § 6.81. 116 “Senftleben, WCT art. 10”, in Thomas Dreier & P. Bernt Hugenholtz, Concise European Copyright Law n.6(b), (2006).

292 CHAPTER IV: COPYRIGHT LAW It is understood that the provisions of Article 10 permit Contracting Parties to carry forward and appropriately extend into the digital environment limitations and exceptions in their national laws, which have been considered acceptable under the Berne Convention. Similarly, these provisions should be understood to permit Contracting Parties to devise new exceptions and limitations that are appropriate in the digital networked environment. It is also understood that Article 10(2) of the WCT neither reduces nor extends the scope of applicability of the limitations and exceptions permitted by the Berne Convention.117

Following a literal reading of the test, as enshrined in various international treaties, the three steps of the test must apply cumulatively.118 By necessity, such cumulative application implies that at least the first and second steps be applied in a liberal manner, so as to leave some relevance to the third and final step.119 A narrow construction of these initial steps would otherwise rob the test of much of its meaning. For this reason, Dr. Geiger has advocated reading the test in reverse, i.e., starting with the third test and working backwards from there. Such a reading is likely to accentuate the normative considerations built into the third (then first) step of the test. Indeed, nothing in the wording of the three-step test would prevent a legislator, international court or a WTO panel from following this approach.120 Another approach, which admittedly takes more liberties with the wording of the provision, would be to perceive the norms reflected in the three steps as a trio of factors to be taken into account by legislators or courts — much like the four factors of fair use in Section 107 of the U.S. Copyright Act.121 This approach has the obvious advantage of offering greater flexibility. A limitation might score low on, for instance, the first or second step, but could still be admitted by scoring high on the third test. Indeed, such a “holistic” approach would do more justice to the proportionality test that in essence underlies the three-step test.122 Scholars tend to read different meanings into the three-step test. While classic doctrine underscores its function as imposing limits on the “erosion” of copyright by limitations and exceptions, more progressive scholars perceive the three-step test as no more than a proportionality test allowing national legislatures a relatively broad measure of discretion in codifying limitations and exceptions while balancing the interests of right holders against those of users and society at large.123 Read in a constructive and dynamic fashion, the threestep test becomes a clause not merely limiting limitations, but empowering contracting States to enact them, subject to the proportionality test that forms its core and that fully takes into account, inter alia, fundamental rights and freedoms and the general public interest.124 2. The Three Steps in Some Detail The WTO Panel Report in the IMRO case has inspired a voluminous literature, including one highly detailed monograph,125 on the meaning of the individual steps of the three-step test. This literature need not be repeated here; we shall limit ourselves to a few general observations. WCT, supra note 91, Agreed statements concerning Article 10. US — Section 110(5) Report, supra note 101, § 6.87. 119 See, e.g., Senftleben, supra note 102, at 244. 120 Geiger, supra note 107, at 18. 121 Kamiel J. Koelman, “Fixing the Three-Step Test”, 2006 Eur. Intell. Prop. Rev. 407; Geiger, supra note 107, at 19. 122 Senftleben, supra note 102, at 243. 123 At a workshop titled “Rethinking the Three-Step Test,” jointly organized by the Max Planck Institute for Intellectual Property Law and Queen Mary University in London, Paris, ULIP, Feb. 16, 2007, participants agreed to work on a declaration on the three-step test, expressing the consensus opinion that the test should be applied in a liberal, holistic, normative and dynamic manner. See Appendix B. 124 See, e.g., Senftleben, supra note 116; Christophe Geiger, “From Berne to National Law, via the Copyright Directive: the Dangerous Mutations of the Three-step Test”, Eur. Intell. Prop. Rev. 486, 490–91 (2007). 125 Senftleben, supra note 102. 117 118

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No authoritative interpretation of the three-step test has ever been given under the Berne Convention.126 However, national courts have applied, or at least referred to, the three-step test on many occasions, even before the incorporation of the test in European jurisdictions. The interpretation and application of the test by national courts varies considerably. For instance, while some European courts have judged statutory limitations that allow unauthorized digital “press clipping” to be compliant with the three-step test, others — in almost identical cases — have not.127 In 2000, TRIPs art. 13 was interpreted in considerable detail in the IMRO case.128 Another Panel has interpreted the test’s patent law corollary — TRIPs art. 30 — in similar detail.129 While both Panel Reports contain valuable analyses of the three-step test and of its place and function in the international law of intellectual property, it should be borne in mind that the WTO Panels are not courts and that the legal framework within which they operate is the law of international trade, not of copyright. Thus, WTO Panels are likely to be relatively insensitive to arguments based on fundamental rights and freedoms or (other) non-economic (e.g., cultural or educational) public interests, even if art. 7 of the TRIPs Agreement mandates that the protection of intellectual property rights be “conducive to social and economic welfare, and to a balance of rights and obligations.”130 Also, it is unlikely for a variety of reasons that decisions of WTO panels qualify as definitive interpretations of the relevant norms in question.131 In sum, WTO panel decisions ought to have only limited precedent value for international courts, such as the International Court of Justice, which is competent to interpret the BC and the WCT, or national courts interpreting national norms of copyright law. a. Step One: “certain special cases” Under the first prong of the three-step test, limitations and exceptions must be confined to “certain special cases.” Although one might argue that any purpose-specific limitation complies with this requirement almost by definition, making the first step basically superfluous,132 the IMRO Panel Report does contain exhaustive discussion of this threshold criterion. The word “certain” implies, according to the Panel, that, as a matter of legal certainty, a limitation must be well-defined. However, this does not rule out broadly phrased limitations, such as the fair use exemption in the United States, as a matter of principle:133 … there is no need to identify explicitly each and every possible situation to which the exception could apply, provided that the scope of the exception is known and particularised. This guarantees a sufficient degree of legal certainty.134 126 Such an interpretation could have been given only by the International Court of Justice. See Ricketson & Ginsburg, supra note 88, at 1152. 127 See Geiger, supra note 124, at 489, (discussing individual national cases). 128 See US — Section 110(5) Report, supra note 101. 129 WTO Panel Report, WTO Panel Report, Canada-Patent Protection of Pharmaceutical Products, Apr. 7, 2000, WTO Doc. WT/DS114/R; see also Panel Reports for the trademark-related cases, WT/DS174/R and DS2890/R (U.S. & Australia v. EU). For a comparison of all three panel decisions, see Martin Senftleben, “Towards a Horizontal Standard for Limiting Intellectual Property Rights? – WTO Panel Reports Shed Light on the Three-Step Test in Copyright Law and Related Rights in Patent and Trademark Law”, IIC 2006/4, at 407. 130 See Ruth L. Okediji, “Toward an International Fair Use Doctrine”, 39 Colum. J. Transnat’l L. 75 (2000); see also Dreyfuss, supra note 105, at 22. 131 Senftleben, supra note 102, at 107–08. 132 Daniel J. Gervais, “Towards a New Core International Copyright Norm: The Reverse Three-Step Test”, 9 Marq. Intell. Prop. L. Rev. 1 (2005). 133 Several scholars have questioned whether the fair use doctrine complies with (the first part of) the three-step test. See, e.g., WIPO Study, supra note 98, at 68–769; Okediji, supra note 130, at 148; Senftleben, supra note 102, at 162. 134 US — Section 110(5) Report, supra note 101, § 6.108.

294 CHAPTER IV: COPYRIGHT LAW The Panel subsequently interpreted the term “special” as meaning something akin to exceptional. “In other words, an exception or limitation should be narrow in quantitative as well as a qualitative sense.”135 The Panel thus rejected the interpretation advanced by several scholars, that “special” has normative meaning (i.e., that the purpose of the exempted use be objectively justifiable).136 According to the Panel, the term “special” does not imply that policy objectives pursued by the limitation or exception at issue need to be objectively justified, as was argued by the EC in the case.137 In other words, it is left to the discretion of WTO members to determine the need for and the objectives of exceptions and limitations as they see fit. b. Step Two: “normal exploitation” The second step is arguably more critical, and the WTO Panel’s interpretation thereof certainly more controversial. The Panel’s reading of “normal exploitation” is essentially economical, and consequently restrictive: We believe that an exception or limitation to an exclusive right in domestic legislation rises to the level of a conflict with a normal exploitation of the work (i.e., the copyright or rather the whole bundle of exclusive rights conferred by the ownership of the copyright), if uses, that in principle are covered by that right but exempted under the exception or limitation, enter into economic competition with the ways that right holders normally extract economic value from that right to the work (i.e., the copyright) and thereby deprive them of significant or tangible commercial gains.138 To avoid a circularity of reasoning that would effectively eclipse exceptions and limitations, Dr. Senftleben has proposed to revisit the preparatory works of the Stockholm Conference. According to the Conference record, normal exploitation would encompass “all forms of exploiting a work, which have, or are likely to acquire, considerable economic or practical importance.”139 The WTO Panel appears to subscribe to this historic reading.140 In other words, there is a conflict with the second step if the exempted use would rob the right holder of a real or potential source of income that is substantive. c. Step Three: No Unreasonable Prejudice to Authors/Right Holders The third step seems to leave legislatures considerable flexibility. The terms “legitimate” and “reasonable” at last inject a measure of normative meaning into the three-step test.141 Both terms allow, in principle, an infinite variety of public interests to be factored into the three-step equation.142 By the same token, these terms allow fundamental rights and freedoms, such as the right to privacy (which might, e.g., justify a freedom to make private copies) or freedom of expression (which could justify an entire spectrum of excepted uses), to be factored into the three-step test. At the 1967 Stockholm Conference, a principle was established that the payment of equitable remuneration could be taken into account in the context of the third criterion.143 In other words, the third step (further) restricts the availability of uncompensated exceptions.144 Id., § 6.109. WIPO Study, supra note 98; Senftleben, supra note 102, at 137 et seq. 137 US — Section 110(5) Report, supra note 101, § 6.112. 138 Id., § 6.183. 139 Senftleben, supra note 102, at 177 et seq.; Severine Dusollier, “L’encadrement des exceptions au droit d’auteur par le test des trois étapes”, Intellectuele Rechten — Droits Intellectuels 212, 219 (2005). 140 US — Section 110(5) Report, supra note 101, § 6.180. 141 Gervais, supra note 132, at 17. 142 Note that the WTO Panels in the corresponding patent and trademark law cases expressly referred to the interests of “third parties,” as a factor in determining legitimacy. 143 Senftleben, supra note 102, at 237. 144 Gervais, supra note 111. 135 136

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From the preceding analysis we can conclude that limitations and exceptions that (1) are not overly broad, (2) do not rob right holders of a real or potential source of income that is substantive, and (3) do not do disproportional harm to the right holders, will pass the test. The test does not prescribe a template for any preferred system of national limitations and exceptions. The test most likely permits both discrete European-style limitations and broader fair-use-style exemptions, or possibly a combination of both.145 C. Conclusion — Final Remarks In conclusion, despite an unmistakable “ratcheting up” of levels of copyright protection at the international, regional and bilateral levels, enough “wiggle room” appears to be left to the parties to the main copyright Conventions to make framing an international instrument on L&Es within the confines of the international acquis a worthwhile exercise. Despite over a century of international norm setting in the field of copyright, limitations and exceptions have largely remained an “unregulated space.”146 This is not to say, of course, that the international acquis is inherently balanced. What it does mean, however, is that there is ample scope for rebalancing without having to deviate from the current acquis. Indeed, nothing in the international acquis would prevent parties to the Berne Union, the WCT or the WTO from entering into a special agreement listing in an exhaustive or enumerative manner those copyright limitations that are permitted within the confines of the three-step test. One could imagine such an instrument as containing a preamble and a number of provisions, divided into several chapters, e.g.: (1) Exclusions from protection (excluding, for instance, facts, ideas, laws and government works); (2) Limits to economic rights (permitting, for instance, exhaustion and various non-public acts of communication); and (3) Limitations and exceptions proper. As concluded earlier, only the norms listed in the latter part would have to comply with the three-step test. As to that chapter, the EU Information Society Directive of 2001147 inspires a pragmatic, albeit not very elegant solution. Like the Directive, the instrument on L&Es could provide a list of (mandatory and optional) limitations, and conclude with a general obligation upon contracting States to subject any transpositions thereof to the threestep test.148 A preamble might then offer guidance to the contracting States in interpreting the test.149 IV. CONTOURS OF AN INTERNATIONAL INSTRUMENT ON L&ES

A. Designing a Multilateral Response With respect to the possibility of an international agreement on L&Es, important questions point to design elements that affect the feasibility of such an endeavor. Despite gains made possible through a multilateral approach, particular design features may vary how appealing an international agreement is to States and how effectively the agreement will accomplish 145 Martin Senftleben, “Beperkingen à la Carte: Waarom de Auteursrechtrichtlijn Ruimte Laat voor Fair Use”, 1 AMI 10 (2003) (arguing that the EU Copyright Directive, despite its positivist provenance, permits a broadly worded, fair-use style limitation within the confines of the three-step test). 146 Gervais, supra note 111. 147 Directive 2001/29/EC, supra note 104, art. 5. 148 See Directive 2001/29/EC, supra note 104, art. 5.5 (“The exceptions and limitations provided for … shall only be applied in certain special cases which do not conflict with a normal exploitation of the work or other subject-matter and do not unreasonably prejudice the legitimate interests of the rightholder.”). 149 In following this approach, however, care should be taken to avoid a proliferation of the test into the norms of national law. See Geiger, supra note 124.

296 CHAPTER IV: COPYRIGHT LAW the stated goals. For example, the breadth of membership could be a significant factor in determining the extent of positive gains that could be realized; if only a few countries join, it could imperil the legitimacy and credibility of the international solution. A treaty that reflects membership only of developing countries is less likely to sufficiently reduce the uncertainty faced, for example, by innovators of new technology who need legal stability on a global basis, and in particular in the developed countries. Some important questions include: Should an instrument on limitations and exceptions be linked with specific institutional mandates? What should be the modalities of such an instrument? Should articulated public interests be universally shared? In the following sections, we offer a preliminary approach to these important questions. 1. Institutional Considerations The objectives and activities of WIPO and the WTO are central to cooperation and coordination in the realm of international intellectual property law. The WTO in particular occupies a distinct role in the oversight of IP harmonization through the activities of the TRIPs Council, which is chiefly responsible for facilitating compliance with the TRIPs Agreement and is therefore deeply involved in the normative design of the current multilateral copyright framework.150 The activities of the TRIPs Council constitute an important medium for generating and spreading copyright norms among WTO member States and for securing at least formal compliance with TRIPs obligations.151 Between its general oversight and interpretive/compliance functions, it is easy to see why the WTO might offer an appealing institutional home for an instrument intended to promote innovation by restoring balance to the normative fabric of the international copyright system. There are, however, offsetting considerations to be taken into account. First of all, the WTO is primarily a trade regime. It does not have the primary responsibility for the development of IP norms qua IP norms; instead, IP protection is viewed through its impact on free trade, which provides a distinct gloss on the interpretation of TRIPs obligations that often disregards cultural and other relevant criteria central to both national and international copyright systems.152 Secondly, the WTO lacks the important historical context and technical considerations to evaluate the need for an international instrument on L&Es and to analyze the nature and scope of what might be contained in such an instrument. Indeed, the agreements that the WTO is charged to enforce originate from WIPO153 and are equally subject to WIPO’s oversight.154 Thus, the WIPO–WTO Agreement creates a partnership in which WIPO can 150 See Ruth L. Okediji, “Institutional Design and Institutional Deficit: Norms and Conflict in the WTO–WIPO Agreement”, in The Netherlands Yearbook Int’l L. (forthcoming, 2008). 151 The TRIPs Council has also taken important actions affecting the uneven costs of harmonization. For example, the WTO TRIPs Council agreed in 2005 to grant LDCs an extension of time — until July 1, 2013, to implement the entire TRIPs Agreement, with the possibility of further extension. This came after the 2001 Doha Declaration on TRIPs and Public Health that extended implementation of TRIPs provisions on granted on pharmaceuticals products and related provisions on exclusive marketing rights until 2016. See Doha WTO Ministerial 2001, Declaration on the TRIPs Agreement and Public Health, Nov. 14, 2001, WTO Doc. WT/MIN(01)/DEC/2, available at http://www. wto.org/English/thewto_e/minist_e/ min01_e/mindecl_trips_e.htm. The WTO Secretariat in its Trade Policy Reviews (TPR) also plays an important role in communicating norms to member States. For a review of TPRs reflecting somewhat the view of the WTO with respect to IP issues, see http://www.wto.org. 152 See generally Neil Netanel, “The Next Round: The Impact of the WIPO Copyright Treaty on TRIPs Dispute Settlement”, 37 Va. J. Int’l L. 441 (1997). 153 See Agreement on Trade-Related Aspects of Intellectual Property Rights art 2.2, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299, 33 I.L.M. 81 (1994) [hereinafter TRIPs Agreement]; see also TRIPs Agreement, art. 5 (excluding “agreements concluded under the auspices of WIPO relating to the acquisition or maintenance of intellectual property rights”). 154 Accordingly, the TRIPs Agreement calls for a “mutually supportive relationship between the WTO and World Intellectual Property Organization.” See id., pmbl.

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support the efforts of the WTO in interpretation of the various WIPO Conventions.155 WTO TRIPs dispute panels have sought information/advice from WIPO on matters arising from the interpretation of WIPO treaties, suggesting deference to WIPO’s expertise, although the legal implications of WIPO’s role in WTO matters, and vice versa, remain largely unexplored.156 Finally, given its founding Agreement, it is unlikely that the WTO can initiate a new international instrument exclusively for IP, much less a stand-alone one for copyright.157 As the historical site for generating norms for international copyright harmonization, we believe that WIPO offers unique advantages as an agency with the necessary experience, expertise and mandate suitable for the proposed multilateral exercise. Already, WIPO has commissioned three major studies on L&Es158 that could serve as a first step in identifying the nature and scope of current concerns by Member States in this regard. Also relevant is the fact that WIPO, as a United Nations (UN) specialized body, is bound by the UN Charter, which obligates it to a larger set of norms reflected in an array of international agreements concluded under the auspices of the United Nations. As with the WTO, there are, however, factors presenting a potential challenge towards using WIPO as the exclusive institutional home of the new instrument on L&Es, most important of which is the nonexistence of a suitable enforcement framework ensuring the successful implementation of the instrument as well as the fact that WIPO’s efforts to produce a treaty in the field of copyright and related rights have failed twice in recent years. a. Minimum Goals and Features Among the principal motivations for an international instrument on L&Es is the need to recognize limitations to copyright as internal to the copyright system and core to its effective functioning. Further, such an instrument will provide States with a coherent framework within which the principle of maximum protection might otherwise constrain unilateral efforts that undermine copyright’s foundational commitment to the public good. With these principles in mind, we identify the minimum goals of an international approach to L&Es to include: i) elimination of barriers to trade, particularly in regard to activities of information service providers; ii) facilitation of access to tangible information products; iii) promotion of innovation and competition; iv) support of mechanisms to promote/reinforce fundamental freedoms; and v) provision of consistency and stability in the international copyright framework by the explicit promotion of the normative balance necessary to support knowledge diffusion. Each of the five goals is specifically referenced in one or more multilateral intellectual property agreements.159 They also collectively reflect the important role of public goods in enhancing human welfare. As such, these goals should be explicitly reflected in the preambular provision of the new international instrument on L&Es. Most importantly, the preamble should include as well a well-articulated statement of the purposes of copyright protection that should be reflective of the dynamic nature of the creative enterprise. 155 See Agreement Between the World Intellectual Property Organization and the World Trade Organization, Dec. 22, 1995, 35 I.L.M. 754 (1996) [hereinafter WIPO-WTO Agreement]. 156 Okediji, supra note 150. 157 For the objectives and functions of the WTO, see Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, The Legal Texts — The Results of the Uruguay Round of Multilateral Trade Negotiations 4 (1999), 1867 U.N.T.S. 154, 33 I.L.M. 1144 (1994) [hereinafter Marrakesh Agreement or WTO Agreement]. 158 See WIPO Study, supra note 98; Judith Sullivan, “Study on Copyright Limitations and Exceptions for the Visually Impaired”, WIPO Doc. SCCR/15/7, Feb. 20, 2007. Both Reports are available on the Web site of WIPO, http:// www.wipo.org. A third report focusing on L&Es for libraries, written by Professor Ken Crews, is expected this year. 159 See, e.g., TRIPs Agreement, supra note 153, pmbl.; WCT, supra note 91, pmbl.; World Intellectual Property Organization Performances and Phonograms Treaty, Dec. 20, 1996, 36 I.L.M. 76, pmbl. [hereinafter WPPT].

298 CHAPTER IV: COPYRIGHT LAW We further identify three vital attributes which should be reflected in an international instrument on L&Es — the instrument must: be flexible; be judicially manageable; and leave ample space for national cultural autonomy. a) Flexibility: An international instrument on L&Es must retain flexibility on several levels. First, it must contain principles that are sufficiently flexible to accommodate technological change that invariably requires a re-calibration of the copyright balance. This flexibility must also facilitate new dimensions/definitions of the “public interest” to reflect changes and gains in technology. In other words, it must be clear that not all surplus from technological developments automatically accrues to rights owners. Second, the instrument must be designed to accommodate exceptional circumstances that warrant adaptation or modification of the rules. Escape clauses in trade agreements are key examples of such “adaptive” flexibility,160 as perhaps are so-called “safeguard” clauses in the GATT. Third, the instrument must accommodate differentiated market structures between rich and poor nations, thus allowing for specific provisions to address unique but persistent problems of concentrated market power and other forms of market failure in the global economy. Finally, the instrument must include a mechanism enabling periodic review and possible revision. b) Judicial manageability: The clarity of copyright doctrine has always been hostage to the vagaries of technological change and unwieldy compromises produced by competing industry interests.161 In both the U.S. and the EU, the increasing density and complexity of copyright law has been a source of significant concern to scholars, policymakers and judges, as courts grapple with practical application of the law simultaneously to new uses, new users and new technologies. Because national courts will remain important actors in enforcing national and international copyright law, an instrument on L&Es must be written in a way that provides clear guidance with respect to how best competing interests might be resolved to reflect copyright’s commitment to the protection of and access to creative goods. c) Space for national cultural autonomy: We recognize that there is inherent tension between the call for international harmonization of L&Es and the preservation of cultural autonomy of individual member States. We therefore recommend explicit recognition, in the new instrument, of a principle of State autonomy over discrete areas/events necessary to address unique national conditions and culture-specific needs. An example would be regulations promulgated by a State dealing with use of copyrighted materials in conjunction with national cultural/religious ceremonies or other episodic national events/circumstances as well as well as sovereignty to allow translation of works into (official) minority languages. 2. Possible Modalities of an International Instrument on L&Es As observed earlier, the range and complexity of international relations has greatly expanded over the years, producing a dense and intricate network of obligations between and among States of different political, cultural, economic and technological strengths. At one end of the spectrum are “hard law” options represented most usually by treaties which have entered into force. These are termed “hard law” because they are always binding. If an international agreement reflects the parties’ intent to be bound, then in principle such an agreement could also constitute hard law even if technically it is not labeled as a treaty.162 Soft law, on the other hand, is usually viewed as comprising non-binding international obligations which nevertheless 160 Barbara Koremenos, Charles Lipson & Duncan Snidal, “The Rational Design of International Institutions”, 55 Int’l Org. 761, 773 (2001). 161 See Jessica Litman, “Copyright, Compromise, and Legislative History”, 72 Cornell L. Rev. 857, 879 (1987). 162 UN Security Council Resolutions adopted pursuant to Article 25 of the Charter are a prime example. See Alan Boyle, “Soft Law in International Law-Making”, in International Law 141, 142 (Malcolm D. Evans ed., 2d ed. 2006).

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have significant normative influence and may in some cases reflect existing law based on State practice, or constitute early attempts to create new customary law.163 Different forms and legal effects exist for soft law, and it is possible for hard-law instruments to share certain features of soft law and vice versa.164 For example, treaties cast in open-ended standards are functionally “soft” in effect,165 while declarations or understandings may reflect norms that are firmly entrenched in State practices.166 An international instrument on L&Es cast in soft-law has much merit. First, soft-law instruments have been quite influential in international economic law and, given the TRIPs Agreement, this option would fit well within the current institutional cooperation between WIPO and the WTO.167 Second, a soft instrument would have the same force of law for purposes of TRIPs interpretation pursuant to extant rules of international law168 and it may even gradually evolve into a formal hard-law international instrument.169,170 A soft law instrument could have a great political calming effect on international copyright relations, much like the Doha Declaration had on the international patent framework.171 3. Conclusion Third, it is often easier to reach agreements using soft law because while such instruments are carefully negotiated and crafted, the limited effects of non-compliance often encourage States to be more willing to negotiate in detail and precision.172 Fourth, soft-law agreements avoid the national ratification processes that in any event may weaken robust commitments made during treaty negotiations. The political costs of treaty ratification often make States less willing to engage in the treaty process, or to agree to meaningful terms.173 Fifth, soft-law instruments have a higher degree of flexibility in that they are easier to upgrade, amend or replace.174 In an area where technological changes will require substantive flexibility, flexibility of institutional form is an important added value. Finally, soft-law instruments can reflect agreements between State and non-State actors. Given the strong role of industry actors in international copyright law, this particular feature of soft law options is an important consideration in thinking about the various actors that need to be engaged in the process of developing an international instrument for L&Es. 163

Id. Janet Koven Levit, “Bottom-Up International Lawmaking: Reflections on the New Haven School of International Law”, 32 Yale J. Int’l L. 393, 413–14 (2007) (“While instruments such as the Global Compact, the Voluntary Principles, and the General Understanding are admittedly ‘soft,’ the norms embedded in such instruments often become ‘hard.’”). 165 See Christine Chinkin, “Normative Development in the International Legal System”, in Commitment and Compliance: The Role of Non-binding Norms in the International Legal System 21, 30 (Dinah Shelton ed., 2000) (providing six definitions of soft law, including vague or imprecise terms). 166 Levit, supra note 164. 167 See Christine Chinkin, “The Challenge of Soft Law: Development and Change in International Law” (1989) 38 Int’l & Comp. L.Q. 850; see also supra text accompanying notes 73–76. 168 See Vienna Convention on the Law of Treaties art. 31(3), May 23, 1969, 1155 U.N.T.S. 331 [hereinafter Vienna Convention]. 169 See id.; see also generally Susy Frankel, “WTO Application of ‘the Customary Rules of Interpretation of Public International Law’ to Intellectual Property”, 46 Va. J. Int’l L. 365 (2006); Joost Pauwelyn, Conflict of Norms in Public International Law 25–29 (2003). 170 See generally Boyle, supra note 162. 171 See Frederick M. Abbott & Jerome H. Reichman, “The Doha Round’s Public Health Legacy: Strategies for the Production and Diffusion of Patented Medicines Under the Amended TRIPs Provisions”, 10 J. Int’l. Econ. L. 921 (2007). 172 Boyle, supra note 162, at 143–44. 173 Id. 174 Id. 164

300 CHAPTER IV: COPYRIGHT LAW An example of an instrument cast in soft law would be a declaration by WIPO Member States identifying a list of L&Es that are already reflected in national laws and thus presumptively valid under the TRIPs Agreement. Such a declaration would reflect existing law, but could also establish guidelines or recommendations that affect member obligations as interpreted by the WTO. Whatever the form of soft law, what is important is that it can afford States a credible defense against threats in response to any challenges to behavior consistent with the codified norms. State practice would also strengthen the normative force and appeal of the instrument through its relationship to Berne Convention provisions. V. POSSIBLE MODALITIES OF AN INTERNATIONAL INSTRUMENT ON L&ES

A. Recommendations In conclusion, we summarize our main recommendations: 1. Multilateral Solution We believe that to restore balance to the international copyright regime a multilateral solution is called for.175 While, for example, the strategic utility and relative simplicity of alternative options such as a moratorium on the further expansion of IP rights,176 or an agreement by developed countries not to sanction (or threaten to sanction) developing countries who employ existing access mechanisms, are useful, we feel strongly that in the digital age, welfare gains from dynamic competition and diffusion of information goods require positive access norms as integral features of an effective international copyright system. Multilateralism in the area of L&Es has important functional, facilitative and normative advantages. As a functional matter, multilateralism invariably fosters centralization which is a key factor in promoting international cooperation, particularly when there is a desire for broad-based membership in the regime.177 A multilateral accord also offers protection against “forum-shopping” by owners of proprietary rights who may be willing to sacrifice long-term dynamic gains of access for short term monopoly gains from rent payments. 2. Regional Experimentation While we underscore the value of multilateralism, regional experimentation during the early stages of the multilateral exercise178 may be an important step in beginning the work toward a coherent global framework for L&Es. Regional incubators for harmonized, minimum L&Es offer the advantage of incremental development of L&Es among like-minded countries. A string of regional successes with such experimentation over time will undoubtedly pave the way for a more general multilateral instrument. 175 See generally Inge Kaul et al., “Why Do Global Public Goods Matter Today”, in Providing Global Public Goods: Managing Globalization (Inge Kaul, Pedro Conceicao, Katell Le Goulven & Ronald U. Mendoza eds., 2002). 176 See Keith E. Maskus & Jerome H. Reichman, “The Globalization of Private Knowledge Goods and the Privatization of Global Public Goods”, in International Public Goods & Transfer of Technology Under a Globalized Intellectual Property Regime (Keith Maskus & Jerome Reichman, eds., 2005). 177 Barbara Koremenos, Charles Lipson & Duncan Snidal, “Rational Design: Looking Back to Move Forward”, 55 Int’l Org., 1051, 1054 (2001). 178 As noted by copyright experts, at present, the primary candidates for experimentation at the regional level appear to be the Southern Common Market (MERCOSUR) and the Association of Southeast Asian Nations (ASEAN).

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3. Joint WIPO and WTO Initiative — Soft-law Modality We believe that a joint initiative between WIPO and the WTO could be an ideal and appropriate expression of a soft-law modality with real impact for collective action on an international instrument on L&Es. Notable examples of soft-law initiatives within WIPO include the Joint Recommendation on Internet Use developed by the WIPO Standing Committee on Trademarks (SCT) and adopted by the WIPO General Assemblies and the Paris Union in 2001,179 and the WIPO Joint Recommendation Concerning Provisions on the Protection of Well-Known Marks.180 Neither is a binding instrument, but the latter clearly is evolving into an international legal standard through its incorporation by the U.S. into several bilateral agreements. It was also recently cited by a U.S. federal court as a potential source of guiding principles for the famous marks doctrine.181 A Recommendation by the SCCRR could similarly be an important contribution to developing coherence in the international law of L&Es. It might involve coordination between the SCCR and the TRIPs Council, particularly through the latter’s activities in the implementation of the TRIPs Agreement. Even a Recommendation solely authored by the SCCR could be used by the TRIPs Council to evaluate both rights implementation and user freedoms when assessing national copyright laws for compliance with the international copyright framework.

APPENDIX B Declaration a Balanced Interpretation of The “Three-Step Test” in Copyright Law Issued July 20, 2008, by Reto. M. Hilty, Director of the Max Planck Institute for Intellectual Property, Competition and Tax Law, Munich, and a Professor at the Universities of Zurich and Munich; Christophe Geiger, a Researcher at Max Planck Institute and Associate Professor and Director, Centre for International Industrial Property Studies (CEIPI), University of Strasbourg, France; and Jonathan Griffiths, Senior Lecturer, School of Law, Queen Mary, University of London. As of Aug. 7, 2008, the declaration had 142 supporters. The Declaration, signatory, and list of supporters are available from Max Planck Institute for Intellectual Property, Competition and Tax Law, http://www.ip.mpg.de/ww/en/pub/news/declaration_on_ the_three_step_.cfm. PREFACE The ever-increasing pace of technological development has prompted a fundamental change in the function and effectiveness of copyright law. The evolution of new business models has 179 WIPO, Joint Recommendation Concerning Provisions on the Protection of Marks, and Other Industrial Property Rights in Signs, on the Internet, adopted by Assembly of the Paris Union for the Protection of Industrial Property and General Assembly of the World Intellectual Property Organization, WIPO Doc. 845(E), pmbl. (Oct. 2001) (setting forth provisions intended to apply when determining whether “use of a sign on the Internet has contributed to the acquisition, maintenance or infringement of a mark or other industrial property right in the sign, or whether such use constitutes an act of unfair competition”). 180 WIPO, Joint Recommendation Concerning Provisions on the Protection of Well-Known Marks adopted by Assembly of the Paris Union for the Protection of Industrial Property and General Assembly of the World Intellectual Property Organization, WIPO Doc. 833(E) (Sept. 1999), available at http://www.wipo.int/about-ip/en/development_ iplaw/ pub833.htm. 181 See ITC Ltd. v. Punchgini, Inc., 482 F. 3d 135 (2d Cir. 2007).

302 CHAPTER IV: COPYRIGHT LAW led to a dramatic shift in priorities. Unprecedented and unfamiliar threats have developed — threats for both the copyright holder and the copyright user. As far as possible, potentially conflicting interests should be reconciled. In the context of global copyright regulation, harmonisation has focused on securing rightholders’ ability to benefit from new modes of exploitation and business models. While international harmonisation primarily serves the interests of copyright-exporting countries in a secure and predictable trading environment, historic evidence, economic theory and the principle of self determination suggest that individual states should have sufficient flexibility to shape copyright law to their own cultural, social and economic development needs. Copyright exceptions and limitations tailored to domestic needs provide the most important legal mechanism for the achievement of an appropriate, self-determined balance of interests at national level. The Three-Step Test has already established an effective means of preventing the excessive application of limitations and exceptions. However, there is no complementary mechanism prohibiting an unduly narrow or restrictive approach. For this reason, the Three-Step Test should be interpreted so as to ensure a proper and balanced application of limitations and exceptions. This is essential if an effective balance of interests is to be achieved. CONSIDERATIONS Copyright law aims to benefit the public interest. It produces important incentives for the creation and dissemination of new works of authorship to the general public. These works serve to satisfy common needs; either in their own right or as a basis for the creation of further works. However, the public interest is only truly served if copyright law provides appropriate incentives for all parties involved. Consequently, copyright law must accommodate the interests of original rightholders (such as creators) as well as the interests of those who acquire rights as a consequence of the marketing or commercial exploitation of a work (in the following: subsequent rightholders). Creators and subsequent rightholders often have concurrent interests, for example, in the prevention of unauthorized uses of works. However, the respective interests of creators and subsequent rightholders may also come into occasional conflict. For example, limitations and exceptions almost always clash with subsequent rightholders’ primary goal of generating the maximum possible profit from their investment. By contrast, limitations and exceptions can, in certain circumstances, favour the interests of creators. This is particularly true within legal systems in which the application of limitations and exceptions is contingent upon the payment of adequate compensation in which the creator has a mandatory participation. The Three-Step Test should not be interpreted in a manner that jeopardizes an adequate solution for this multilevel conflict of interests. – The public interest is not well served if copyright law neglects the more general interests of individuals and groups in society when establishing incentives for rightholders. Where friction arises between the interests of rightholders and the general public, an effort must be made to bring them into equilibrium. This balancing of interests is a general objective of intellectual property regulation as embodied in Art. 7 TRIPs and the WIPO Copyright Treaty, the preamble to which emphasizes “the need to maintain a balance between the rights of authors and the larger public interest, particularly education, research and access to information.” Limitations and exceptions are the most important legal instrument for reconciling copyright with the individual and collective interests of the general public. In determining the scope of application of limitations and exceptions, the Three-Step Test should not take into account only the interests of rightholders. The need to give equal consideration to third party interests is confirmed explicitly in the Three-Step Test as applied in industrial

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property law (Art. 17, Art. 26(2) and Art. 30 TRIPs). The fact that third party interests are not explicitly mentioned in the Three-Step Test as applied in copyright law does not detract from the necessity of taking such interests into account. Rather, it indicates an omission that must be addressed by the judiciary. – When correctly applied, the Three-Step Test requires a comprehensive overall assessment, rather than the step-by-step application that its usual, but misleading, description implies. No single step is to be prioritized. As a result, the Test does not undermine the necessary balancing of interests between different classes of rightholders or between rightholders and the larger general public. Any contradictory results arising from the application of the individual steps of the test in a particular case must be accommodated within this comprehensive, overall assessment. The present formulation of the Three-Step Test does not preclude this understanding. However, this approach has often been overlooked in decided cases.182 – The public interest is particularly clear in the case of those values that underpin fundamental rights. These values must be given special consideration when applying the Three-Step Test. In addition, the public interest is served when the inevitable tendency of copyright law to restrict competition through the grant of exclusive rights is no greater than necessary. Limitations and exceptions provide a mechanism for the elimination of anti-competitive exclusive market positions. In this respect, limitations and exceptions have an advantage over the remedies provided within competition law as they establish a general basis for remedies (as opposed to the case-by-case approach of competition law). Thus, they ensure legal certainty and predictability and reduce transaction costs. Decisions concerning the introduction and scope of limitations and exceptions promoting competition should be left to the discretion of the relevant legislature. The Three-Step Test should not be applied in a manner that safeguards anti-competitive practices or impedes the establishment of a harmonious balance between the legitimate interests of rightholders, on the one hand, and competition (especially competition in secondary markets) on the other. One of the key incentives that copyright law offers to original and subsequent rightholders is compensation at market rate. In fact, higher prices must be accepted as long as they result from market-based competition. However, it is not the case that only market-based pricing can be “adequate” and commensurate with the interests of right holders. Compensation developed under anti-competitive conditions is unjustifiable. Consequently, where third-party interests justify the introduction of limitations and exceptions to exclusive rights, the Three-Step Test should not preclude the payment of compensation below the market rate. Compensation is inherently adequate as long as there are sufficient incentives for the continued creation and dissemination of works. Compensation can also be sufficient where the difference between actual below-market compensation and theoretical compensation at market rate is justified by third-party interests. AIMS The Three-Step Test performs distinct functions at different regulatory levels and within different legal systems. Internationally, it controls state autonomy in drafting domestic exceptions and limitations. At the domestic level, the Test may be incorporated directly or it may function exclusively as an aid to the interpretation of domestic legislation. This Declaration does not seek to eliminate such differences. Furthermore, it does not aim to constrain the freedom or discretion of regional and domestic legislators to permit or 182 See, for instance, the decision of the French Supreme Court, Feb. 28, 2006, 37 IIC 760 (2006). The same attitude is revealed the WTO-Panel report WT/DS114/R of Mar. 17, 2000 (Canada — Patents), where it is held that failure to meet the requirements of one of the three steps will necessarily result in a violation of Article 30 TRIPs. Though not expressly endorsing the same attitude, the subsequent Panel report WT/DS160/R, June 15, 2000 (USA — Copyright), has not distanced itself from Canada — Patents in a manner that would help to rule out further misunderstandings.

304 CHAPTER IV: COPYRIGHT LAW prohibit particular limitations and exceptions. Neither shall it undermine the internal European allocation of competencies with respect to legislating on limitations and exceptions. International economic regulation allows for a balance of economic and social interests. International intellectual property law also stresses the need for balance. In the field of copyright law, this Declaration proposes an appropriately balanced interpretation of the Three-Step Test under which existing exceptions and limitations within domestic law are not unduly restricted and the introduction of appropriately balanced exceptions and limitations is not precluded. DECLARATION The Signatories, – Recognising the increasing reliance on the Three-Step Test in international, regional and national copyright laws – Considering certain interpretations of the Three-Step Test at international level to be undesirable, – Perceiving that, in applying the Three-Step Test, national courts and legislatures have been wrongly influenced by restrictive interpretations of that Test, – Considering it desirable to set the interpretation of the Three-Step Test on a balanced basis, Declare as follows: 1. The Three-Step Test constitutes an indivisible entirety. The three steps are to be considered together and as a whole in a comprehensive overall assessment. 2. The Three-Step Test does not require limitations and exceptions to be interpreted narrowly. They are to be interpreted according to their objectives and purposes. 3. The Three-Step Test’s restriction of limitations and exceptions to exclusive rights to certain special cases does not prevent (a) legislatures from introducing open ended limitations and exceptions, so long as the scope of such limitations and exceptions is reasonably foreseeable; or (b) courts from — applying existing statutory limitations and exceptions to similar factual circumstances mutatis mutandis; or — creating further limitations or exceptions, where possible within the legal systems of which they form a part. 4. Limitations and exceptions do not conflict with a normal exploitation of protected subject matter, if they – are based on important competing considerations or – have the effect of countering unreasonable restraints on competition, notably on secondary markets, particularly where adequate compensation is ensured, whether or not by contractual means. 5. In applying the Three-Step Test, account should be taken of the interests of original rightholders, as well as of those of subsequent rightholders. 6. The Three-Step Test should be interpreted in a manner that respects the legitimate interests of third parties, including – interests deriving from human rights and fundamental freedoms; – interests in competition, notably on secondary markets; and – other public interests, notably in scientific progress and cultural, social, or economic development.

CHAPTER IV

Copyright Law Part D: Copyright Exceptions and Limitations Section 2: Free Speech and Copyright and Trademark Issues in the United States and Around the World Moderator PROF. SONIA KATYAL

Fordham University School of Law (New York) Speakers PROF. ROBERT BURRELL

PROF. SPYROS MANIATIS

University of Queensland (Brisbane, Australia)

Queen Mary, University of London (London)

PROF. REBECCA TUSHNET

Georgetown University School of Law, (Washington, D.C.) Panelists PROF. PAMELA SAMUELSON

PROF. SUSAN SCAFIDI

University of California (Berkeley, CA)

Fordham University School of Law (New York)

PROF. KATYAL: Hello, everyone. Welcome to the panel on the intersection between free speech, trademark, copyright, and other IP issues, both in the United States and internationally. We have a distinguished panel ahead of us, each of whom is going to explore a variety of ways that intellectual property law intersects with different areas of legal regulation. As we are now aware, the fragile balance that previously characterized IP and free speech principles1 has time and time again proposed a number of complex challenges for courts and 1

U.S. Const. art I, § 8, cl. 8

306 CHAPTER IV: COPYRIGHT LAW legal commentators. We are all by now familiar with the Eldred case,2 which touched on the intersection between the First Amendment and copyright law. In the trademark arena we have dealt with a number of very high-profile cases that involve the limits and possibilities of dilution and fair use.3 And we have also struggled with the contours of trademark law’s constitutional status as commercial speech in the United States and its implications.4 Even in the trade secret context, we have seen tensions arise between whether trade secrets are immune from First Amendment considerations and whether injunctive relief is appropriate.5 And certainly, the additional role of e-commerce and global digital technology has posed a number of unique challenges in this context. And then, finally, even aside from these issues that pose interesting complexities in the United States, we face additional issues that stem from the international aspects of the domains of free speech and the reach of intellectual property protections. Our distinguished panelists today are here to help us sort through some of these difficult questions. I will introduce them in their speaking order. First, we have Professor Robert Burrell, who is here with us from the University of Queensland, who will explore the interesting question of how freedom of expression might intersect with international trade issues and the reach of freedom-of-expression principles in the international context. Second, we have Professor Spyros Maniatis, who joins us from the University of London, who is going to focus specifically on trademark law and the issue of trademark parody from an international perspective. Next, we have Rebecca Tushnet from Georgetown, who will be speaking to us on the tiers of speech protection in the United States and whether trademark 2 Eldred v. Ashcroft (formerly v. Janet Reno), 239 F.3d 372 (D.C. Cir. 2001), reh’g and reh’g en banc denied, 255 F.3d 849 (D.C. Cir. 2001), cert. granted, 534 U.S. 1126 (2002), order granting cert. amended, 534 U.S. 1160 (2002), reh’g denied, 538 U.S. 916 (2003); see also Kahle v. Gonzales, 487 F.3d 697 (9th Cir. 2007) (holding that, followed Eldred, change from “opt-in” to “opt-out” copyright regime is constitutional), cert. denied, 128 S. Ct. 958 (2008). 3 See, e.g., Deere & Co. v. MTD Prods., Inc., 41 F.3d 39, 45–46, 32 U.S.P.Q.2d 1936 (2d Cir. 1994) (parody deemed unfair comparative advertisement); Cumberland Packing Corp. v. Monsanto Corp., 32 F. Supp. 2d 561, 581 (E.D.N.Y. 1999) (rejecting Deere); Avery Dennison Corp. v. Acco Brands, Inc., No. CV99-1877DT(MCX), 1999 WL 33117262, at *9 (C.D. Cal. 1999) (nominative fair use); New Kids on the Block v. News Am. Publ’g, Inc., 971 F.2d 302, 23 U.S.P.Q.2d 1534 (9th Cir. Oct. 12, 1992) (descriptive fair use). 4 Commercial speech can be defined roughly as speech that proposes a commercial transaction. Rebecca Tushnet, “Trademark Law as Commercial Speech”, 58 S.C. L. Rev. 737 (2007), available at http://papers.ssrn.com/sol3/papers. cfm? abstract_id=1006018; see United States v. United Foods, Inc., 533 U.S. 405, 409 (2001) (citing Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, Inc., 425 U.S. 748, 762 (1976) (First Amendment protects commercial speech); Central Hudson Gas & Elec. Corp. v. Pub. Service Comm’n, 447 U.S. 557 (1980) (setting out four-part test: (1) truthful, nonmisleading speech may be regulated when (2) the regulation serves a substantial government interest, (3) the regulation directly advances that government interest, and (4) the regulation is no more extensive than necessary). Lanham Act § 43(c)(4)(A), 15 U.S.C. § 1125(c)(4)(A) excludes “fair use of a famous mark … in commercial comparative advertising” from liability. See, e.g., New Kids on the Block v. New Am. Publ’g, Inc., 971 F.2d 302, 307, 25 U.S.P.Q.2d 1534 (9th Cir. 1992) (nominative use permitted); Smith v. Chanel, Inc., 402 F.2d 562, 566–69, 159 U.S.P.Q. 388 (9th Cir. 1968) (comparative advertising); Dairy Queen Corp. v. New Line Prods., Inc., 35 F. Supp. 2d 727, 734 (D. Minn. 1998) (deemed used to be commercial speech); see also Rebecca Tushnet, “Gone in 60 Milliseconds: Trademark Law and Cognitive Science”, 86 Tex. L. Rev. 507 (2008); Robert Post, “The Constitutional Status of Commercial Speech”, 48 UCLA L. Rev. 1, 21 (2000). 5 See, e.g., Chicago Lock Co. v. Fanburg, 676 F.2d 400 (9th Cir. 1982) (no need to invoke First Amendment as trade secrecy law resolves dispute); Religious Tech. Ctr. v. Netcom On-Line Commc’n Services, Inc., 908 F. Supp. 1361 (N.D. Cal. 1995) (unnecessary to invoke First Amendment because limiting doctrines of trade secret law protected Post’s publication); DVD Copy Control Ass’n, Inc. v. Bunner, 31 Cal. 4th 864 (2003) (trade secrets law trumps free speech); Universal Studios, Inc. v. Reimerdes, 111 F. Supp. 2d 346 (S.D.N.Y. 2000), aff’d, Universal City Studios, Inc. v. Corley, 273 F.3d 429 (2d Cir. 2001) (2600 case, a.k.a. DVD DeCSS case) (rejecting First Amendment defense); Apple Computer, Inc. v. DePlume, No. 1-05-CV-03341 (Cal. Sup. Ct., Santa Clara County, filed Jan. 4, 2005) (to enjoy a robust right to free speech is not to operate “outside the law”); see also Pamela Samuelson, “Resolving Conflicts between Trade Secret and Free Speech” (Mar. 20, 2003), available at http://people.ischool.berkeley.edu/~pam/papers/ TS%201st%20A%203d%20dr.pdf.

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law should be classified as commercial speech, and the implications of this question for freedom of expression. We have two panelists: Pam Samuelson, who is joining us from Boalt Law School, who is going to comment on the free speech implications of a variety of different arenas of trademark, copyright, and trade secret law; and, last but not least, our very own Susan Scafidi, who is at Fordham with us, who, aside from being a brilliant scholar, operates probably the mostread blog on counterfeiting and fashion design in the world, counterfeitchic.com, which I encourage all of you to take a look at if you haven’t already, and she will be talking about the intersection of these areas with freedom of speech principles. Without further ado, let me turn things over to our first speaker, Robert Burrell.

Exporting Controversy: Free Speech and Trade Agreements Prof. Robert Burrell* When Hugh asked me to speak about calls to make freedom of expression a trade issue, this seemed to me to be entirely appropriate, if for no other reason than the fact that I first encountered calls for freedom of expression to be treated as a trade issue at last year’s Conference.6 But since last year’s conference we have seen Google throw its weight behind these proposals, with Andrew McLaughlin, Google’s Director of Public Policy, making a strong statement to this effect in June last year.7 We have also seen some human rights lawyers and some trade lawyers expressing support for this proposal.8 Now, in contrast, I want to suggest that such calls need to be treated with considerable care, that we need to be very clear about what it is that we are talking about, and that the United States needs to think carefully about what some of the costs of such policy might be, something that I hope might also help prompt a broader reevaluation of some features of current U.S. trade strategy. It seems to me that the first question is: What might be motivating these calls to have freedom of expression treated as a trade issue? I think, fairly obviously, companies like Google have a financial incentive, ensuring that their business operations are not disrupted by various forms of censorship. And, as I will come back to, I think there are some genuine issues that merit consideration here. But it seems to me that calls to have freedom of expression treated as a trade issue rest on something more than those financial concerns. I think these calls also rest on a desire to make future trade agreements more balanced. These calls are, if you like, the information law analog to moves to have higher labor and environmental standards included in future trade agreements. Now, I am highly sympathetic to calls to reduce censorship. But it seems to me that attempting to have freedom of expression treated as a trade issue is potentially problematic and, I think, is unlikely to be met with much enthusiasm in partner countries. I think that can * University of Queensland, Brisbane, Australia. 6 See Session VIII, Part A, “Copyright: Canada, Australia and New Zealand”, 10 Intellectual Property Law and Policy 591 (Hugh C. Hansen ed. 2008) (Fordham University School of Law Fifteenth Annual Conference on Intellectual Property Law and Policy, Apr. 12–13, 2007). 7 Christopher S. Rugaber (AP), “Google Fights Global Internet Censorship”, WashingtonPost.com, June 25, 2007, available at http://www.washingtonpost.com/wp-dyn/content/article/2007/06/25/AR2007062500364_pf.html. 8 See World Trade Organization, Office of High Commissioner for Human Rights, Human Rights and World Trade Agreements (2005), available at http://www.ohchr.org/Documents/Publications/WTOen.pdf.

308 CHAPTER IV: COPYRIGHT LAW be illustrated by considering how Australia would have been affected had such a clause been included in the U.S.–Australia Free Trade Agreement.9 At this point we face some difficulty — and again, this is an issue I want to come back to. When we say that freedom of expression should be treated as a trade issue, that might mean a number of different things. On one interpretation, calling for freedom of expression to be treated as a trade issue means the United States exporting the First Amendment. The impact of that type of provision on Australia would have been dramatic, because Australia’s approach to protecting freedom of expression differs fairly dramatically from that of the United States. More specifically, the Australian Constitution entrenches a freedom of political communication.10 Many of the details of Australia’s freedom of communication have yet to be finally determined, but I think we are now at the point where the general outlines of this freedom are now at least tolerably clear. For present purposes, I just want to draw your attention very briefly to three features of the Australian freedom of political communication: • First, because of the way the freedom arises under the Constitution, there is simply no scope for arguing that corporations should be afforded less favorable treatment than real persons. You might look at a case called Cunliffe v. Commonwealth11 for support of that proposition. • Secondly, it is clear that expressive behavior, as well as more direct forms of communication, also fall within the scope of the freedom. Here you might look at Levy v. Victoria.12 • Thirdly — and this is the most important issue — it is only communication with a political content that attracts the constitutional protection. This last feature does most to distinguish the Australian approach to freedom of expression from that of the United States, and indeed, I think, serves to make the Australian approach somewhat idiosyncratic. Now, many of you are probably thinking that this sounds much too limited and that if only freedom of expression had been inserted into the U.S.–Australia Free Trade Agreement we could have been saved from ourselves. But I think that many Australians would be tempted to respond, “Well, at least the limitation to political speech prevents our courts from spending their time arguing over the extent of constitutional protection of pole dancing.” However difficult courts may have found it to draw a line between the political and the nonpolitical — in cases like Coleman v. Power,13 somebody insulting a police officer; or Hanson v. Australian Broadcasting Corp.14and Brander v. Ryan,15cases where people were just being rude about politicians rather than criticizing them in any more obvious or fundamental way — I think we might also point out that the Australian approach is perhaps not too far removed from Robert Bork’s reading of the proper boundaries of the First Amendment,16 although I 9 U.S.–Australia Free Trade Agreement, May 18, 2004, available at http://www.ustr.gov/Trade_Agreements/ Bilateral/Australia_FTA/Final_Text/Section_Index.html. 10 The constitutional guarantee of freedom of political communication is, prima facie, far more restricted than the generalized guarantee of freedom of speech and of the press in the U.S. Constitution. The High Court of Australia found that the Constitution contained an “implied” right to freedom of political communication. Theophanous v. Herald and Weekly Times Ltd., (1994) 182 C.L.R. 104 at 140; see also Nationwide News Pty Ltd. v. Wills, (1992) 177 C.L.R. 1; Australian Capital Television Pty Ltd. v. Commonwealth, (1992) 177 C.L.R. 106; Lange v. Australian Broad. Corp., (1997) 189 C.L.R. 520. 11 (1994) 182 C.L.R. 272. 12 (1997) 146 A.L.R. 248. 13 (2004) 78 A.L.J.R. 1166. 14 Writ No. 7681 (1997). 15 (2000) 78 S.A.S.R. 234, 250 (Lander J), 235 (Prior, J., agreeing). 16 See Robert H. Bork, “Neutral Principles and Some First Amendment Problems”, 47 Ind. L.J. 1 (1971); Hoover Institution, “Robert’s Rules of Order: A Conversation with Robert Bork” (filmed July 13, 2003), transcript available...

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probably like to think that Australia does not resemble Robert Bork’s republic in any other respect whatsoever. You might also note that the High Court has used the provisions that underpin the freedom of political communication in the Roach decision17 to give much greater freedom to the rights of convicted felons to participate in the political process than, at least as I understand it, anything that exists here. More generally, rightly or wrongly, I think that many Australians would be reluctant to accept that the United States has more extensive or better protection for human rights than Australia. Now, I say all of that not to engage in some tiresome “our law is better than your law” type of slinging match, but simply to make the point that other nations, even other Western democratic nations, often have very different values. You might note that, insofar as there are calls for reform of the way Australia protects freedom of expression at the moment — and that is something that has attracted some attention under the Labour government — any reform that took place would almost certainly move Australia more towards the European model, not towards the U.S. model. Again, anyone who has looked at this knows that most other countries, including Europe, adopt a very different approach to the protection of freedom of expression than the United States. As Rebecca said in an email to me, this is an area where U.S. exceptionalism is at its most obvious. So the key point that I am trying to make is that I think it is fairly safe to say that any attempt to export the First Amendment to Australia would have created significant resistance. And, as I have tried to demonstrate elsewhere, even as it was, the U.S.–Australia Free Trade Agreement fed anti-American sentiment. Remember that this is an agreement that was memorably described in Congress as being America’s way of saying “thanks, mate” for Australia’s support in Iraq. Yes, thanks indeed. It seems to me that you really do have to start weighing the political costs associated with your present form of trade agreements. Attempts to rebalance U.S. policy by requiring partner countries to adopt First Amendment values is only going to increase the problem. Now, at this point it needs to be acknowledged that calls to make free speech a trade issue might not be cause to internationalize the First Amendment at all. Indeed, supporters of the call to have freedom of expression treated in this way are usually quick to insist that they are not asking for the First Amendment to be internationalized. But it seems to me that trade partners are entitled to be somewhat skeptical about how the U.S. Trade Representative (USTR) would form a view as to what is or is not an acceptable level of protection. After all, the argument that Australia had a different but equally coherent model of copyright protection was not one that carried any weight in the context of the Free Trade Agreement (FTA) negotiations. But the real problem to my mind is that anything that didn’t result in the First Amendment being internationalized would not have any effect on the genuine trade issues that do arise. After all, the USTR could not sign up to anything that was incompatible with the First Amendment. So if we are not talking about the First Amendment being internationalized, we must be talking about some vague “motherhood” statement, which would not do anything to deal with the very different approaches and the difficult trade issues that arise when, for example, different countries take different approaches to defamatory statements about public figures. I think it would, therefore, be far better to negotiate on the specifics — e.g., to negotiate on the question of jurisdiction on the Internet. It seems to me entirely reasonable, for example, at http://www.hoover.org/multimedia/uk/2940316.html; Robert H. Bork, A Country I Do Not Recognize: The Legal Assault on American Values (2005). 17 Roach v. Electoral Comm’r, [2007] HCA 43.

310 CHAPTER IV: COPYRIGHT LAW that the United States and Australia might enter into a negotiation about jurisdictional questions following a case like Gutnik,18 which was an Australian case that, to my mind quite extraordinarily, resulted in somebody being able to sue for defamation in Australia and being able to sue an American magazine that only had a tiny pool of Australian subscribers. So I think that, rather than vague arguments about “let’s have freedom of expression treated as a trade issue,” let’s focus on specific areas where different rules on, for example, jurisdiction or contempt of court might create problems for organizations like Google. I think negotiating around those might produce more meaningful results, and might do so at a much lower political cost than some of the alternatives that are being proposed at the moment. Thank you. PROF. KATYAL: Thank you so much. Our next speaker is Professor Spyros Maniatis.

Mr Miss World and Haute Diggety Dog: Parody, Freedom of Speech and Trade Mark Law Prof. Spyros Maniatis* I will look at this issue from a very practical perspective, focusing on two cases, one from the United Kingdom, one from the United States. Are they canonical? Not yet. Can we see whether there is convergence or divergence? Not really, because they are two very different cases. The U.K. case dealt with an order to restrain publication before trial. The U.S. case went to the court of appeal.19 Nevertheless, I think that they point towards different principles and, to some extent, divergence. I. MR MISS WORLD

In the United Kingdom, Channel 4, a TV channel, used the term “Mr Miss World” in order to title a documentary program on a beauty contest for transsexuals. The case20 concerned the TV program only, not the contest itself, which was titled “Miss International Queen.” In the United Kingdom, the owners of the MISS WORLD and MR WORLD trademarks, registered amongst other things for entertainment services, sought an interim injunction. The case came before Mr. Justice Pumfrey before he moved to the court of appeal and before his sudden death, a loss for intellectual property in the United Kingdom and a loss for Fordham because he was a very good friend of the Conference. He started by looking at whether there is straightforward trademark infringement.21 Arguably, he said, there is; the marks are very similar, and definitely the specification for entertainment Dow Jones & Co., Inc. v. Gutnik, [2002] HCA 56. * Queen Mary, University of London. 19 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp. 2d 495, 504–05 (E.D. Va. 2006), aff’d on other grounds, 507 F.3d 252 (4th Cir. 2007). 20 Miss World Ltd. v. Channel 4 Television Corp., [2007] E.W.H.C. 982 (Pat), 2007 WL 1292609 (Apr. 16, 2007, Pumfrey, J.). 21 Trade Marks Act, §§ 10(1), 10(2), and 10(3). Pumfrey, J., held that § 10(1) infringement was at least arguable even taking a narrow approach to the idea of identity. If this interpretation was incorrect the question became one of infringement under § 10(2), for which there was a strongly arguable case: the marks were plainly similar and there would be relevant confusion through association due to the claimant’s extensive reputation in the words “Miss World.”... 18

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services does cover TV programs. So, given in particular the boosts that the MISS WORLD trademark enjoins as a result of reputation, he said that this is a triable question. He then turns to our dilution provision. In his own words, “Central to the complaint here is that, even if the public is not confused by the use into the belief that this is a ‘Miss World’ production, they will still associate it with the claimant’s products. The use would be parasitic upon the claimant’s reputation.” What Miss World really supported here was a free-ride line of argument with a little bit of tarnishment. First of all, in order to communicate that this is a program not about unmarried young women but about transsexuals, unfair advantage was taken of the distinctive character and the reputation of the trademark. And then, a little bit of tarnishment. This was a program with unusual content. It would be shown after the 10 o’clock Watershed. They avoided a moralistic approach, and they said, “We have nothing against the organizers of the contest. They do have very noble aims, because quite a lot of money would go to charities. Our complaint is with Channel 4, that it is trying to bolster by association with the MISS WORLD trademarks its viewing figures and advertising revenues.” Again, Mr. Justice Pumfrey found that this was an arguable and triable question. He then moved to the freedom-of-speech arguments that were developed before him. He followed very closely the South African Laugh It Off case.22 There, a couple of years ago, before the Constitutional Court, it was held that parodic use of a trademark on T-shirts would not be trademark infringement. There were two concurring opinions. One, developed by Judge Moseneke, was more or less traditional in its approach and tried to establish that there is no infringement on the basis of a traditional trademark analysis.23 The second opinion, by Justice Sachs, tried to establish a hierarchy between different rights and again supported that there is no infringement.24 Starting from Article 10 of the European Convention on Human Rights, Mr. Justice Pumfrey accepted that everyone has the right to freedom of expression.25 Then, he moved to Section 12 of the Human Rights Act in the United Kingdom, which incorporates into the United Kingdom the European Convention on Human Rights, and in particular Section 12(3), which provides that “no such relief is to be granted “o as to restrain publication before trial.”26 Unless the Court is satisfied that the applicant is likely to establish that, publication should not be allowed. Note that in his review of the South African case Mr. Justice Pumfrey did refer to the argument that was developed by the defendant, that here you have an ideological issue. The brand is pitted against its own weight and popularity. It entails using well-known registered Pumfrey, J., commented that §10(3) raised the only real reason for requiring removal of the mark from the program at such a late stage before transmission, rather than leaving the claimant to its remedy in damages. 22 South African Breweries (Finance) BV trading as SAB Mark Int’l v. Laugh It Off Promotions, 2003 (2) All SA 454 (CC) (S. Afr.). 23 Moseneke, J., observed that there was a lack of evidence of economic or material harm. 24 Sachs, J., held that there is a need to provide latitude for parody, laughter, and freedom of expression. 25 Convention for the Protection of Human Rights and Fundamental Freedoms as amended by Protocol No. 11. Rome, 4.XI.1950, art. 10 Freedom of Expression: 1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises. 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary. 26 Human Rights Act 1998, § 12(3): where the relief granted by a court might affect the exercise of the Convention right to freedom of expression “[n]o such relief is to be granted so as to restrain publication before trial unless the court is satisfied that the applicant is likely to establish that publication should not be allowed.”

312 CHAPTER IV: COPYRIGHT LAW trademarks of large corporations, slightly altered but still recognizable as an adaptation of the original brands. But, according to the judge, here this was a question of fact. This was a case in which the point that was made by the alleged infringer in the South African case was so disconnected from the ordinary function of a trademark as an indication of origin and as an indication of quality that it was fanciful to say that the mark was affected in any way. Turning to the fundamentals of freedom of expression in the United Kingdom, in Europe, he agreed with a leading commentary in this area that the European Court of Human Rights had in effect identified three types of expression — political expression, artistic expression, and commercial expression — and that the court consistently attaches great importance to political expression but appears to apply less vigorous principles to artistic and commercial expression.27 The use was defended by Channel 4 as a parody. “Miss World” was used in the title of a program as a byword, a reputation and an attitude in sexual matters that were appropriate for the 1970s but inappropriate in today’s much more complicated world. Mr. Justice Pumfrey accepted that the use of the words “Mr World” and “Miss World” is “an ingenious shorthand to convey what a program is all about.” But he also added that “the true unpacking of a name will not become apparent to everybody until they have looked at a descriptive matter. But once the descriptive matter is looked at, then the way in which the name is to be unpacked is quite apparent.” He accepted that in essence this is descriptive use. But he said that “the power of the descriptive use relies upon the reputation that is attached to the words ‘Miss World,’” and this potentially could be a dilution case. The next step was to examine whether the infringement case was strong enough to satisfy Section 12(3) of the Human Rights Act. He sought guidance, looking to the House of Lords, which said that “courts must be exceedingly slow to make interim restraint orders. Where the applicant has satisfied the court, he will probably” — and “probably” meant more likely than not — “succeed at the trial.”28 What this meant for Mr. Justice Pumfrey is that this introduced some flexibility and balance between rights. Here he started talking about trademarks as property rights and the fact that you do not need to pay too much attention, give inappropriate weight, to the Convention’s right of freedom of speech, but you need to balance it with property rights as well. II. HAUTE DIGGITY DOG

Moving quickly to the U.S. court of appeal case, Louis Vuitton,29 about the CHEWY VUITON dog toy and other similar uses of well-known trade marks, what was really, I think, very interesting from a European perspective is that the court of appeal accepts that this is not necessarily a defense. Why is parody not necessarily a defense, although it is acknowledged in the law? Because the parodied trademark is used as an indication of source. 27 Pumfrey, J., noted that the European Court of Human Rights has distinguished three types of expression: political, artistic, and commercial. The court consistently attaches great importance to political expression and rather less to artistic and commercial expression. The relief here was not to restrain broadcast of the program, but to do so using the words “Mr Miss World.” Pumfrey, J., was unpersuaded that such use gave rise to questions under Article 10; the name was essentially descriptive. However, in case Article 10 was in fact engaged, Pumfrey, J., considered whether the case was strong enough to satisfy the requirement imposed by § 12(3). 28 Pumfrey, J., considered the judgment in the House of Lords in Cream Holdings v. Banerjee, [2004] U.K.H.L. 44, and the meaning of the word “likely.” In Cream Holdings Lord Nicholls held that the degree of likelihood of success at trial needed to satisfy Section 12(3) must depend on the circumstances. The general approach was that the courts should be slow to make interim restraining orders unless the applicant showed that he was “more likely than not” to succeed at trial, although there would be cases where a lesser degree of likelihood would suffice. 29 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp. 2d 495, 504–05 (E.D. Va. 2006), aff’d on other grounds, 507 F.3d 252 (4th Cir. 2007).

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Nevertheless, the court of appeal says, it is still possible for the courts to consider the parody arguments in order to determine whether there is infringement in the first place. The fact that this was considered to be a successful parody made the court decide that this is not an infringement in traditional terms, but also that it is not an infringement in dilution terms. What is very interesting from a U.S. perspective is that the court of appeals decision seems to be quite similar to Moseneke’s approach in the South African case.30 PROF. KATYAL: Thanks so much.

Our next speaker is Rebecca Tushnet.

Commercial Speech and Intellectual Property Law Prof. Rebecca Tushnet* I would like to talk about the shift in U.S. courts, which is often discussed in political circles as a shift in a conservative direction. What we are seeing is a lot of skepticism by the federal judiciary about suits against businesses. This has obvious effects when consumers sue businesses, but it is also quite important when businesses sue other businesses. I think that we are seeing a trend where courts are inclined to tell competitors, in particular, “fight it out in the market; don’t bring it into court.” In competitor litigation over advertising, there is a very strong trend to limit false advertising claims based on things like standing, lack of materiality, and other factors. Since the United States historically sees trademark as a branch of false advertising law, my proposition is that we are seeing that skepticism feed over into trademark, and we will see more of it as the new, reconstituted Supreme Court gets more chances to define the commercial speech doctrine, or whatever is left of it. This is because, unlike the regime we just heard about, the United States has steadily been moving towards greater and greater protection, near political protection, for truthful, non-misleading commercial speech. Under the current doctrine, which may or may not be stable, false or misleading commercial speech can be banned outright. However, truthful, non-misleading commercial speech can only be regulated if the regulation directly advances a substantial government interest and there is a reasonable fit between the aim of the government interest and the form of the ban. So, for example, wanting kids to stop smoking turns out to not be closely enough related to banning advertising for cigarettes to sustain such a ban. If there are non-speech policies that will better target the problem at issue, or if the speech regulation only targets a small part of a larger problem, it will be unconstitutional. The problems here for trademark dilution are, I think, obvious. Dilution rests on the proposition that there is nothing false or misleading about a dilutive use; it merely causes damage to a trademark owner in other ways. But if it is truthful, or at least if it is not false, we appear to be in this realm of heightened constitutional scrutiny, and it is not at all clear that courts, when they are asked to do it, will find that dilution law advances a substantial government interest in a narrowly tailored way. I think this is hard to accept, because trademark lawyers, by virtue of their expertise, have this assumption that brand value is worth protecting, and of course it naturally follows that See supra note 23. * Georgetown University School of Law, Washington, D.C. 30

314 CHAPTER IV: COPYRIGHT LAW there must be a substantial government interest in protecting it. I actually agree, because under current doctrine basically a non-laughable interest is a substantial government interest. Certainly, brand value is a non-laughable interest. However, American dilution law turns out to have a problem with narrow tailoring. If you look at dilution law, there are so many exceptions — for parody, for criticism, for comparative advertising — that the set of things that dilution law targets that are left over is quite small. Under current First Amendment doctrine, it turns out that if you are just tackling a teeny part of the problem, if you are taking a thimbleful of water out of an overflowing bathtub, the court is going to say that is unjustified.31 Unpacking this a little, federal dilution law is aimed at dilutive uses of marks as marks for the defendant’s goods or services.32 But uses as marks that are diluting are just a tiny part of the dilution that occurs in terms of criticism, parody, and other uses — for example, uses in second-hand stores or in down-market venues, which the trademark owner cannot control and which nonetheless may diminish the value of the mark. Because under U.S. law we do not regulate any of those, the amount of speech that dilution does regulate is just too small to survive the First Amendment analysis that the Supreme Court has employed in other areas of commercial speech regulation. So I would predict there may be some surprises in store for trademark lawyers if this gets fully litigated. A deeper problem with the current commercial speech doctrine, which has yet to come over to trademarks but is starting to appear in false advertising law generally, is the question of how do you distinguish true from false.33 In other areas of advertising regulation, the Supreme Court has proved itself deeply skeptical about claims that consumers are being confused or damaged by particular aggressive advertising tactics. They have required potential regulators to show quite directly and with clear evidence that there is a harm to consumers. If you just think that a lawyer advertising practice is unworthy of the profession of law, that is in general not going to suffice to sustain a regulation. In trademark law, by contrast, confusion, especially initial interest confusion, has long been something that courts are willing to infer by looking at the factors, without necessarily looking at evidence from deceived consumers. I think that is certainly reasonable to determine that there can be confusion by applying general principles and presumptions in some cases. But that kind of treatment is inconsistent with the way that the Supreme Court has treated other kinds of commercial speech regulation. So if we see, as I expect we will, an increase in the level of protection granted to commercial speech, trademark owners may be surprised to find out that the business-friendly Supreme Court has turned out to be friendly to perhaps infringing businesses. From the perspective of someone who is pretty much a trademark restrictionist, I think this is going to have many positives and many negatives. I am no big fan of dilution, so I wouldn’t be sad to see dilution law go. But American law is exceptionalist in its treatment both of freedom of speech and of trademark. Given that U.S. trademark law is basically a variant of false advertising law, as advertising law goes, so goes trademark. I am quite concerned about the effects on consumer protection law more generally 31 See City of Cincinnati v. Discovery Network, 507 U.S. 410 (1993) (invalidating a regulation of commercial speech when commercial speech only generated a tiny fraction of the problem — litter — targeted by the law, and noncommercial speech was responsible for a much greater proportion of the harm at issue). 32 See Stacey Dogan & Mark Lemley, “The Trademark Use Requirement in Dilution Cases”, 24 Santa Clara L. Rev. 541 (2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1033165. 33 See Rebecca Tushnet, “It Depends on What the Meaning of ‘False’ Is: Falsity and Misleadingness in Commercial Speech Doctrine”, 41 Loy. L.A. L. Rev. 101 (2008).

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of a heightened standard of proof for those attacking false advertising and a skepticism about regulation.34 PROF. KATYAL: Thank you.

Now we’ll hear from the first of our two panelists, Pam Samuelson. PROF. SAMUELSON: I am going to talk a little bit about American developments here, because I know a lot more about that than I do about European and other developments. So forgive me for my ignorance. I think it was the case five years or so ago that most American intellectual property people would say: “Oh, the First Amendment or free speech being a limiting principle isn’t a very big deal,” because there were a number of cases that said that trademarks, copyrights, or other intellectual property interests are property interests, and you do not have a First Amendment right to trample on property rights. I think that that kind of perception is eroding. I have spent quite a lot of time in the last few years doing a study of American trade secrecy law and tensions with free speech, and I have come up with a set of principles that I think really show that there is plenty of room to raise First Amendment defenses.35 They are most likely to succeed in cases involving third parties who got the information without any fault of their own and decided to publicly disclose it. But I think, even if people pledge not to disclose it, if they publicly disclose it and there is some public interest that is thereby promoted, it will be allowed under free speech. Right of publicity law: There was a big burst of First Amendment/free speech limitation cases and then it kind of quieted down. I think it has picked up again. So I see the First Amendment or free speech as a limitation on right of publicity coming back. Expressive uses and critical uses of trademarks are becoming increasingly accepted. So First Amendment is limiting there too. And, if the Federal Circuit does not limit patentable subject matter to technology, I foresee that there are going to be First Amendment defenses raised in patent cases too, because to the extent that a method is patented that you can basically think and infringe it, or communicate and infringe it, those methods which are non-technological could potentially raise free speech issues. There are a couple of papers that have begun to express this. Kevin Collins has written about patenting thought.36 Dan Burk wrote a paper on patenting speech.37 But I think we haven’t seen that. What the Federal Circuit does in the In re Bilski case38 I think will tell us something about that. 34 See Rebecca Tushnet, “Truth and Advertising: The Lanham Act and Commercial Speech Doctrine”, in Trademark Law and Theory: A Handbook of Contemporary Research 294 (Graeme B. Dinwoodie & Mark D. Janis eds., Edward Elgar Press 2008). 35 See Pamela Samuelson, “Principles for Resolving Conflicts Between Trade Secrets and the First Amendment”, 58 Hastings L.J. 777 (2007), re-publication forthcoming in First Amendment Law Handbook 2007–08 (Rodney Smolla ed., 2008), UC Berkeley Public Law Research Paper No. 925056 (Aug. 9, 2006), available at http://papers. ssrn.com/sol3/ papers.cfm?abstract_id=925056; Samuelson, supra note 5. 36 Kevin Emerson Collins, “Propertizing Thought”, Indiana Legal Studies Research Paper No. 64 (Nov. 12, 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=939278. 37 Dan L. Burk, “Patenting Speech”, UC Irvine School of Law, University of California, Irvine Law School Working Paper Series (2000), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=223517. 38 In re Bilski, 264 Fed. Appx. 896 (Fed. Cir. Feb. 15, 2008), available at http://www.cafc.uscourts.gov/opinions/07-1130%20order.pdf. [Note: Subsequent to the Conference, on May 8, 2008, the U.S. Court of Appeals for the Federal Circuit held a rare en banc hearing to determine what constitutes a patentable process under the patent laws. The twelve judges examined terms such as “tangible,”’ “abstract,” “concrete,” and “transformative,” and focused on what is patentable subject matter under Section 101 of the Patent Act. See Eileen McDermott, “Federal Circuit Seeks...

316 CHAPTER IV: COPYRIGHT LAW In the copyright side, the old conventional wisdom of fair use and the idea/expression distinction basically take care of all the First Amendment concerns. At least among the scholarly literature it is, shall I say, not persuasive. So what I see all over the place is more effort to breathe more First Amendment doctrine into all kinds of things. Things such as saying that fair use should be a right — if First Amendment is a right and fair use is kind of the standard in copyright,39 then fair use ought to be a right. I found eight different articles lately saying that fair use is a right and no longer a defense. I think that the Supreme Court, in some sense, invited that by the way that it reacted in the Eldred40 and Harper & Row41 cases. I think there is also a lot of literature recently suggesting that the scope of exclusive rights, particularly the derivative work right, has to be cut back in order to foster free expression. There are a few cases also asserting that unwarranted assertion of copyright should be treated as misuse, and actually that you should be able to bring a case challenging that. That happened in the declaratory judgment action that was brought against the Joyce estate by the Stanford scholar whose biography of Lucia Joyce was criticized for not having enough evidence. She said, “All the evidence is the stuff that the Joyce estate wouldn’t let me put in.” They brought a declaratory judgment action to assert fair use, but on a kind of First Amendment argument.42 I know somebody is working on copyright misuse as an affirmative claim that you can bring. The Online Policy Group v. Diebold case43 suggests that there might be a little bit of legs to that. There are also some intellectual privacy interests that can have a First Amendment dimension to them. Certain acts of circumvention can raise First Amendment/free speech issues. In a recent volume, even some fairly conservative people recognized that there might be some free speech New Patentability Test in Bilski”, Managing Intell. Prop. (May 12, 2008), available at http://www.managingip.com/ Article/1930343/Federal-Circuit-seeks-new-patentability-test-in-Bilski.html.] 39 See The Copyright Act of 1976, 17 U.S.C. § 107 (1996). Section 107 does not define “fair use,” but enumerates four broadly worded factors that courts shall consider in determining whether a use is “fair” and thus uninfringing: Notwithstanding the provisions of sections 106 [Exclusive rights in copyrighted works] and 106A [Rights of certain authors to attribution and integrity], the fair use of a copyrighted work, including such use by reproduction in copies or phono records or by any other means specified by that section, for the purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include – (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the potential market for or value of the copyrighted work. The fact that a work is published shall not itself bar a finding of fair use if such a finding is made upon consideration of all the above factors. Id. 40 Eldred v. Ashcroft, 239 F.3d 372 (D.C. Cir. 2001), reh’g and reh’g en banc denied, 255 F.3d 849 (D.C. Cir. 2001), cert. granted, 534 U.S. 1126 (2002), order granting cert. amended, 534 U.S. 1160 (2002), reh’g denied, 538 U.S. 916 (2003). 41 Harper & Row v. Nation Enters., 471 U.S. 539 (1985). 42 Sloss v. Estate of James Joyce, No. 5:07-cv-00517-JW (N.D. Cal. Jan. 25, 2007) (Joyce Estate motion denied). Settlement agreement available at http://cyberlaw.stanford.edu/system/files/Shloss+Settlement+Agreement.pdf; complaint for declaratory judgment and injunctive relief available at http://www.scribd.com/doc/2615300/Shloss-v-JoyceDocument-No-1. 43 Online Policy Group v. Diebold, Inc., 337 F. Supp. 2d 1195 (N.D. Cal. 2004) (holding that defendants violated § 512(f) of the Digital Millennium Copyright Act by having outside counsel send DMCA takedown notices to Internet Service Providers).

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issues there. I think Ed Felten would have won if the recording industry had gone forward with their case against him for circumventing to write a paper about the flaws in the SDMI technology.44 There are also some arguments that some procedural rules and remedies really ought to be treated differently when free speech issues are at stake. So I see that, rather than First Amendment/free speech just going away, it has actually been revitalized. We will see what happens with the courts. Obviously, the scholarly literature and the courts are two different things. But I actually think that there is enough going on there. And that’s just leaving aside the Martignon45 and Golan46 cases — like what’s the First Amendment doing there? — but whatever. Thank you. PROF. KATYAL: Great. Thanks so much. Susan? PROF. SCAFIDI: Thank you. Speaking last, it’s my privilege to be able to comment in a more traditional way and to try to tie some of the themes of the papers together. I would like to start at the point of saying that it is very interesting to try to combine copyright and trademark in a free speech context because there are some substantial differences. Rebecca has gone on record as being no fan of dilution, but I think the existence of dilution and of that protection points directly at the difference between trademark and copyright. There is always tension in copyright between free speech and the right holder. That same tension does not exist to the same degree necessarily in trademark, because both the rights holder and the would-be other user of the mark would like to have that mark register a clear message. In other words, it is an issue of signaling — hence, dilution. As we think about this, I think we need to realize that, as Pam as so beautifully put it, free speech has been breathing life back into these issues, but they are very different across different areas of IP. I think also that the wonderful points that Robert made go to the question of cultural norms and how difficult it is to write something as broad as free speech into any general kind of category. I think that issue of cultural norms and of uncertainty ties right back to our previous panel on fair use and on standards vs. rules and the points that Pam made in that panel. That 44 As part of a contest in 2000, Secure Digital Music Initiative (SDMI) invited researchers and others to try to break its digital audio watermark technologies. Edward Felten, an initial participant of the contest, chose to opt out of confidentiality agreements that would make his team eligible for the cash prize. Felten and his team managed to modify the files sufficiently that SDMI’s automated judging system declared the watermark removed. SDMI did not accept that Felten had successfully broken the watermark according to the rules of the contest, noting that there was a requirement that the files lose no sound quality. They claimed that the automated judging result was inconclusive, as a submission which simply wiped all the sounds off the file would have successfully removed the watermark but would not meet the quality requirement. Felten’s team wrote a scientific paper explaining the methods used by his team in defeating the SDMI watermarks, which he planned to present at the Fourth International Information Hiding Workshop of 2001. Felten was threatened with legal action by SDMI, the Recording Industry Association of America, and Verance Corporation, under the terms of the DMCA, on the argument that one of the technologies his team had broken was currently in use in the market. Felten withdrew the presentation from the workshop, reading a brief statement about the threats instead. SDMI and other copyright holders denied that they had threatened to sue. However, SDMI appears to have threatened legal action when spokesman Matthew Jan Oppenheim warned Felten in a letter that “any disclosure of information gained from participating … could subject you and your research team to actions under the Digital Millennium Copyright Act,” available at http://w2.eff.org/IP/DMCA/Felten_v_RIAA/0010409_riaa_sdmi_letter. html. Felten (with help from the Electronic Frontier Foundation) sued the groups, requesting a declaratory judgment ruling that publication of the paper would be legal. The case was dismissed for a lack of standing. 45 United States v. Martignon, 492 F.3d 153 (holding that anti-bootlegging statute that was concededly inconsistent with the Copyright Clause’s limited duration requirement was not subject to Copyright Clause scrutiny because it did not allocate property rights in expression). 46 Golan v. Gonzales, 501 F.3d 1179 (10th Cir. 2007) (overturning copyright legislation on First Amendment grounds).

318 CHAPTER IV: COPYRIGHT LAW is to say, if you have a tension between standards and rules, or a lack of agreement as to what those standards or those rules might be from situation to situation, then it is very hard to come to some kind of agreement. I think we particularly see that uncertainty existing in the subset of fair use that is parody, on which Spyros focused. In the parody context, it is often said in jest that if you can make the judge laugh, then as the defendant you’ll win your case. Clearly, the Haute Diggety Dog case47 made a number of judges laugh. I think the same wouldn’t be true of “Mr Miss World.”48 I don’t know if any of you have had a chance to see any portion of that documentary. If this weren’t a copyright session, I would tell you that it is available on YouTube (but I didn’t just tell you that) broken up into nice tenminute bites. But it is not at all a farce. It’s quite a serious documentary focusing on a man who’s a transsexual in Britain who then goes to this beauty contest. There is no sense of any kind of critical commentary on beauty pageants via this documentary. There is no sense of making fun of beauty pageants. The association via the proposed title, “Mr Miss World,” which was ultimately after the injunction changed to “Mr Miss Pageant,” I think was one of attempting to force the audience to remember their own preconceptions and impressions of what a beauty pageant is and to make the connection in their mind. So it was didactic or instructive, but only in a very attenuated way. So whether or not that fits in parody is part of the cultural issue associated with how we can actually define a parody. I think the other difficulty we have in defining parody when it comes to trademark is that we are so much more accustomed to making these analyses via some kind of post hoc narrative. Visual symbols, in particular, are subject to multiple interpretations in a way that words are less subject to those interpretations. So whoever makes the judge laugh wins, but whoever has the better post hoc story wins. I think we see that a little bit in the Haute Diggety Dog case. After the Fourth Circuit decision came down, I actually was contacted by both sides, neither of whom was entirely happy with different parts of the case. Part of the issue in looking at the Haute Diggety Dog case, or the “CHEWY VUITON” case, was how to define parody and how far it can go. Obviously, Louis Vuitton, as the plaintiff, wasn’t pleased with the outcome, and believed that a great deal more emphasis should be placed on exactly what Spyros as pointed to, and that is the fact that we don’t think of it as the “Haute Diggety Dog” toys; we think of them as the “Chewy Vuiton” toys. That is to say that the product mark was used as a source indicator, not even in conjunction with the name of the company. So that was potentially a fatal error. Had the other elements not been quite so strong, I think that case might have come out very differently. So perhaps there is not that much difference between what the Fourth Circuit did here and what was done in Britain in that regard. It is just that the other elements were so crucial. I also think that we get counsel’s intuition regarding parody — I have heard this across the board from a number of different individuals — being that if one is a work of art and should not be attacked, ten may be speech, but 1,000 are commercial and are mere free riding. I do not know that that has come forth perfectly in the analysis of commerciality that we have had either in infringement or in dilution. So what we have when we talk about parody, in particular, is a difficulty in conceptualizing culturally what we mean. Rebecca has said dilution covers very little because of these huge exceptions. We have a question as to how huge this particular exception really is, and a question that I think is going to have to be fleshed out over time. 47 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp. 2d 495, 504–05 (E.D. Va. 2006), aff’d on other grounds, 507 F.3d 252 (4th Cir. 2007). 48 Miss World Ltd. v. Channel 4 Television Corp., [2007] E.W.H.C. 982 (Pat), 2007 WL 1292609 (Apr. 16, 2007) (Pumfrey, J.).

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The reason why I think probably courts will have to be asked to flesh this out over time is that, seeing things like Haute Diggety Dog, more and more defendants are reaching not just for fair use in general but, for parody in particular, to try to defend themselves, and are reaching for a very broad conception of what parody might be. The last image that I want to leave you with before we open this up for more questions is an image that was all over the Internet a couple of months ago of a pair of girls’ panties with Mickey Mouse on the bottom and the words “Parody Design” written under Mickey Mouse.49 If you label it a parody, it must be. With that, I think probably Sonia has questions of her own. PROF. KATYAL: Great. Thanks so much. Thanks to our panelists. That was great. We have a few minutes. I would like to turn things over to the audience. Questions? Michael? QUESTION [Michael Einhorn, Ph.D., New York]: In connection with the definition of parody, I will observe that Richard Posner tried to make the distinction between parody and satire,50 the point being that a parody is something where, getting back to Wendy Gordon,51 you would have a market failure because nobody would reasonably license a parody of himself. But satire presumably would not. Therefore, anybody would reasonably license a satire of someone else — let’s say making fun of George Bush using my images to make fun of him — and presumably the market would work there. Once you realize how dubious that statement is and the bad reasoning behind it — of course, it’s not true — that should even more make the basis for an economic case of a distinction between a parody and a satire is meaningless. That Disney would seriously allow itself to be used on a pair of panties, because it’s not parodying Disney, is another example of this. Of course, Posner’s distinction became part of Campbell v. Acuff Rose,52 as I understand it. That they made that distinction upon a presumed economic justification shows how dubious the distinction is. PROF. SCAFIDI: I am so glad you brought that up. How many members of the public who might be desirous of engaging in either parody or satire actually know the difference? It is particularly tough in that regard. PROF. KATYAL: Does anyone else want to address the distinction? Rebecca? PROF. TUSHNET: I think that’s absolutely right. Posner is a smart guy, but he knows very little about popular culture. For example, I wrote a paper where I discuss the various official DC versions of Batman, including the “Bat-Mite,” which is a little creature from another dimension who flaps around and generally makes a fool out of himself.53 So it is both untrue that people who wouldn’t license parody would license satire and untrue that people who would license satire wouldn’t license parody. The market failure argument is 49 See Alvinology, “Don’t Sue me Disney: It’s a Parody Design”, http://alvinology.wordpress.com/2008/01/27/ dont-sue-me-disney-its-a-parody-design (Jan. 27, 2008). 50 Richard A. Posner, “When is Parody Fair Use?”, 21 J. Legal Stud. 67–78 (1992) (for a parody to be considered fair use, there must be three qualifications. (1) The parody uses the parodied work only as a target not a weapon. (Posner divides parody into two categories: “weapon” parodies, where the target is not the original work but rather uses the copyrighted work to comment on something else; and “target” parodies, which comment on the original work itself. The latter should be allowed to claim fair use (assuming it meets the other two qualifications) but the former should not. (2) The parodist should not be allowed to take a portion of the copyrighted work such that the parody becomes “a substitute for that work.” (3) The fact that a parodist only takes a small amount of copyrighted material should not be relevant to fair use.). 51 See Wendy J. Gordon, “Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and its Predecessors”, 82 Colum. L. Rev. 1600 (1982). A similar point is made by William M. Landes & Richard A. Posner, “An Economic Analysis of Copyright Law”, 18 J. Legal Stud. 325, 357 (1989). 52 Campbell v. Acuff-Rose Music, 510 U.S. 569 (1994). 53 See Bruce P. Keller & Rebecca Tushnet, “Even More Parodic than the Real Thing: Parody Lawsuits Revisited”, 94 Trademark Rep. 979, 996 & n.86 (2004).

320 CHAPTER IV: COPYRIGHT LAW just wrong. There are some people who will license everything — Paris Hilton comes to mind — and some people who will license nothing. It’s a useless distinction. QUESTIONER [Mr. Einhorn]: As a follow-up to that, concerning some comments I made earlier about graduated response, why not have a standard in the law that says “we will not enjoin free speech,” so that if a satire in fact is found not to be fair use, we can still find you guilty of copyright infringement but we are not going to enjoin the speech, much as we handle presumed slander or libel right now? It is then the responsibility of the plaintiff, since you are not going to have an injunction, now to prove damages. I think if you compel Victoria’s Secret to prove damages that resulted from Victor’s Little Secret, you might find that, even if they could prove in some hypothetical way that it is or is not a parody or dilution, they are not going to be able to prove any damages and the case is going to have to go away once you take the injunction away.54 So why not just establish a limited response in the law that says “All right, you may or may not be liable for a copyright or trademark violation, but we are not going to put an injunction in this because it is sufficiently free speech?” PROF. SAMUELSON: It is really surprising that, given that the Supreme Court has a couple of times said “this is fine; go ahead and do it,” the courts do not do it. It is really surprising. There have been a lot more parody/satire cases, even since Campbell v. Acuff-Rose,55 where the Court says either it is fair (and usually it is fair) or unfair, but where they usually do not even discuss the possibility of withholding injunctive relief.56 I know of only one case like that, where a dissenter said, “Let’s just award damages and let them go ahead and do it,” but that was a dissent.57 So it is really surprising that, given the endorsement — including in eBay v. Merc Exchange,58 the patent case — they said, “Oh, we already said this is totally cool not to issue injunctions,” and then they cited the copyright cases. I don’t get it. PROF. TUSHNET: Can I beg to disagree? I’m actually neither surprised that this suggestion hasn’t been taken up by lower courts nor enthusiastic about the idea. I think the intuition behind saying “it is fair or it is not” is that if you split the baby the baby dies. If we adopted a monetary remedy, it would be an impetus to expand the underlying right, whether copyright or trademark, and then find it violated in more and more situations. There are lots of cases where we don’t want people to have to pay at all. Particularly in the kinds of content that we were talking about this morning, user-generated content, if you make a parody of Bush using Mickey Mouse and you disseminate it on YouTube, you are engaging in political speech, but you aren’t funding it. If you had to pay, you just wouldn’t do it. That’s something that I think judges are, at least sub rosa, taking into account when they, in general, don’t think of that as a useful remedy. PROF. MANIATIS: Can I make a point about the court of appeals’ Haute Diggety Dog case?59 It doesn’t appear to me, as a non-American, that the court made a clear distinction between parody and satire as well. I think that some point they called it a parody. At another point, they called it satirical. So I think the court was not certain what it was doing. There are interesting developments in Europe when you look at comparative advertising cases. There was a court of appeal decision in the United Kingdom, L’Oreal v. Bellure, Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). Campbell, 510 U.S. at 569. 56 See, e.g., Dr. Seuss Enters., LP v. Penguin Books USA, Inc., 109 F.3d 1394 (9th Cir. 1997) (where The Cat NOT In the Hat, a satire of the O.J. Simpson trial written in the style of Dr. Seuss, was ruled unfair and was enjoined). 57 Elvis Presley Enters., Inc. v. Passport Video, 349 F.3d 622, 68 U.S.P.Q.2d (BNA) 1924 (9th Cir. 2003), dissent amended, 357 F.3d 896 (9th Cir. 2004) (Noonan, J.). 58 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 59 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 464 F. Supp. 2d 495, 504–05 (E.D. Va. 2006), aff’d on other grounds, 507 F.3d 252 (4th Cir. 2007). 54 55

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where Lord Justice Jacob looked at comparative advertising.60 He considered that the use of trademarks in lists that compared branded perfumes with smell-alikes probably is not an infringement. He felt he had to send a couple of questions to the European Court of Justice. But what was interesting is that in his review of whether this is a passing-off or an unfair competition case, he did refer quite extensively to what is happening in the United States. He did mention that in the facts of the cases in many cases there was a “wink” element. I think “wink” is a very good term to describe what parody is all about. It is not the original. So I think there are interesting developments also in terms of commercial speech from a different perspective in Europe. PROF. KATYAL: Great. Thanks so much.

60 L’Oreal SA v. Bellure NV, [2007], Court of Appeal for England and Wales, E.W.C.A. (Civ) 968 (Oct. 10, 2007, Leading Judgment) (Jacob, L.J.).

CHAPTER V

Patent Law Part A: The Scope of Patentable Subject Matter: What is Afoot? Lab Corp. v. Metabolite and its Aftermath; In re Bilski and Business Method Patents Moderator PROF. JEANNE FROMER

Fordham University School of Law (New York) Speaker HON. PAUL R. MICHEL

Chief Judge, Court of Appeals for the Federal Circuit (Washington, D.C.) Panelists NATALIE DERZKO

HON. ROGER HUGHES

Covington & Burling (Washington, D.C.)

Judge, Federal Court of Canada (Ottawa)

CHUCK FISH

DEBORAH SOMERVILLE

Vice President & Chief Patent Counsel, Time Warner (New York)

Kenyon & Kenyon (New York)

PROF. KATHERINE J. STRANDBURG

New York University School of Law (Visiting)

324 CHAPTER V: PATENT LAW PROF. FROMER: Hi. Welcome. My name is Jeanne Fromer. I am a professor here at Fordham. In this session we are going to be talking about the scope of patentable subject matter. We will be talking about Lab Corp. v. Metabolite1 and its aftermath; In re Bilski,2 an upcoming Federal Circuit en banc decision; and business method patents. I am going to introduce the speakers today and then I am going to sit down and shut up, because it is such an illustrious panel that I think it would be great to hear what they have to say. Our speaker is The Honorable Paul Michel, who is the Chief Judge of the Court of Appeals for the Federal Circuit. He will be speaking about In re Comiskey,3 In re Bilski, and business method patents: Is physical transformation needed for inventions not implemented by computer; and, for those that are computerized, must the use of the computer be necessary? Then we have a number of panelists: Natalie Berzko from Covington & Burling; Chuck Fish, Vice President and Chief Patent Counsel of Time Warner; Deb Somerville from Kenyon & Kenyon; the Honorable Roger Hughes from Canada; and Professor Kathy Strandburg, who is visiting at NYU Law School and whom we are fortunate enough to have visiting with us next year. Chief Judge Michel.

Limits on Patentable Subject Matter: What Are the Issues Requiring Clarification or Resolution? In re Comiskey, In re Bilski, and Business Method Patents: Is physical transformation needed for inventions not implemented by computer and for those that are computerized, must use of the computer be necessary? Hon. Paul R. Michel* Thank you, Professor Fromer. It is a pleasure to be here with all of you. You have an able moderator and a very distinguished panel. I consider my job essentially to set the stage. Contrary to the advertisement you just heard, I have no intention at all of talking about In re Bilski, or for that matter the Metabolite case, or any alleged connection between the decision 1 Metabolite Labs., Inc. v. Laboratory Corp. of Am. Holdings, 370 F.3d 1354, 1359 (Fed. Cir. 2004), cert. denied, 548 U.S. 24 (2006) [hereinafter Lab Corp.], available at http://www.supremecourtus.gov/opinions/05pdf/04-607.pdf. 2 In re Bilski, No. 2007-1130 (Fed. Cir. Feb. 15, 2008), available at http://www.cafc.uscourts.gov/opinions/07-1130 %20order.pdf. Appeal of UPTO rejection of Bilski’s patent application for a method for managing consumption risk costs of a commodity. The claimed process included three steps involving various transactions between a commodity provider and market participants in a way that balanced risk. The PTO rejected the patent application on the basis that it was not a “process” as that term is defined in the patent statute and earlier court decisions. According to the PTO, in order to be patentable, a process must either be tied to a particular machine, or it must transform a tangible article to a different state. Because Bilski’s claimed invention did neither, it did not meet the definition of a “process.” [Note: Subsequent to the Conference, on May 8, 2008, the U.S. Court of Appeals for the Federal Circuit held a rare en banc hearing to determine what constitutes a patentable process under the patent laws. The twelve judges examined terms such as “tangible,” “abstract,” “concrete,” and “transformative,” and focused on what is patentable subject matter under Section 101 of the Patent Act. See Eileen McDermott, “Circuit Seeks New Patentability Test in Bilski”, Managing Intell. Prop. (May 12, 2008), available at http://www.managingip.com/Article/1930343/Federal-Circuitseeks-new-patentability-test-in-Bilski.html. 3 In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007), available at http://www.uspto.gov/go/com/sol/ fedcirdecision/06-1286.pdf. * Chief Judge, Court of Appeals for the Federal Circuit, Washington, D.C.

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of the Court of Appeals to rehear en banc the case of In re Bilski and the comments by Justice Breyer and two colleagues in Lab Corp.4 It is my view, on the contrary, that the genesis of the Bilski en banc case is actually the State Street Bank decision of our court exactly ten years ago, in 1998.5 Be that as it may, I want to proceed in this essential fashion. I want to sketch a couple of the markers that have been laid down in prior Federal Circuit or Supreme Court cases. I am going to try to identify for possible use by the panel and possible questions by those in the audience, significant issues that seem to me to remain very unclear. Certain easier questions seem to have been well resolved. We’ve all read innumerable times, for example, that an abstract mathematical algorithm by itself is not patentable subject matter under the Patent Act Section 101. So that much is clear. And there are certain other markers that I think are equally clear. But there are large areas that seem to me to be not clearly mapped, if mapped at all. That, hopefully, will be the point of our departure and our discussion. Some might suggest that I should start back in 1852, with the Supreme Court case of Le Roy,6 the lead pipe cinch case. But I am not going to start there. We never finished, and I’m not sure it is the best starting point anyway. I start instead with the 1989 Federal Circuit case In re Grams.7 Among other things there, we said: “The inclusion of a mathematical algorithm in a claim can render it non-statutory if the claim in essence covers only the algorithm.” Now, I have stressed the words “in essence” because this immediately creates an area of unclarity and ambiguity. You will recall that there are other cases that talk about how you have to look at the claim as a whole, as opposed to its essence. So right away there is a little bit of tension. The second thing said in In re Grams that I think is quite interesting is: “The only physical step [in that particular invention] involves merely gathering data for the algorithm.” So this is at least a suspect label put over a data-gathering step. The next case to focus on is Arrhythmia Research, a 1992 case,8 three years later. It repeats some of the perfectly accurate slogans, but then it says, with a little more elaboration, that while an abstract mathematical formula or equation is not statutory, “whereas claims to a specific process or apparatus that is implemented in accordance with a mathematical algorithm will generally satisfy Section 101.” So now we have this new factor thrown in there of specificity, but with a hedge that it generally (but not always, obviously) will impart patentability. Interestingly, also in that case was something of a definition perhaps of the word “specific” used in the earlier quote. The court said that the steps of converting, applying, determining, and comparing are “physical process steps that transform one physical electrical signal into another.” So a little bit of a clue about why the invention there was found to be patentable subject matter. Next, three years later, 1994, in In re Schrader9 the holding was unpatentable, relying heavily on Grams10 and Flook.11 This was a process for conducting an auction, so what you might consider a pure business method-type claim. Next, 1998, State Street Bank, the one we are all so familiar with.12 Here again is an interesting clue, when the court talks about “the transformation of data” in this case, which of 4 Lab Corp., 548 U.S. at 124, 126–39 (Breyer, J., dissenting from cert. dismissal, joined by Stevens and Souter, J.J.), available at http://www.ll.georgetown.edu/Federal/judicial/fed/opinions/03opinions/03-1120.pdf. 5 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). 6 Le Roy v. Tatham, 55 U.S. 14, How. 155 (1852). 7 In re Grams, 888 F.2d 835 (Fed. Cir. 1989). 8 Arrhythmia Research Tech. v. Corazonix Corp., 958 F.2d 1053, 22 U.S.P.Q.2d 1033, 1035 (Fed. Cir. 1992). 9 In re Schrader, 22 F.3d. 290 (Fed. Cir. 1994) 10 Grams, 888 F.2d at 835. 11 Parker v. Flook, 437 U.S. 584 (1978). 12 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998).

326 CHAPTER V: PATENT LAW course was essentially a “numbers in, numbers out” kind of invention, employing a computer to do fairly complex share price evaluations under severe time constraints. The following year, AT&T,13 relying on State Street and Alappat,14 stressed heavily the involvement in that case of switches and other mechanical and electrical equipment as part of the implementation of the invention as claimed. I said I wouldn’t comment on Lab Corp., but I would make just this one observation, because it may help guide our discussion. In Justice Breyer’s opinion, in which Justices Stevens and Souter joined, he commented about the use of the three adjectives in State Street and since: “useful, concrete, and tangible” result.15 Those three adjectives have become a little bit of a mantra. He treated it as if it were a test. In fact, it looks to me, reading his opinion, that he treated it as being the test. This reminds me a little bit of KSR,16 where the so-called “teaching, suggestion, motivation” (TSM) test was also treated as the invariable, and indeed inflexible, test. It seems to me that we should all be cautious about isolating a few adjectives in an opinion in one case, as opposed to reading the evolution of the law over a series of related cases. I think the latter approach gets us much closer to understanding what the adjudicative standard really is. You are all familiar with the more recent case, just last year, In re Nuijten,17 which was, in essence, a pure electrical signal case, and In re Comiskey,18 which in the relevant claims, although not all the claims, was an arbitration system that did not require the use of a computer, so it was a sort of disembodied arbitration system. A very interesting statement by the panel in Comiskey. It will be very interesting to see what happens to it. The panel said: “[A] claim reciting an algorithm or abstract idea can state statutory subject matter only if, as employed in the process” — and the word “only” is the key word here — “is embodied in, operates on, transforms, or otherwise involves another class of statutory subject matter, manufacture or composition of matter.”19 Obviously, there was no computer required. That is a quick sketch of the cases. The In re Bilski case, which we have voted to rehear en banc, is in the following status. We are receiving briefs as we talk.20 Oral argument will be during our normal argument week in May, on May 8.21 Any of you interested in following further developments on this, that would be an important date. Now, I want to try to isolate what I consider to be six areas of considerable uncertainty, which one would hope will get some substantial clarification in Bilski, or the next case or the next case, in our court, or perhaps in the Supreme Court, but more likely in our court because we are invading the turf earlier. • The first is what I last mentioned, whether a process has to somehow involve one of the other three of the four statutory classes. Of course, we all know it has to be new, essentially meaning manmade, not preexisting in all time. And it has to be useful. But the word “useful” AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999). In re Alappat, 33 F.3d 1526, 1540–41, 31 U.S.P.Q.2d 1545, 1554 (Fed. Cir. 1994) (en banc). 15 Lab Corp., 548 U.S. at 124, 126–39 (Breyer, J., dissenting) (citing State Street and noting that the “useful, concrete, and tangible result” test from that case has never been adopted by the Supreme Court and, in fact, is contrary to precedent). 16 KSR Int’l. Co. v. Teleflex, Inc., 127 S. Ct. 1727 (2007). 17 In re Nuijten, 500 F.3d 1346 (Fed. Cir. 2007). 18 In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007). 19 Id. at 1376. 20 For a synopsis of and links to the amicus briefs in In re Bilski, see http://www.patentlyo.com/patent/2008/04/ ex-parte-bilski.html. 21 See supra note 2. 13 14

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is subject to lots of interpretation, which generates part of the uncertainty on all these more specific points. But it seems to me an innovation in Comiskey to suggest that it is within 101 only if the process affects one of the other three classes. So that is one area of uncertainty. That is number one. • Number two: In Nuijten the rationale of the court seemed to depend heavily — I think this is a fair reading; you judge for yourselves — on the notion that the signal that had within it certain sub-signals embedded was sufficiently physical and sufficiently non-transient.22 If you look at the dissent by Judge Linn, he emphasizes the issue of whether those are fair markers to be dispositive in light of prior case law, even though it seemed to be the critical ground for the majority in that case. So this is a second area of uncertainty.23 • Third, in Comiskey there is an interpretation of State Street that suggests — this is my reading; you can perhaps have another reading — that the involvement of a computer has to be necessary in order to impart patentable subject matter under Section 101. Or to put it differently, you can’t just tag some use of a computer onto step ten of a ten-step process claim and automatically come within Section 101. But the whole concept of how necessary does it have to be and how do you judge that, that’s the third area of uncertainty. • Area four goes back to what I mentioned earlier, where you talk about the essence of the claim, what it is directed to, or you talk about insignificant limitations. If you look at the Supreme Court opinion in Parker v. Flook,24 for example, you’ll see some verbiage that makes it sound like some claim limitations are not really important for the Section 101 analysis. And as I mentioned earlier, there are other laws suggesting that every claim limitation is crucial. So this again deals with the “essentially” idea. • Area five, whether the court should overrule State Street25 and/or AT&T.26 That was actually a question we propounded to the parties and to the amici. But the reason I am highlighting it is we used the verb “overrule.” Of course, who knows what we will actually do? I am not implying some prediction. I don’t have one; and if I did, I wouldn’t be allowed to make it here. But I just highlight the verb because, obviously, there are lesser alternatives. One might modify a prior precedent, as opposed to simply overrule it or do not overrule it. Or a court might explain it without even modifying it. So I am just trying to suggest that, even though we said “overrule,” there may be a range of options available to the court as we get into the case. • Finally, the sixth area of confusion: It has been suggested in LeapFrog27 that what was there called “the routine addition of modern communications devices to an otherwise nonstatutory process” would not make it statutory. Again, I think this is an area of considerable uncertainty and unpredictability. So the courts have a lot of work to do, and we have a lot to discuss. Thank you very much. PROF. FROMER: Natalie? MS. DERZKO: I will try to respond to some of the questions posed by Judge Michel, and also

sketch out how I look at this area of patent law. Because I only have a few minutes, let me just scope out my thoughts first, and they will be somewhat responsive. In my view, we need to, when we look at patentable subject matter, recognize that there are some policy decisions that underlie the determination of what is patentable subject matter and Nuijten, 500 F.3d at 1346. Id. at 1358 (Fed. Cir. 2007) (Linn, J., concurring in part and dissenting in part). 24 Parker v. Flook, 437 U.S. 584 (1978). 25 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). 26 AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999). 27 LeapFrog Enters., Inc. v. Fisher-Price, Inc., 85 F.3d 1157 (Fed. Cir. 2007). 22 23

328 CHAPTER V: PATENT LAW what lies outside of what can be patented. At least to me, it seems that when you have — and the case law would bear this out — a business method that is only involving certain abstract steps, you are really on the fringes of what would be patentable; and if it is patentable at all, that is really the question. In terms of policy issues, the things I think about are twofold. Number one, if we decide that some type of business method that involves abstract steps is patentable, what is the consequence from an economic perspective? Is this going to shut down what would be otherwise beneficial economic activity? I do think these questions are quite important to ask when considering these issues. The other policy consideration is, of course, what effect it might have on innovation. This type of question I think may be more important in an area, such as what was explored in the Lab Corp. case,28 where we are talking about biologic inventions. In that case, the claim was directed to effectively measuring a certain value in a body fluid and then correlating that value with a certain condition. We really do need to be careful about this type of claim language, because of course that in itself may have some utility, but it may well be that the downstream invention is actually more meritorious of patentability because it may in fact be more beneficial to society. So we should consider these issues. In terms of some of the questions that are raised more directly by current case law, particularly in the business method area, the computer area, it seems to me that we really should be separating out these two categories of invention and looking at them somewhat differently. Although of course the Nuitjen case is decided now, I would probably have aligned myself more with the dissenting decision, in that it seems to me that one should not be driven by the transient nature of the signal.29 That, at least personally, does not trouble me, and I would not see that as being the key demarcating factor between what is patentable and what is not patentable. Let me also mention another area that we should be keeping in mind as we grapple with these issues in Section 101. There are, of course, other categories that one must consider in terms of patentability under Sections 102, 103, and 112 of the Patent Act. It is an important point to keep in mind, because Section 101 provides some threshold considerations that are obviously important, but it may be that some of the questions that we ask in the context of Section 101 are perhaps better answered in the context of another aspect of patentability consideration. For example, the question of how much context must we have in a claim to make it patentable. And this question that Judge Michel has posed about what do we have to see in the claim; what if we have a business method and we have tacked onto it an attempt step, a computer element; is that sufficient or is that not sufficient? Perhaps some of that consideration is better thought through and responded to under, for example, Section 112. My time is coming to a close, so I am going to end there. But I throw out these points, and hopefully we can discuss them more when we get through the panel. PROF. FROMER: Thank you. Chuck? MR. FISH: Thank you very much. I think when thinking about Section 101 the Chief Judge certainly lays out some areas where there are questions. But I tend to think about Section 101 a little bit differently. It seems to me that there are probably four important points, and I think some of these will cross across. 28 Metabolite Labs., Inc. v. Laboratory Corp. of Am. Holdings, 370 F.3d 1354, 1359 (Fed. Cir. 2004), cert. denied, 548 U.S. 24, 126 S. Ct. 2921 (2006). 29 In re Nuijten, 500 F.3d 1346, 1358 (Fed. Cir. 2007) (Linn, J., concurring in part and dissenting in part).

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The first one is in some ways the last point that Natalie was making. I think it has been very clear in the development of the Federal Circuit’s jurisprudence ― and it is a little bit less clear but I think it is there in the Supreme Court’s jurisprudence — that it is important for us not to conflate Section 101 with other sections of the Act. I think that has been developed very, very clearly. That is really the first principle, it seems to me, when we are looking at this Section. That is certainly what the run-up to the 1952 Act30 teaches us. Such legislative history as it exists for the 1952 Act I think teaches us that. I think the cases decided since then, and certainly the cases decided by the Federal Circuit since then, have developed that principle and make it very clear, and that is very important. The second point that I would make, and this may perhaps go to Chief Judge Michel’s point about the essence of the invention and some of those issues ― and he didn’t even mention In re Musgrave,31 although of course one doesn’t know how well it has been cabined by the Supreme Court in Benson32 or not — I think it is important not to conflate the notion of invention with the notion of claiming. When I go back and reread Chief Judge Rich in the State Street case,33 I think there is a tone to it that is much more preachy when I read it now than when I read it when it came out. I think that case stands for the proposition: Wake up, you knuckleheads, this is what this section of the law means. When you read what was added to Section 103 in 1952 — “the manner of invention will not negate obviousness” — I think that is bleeding back into the Section 101 jurisprudence. So I would suggest that if you read the Supreme Court case law and if you read the better considered cases from the Federal Circuit — and I would put Comiskey in that category34 — actually it is very, very important for us not to conflate the notion of making an invention with the notion of what you claim. The last thing that I would say that relates to that — and then I have one perhaps provocative, perhaps not, proposal — is that I think, until Comiskey, where the jurisprudence in the Federal Circuit had gotten was basically that Section 101 was a portion of the law that had four pigeonholes — process, machine, manufacture, or composition of matter — and as long as you could fit the thing that was in the document that the Patent Office had said was not patentable (because, of course, that is how the cases get to the Federal Circuit) into one of those pigeonholes, it was patentable; otherwise it was not. Or if you look at the cases that come from the district court — State Street,35 AT&T,36 and others — as long as you can fit it into a pigeonhole, it is patentable; if it does not fit, well then it is not. I think — and maybe this is provocative, or maybe it’s not — what this does, because of course what the Federal Court is doing is interpreting a statute, is it tends to ignore the first phrase of Section 101. Section 101 of the American law does not say “whoever files a patent application that claims,” and then lists four statutory categories; and it does not say “if you review a patent application and it claims” or “it can fit into one of these categories.” What it says is “whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title” — four categories. And so I agree entirely with Chief Judge Michel that the law is very clear about what the statute means by “new” and what it means by “useful.” But I would like to submit to the Patent Act of 1952, 35 U.S.C. § 103. 431 F.2d 882, 167 U.S.P.Q. (BNA) 280 (C.C.P.A. 1970). 32 Gottschalk v. Benson, 409 U.S. 63 (1972). 33 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). 34 In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007). 35 State Street, 149 F.3d at 1368. 36 AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999). 30 31

330 CHAPTER V: PATENT LAW audience that we have been ignoring the first part of the phrase, so there actually is a meaning to the notion of invent and there actually is meaning to the notion of discover — just ask our friends in Europe who do not think there ought to be discoveries that are patentable, for example. If we just stay true to the statute, that is I think where we can find what I call a “technicity” requirement, which keeps the most ridiculous things that have issued as patents from happening. So you cannot get a patent for a method of pulling together a cartel to fund a movie (and there are actually four of those that have issued) if you look at: Was this an invention or a discovery in the sense that the statute means it, in the sense that the law has meant it, for 200plus years? You cannot get method of swinging on a swing that way either, and I would submit you probably cannot get most pure mental steps, if you stay true to the notion of invention or discovery. I will cede the remaining fifteen seconds of my time. PROF. FROMER: Judge Hughes. JUSTICE HUGHES: I am coming to give you a little different perspective that we have developed in Canada on this notion. Natalie touched on it. She is from Canada too. We say “about” a lot when you are not listening. We have taken a definition that is essentially the same as the rest of the world and, by policy made by our highest court, Supreme Court of Canada, in a 5-to-4 decision, said there are limits to what you can get patents for.37 In the rest of the world, pretty much you can get a patent on a Harvard mouse, a genetically altered mouse. In Canada you cannot. There is no reason, other than policy enunciated by our Supreme Court that says that you cannot do it. So we have had judicial intervention at the highest level, as they say, over patentable subject matter. Why do we do this? I think there are a couple of reasons. First of all, our legislators are not going to go to the election polls and try to win a case or win an election on reform to the patent law. So I think patent law reform is going to be left to the courts in Canada, and possibly in other countries as well, for the foreseeable future. The second thing is there is an elephant in the room that nobody is addressing: Are patents good things for all things? I know there is a debate that goes on forever about is a patent really a useful thing to have at all. There is no real answer to it, other than we all belong to the same religion and church of patentology, or something like that, to say it must be a good thing; after all, we are making a good living from it. But there is this unspoken debate about whether we really should have patents that extend as far as, for instance, business methods, living animals, methods of medical treatment, for instance, and that sort of thing. That debate has to carry on, I think, more so in countries like Canada, where 95 percent of the patents issue to non-Canadians. So we are, in effect, dominated by others in terms of patents. Every time we foray out — remember, the losing party in KSR was a Canadian company;38 BlackBerry comes into the States and gets squashed like a bug by a patent troll39 — we feel very, very sensitive to patent issues and patentable subject matter. I think that is a debate that here is almost taken for granted, because you are net exporters of patents, you get patents, you develop industries on patents and then export those industries. But to a country that is suffering, if you like, under the yoke of foreign patents, it is a very, very different debate. Where it is manifesting itself in Canada is through judicial and court intervention, to say “no, patents cannot go that far.” 37 Harvard College v. Canada, [2002] 4 S.C.R. 45, available at http://csc.lexum.umontreal.ca/en/2002/2002scc76/2002 scc76.html. 38 KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007). 39 NTP Inc. v. Research in Motion Ltd. (RIM), 418 F.3d 1282 (Fed. Cir. 2005) (appeal to the U.S. Supreme Court pending).

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I will just leave it up to you to think a little bit about whether in certain circumstances and certain jurisdictions that fundamental debate has yet to be thought out. Thank you. PROF. FROMER: Deb? MS. SOMERVILLE: Thank you. Looking at the different policies and rationales that have been presented, I come to the conclusion that the only requirement for patentable subject matter is that there is something more than just simple mental steps. I think one rationale that has not been mentioned is that I do not think it is appropriate for the courts to be controlling human thinking. That to me just does not seem to be what the patent is about or appropriate. Also, I think it does provide a clean line that provides predictability. I think the question about whether the steps that are added if they are physical are significant or not can be addressed, as mentioned, by other requirements of the statute: Is the claim as a whole still new and nonobvious? I also think that as long as State Street40 and AT&T41 are not adding any more to the patent statute beyond the requirement of tangibleness, if that is physical, I think that I can go along with those cases. The idea of having new and usefulness is already in the patent statute, as mentioned. The other rationale that I see, for example, in the PTO’s brief in In re Bilski for requiring either transformation of matter or tied to an apparatus, troubles me.42 I don’t see any rationale. They just say that’s the way we see the Supreme Court cases. And yet they go on to conclude that that standard could change, which is not providing any predictability. Also, Judge Michel mentioned the idea about do we need to have it tied to a computer. I do not think we want to be making patentability depend on whether the algorithm is too complex, that it needs to be done in the computer and not in the head. I think you need to look at the claim as a whole. The other rationale that was mentioned in the briefs, and also in the Metabolite dissent by the Supreme Court,43 the whole idea that you want to be avoiding preemption of abstract ideas, I think is also a little bit misplaced, because that really is grounded on the idea that you do not want to take away natural phenomena, physical phenomena, such as e = mc2, that is already out there and exists. That gets to the idea of newness. It is an interesting thought, though. When you look at some of the algorithms of business methods, those are not abstract ideas that have been out there for people to use. These are new developments made by man. Another thought is, then: Do you distinguish with natural phenomena; do you draw some kind of line? I do not think so. That raises questions as well. We just saw in the Ariad case,44 which involves the inhibition of NF-kappa-B, the experts got into a fight about whether it was a natural phenomenon. The district court concluded that the claim was patentable because it hadn’t been proved that it was a natural phenomenon. That case just got appealed to the Federal Circuit several days ago. That’s going to be interesting to see. Universities and research institutes could also be, I think, possibly penalized if we draw some distinction for natural phenomena. So again, I think that as long as the process or the subject matter includes more than just mental steps, the rest of the patent statute addresses any other issues. For example, with Section State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999). 42 The PTO’s brief is available at http://www.webblaw.com/Bilski/brief.pdf. 43 Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124, 126–39 (Breyer, J., dissenting from cert. dismissal), available at http://www.ll.georgetown.edu/Federal/judicial/fed/opinions/03opinions/03-1120.pdf. 44 Ariad Pharmas., Inc. v. Eli Lilly & Co., No. 02-11280-RWZ, 2003 U.S. Dist. LEXIS 8030 (D. Mass. 2003). 40 41

332 CHAPTER V: PATENT LAW 112 we have the University of Rochester;45 with newness, the Ariad case, where again you have the inhibition of a protein, has actually been rejected in a re-exam based on Luke teaching that the Good Samaritan administered wine into the wounds of the traveler. So people do have to be careful that they are not claiming too broadly. There are other statutory requirements. For those of you who are following the Metabolite or Ariad cases, I just wanted to mention also, be careful what you debate. The Metabolite case, as you know, was finally dismissed. The jury damages award was maybe $5–6 million. The patent just expired last year and the injunctions dissolved. So there you go. Thank you. PROF. STRANDBURG: It is always challenging to go last on one of these panels, after many of the interesting things to say have already been said, so I will try to just give a few thoughts here. The first thing that I want to say is that I personally believe that this is one of, if not probably the, most difficult areas in patent theory, speaking from an academic perspective. So, because of that, my thought about where we are with the law of patentable subject is that, first of all, I am very, very happy to see the Federal Circuit engaging with this issue in the way that it has been recently. I could go through things I like and don’t like about the specific opinions, but I think that this is exactly what we need to have happening. We need to have a lot of exploration of this question. So I am very encouraged by that. I also think, however, that on our side, on the academic side, we really need to do a lot more work on this. I say that mindful that a few of the people who have done the best work on it are sitting out there in the audience. Nonetheless, I think part of the problem we are having with patentable subject matter is that we do not have a theory for it; we do not really know what we are doing. So here I am with Justice Hughes in saying that I think we have some hard thinking to do about this. For that reason, I have mixed feelings about the fact that there is going to be an en banc opinion in In re Bilski, because I think we need development here.46 I am not, as I was with KSR, for example, pushing for the Supreme Court to start taking a hand in this right at the moment. I think we have development to do. Then, you might ask yourself: Well, maybe Debbie’s argument, which was put forward very persuasively, is persuasive, and we should just conclude that we don’t really need a patentable subject matter restriction beyond just “useful, concrete, tangible”; that’s good enough, and the other doctrines of patent law can take care of making sure we do not issue undesirable patents without using patentable subject matter. I know that there is a group of academics that probably will be saying that in an amicus brief. I do not think that is the right answer, however. I think that the truth of the matter is that there are areas where patenting is not helpful. The problem is we do not know yet what the principle is that defines them. So far we have two kinds of principles being proposed for sorting out the patentable subject matter issue. The first kind of principle we can look to is a balance-of-incentives kind of principle in which we consider the point at which providing more incentives for initial inventors, which clearly I think patents do in any field, gets too much in the way of follow-on inventors. So this is an argument about protecting the public domain, about the additional transaction costs and administrative costs that you get when you have a lot of patents around that you didn’t really need. So there is that kind of argument. 45 46

University of Rochester v. G.D. Searle & Co., Inc., 358 F.3d 916 (Fed. Cir. 2004). See supra note 2.

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And then, secondly, there is a human autonomy argument, relating to patenting mental activity. My feeling is we are converging toward some agreement on this human autonomy principle — that we should stay away from patenting purely mental activity. But that principle is not going to take us very far. Thus, even though it is more difficult and contentious, I think we really need to be focusing our thinking on the other principle, about the balance of incentives. On that I will just make one point, coming out of some work that I am doing right now with Mike Meurer.47 Our work suggests that there is a distinction between what you can accomplish with something like a strict nonobviousness standard and other patentability doctrines and what you can accomplish with patentable subject matter. A strict nonobviousness standard serves to push inventors to try more and more difficult technology. However, our model suggests that there will be certain areas in which the social costs of patenting are high enough that it is not worth it to push to that higher level of technology in the short run. In those situations a smaller unpatented advance may be more socially valuable than a larger patented advance. If there are situations like that, then playing around with the obviousness doctrine is not going to get us a socially preferred rule about what to patent. Now, maybe some of the scope doctrines would. That’s what we need to be thinking about — identifying the technical areas where the social cost of patenting is particularly high. If we are going to use a patentable subject matter doctrine to restrict patenting, that is where I think we want to focus our efforts. JUDGE MICHEL: I would just like to add that one might ask, if the State Street Bank48 language was viewed as very broad, possibly overbroad or somewhat ambiguous, why are we still trying to figure out if there is a narrower gate ten years later? But the reason is it almost never gets raised. I have been on the court twenty years. I have never been on a district court infringement case that had a live 101 issue in it, because normally litigators only litigate other issues. Obviously, courts normally do not inject issues that aren’t there. Similarly, the Patent Office, in the decade following State Street Bank, almost never kicked anything out under Section 101. Section 103 by the hordes, but almost never 101. So again, in that stream of cases, no opportunity for us to further map the territory or reconsider State Street Bank or anything of the sort. That circumstance changed, and we now have five or six cases involving Section 101 rejections by the Patent Office, but all arising just in the most recent time. I hope no one will jump to the conclusion, which I think would be false, that there is some hesitance or reluctance or unwillingness on the part of the court to face up to these issues. We didn’t get any chances until very recently, and we are doing it quite promptly. MR. FISH: If I could just pile on here, it seems to me particularly unfair to blame the State Street decision when Mr. Bilski filed his patent application before the State Street decision was handed down, first of all. You can go back, and he did. There are two other things that I would say, Judge. Didn’t 101 come up in the Comiskey case,49 on the court’s urging rather than because of what the Patent Office did? I guess the third thing is the reason we have not seen a lot of 101 decisions since State Street and AT&T50 is because since State Street and AT&T, as long as you could fit into one of those pigeonholes, at least arguably, there wasn’t an issue. JUDGE MICHEL: The only response I want to make to that is that State Street did not overrule any prior precedent. So all those cases remained in full force and effect, and State 47 See Michael J. Meurer & Katherine J. Strandburg, “Patent Carrots and Sticks: An Economic Model of Nonobviousness”, 12 Lewis & Clark L. Rev. 549 (2008), available at http://works.bepress.com/katherine_ strandburg/19/. 48 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). 49 In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007). 50 AT&T Corp. v. Excel Commc’ns, Inc., 172 F.3d 1352 (Fed. Cir. 1999).

334 CHAPTER V: PATENT LAW Street would have to be rationally read as a part of that grouping of cases. So it seems to me that the language in State Street was hardly a bar to people litigating the issue in view of the prior cases, going back quite a ways. PROF. FROMER: It is time to take questions from the audience, perhaps to elaborate on some of the interesting issues that have come up. QUESTION: A number of the panelists made reference to the fact that they do not believe that patents should cover pure mental steps. I am curious just what that means to you. In particular, I remember the rubber-curing case, which involved a well-known equation for the amount of time needed to cure rubber that was then put into a computer and automated, and that patent was upheld.51 Is it really just because you got nice rubber out of that? What is the difference between that and a business method patent, where you apply these mental steps, perhaps automatically through a machine, and out of it you get a pile of money? MS. SOMERVILLE: I actually was thinking about how do you actually police that and how do you prevent people from thinking. Just as a practicality, it does not seem to make sense. I was envisioning a claim like a method of a new way of chanting in your mind to reach a higher plane or something. We saw the swinging patent.52 What is to prevent people from trying to do something that is purely in your head? I do not see how you can enforce that or prevent people from thinking. That is what I had in mind. MR. FISH: I think there are also plenty of examples of patents that have issued, or patent applications that have published, that anybody who is not a pointy-headed patent lawyer would look at and say, “My goodness, what is wrong with the system?” So, for example, the studios in Hollywood are all up in arms because there have been a couple of patent applications that were published that relate to plot lines for stories. Now, I don’t think there is any way that the current Patent Office is going to issue those things. First of all, they will have a ridiculous sixty- or sixty-five-month pendency and then they will not issue, so it is nothing to be afraid of. But there are plenty of good examples of things that nobody in their right mind who wasn’t trapped inside the patent law would call an invention, I think. So a method of determining the compensation for an executive comprising having an Human Relations person go out and look at what comparable executives are paid and then aligning his responsibilities with theirs and then coming up with a number — now, is that an invention? I would submit to you that it is not. PARTICIPANT [Prof. Martin Adelman, George Washington University Law School, Washington, D.C.]: That’s obvious. MR. FISH: Well, whether or not it is obvious. But I am not talking about conflating Section 103, Marty. I am saying that at the outset that is not an invention under any meaningful sense of the term. PARTICIPANT [Prof. Adelman]: What if it was genius? What if we agreed that it was genius, we all agreed this was so creative that it was actually a work of genius? MR. FISH: I don’t think that matters. That might matter under the old obviousness tests, but I do not think it matters under Section 101. I mean maybe it was genius for the gentleman who came up with better accounting forms to come up with those, but the Supreme Court said that was not copyrightable.53 So it doesn’t really matter, I think, whether it is genius. MS. SOMERVILLE: I would disagree. I would think it is an obviousness question. That is why I have trouble with the Parker v. Flook case,54 where it was actually a new algorithm that the guy developed; it wasn’t using anything preexisting. Diamond v. Diehr, 450 U.S. 175 (1981). The U.S. Patent Office issued patent 6368227 on Apr. 9, 2002 to Steven Olson of St Paul, Minnesota, for a “method of swinging on a swing.” 53 Baker v. Seldon, 101 U.S. 99 (1879). 54 Parker v. Flook, 437 U.S. 584 (1978). 51 52

PART A: THE SCOPE OF PATENTABLE SUBJECT MATTER: WHAT IS AFOOT? 335 JUSTICE HUGHES: There is an old adage: to a man with a hammer everything is a nail. You think that if it is not obvious and it is new that it must be patentable. I think you have to revise that thinking. There are limits to what can be patentable. That is where you should start, not end. PARTICIPANT [Prof. Adelman]: Surely not, with the Canadian Supreme Court 5–4 decision that the Harvard Mouse was not patentable, 55 so that two years later the Canadian Supreme Court had to through the back door say, “Ah, but the cells of the mouse are patentable; therefore, the mouse infringes.” JUSTICE HUGHES: I was counsel on that case two years later. I won that case two years later. Where the line was drawn in Harvard Mouse was the plasmid was patentable. In the Monsanto case two years later, the gene cell in the plant was patentable.56 And yes, I agree with you, it is highly arbitrary. But I also stress that maybe there is a line there someplace, that not everything that’s nonobvious is automatically per se patentable. PARTICIPANT [Prof. Adelman]: But is it worth the effort? For example, look at the danger of how bad the Supreme Court’s three-judge opinion was in Lab Corp.57 It would mean that if I discovered some physical phenomenon in the body that predicted pancreatic cancer — and I pick that for a particular reason I’ll tell you — and it would pick it up early enough to cure the 35,000 people who are going to die this year in the United States from that dread disease, according to our three judges, who I think wrote an embarrassingly bad opinion, that would not be patentable. It is just that kind of thing that you open up when you may try and draw these fine lines like the Canadian Supreme Court’s embarrassment. JUSTICE HUGHES: I agree with you. But the reward isn’t always a patent. MS. SOMERVILLE: It doesn’t seem to me that that becomes the role of Congress to define what types of categories might not be patentable. In the United States we do not have the restriction on the Harvard Mouse. PARTICIPANT [Prof. Adelman]: They didn’t in Canada either. They made it up. MS. SOMERVILLE: There was an Act submitted, the Weldon Act,58 which would have prevented the PTO from spending funds on patenting human or chimeric life forms. I am not sure what the status is. Jeremy Rifkin actually filed an application.59 PARTICIPANT [Prof. Adelman]: They didn’t. QUESTION: It seems like then, perhaps, the best compromise solution would be for the legislature to create almost a middle step, a sub-patent. They have already taken steps to moderate the business method patents. They have provided a special exception for business method patents when somebody has been using the patent before the application was filed. So it seems that perhaps what is necessary is some method of protection for innovations like these that doesn’t quite rise to the same absolute monopoly of a patent. PROF. STRANDBURG: One point that you could make about that is that in fact we already have methods of protection that are not patents. They are things like lead-time advantage, trade secrecy. There are other ways that people recoup their investment in inventing things besides getting patents. So I think it is a mistake if we think that the only way we ever get any 55 Harvard College v. Canada, [2002] 4 S.C.R. 45, available at http://csc.lexum.umontreal.ca/en/2002/2002scc76/ 2002scc76.html. 56 Monsanto Can., Inc. v. Schmeiser, [2004] 1 S.C.R. 902. 57 Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124, 126–39 (Breyer, J., dissenting from cert. dismissal, joined by Stevens and Souter, J.J.), available at http://www.ll.georgetown.edu/Federal/judicial/fed/ opinions/ 03opinions/03-1120.pdf. 58 Human Chimera Prohibition Act of 2005, S. 659, 109th Cong. 1st Sess. (to amend title 18, United States Code, to prohibit human chimeras), available at http://thomas.loc.gov/cgi-bin/query/z?c109:S.659. 59 In 1998, Stuart Newman and Jeremy Rifkin filed patent application 08/993563 to the U.S. Patent and Trademark Office (PTO) seeking a patent for certain human/animal hybrid life forms (chimeras) including a “humouse” and a “humanzee.” The patent was ultimately rejected by the PTO in 2005.

336 CHAPTER V: PATENT LAW invention is by having patents, because that’s just simply not true. It is also the case that in most circumstances having a patent is costly, socially costly, because it excludes people from using the invention, it has transaction costs, etc. So there is a balance there. I think that we just need to be mindful of that balance. In other words, I think it is a mistake to think that because we can say, “If we offer a patent we will get further along the technological path quicker” we should offer patents on everything. I think that it is probably true in almost every case that patents provide an incentive for greater investment in invention. But it is not free to do it that way. So there is a balance there. It is possible — and, in fact, I think likely — that there are areas, and perhaps business methods are one of those areas, where in fact it is quite socially costly to have certain things patented — because there are many, many uses for them, because people might be likely to invent them as a side effect of what they are already doing, which is probably the case for many kinds of business methods, so there is less of a need for the patent for an incentive. These are the types of things that we have to think about. I guess the question is: Can we think through all those things and try to deal with them only through the other doctrines of patent law? My view on that, although I could be persuaded otherwise, is that we cannot, that we are going to want, if not need, to make some patentable subject matter distinctions, because there are going to be areas of subject matter where patents are going to be very costly and it is just not worth going through every single one of those in deciding whether to patent them or not. QUESTION: You were speaking about social cost. I was wondering whether you have a view on the social cost of the European system, where there is a shopping list of exclusions from the concept of invention. Over the last thirty or so years, it seems to have yielded an almost incomprehensible body of jurisprudence, which seemingly no one can provide any explanation of or provide any predictive certainty as to whether or not something will be an invention or not where there is tightly intermingled subject matter. MS. SOMERVILLE: I am still not able to understand why you can get the rat or the mouse. QUESTIONER: Surely where you have a list of exclusions like that, that itself involves some social cost in the uncertainty of trying to work out where patentable invention is and where the excluded subject matter is. PROF. STRANDBURG: Certainly that is true. There is no doubt about that, that there is a cost involved in drawing the line. So the question is: Is it worth drawing the line? My personal view about this, after I have been thinking about it recently, is that the reason this is so difficult is that we don’t have a good theory for it. Your point about the list is exactly right. We have instincts and intuitions that tell us that certain things should not be patented, and my personal view is that our instincts and intuitions are correct at least to some extent. If you think they are not correct, then you just say, “We don’t need to bother drawing this line and we will just go down the 103/112 route.” But if you think that our intuitions are correct — that when you tell somebody, “Well, suchand-such thing is patented” and they say, “You have got to be kidding me,” those intuitions have some basis — then we have to do the hard work. We have to try to figure out what the theory is underlying our intuitions. JUDGE MICHEL: You know, 99-point-something percent of the issued patents are never enforced. So the fact that a patent has issued shouldn’t throw us into a tailspin. If they get enforced because there is commercial value, there is the opportunity to litigate validity on every possible ground, and it is done. So a method of swinging on a swing is no threat to anybody. There are no little kids who are being kept off playgrounds because of such a patent. Nobody is losing money, no businesses are going out of business, and so on.

PART A: THE SCOPE OF PATENTABLE SUBJECT MATTER: WHAT IS AFOOT? 337

In terms of the notion that courts should be thrust into trying to adjudicate case by case, claim by claim, whether there would have been other sufficient incentives that might have mustered the venture capital needed or might later compensate the people who made the investments, I think that is hardly an exercise for which courts are well equipped to do well, much less cheaply, much less speedily. The big complaint in all civil litigation that I hear, at least much so in patent law, is that it is already too expensive, takes too long, too complicated, too much uncertainty, too much unpredictability. So then, if people want us to do vastly more complicated analysis, we have to assume that the results are going to be more delay, more cost, more uncertainty. I really wonder if that is a road that we want to start going down. PARTICIPANT: Broadly speaking, there is a tension at the moment in IP between the electronics and computer industry and the pharmaceutical/biotech industries as to what impedes things, what should go forward. I heard a number of the speakers talk about policy and cost. As Judge Michel just said, the Constitution sets out broadly what is to be rewarded and preserved. The Congress in 1952 and thereafter enacted standards. If those industries and others want those standards to be changed, the Congress is the place to change them, not the courts, in my humble opinion. QUESTION [Prof. Susy Frankel, Victoria University of Wellington, New Zealand]: Just following on from Justice Hughes’s comment, one of the reasons that the Canadians and the New Zealanders think along similar lines, other than just 95 percent of patents being foreign owned, is that we have a long history of separating invention from patentable invention. The policy reason for that is precisely to provide the space to discuss these social and policy concerns. There is a debate, which comes out of the House of Lords, that argues that policy issues should not be thrashed out in the courts but they should be discussed in Parliament. Although that separation of invention form patentability is difficult — and I know Marty would say it is illusory, particularly in relation to the Harvard Mouse — it is precisely separating those concepts that allows for the policy issues to be discussed. Otherwise there would be no legislative rationale to consistently discuss the policy concerns. Also the international agreement standard, Article 27 of TRIPs, is relevant here.60 I heard this morning we had to interpret TRIPs literally, and I disagree with that — but if we are going to do it literally, Article 27 of TRIPs treats invention and patentable invention differently as well. 60 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/docs_e/legal_e/27-trips_04c_e.htm. TRIPs Agreement, art. 27 – Patentable Subject Matter: 1. Subject to the provisions of paragraphs 2 and 3, patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application. (5) Subject to paragraph 4 of Article 65, paragraph 8 of Article 70 and paragraph 3 of this Article, patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced. 2. Members may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law. 3. Members may also exclude from patentability: (a) diagnostic, therapeutic and surgical methods for the treatment of humans or animals; (b) plants and animals other than micro-organisms, and essentially biological processes for the production of plants or animals other than non-biological and microbiological processes. However, Members shall... provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof. The provisions of this subparagraph shall be reviewed four years after the date of entry into force of the WTO Agreement.

338 CHAPTER V: PATENT LAW PROF. FROMER: One more question. QUESTION: I would like to ask any panelist who believes that there should be additional

limitations on subject matter if you can come up with an example of a patent that you think was wrongfully granted on no other basis than because of subject matter, or if you think that every example you can come up with is actually wrong on some other basis as well. JUSTICE HUGHES: Well, the Canadian courts have, of course, and I’ve talked about that. But you do not want to talk about the Canadian courts; you want to talk about the U.S. courts. MS. DERZKO: I am not sure that that question can be answered without actually looking at the prosecution that occurred. I, myself, cannot give you such an example. In all likelihood, the examiner would have looked at all areas and made a number of rejections. I think it is quite rarely the case that in prosecution you would only have had a Section 101, and then if you have passed that, you are off to the races and off to getting a patent. QUESTIONER: I guess my point is trying to ask by way of firm example if there really needs to be an amendment to this area of the law, or if the problem is just one of patents probably having been granted that should not have been granted on some other basis, and we look at them and say, “That’s a bad patent,” and it is a bad patent because it is obvious, because it is not novel, and also because that is not a good subject to patent. MS. DERZKO: I look at it differently. I do not think it is that necessarily the law needs to be amended. It needs to be better understood. Why does it need to be better understood? Because there is continuous innovation, and probably an area that we did not envision would occur. That is actually what is pushing the envelope and forcing us to take a look at the statute once again and say, “Okay, what does this actually mean in the context of this invention?” JUDGE MICHEL: I think it is interesting that in the extensive reports by the Federal Trade Commission61 and two years later by the National Academy of Sciences,62 if recollection serves correctly, neither suggested changes in the scope of what is patentable under Section 101. In the currently pending legislation in both the House and the Senate in the U.S. Congress, with I think two rather minor exceptions, one having to do with check processing and one having to do with tax avoidance strategies, the whole subject of what sorts of inventions should or shouldn’t be patentable is not even addressed in these otherwise rather comprehensive proposals.63 So maybe the right conclusion is that there is no big problem here. PROF. STRANDBURG: Can I just stick my neck out and say I think I would put the Lab Corp. patent in that category? PARTICIPANT [Prof. Adelman]: It was a good patent. PROF. STRANDBURG: Right. A good, possibly nonobvious, patent that should not be patentable, exactly. PARTICIPANT [Prof. Adelman]: Right. MS. SOMERVILLE: Maybe under Section 112. PARTICIPANT [Prof. Adelman]: So a method of detecting pancreatic cancer shouldn’t be patented? PROF. STRANDBURG: Well, it depends on the method. PARTICIPANT [Prof. Adelman]: Really? Any method that I came up with you would say it depends on the method? Thirty-five thousand people in the United States alone would be saved. PROF. STRANDBURG: Yes. So if there is a test that just depends on discovering a natural correlation that people cannot avoid making in their heads after the discovery, it shouldn’t be patentable. 61 Federal Trade Comm’n, 2003 Report on Patents and Competition (2003), available at http://eupat.ffii.org/ papri/ ftc03. 62 Nat’l Acad. of Sciences (NAS), Committee on Intellectual Property Rights in Genomic and Protein Research and Innovation, Reaping the Benefits of Genomic and Proteomic Research: Intellectual Property Rights, Innovation, and Public Health (Nov. 17, 2005), available at http://www.nap.edu/catalog/11487.html.

PART A: THE SCOPE OF PATENTABLE SUBJECT MATTER: WHAT IS AFOOT? 339 PARTICIPANT [Prof. Adelman]: I rest my case. MS. SOMERVILLE: Bear in mind, though, that it does have another step, assay. With that

step in mind, I think it should have been brought out. PROF. STRANDBURG: It doesn’t fit in the mental steps, that’s true. MR. FISH: For what it’s worth, I think we should all be very disappointed that Marty is holding off on curing pancreatic cancer only because he is not going to get a patent. PARTICIPANT [Prof. Adelman]: I haven’t come up with it. MR. FISH: I think there might be other incentives at play. I’m guessing. PROF. FROMER: Thank you very much. Please join me in thanking the panel.

63 See Patent Reform Act of 2007, H.R. 1908, 110th Cong. (introduced Apr. 18, 2007); S. 1145, 110th Cong. (introduced Apr. 18, 2007) (to provide for an explicit ban on tax patents but include an exemption for software that calculates taxes); Stop Tax Haven Abuse Act, S. 681, 110th Cong. (to provide for a similar ban); Tax Patent Legislation: Excusing Infringement of Patented Tax Planning Methods, H.R. 2365, 110th Cong.; Check Clearing for the 21st Century Act (“Check 21”), Pub. L. No. 108-100, 117 Stat. 1177 (2003), available at http://legislation. politicalinformation.com/check-21-act-2004.htm (to amend 35 U.S.C. § 287 to eliminate any liability that banks have incurred as a result of the possible breach of patents that were created several years before the law was passed).

CHAPTER V

Patent Law Part B: Nonobviousness/Inventive Step Section 1(a): KSR and its Aftermath in the United States Moderator JOHN RICHARDS

Ladas & Parry (New York) Speakers CHARLES ELOSHWAY Attorney-Adviser, Officer of International Relations, U.S. Patent and Trademark Office (Arlington, VA)

DAVID S. BLOCH

Winston & Strawn (San Francisco)

Commentators BRIAN P. MURPHY

HON. RANDALL R. RADER

Morgan, Lewis & Bockius (New York)

Court of Appeals for the Federal Circuit (Washington, D.C.)

HON. PAULINE NEWMAN

PROF. JOHN R. THOMAS

Court of Appeals for the Federal Circuit (Washington, D.C.)

Georgetown University School of Law (Washington, D.C.)

HON. PAUL R. MICHEL

Chief Judge, Court of Appeals for the Federal Circuit (Washington, D.C.)

MR. RICHARDS: Good afternoon.

The topic of this session is in two halves, first the United States and then internationally, where we are really with obviousness following the KSR International Co. v. Teleflex, Inc. decision.1 1

127 S. Ct. 1727 (2007).

342 CHAPTER V: PATENT LAW I would like to pose a question to the panel to think about: What is the real purpose for the nonobviousness requirement? Is it out there basically to prevent patents from being granted on things that would naturally be developed; or is it out there to provide some reward for above-average levels of inventivity, which is not necessarily the same as cutting off the natural development ― after all, the word “obviousness” comes from the Latin ob via, meaning in the road ― or is it really just out there to prevent too many patents being granted and to reduce the burden on society? We have assumed a knowledge of KSR in this presentation. We have noted that there seems to be a difference in the treatment and regard of the scope and effect of KSR between the Federal Circuit and the PTO. We have representatives of both here. I am not quite sure how much they are prepared to say, but I hope they will say something on these issues. Before we jump into that, David Bloch will give us a brief summary of where the case law stands since KSR in light of what the Federal Circuit has actually decided in its interpretation.

KSR and its Aftermath: Effect on U.S. Patent Prosecution David S. Bloch* We will, as John says, assume a degree of understanding of what has happened in the KSR case, so, rather than telling war stories, I am going to focus more on what has actually been happening in the courts since KSR came down. But, just in case, very briefly, for those of us who have forgotten in the intervening year, KSR issued just about a year ago. In KSR the Supreme Court really ruled on something that was not happening. It concluded that the “teaching, suggestion, and motivation” (TSM) test was being applied too rigidly.2 That may or may not be the case, but I tend to think that the TSM test was just one of many ways of examining the question of obviousness under Section 103. I will point out that, at least where I sit, as a guy that tries these cases, there was no real clamor in the bar for a modification of the TSM test, because we didn’t really see it as a test. If you are on one side of it, you argue for a strict reading of it. If you are on the other side, you would argue for something else. It wasn’t really an issue that in many ways the Supreme Court needed to address. But it did. It is fairly clear that the standard it replaced it with is a more relaxed one. Interpreted by the lower courts, the test now, following the Graham test3 as elaborated on in KSR, the factors are: the scope and content of prior art, the differences between the prior art and the claims, the * Winston & Strawn, San Francisco. 2 The Supreme Court held that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws;” and warned that a rigid application of teaching/suggestion/motivation (TSM) as a litmus test for obviousness is inconsistent with the Graham framework, but stopped short of rejecting the TSM test outright. Thus, the TSM shortcut for an obviousness analysis is no longer available. Importantly, the Court’s opinion focused on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rigid rule that “obvious to try” is per se insufficient to show obviousness), available at http://www. supremecourtus.gov/opinions/06pdf/04-1350.pdf. 3 Graham, 383 U.S. at 1. The factual inquires set forth in Graham, that are applied for establishing a background for determining obviousness under 35 U.S.C. § 103(a) are summarized as: (1) Determining the scope and contents of the prior art; (2) ascertaining the differences between the prior art and the claims at issue; (3) resolving the level of ordinary skill in the pertinent art; (4) considering objective evidence present in the application indicating obviousness or nonobviousness. Id. at 15.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 343

level of ordinary skill in the pertinent art, and such secondary considerations as commercial success, long-felt but unsolved needs, etc. That is from Bayer v. Barr, a case that was decided just a couple weeks ago.4 It cites Takeda v. Alphapharm,5 which is of course a Federal Circuit case following KSR. The consensus appears to be that KSR has in fact raised the bar as to what qualifies as nonobvious, although in practice, as we will be developing in the next couple minutes, that is less obvious than it would be. When this came down on May 1, 2007, everyone thought the sky was falling and some radical change had been wrought. But, as I think is going to emerge in the next few minutes, that appears not to be the case. In fact, KSR appears to be, at most, a fairly modest correction for a problem that maybe didn’t exist in the first place and has not really transformed the obviousness determination in the way I think a lot of commentators believed it would have in the month or two following it. At the beginning of the session this morning, Judge Michel pointed out that the arguments in KSR looked like there was going to be a radical shift, and by the time the Supreme Court finished actually wrestling with the issues and came out with a decision, you saw something that was actually quite modest and moderate (see Chapter V.A, supra this volume). In fact, the criticism was simply of the rigidity with which a particular test was applied, not with the test itself. KSR, at least to me, seems to be part of an ongoing reaction by the Supreme Court to the nonpracticing entity phenomenon. I think you can look at MercExchange6 and MedImmune7 in the same light. I include Seagate8 in there, knowing that that is not a Supreme Court case, but, given that it was an en banc decision, I think it follows some of the same motivational lines. The consensus was when these came down that as a consequence, under KSR, patents were going to be harder to get and easier to invalidate, under MercExchange they will be less valuable for enforcement purposes, and under MedImmune they will be harder to assert outside of litigation without the risk of being sued. But the question I want to address in the few minutes I have remaining is how KSR has actually played out in practice. To determine that, I read every single case that has come down since KSR was decided, which was all kinds of fun. To date, there are about 100 cases that have cited or discussed KSR in the last eleven or so months. That’s ten cases per month. At first blush, I thought that seemed like a lot. But then I decided to run a very similar search for the preceding ten months, April 2006 to March 2007, versus April 2007 to March 2008. Lo and behold, we are at just about the same rate: 131 cases in the 2006–2007 period, 127 cases in the 2007–2008 period. Of course, there is a lot of double counting in there. This is not necessarily a scientific comparison. What it does suggest is there has not been a spike. There has not been a sudden rush to the courtroom to try to invalidate as obvious patents that pre-KSR looked invulnerable. KSR has been cited by the Federal Circuit, the Seventh Circuit, the United States Court of International Trade, and twenty-nine district courts. I will briefly talk about what has happened in those different places. In the Federal Circuit, KSR has been discussed substantively at least nineteen times.9 Now, obviously, if I got that counting wrong, the instruments of my correction are right at hand. But Bayer Schering Pharma AG v. Barr Labs., Inc., No. 05-2308, 2008 WL 628592 (D.N.J. Mar. 03, 2008). Takeda Chem. Indus. v. Alphapharm Pty., Ltd., 492 F.3d 1350 (Fed. Cir. 2007). 6 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 7 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). 8 In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). 9 Federal Circuit Cases citing KSR [last updated Aug. 4, 2008]: In re Stauffer, 290 F. App’x 327 (Fed. Cir. 2008); Eisai Co. v. Dr. Reddy’s Labs., 533 F.3d 1353 (Fed. Cir. 2008); Muniauction, Inc. v. Thomson Corp., 532 F.3d 1318... 4 5

344 CHAPTER V: PATENT LAW I think that is about right. There are a couple of other cases in which KSR is mentioned but not really analyzed. No particular trend emerges in terms of the types of patents in dispute. And there is no real trend favoring obviousness. Now, granted, nineteen cases all told is a sufficiently small sample size that I don’t think we can draw too much out of it. Nevertheless, the numbers are kind of interesting. Eight of the nineteen cases I identified upheld a finding of nonobviousness or reversed a finding of obviousness, so ruled for the plaintiff. The remaining eleven went for the defendant, either found obviousness or upheld an obviousness ruling from the lower court. Interestingly, though, the salient difference seems to be patentability at the PTO stage versus during litigation. Five of the cases I have just discussed are cases appealed from the BPAI. In four of those five instances, the Federal Circuit upheld an obviousness rejection. In the fifth case, In re Sullivan,10 I think they were going to do so, but they remanded only to allow the BPAI to consider some rebuttal evidence. If you extract those cases, we are back at seven for obviousness, seven against. About 50 percent, as those of us who are in these appeals know, is the historical average. So we have not seen a spike at the Federal Circuit level. Let’s talk next about the district courts.11 Sixty-eight times in twenty-nine district courts, led by the Northern District of California, my home jurisdiction, with twelve cases citing KSR; (Fed. Cir. 2008); Erico Int’l Corp. v. Vutec Corp., 516 F.3d 1350 (Fed. Cir. 2008) (reversing preliminary injunction on the ground that the accused infringer had raised a substantial question of invalidity for obviousness); Agrizap, Inc. v. Woodstream Corp., 520 F.3d 1337 (Fed. Cir. 2008); Ortho-McNeil Pharm., Inc. v. Mylan Labs., 520 F.3d 1358 (Fed. Cir. 2008); Scanner Techs. Corp. v. ICOS Visions Sys. Corp., 528 F.3d 1365 (Fed. Cir. 2008) (affirming bench trial verdict of invalidity for obviousness); Aventis Pharma Deutschland GmbH v. Lupin Pharms., Inc., 499 F.3d 1293 (Fed. Cir. 2007) (reversing bench trial verdict that claims in suit would not have been obvious); Daiichi Sankyo Co. v. Apotex, Inc., 501 F.3d 1254 (Fed. Cir. 2007) (reissued as precedential) (overturning bench trial verdict of nonobviousness); In re Comiskey, 499 F.3d 1365 (Fed. Cir. 2007); In re Translogic Tech., Inc., 504 F.3d 1249 (Fed. Cir. 2007); z4 Techs., Inc. v. Microsoft Corp., 507 F.3d 1340 (Fed. Cir. 2007) (refusing request for new trial on purportedly incorrect jury instruction); In re Sullivan, 498 F.3d 1345 (Fed. Cir. 2007) (reversing PTO rejection for obviousness); In re Trans Tex. Holdings Corp., 498 F.3d 1290 (Fed. Cir. 2007) (affirming PTO rejection for obviousness); In re Icon Health & Fitness, Inc., 496 F.3d 1374 (Fed. Cir. 2007) (affirming PTO rejection for obviousness); Daiichi Sankyo Co. v. Apotex, Inc., slip op., 2007 WL 2032123 (Fed. Cir. 2007) (overturning bench trial verdict of nonobviousness), superceded, 501 F.3d 1254 (Fed. Cir. 2007); PharmaStem Therapeutics, Inc. v. ViaCell, Inc., 491 F.3d 1342 (Fed. Cir. 2007) (overturning jury verdict of nonobviousness); Frazier v. Layne Christensen Co., 239 F. App’x 604 (Fed. Cir. 2007); Takeda Chem. Indus. v. Alphapharm Pty., Ltd., 492 F.3d 1350 (Fed. Cir. 2007); Omegaflex, Inc. v. Parker-Hannifin, 243 Fed. App’x 592 (Fed. Cir. 2007); Pfizer, Inc. v. Apotex, Inc., 488 F.3d 1377 (Fed. Cir. 2007) (opinions on court’s denial of en banc review); LeapFrog Enters., Inc. v. Fisher-Price, Inc., 485 F.3d 1157 (Fed. Cir. 2007); Syngenta Seeds, Inc. v. Monsanto Co., 231 Fed. App’x 954 (Fed. Cir. 2007) . 10 In re Sullivan, 498 F.3d 1345 (Fed. Cir. 2007). 11 District Court cases citing KSR [last updated Aug. 4, 2008]: Tech. Licensing Corp. v. Gennum Corp., No. 0104204, 2007 WL 1319528, at *18 n.38 (N.D. Cal. May 4, 2007); Smith & Nephew, Inc. v. Arthrex, Inc., 511 F. Supp. 2d 1046 (D. Or. 2007); Abbott Labs. v. Sandoz, Inc., 500 F. Supp. 2d 846 (N.D. Ill. 2007); In re Omeprazole Patent Litig., 490 F. Supp. 2d 381 (S.D.N.Y. 2007); Eaton Corp. v. ZF Meritor LLC, 504 F. Supp. 2d 217 (E.D. Mich. 2007); McNeil-PPC, Inc. v. Perrigo Co., No. 05-1321, 2007 WL 1624764 (S.D.N.Y. June 5, 2007), superceded, 516 F. Supp. 2d 238 (S.D.N.Y. July 3, 2007); Torspo Hockey Int’l, Inc. v. Kor Hockey Ltd., 491 F. Supp. 2d 871 (D. Minn. 2007); Semiconductor Energy Lab. v. Chi Mei Optoelectronics Corp., 531 F. Supp. 2d 1084 (N.D. Cal. 2007) (granting summary judgment of invalidity for obviousness); Stryker Trauma S.A. v. Synthes (USA), No. 01-3879, 2007 WL 1959231 (D.N.J. June 29, 2007); Stryker Trauma S.A. v. Synthes (USA), No. 01-3879, 2007 WL 1959233 (D.N.J. June 29, 2007); Single Chip Sys. Corp. v. Intermec IP Corp., 495 F. Supp. 2d 1066 (S.D. Cal. 2007); Andersen Mfg., Inc. v. DiversiTech Corp., No. 05-923, 2007 WL 1892509 (D. Utah July 2, 2007); McNeil-PPC, Inc. v. Perrigo Co., 516 F. Supp. 2d 238 (S.D.N.Y. 2007); Pass & Seymour, Inc. v. Hubbell Inc., 532 F. Supp. 2d 418 (N.D.N.Y. 2007) (denying preliminary injunction because, inter alia, the accused infringer raised a serious question that the claims in suit are invalid for obviousness); Friskit, Inc. v. RealNetworks, Inc., 499 F. Supp. 2d 1145 (N.D. Cal. 2007) (granting summary judgment of invalidity for obviousness); MercExchange, LLC v. eBay, Inc., 500 F. Supp. 2d 556 (E.D. Va. 2007); Muniauction, Inc. v. Thomson Corp., 502 F. Supp. 2d 477 (W.D. Pa. 2007); Andersen Corp. v. Pella Corp., 500...

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followed by five in New Jersey and four in Chicago, San Diego, and Minnesota. Twenty-one found obviousness; thirty found nonobviousness. And there was no real trend, once again, emerging in terms of the kinds of cases where obviousness was or was not found. F. Supp. 2d 1192 (D. Minn. 2007); Asyst Techs., Inc. v. Empak, Inc., No. 98-20451, 2007 WL 2255220 (N.D. Cal. Aug. 3, 2007); Lucent Techs., Inc. v. Gateway, Inc., 509 F. Supp. 2d 912 (S.D. Cal. 2007); Craig v. Foldfast, Inc., 504 F. Supp. 2d 1313 (S.D. Fla. 2007); AdvanceMe Inc. v. RapidPay, LLC, 509 F. Supp. 2d 593 (E.D. Tex. 2007); Boston Scientific Corp. v. Johnson & Johnson, 534 F.Supp.2d 1062 (N.D. Cal. 2007); MMJK, Inc. v. Ultimate Blackjack Tour LLC, 513 F. Supp. 2d 1150 (N.D. Cal. 2007); PBI Performance Prods., Inc. v. NorFab Corp., 514 F. Supp. 2d 732 (E.D. Pa. 2007); TradeCard, Inc. v. S1 Corp., 509 F. Supp. 2d 304 (S.D.N.Y. 2007); Altana Pharma AG v. Teva Pharmas. USA, Inc., 532 F. Supp. 2d 666 (D.N.J. 2007) (denying preliminary injunction on strength of accused infringer’s obviousness-based attack); Novartis Pharmas. Corp. v. Teva Pharmas. USA, Inc., No. 05-1887, 2007 WL 2669338 (D.N.J. Sept. 6, 2007) (denying preliminary injunction on strength of accused infringer’s obviousness attack); SudChemie, Inc. v. Multisorb Techs., Inc., No. 03-29, 2007 WL 2669366 (W.D. Ky. Sept. 7, 2007) (holding claims invalid for obviousness); Eaton Corp. v. ZF Meritor LLC, No. 03-74844, 2007 WL 2738811 (E.D. Mich. Sept. 19, 2007); Caponey v. ADA Enters., Inc., 511 F. Supp. 2d 624 (D.S.C. 2007); Timeline, Inc. v. Proclarity Corp., No. 05-1013, 2007 WL 2789340 (W.D. Wash. Sept. 24, 2007); Eaton Corp. v. ZF Meritor LLC, No. 03-74844, 2007 WL 2822775 (E.D. Mich. Sept. 26, 2007); Titan Tire Corp. v. Case New Holland, Inc., No. 07-00063, 2007 WL 2914513 (S.D. Iowa Oct. 3, 2007) (denying preliminary injunction); Eaton Corp. v. ZF Meritor LLC, No. 03-74844, 2007 WL 2901692 (E.D. Mich. Oct. 4, 2007) (denying summary judgment); VNUS Medical Techs., Inc. v. Diomed Holdings, Inc., No. 05-2972, 2007 WL 3096589 (N.D. Cal. Oct. 22, 2007); Bayer AG v. Dr. Reddy’s Labs. Ltd., 518 F. Supp. 2d 617 (D. Del. 2007); TGIP, Inc. v. AT&T Corp., 527 F. Supp. 2d 561 (E.D. Tex. 2007); Monolithic Power Sys. Inc. v. O2 Micro Int’l Ltd., No. 04-2000, 2007 WL 3231709 (N.D. Cal. Oct. 30, 2007); Apple Computer, Inc. v. Burst.com, Inc., No. 06-0019, 2007 WL 3342829 (N.D. Cal. Nov. 8, 2007); Panoptx Inc. v. Protective Optics, Inc., No. 06-7610, 2007 WL 3344453 (N.D. Cal. Nov. 9, 2007); Callaway Golf Co. v. Acushnet Co., 523 F. Supp. 2d 388 (D. Del. 2007); Abbott Labs. v. Sandoz Inc., 529 F. Supp. 2d 893 (N.D. Ill. 2007); In re Muth Mirror Sys., 379 B.R. 805 (Bankr. E.D. Wisc. Dec. 5, 2007); Gemtron Corp. v. Saint-Gobain Corp., No. 04-0387, 2007 4334780 (W.D. Mich. Dec. 6, 2007); DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 526 F. Supp. 2d 162 (D. Mass. 2007); Depomed, Inc. v. Ivax Corp., 532 F. Supp. 2d 1170 (N.D. Cal. 2007); Printguard, Inc. v. Anti-Marking Systems, Inc., 535 F. Supp. 2d 189 (D. Mass. 2008) (denying preliminary injunction on the strength of the obviousness attack on the patents in suit); Lucent Techs., Inc. v. Gateway, Inc., 537 F. Supp. 2d 1095 (S.D. Cal. 2008); Berkel & Co. Contractors, Inc. v. HJ Found., No. 061073, 2008 WL 227880 (M.D. Fla. Jan. 25, 2008) (granting summary judgment of invalidity for obviousness); ResQNet.com, Inc. v. Lansa, Inc., 533 F. Supp. 2d 397 (S.D.N.Y. 2008); Lucent Tech., Inc. v. Microsoft Corp., 544 F. Supp. 2d 1080 (S.D. Cal. 2008); Boston Scientific Corp. v. Johnson & Johnson, 550 F. Supp. 2d 1102 (N.D. Cal. 2008); Proctor & Gamble Co. v. Teva Pharmas. USA, Inc., 536 F. Supp. 2d 476 (D. Del. 2008); Bayer Schering Pharma AG v. Barr Labs., Inc., No. 05-2308, 2008 WL 628592 (D.N.J. Mar. 03, 2008); Kleen-Tex Indus. v. Mountville Mills, No. 03-093, 2008 WL 2486363 (N.D. Ga. Mar. 3, 2008), vacated, 2008 WL 2486358 (N.D. Ga. May 28, 2008); Murata Mfg. v. Bel Fuse, Inc., No. 03-2934, 2008 WL 719217 (N.D. Ill. Mar. 12, 2008); Perricone v. Medicis Pharm. Corp., 539 F. Supp. 2d 571 (D. Conn. 2008); Shuffle Master, Inc. v. MP Games LLC, 553 F. Supp. 2d 1202 (D. Nev. 2008); Ball Aerosol & Specialty Container, Inc. v. Limited Brands, Inc., 553 F. Supp. 2d 939 (N.D. Ill. 2008); Takeda Pharm. Co. v. Teva Pharms. USA, Inc., 542 F. Supp. 2d 342 (D. Del. 2008); Farrago v. Rawlings Sporting Goods Co., No. 06-958, 2008 WL 880178 (E.D. Mo. Mar. 31, 2008); Fisher-Barton Blades, Inc. v. Blount, Inc., No. 05-460, 2008 WL 906125 (E.D. Wis. Mar. 31, 2008); Eaton Corp. v. ZF Meritor LLC, No. 03-74844, 2008 WL 920073 (E.D. Mich. Apr. 3, 2008); Therasense, Inc. v. Becton, Dickinson & Co., 560 F. Supp. 2d 835 (N.D. Cal. 2008); Power-One, Inc. v. Artesyn Techs., Inc., 556 F. Supp. 2d 591 (E.D. Tex. 2008); Elantech Devices Corp. v. Synaptics, Inc., No. 06-1839, 2008 WL 1734748 (N.D. Cal. Apr. 14, 2008); Honeywell Int’l Inc. v. United States, 81 Fed. Cl. 514 (Fed. Cl. Apr. 14, 2008); Ortho-McNeil Pharm., Inc. v. Kali Labs., Inc., No. 06-3533, 2008 WL 1782283 (D.N.J. Apr. 17, 2008); Rothman v. Target Corp., No. 05-4829, 2008 WL 1844284 (D.N.J. Apr. 23, 2008); Alloc, Inc. v. Pergo, Inc., No. 02736, 2008 WL 1968391 (E.D. Wis. May 1, 2008); U.S. Philips Corp. v. Iwasaki Elec. Co., No. 03-172, 2008 WL 2115176 (S.D.N.Y. May 14, 2008); Wyers v. Master Lock Co., No. 06-619, 2008 WL 2168977 (D. Colo. May 22, 2008); Hitachi Koki Co. v. Dudas, 556 F. Supp. 2d 41 (D.D.C. 2008); Stanford Univ. Trustees v. Roche Molecular Sys., Inc., 563 F. Supp. 2d 1016 (N.D. Cal. 2008); Izzo Golf, Inc. v. King Par Golf Inc., 561 F. Supp. 2d 334 (W.D.N.Y. 2008); Lucent Techs. v. Gateway, No. 07-2000, 2008 WL 2491955 (S.D. Cal. June 19, 2008); Therasense, Inc. v. Becton, Dickinson & Co., 565 F. Supp. 2d 1088 (N.D. Cal. 2008); Church & Dwight Co. v. Abbott Labs., No. 05-2142, 2008 WL 2565349 (D.N.J. June 24, 2008); Comcast Cable Commc’ns Corp. v. Finisar Corp., No. 06-04206, 2008 WL 2740324 (N.D. Cal. July 11, 2008); Patent Category Corp. v. Target Corp., 567 F. Supp. 2d 1171 (C.D. Cal. 2008); Avante Int’l Tech. Corp. v. Premier Election Solutions, Inc., No. 06-0978, 2008 WL 2783237 (E.D. Mo. July 16, 2008); Izzo Golf, Inc. v. Taylor Made Golf Co., No. 04-6253, 2008 WL 2789026 (W.D.N.Y. July 16, 2008); Lucent Techs., Inc. v. Microsoft Corp., No. 06-0684, 2008 WL 2872738 (S.D. Cal. July 23, 2008); NuClimate Air Quality Sys., Inc. v. M&I Heat Transfer Prods., Ltd., No. 08-0317, 2008 WL 2917589 (N.D.N.Y. July 24, 2008).

346 CHAPTER V: PATENT LAW I mentioned that there were a couple of other cases. In the Deckers Corp. v. United States case, the Court of International Trade considered KSR.12 In Jennings v. Auto Meter Products, Inc., a very odd RICO case out of the Seventh Circuit, patentability was raised.13 But the real question I think we face is whether KSR has raised the patentability bar. I think the answer to that is yes. But it manifests not so much at the district court or the Federal Circuit levels, but rather at the level of the PTO. KSR has freed examiners to reject patents that before they may have been inclined to reject as obvious but were less confident doing so given some level of misunderstanding of the development of Federal Circuit precedence. It is clear from my review of these cases that district courts are very much aware of the impact of KSR. Several courts in 2007, after KSR came down, asked for supplemental briefing and indicated they might have ruled differently before. Operationally, I have only been able to determine two places where you really are seeing an impact of KSR. First, a number of district courts seem to believe that KSR paid special attention to combination patents and, thus, have suggested that combination patents, combinations of two otherwise known items into something that has allegedly become patentable by combining, are more vulnerable under KSR than they were before. I will point to a couple of cases to that effect. If that is the case, then certain pharmaceutical combination patents and certain business method patents could be predicted over the next few months or years to come under significant additional scrutiny. In addition, KSR has clearly weakened the ability of plaintiffs to seek preliminary injunctions and increased defendants’ incentives to file summary judgment, simply because there has been this perceived shift. Single Chip Systems Corp. v. Intermec IP Corp., a San Diego case, talked about limitation to combination patents.14 The idea that KSR is important in preliminary injunctions also emerges from the cases. Lots and lots of defendants are now defending preliminary injunction cases by saying, “I can make a prima facie case of obviousness.” While obviousness is the defendant’s burden by clear and convincing evidence, at an actual motion by the defendant defending a motion for preliminary injunction you have a much lower standard of proof, and KSR clearly has helped defendants in that instance. Summary judgment is predictably increasing as a result. I do think these effects are basically housekeeping in nature and that in the long run you are going to see a reduction to historical trends. Thank you very much. MR. RICHARDS: Thank you, David. Next we have Charles Eloshway from the PTO, who will give us the PTO’s view on the significance of KSR.

12 Deckers Corp. v. United States, No. 02-00674, 2007 WL 2489657, at *4 n.12 (Ct. Int’l Trade Sept. 5, 2007), available at http://www.cit.uscourts.gov/slip_op/Slip_op07/07-136.pdf, aff’d, 532 F.3d 1312 (Fed. Cir. 2008). 13 Jennings v. Auto Meter Prods., Inc., 495 F.3d 466 (7th Cir. 2007). 14 Single Chip Sys. Corp. v. Intermec IP Corp., 495 F. Supp. 2d 1066 (S.D. Cal. 2007) (rejecting proposed “21 factors” of obviousness test).

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KSR and its Aftermath — USPTO Perspective Charles Eloshway* Our previous speaker noted that there didn’t seem to be a lot of clamor among the bar for a shift in obviousness jurisprudence. I think it would be a gross understatement to say that was not the case at the USPTO. I wanted to touch on four topics: what the pre-KSR state of examination was regarding obviousness; the KSR decision and its consequences for examination, some of the USPTO views on that; post-KSR practice in USPTO Examiner Guidelines; and then, finally, some issues that I think it will be interesting to watch out for over the coming years. I. PRE-KSR STATE OF EXAMINATION

With regard to pre-KSR state of examination, those of you who have been practitioners for some time will recall that we used to have a practice at the USPTO that was more or less a checkbox form, “a in view of b,” with very little or no explanation as to the rationale for why the claim was rejected under Section 103. Interestingly, if you look at some of the jurisprudence from the predecessor court to the CAFC, you will note that in many of those instances there were purely conclusory statements of obviousness. Over time, both practices evolved into what we had pre-KSR, which was a very lengthy comparative analysis of the prior art and the claims coupled with reasoned statements of obviousness. Now, this trend towards increasingly detailed analyses was coupled with an increasing emphasis being placed on documentation, documentary prior art evidence. This was particularly drawn to, and most disturbingly in my view, with regard to the reasoning ability of the person skilled in the art. In other words, it wasn’t simply a matter of the reference taught, “features a, b, and c.” What the jurisprudence was increasingly requiring was the prior art itself; explain the difference and how you would bridge the difference between the prior art and the claims. There were two driving forces for this, in my view. One was the increasingly strict jurisprudence with regard to “teaching, suggestion, motivation” and the increasing emphasis being placed on hindsight risk reduction, coupled together. Also — and I think this sometimes get overlooked — is the Zurko opinion.15 Following the Zurko opinion, the CAFC seems to have placed a great deal of emphasis on the USPTO’s fact finding, producing substantial evidence in the form of documentation, rather than relying on fact finding in the USPTO’s capacity as fact finder. This, we think, created some tension between evidence, on the one hand, and common sense, on the other. This is something that the Supreme Court pointed out very plainly in its opinion, that sometimes what is obvious is not written down, simply because it is obvious. What I think happened — this is my personal view — is that over time the CAFC’s jurisprudence transformed the “person of ordinary skill in the art” into a “person of average reading ability.” Now, this caused some problems at the USPTO in technologies across the board, but I think most particularly with regard to business methods and other types of methods generally. * Attorney-Adviser, Officer of International Relations, U.S. Patent and Trademark Office, Arlington, VA. 15 Dickinson v. Zurko, 142 F.3d 1447, 46 U.S.P.Q.2d 1691 (Fed. Cir. 1998), rev’d and remanded, 119 S. Ct. 1816 (1999).

348 CHAPTER V: PATENT LAW II. THE KSR DECISION AND ITS CONSEQUENCES FOR EXAMINATION

In the previous discussion, you heard some of the views on the interface between Section 101 and Section 103. There were some views expressed that Section 101 is just a basic threshold gatekeeper,16 and you should allow more things in and then defeat them on other patentability grounds, mainly Section 103. Well, the problem with that is that if you have increasingly strict documentation-based rejection requirements, then in areas like business methods, where very few things are written down in that level of detail, if they are written down at all, defeating patentability on the grounds of Section 103 becomes increasingly difficult. The KSR decision reaffirmed the vitality of the four-prong, fact-based Graham v. John Deere test.17 It also corrected “errors” in CAFC jurisprudence that had cropped up since then. Some of those errors were that the courts and examiners can only focus on the same problem that the applicant or patentee was trying to solve. Or the assumption that the person of ordinary skill in the art will be led only to those elements of the prior art to solve that same problem. Or the conclusion that the claim cannot be said to be obvious because it would have been obvious to try. Then also — and I think this is the primary result — the over-emphasis on hindsight resulted in rigid preventative rules that denied fact finders recourse to common sense. What came out at the end of the day was that the “teaching, suggestion, motivation” (TSM) test was one, but not an exclusive, methodology for determining obviousness.18 III. POST-KSR PRACTICE IN USPTO EXAMINER GUIDELINES

Now, post-KSR the USPTO published Examination Guidelines to as much as possible standardize examination across the various technology centers in conformance with the Supreme Court’s holding in KSR. Those Guidelines were published in the Federal Register on October 10, 2007.19 I refer you to those for further details. Consistent with what the previous speaker has just said, we do not think that there has been a dramatic shift, if any shift at all, in basic examination practice. It is going to remain more or less the same. The examiner is still going to be required to articulate the similarities and differences between the claims and the prior art and provide a reasoned statement or rationale to explain the differences. But — and this is an important but — KSR allows for a more expansive view of obviousness, and I think in two important respects: (1) There is a provision for reliance on what I’ll call extrinsic factors, like market- or design-driven factors, other than what was purely stated in the scientific literature; and (2) There is a return to “obvious to try” where there is a finite number of solutions with predictable results and a reasonable expectation of success. The USPTO Guidelines give a number of non-exhaustive examples and acceptable rationales that are consistent with the Supreme Court’s findings in KSR. Again, I refer you to those Guidelines for further details. IV. INTERESTING ISSUES TO WATCH OUT FOR IN THE FUTURE

Now, in terms of some issues that I think may be interesting to watch out for as post-KSR jurisprudence evolves, including — and I think primarily driven by — USPTO examination. 16 35 U.S.C. § 101 (“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title”). 17 Graham v. John Deere Co., 383 U.S. 1 (1966); see supra note 3. 18 See supra note 2.

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Number one: Throughout all of the Supreme Court’s discussion, there was this thread of predictability. I think that this is going to place an increased emphasis on this question of predictability of results, primarily on the so-called “secondary” considerations in the form of rebuttal evidence. It is going to be interesting to see what kinds of trends develop in this rebuttal evidence of unexpected results. I think that there have been a couple of cases that have pointed this out. The LeapFrog case20 comes to mind. A few other USPTO Board of Appeals cases that have been cited as precedential or informative cite the KSR case for the same proposition.21 The second issue to watch for is reasoning based on extrinsic factors — market demand, design considerations, and the like. It is going to be interesting to see how this may affect applicant behavior in terms of, for instance, discussing the background of the invention, discussing the prior art in responses; or, if the legislation in its current form passed with some sort of applicant quality submission requirement, what applicant behavior will be in that regard as well. It is also going to be interesting to see how the CAFC might react to examiner statements that something is market- or design-driven. This may seem to invite a return to rigid formulations or documentation reliance, which KSR counsels against, but it does revive this tension of evidence and common sense. I will reserve some time to discuss some other trends in follow-up comments.

MR. RICHARDS: Thank you.

Jay, have you got an academic’s view on all this? PROF. THOMAS: Sure. You asked why we have an obviousness requirement. We do this in order to allow the artisan to have a zone of freedom to engage in his operations, and, as my earlier colleague suggested, we mediate between pioneer and follow-on inventors. If everybody gets a patent, they all have to share. That diminishes the intellectual property benefit that adheres to the pioneer. If only the pioneers get the patent and the improvers do not, then the pioneer can enjoy the right in an unfettered way. JUDGE RADER: That’s enablement. PROF. THOMAS: I think that’s obviousness. In terms of KSR, I don’t think KSR was just about TSM. There is a lot of rhetoric in U.S. patent law that has changed. “Combination patents,” which was a forbidden term for my entire professional career, now is back. “Common sense” is back. “Market forces” used to suggest that an invention would not have been obvious, otherwise someone would have done it; now “market forces” in fact can suggest that it would have been obvious. The presumption of validity is reduced. Obviousness is said to be more amenable to summary judgment. 19 Dep’t of Com., Patent and Trademark Office, Docket No. PTO–P–2007–0031, Examination Guidelines for Determining Obviousness Under 35 U.S.C. 103 in View of the Supreme Court Decision in KSR International Co. v. Teleflex Inc., 72 Fed. Reg. 57,526 (Oct 10, 2007), available at http://www.uspto.gov/web/offices/com/sol/ notices/72fr57526.pdf. 20 LeapFrog Enters., Inc. v. Fisher-Price, Inc., 485 F.3d 1157 (Fed. Cir. 2007). 21 Precedential Board of Patent Appeals & Interferences Cases citing KSR [last updated Aug. 4, 2008]: Ex parte Kubin, Appeal No. 2007-0819, Application No. 09/667,859, Tech. Ctr. 1600, 83 U.S.P.Q.2d 1410 (BPAI May 31, 2007); Ex parte Smith, Appeal No. 2007-1925, Application No. 09/391,869, Tech. Ctr. 3700, 83 U.S.P.Q.2d 1509 (BPAI June 25, 2007); Ex parte Catan, Appeal No. 2007-0820, Application No. 09/734,808, Tech. Ctr. 1700, 83 U.S.P.Q.2d 1569 (BPAI July 3, 2007); Ex parte Fu, Appeal No. 2008-0601, Application No. 10/320,809, Tech. Ctr. 1700, 2008 WL 867826 (BPAI Mar. 31, 2008). The Board provides a list of its recent precedential decisions at http:// www.uspto.gov/web/offices/dcom/bpai/prec.htm.

350 CHAPTER V: PATENT LAW I very much admire that quantitative study. I think that is actually, even though it is regrettably a small sample size, the most useful sample we are going to see, because there were already litigations and KSR has basically intruded in them. We do not really know what is going to happen as people decide whether to risk their patents or not with KSR sitting around. A couple more interesting points, for me at least. KSR arises in the mechanical arts, and it also suggests predictability throughout the opinion. Mechanical arts are predictable. So it is very interesting to see them in chemical cases, where we are seeing really some different results in fairly similar chemical cases, for example the realization of a racemate in it to its stereoisomers. We had two cases that came out within a week — certainly different facts, certainly different circumstances, but also different holdings.22 For my foreign colleagues here who are very enamored of the problem-solution approach, I would certainly strip that from your patents when you file them in the States. You are creating straw men. Be very clear to solve the problem that you are identifying. If you are writing patents for the European Patent Office especially, I think you ought to consider getting rid of some of the spec when you file it here. MR. RICHARDS: Thank you, Jay. Which of our judges would like to start? Judge Rader. JUDGE RADER: I am going to do something different. I am going to pose a question, and the question which most troubles me: If the principle in KSR — and indeed, perhaps, the whole principle of obviousness — stands for the concept that an incremental advance that would be achieved by science anyway does not deserve an exclusive right, then how do we deal with the problem that this is the way all science advances? Science and technology advances in increments. Maybe, rarely, there is an Einstein who steps in and sees relativity where Newton had dominated the entire landscape for centuries. But that is so rare. Science does advance in increments. If we are going to say that each incremental advance is obvious, then we are building, I guess, the perverse incentive into the system to withhold your patent filings until you have made enough incremental advances to show that you have made an alarming advance, which of course is entirely contrary to the disclosure principle of patent law in the first place, that we want that information early in the hands of the cognoscenti so that they can build on that in their research that may be in a different related field. How do we deal with the reality that all science and technological advance is incremental if we are going to rule out incremental advance as obvious? That is really a question. I do not have the answer. I am just interested if anybody else does. MR. MURPHY: Judge Rader, I think you have hit the nail right on the head. For me, what was troubling about the KSR decision was the language at the end of the decision by Justice Kennedy. He used the words “ordinary innovation.”23 The message was ordinary innovation is not good enough to merit patent protection. The reason that might present a problem is because you have a system — certainly decades old, if not longer — which has been based on the concept that if you have “innovation,” even 22 See, e.g., Aventis Pharma & King Pharm. v. Lupin Ltd., Inc., 499 F.3d 1293 (Fed. Cir. 2007) (reversing bench trial verdict that claims in suit would not have been obvious); Takeda Chem. Indus., Ltd. v. Alphapharm Pty., Ltd., 492 F.3d 1350 (Fed. Cir. 2007) (finding not obvious to try); In re Sullivan, 498 F.3d 1345 (Fed. Cir. 2007) (holding that a compound and all of its properties are inseparable and so the unexpected property of the Fab fragments led to a use that was not just new but also unexpected); see also Ortho-McNeil Pharm., Inc. v. Mylan Labs., Inc., 520 F.3d 1358 (Fed. Cir. Mar. 31, 2008); Ortho-McNeil Pharm., Inc. v. Kali Labs., Inc., No. 06-3533, 2008 WL 1782283 (D.N.J. Apr. 17, 2008), vacated, Ortho-McNeil Pharm., Inc. v. Teva Pharm. Indus., Ltd., 2009 WL 2604919 (Fed. Cir. Aug 26, 2009). 23 KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727, 1746 (2007) (“[A]s progress beginning from higher levels of achievement is expected in the normal course, the results of ordinary innovation are not the subject of exclusive rights under the patent laws. Were it otherwise patents might stifle, rather than promote, the progress of useful arts.”).

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if it is incremental, as long as it is “new, useful, nonobvious” — and you have to, obviously, weigh the question “what’s obvious?” ― you are entitled to a patent. You start with the presumption of patent validity. I come from purely a patent litigation background. I am not a patent prosecutor. I represent big pharma. So I am typically for the plaintiff who proposes strong patent rights. But having said that, and taking that with a big grain of salt, it is a problem for me. When you read Lab Corp., Justice Breyer is even more explicit. I did write this down because I wanted to share this with people. It is the language, the tone of the discussion, not necessarily the holding of the case. In Lab Corp. Justice Breyer said that “sometimes too much patent protection can impede rather than ‘promote the Progress of Science and the useful Arts,’ the constitutional objective of patent and copyright protection.”24 Well, that is turning it on its head, it seems to me, because the history of science by and large, and certainly the history of our patent system, is based on incremental improvement patents. And so I think, at least on the larger policy view, I also share Judge Newman’s caveat earlier this morning (see Chapter III.A, supra this volume), that I hope we are not actually shifting back to a time period before the Federal Circuit was formed in 1982, where these types of incremental improvement patents were regularly thrown out by the district courts, often on summary judgment. I agree with David. I think you are absolutely going to see more summary judgments. There is no question about it. Let me try to offer one practical piece of advice. I agree the emphasis on — in particular, I think Charles mentioned it — evidence of synergistic or unexpected results as a secondary indicia is crucial if you are trying to defend a patent. If you are trying to attack the patent, you are going to go after that and say there isn’t, that this is nothing but the normal, ordinary course of routine experimentation and there is just nothing there. MR. BLOCH: Certainly in pharma. MR. MURPHY: Certainly in pharma, but I think it applies more broadly, I really do. I think, in terms of the objective indicia analysis under Graham v. John Deere,25 it seems to me in any event, that reading KSR — I’m not sure what the Federal Circuit is going to do with it over time — but it seemed to me there was perhaps an undue emphasis on objective evidence of synergistic unexpected results. MR. RICHARDS: Judge Newman? JUDGE NEWMAN: To elaborate on this theme we have just been developing, what we really need to understand is what it means. I too think back, as I mentioned earlier, to the state of industry-supported innovation in the judicial climate that we were experiencing, the attempt of the Federal Circuit to take definitive giant steps to adjust that climate by one of the very early cases, that synergism is not the issue, an invention does not have to be greater than the sum of the parts.26 The setback to the past that I have heard discussed here this afternoon is not something that really seems to be in accord with past decisions. “The person of ordinary skill,” however, was not viewed as the ordinary creative intellect, but as the ordinary, experienced, trained scientist, like most of us who go about our work. The role of the patent system in the economy of nations is what we need to think about. It seems to me that for industry that is so dependent, as Judge Rader mentioned, on improving itself step by step, it is not only that a company might save a dozen or so incremental steps 24 Metabolite Labs., Inc. v. Lab. Corp. of Am. Holdings, 548 U.S. 124, 126–27 (Breyer, J., dissenting) (emphasis in original), available at http://www.supremecourtus.gov/opinions/05pdf/04-607.pdf. 25 383 U.S. 1 (1966). 26 Diamond v. Diehr, 450 U.S. 175, 192 (1981).

352 CHAPTER V: PATENT LAW until it had something that it thought was big enough to survive litigation, but it might never take the first step. It is very hard to keep in-house development secrets as you go along. If everything that you achieve after a certain amount of work is immediately available to your competitor, certainly you think about whether it is worth your while to go in that direction. Well, who is the loser here? Not the industry. Not the competitor. It is the public. That is what we have to continually have in mind, and that is what concerns me. This is what the prophets who see dire consequences, or even modestly negative consequences, from KSR are concerned about. We will all survive with fewer innovations. We have quite an active technology-based society. Do we indeed want to take a step that might enhance competition with what is already out there, but slow the advance for what is not yet there, if in fact that is an accurate prediction of at least some of the responses to a more difficult, more complex patent environment? Did you turn the timer off? Be careful, or I’ll keep on going. MR. RICHARDS: Judge Michel? JUDGE MICHEL: No one will remember this, but the Federal Circuit panel did not find the patent valid, did not find the invention was nonobvious.27 The panel simply found that there had been no analysis or explanation in the judgment we were reviewing. So we remanded — we didn’t reverse, we remanded. But everybody forgets that. So go ahead and forget that. MR. MURPHY: And it was non-precedential to boot. JUDGE MICHEL: The reason it was non-precedential is that it was so obvious to us that the lack of an explanation made it unreviewable on appeal. So of course we had to send it back. That was so clear we didn’t have any need to write a precedential opinion. The second point I would like to make about the Supreme Court opinion is that, as I read it and reread it and reread it and hear other people describe what they see in it when they read it, it’s like a Rorschach test. It means something different to everybody. When you read it on repeated intervals, it may mean something different to you one week than the next week or the next month, because it has a little bit of everything in there for anybody. It is a great source of arguments on both sides of all factors. It seems to me that, as a matter of analysis or as a matter of law, it does not really change much of anything. As a matter of psychology, it apparently has greatly encouraged the Patent Office to do its job. So that is all to the good, because of course they need to vigorously examine applications and application claims for possible obviousness. Now, it seemed to me that the specific sub-holdings in the case essentially shot down a series of straw men. For example, common sense. Common sense was always part of the analysis. So when somebody says, “Now common sense is back in the analysis,” well, it was never taken out of the analysis. And so on and so on down the line. With one exception, which was the “obvious to try” portion of the opinion. I had always understood the doctrine to be correctly labeled “merely obvious to try,” which was meant to imply that you would have no idea whether the results would be successful, and therefore that would not predicate an obviousness finding. The Supreme Court seemed to turn it around and say, “Well, if it was obvious to try, then it probably was obvious and it probably does negate patentability,” which seemed to me to be not right. Of course, the saving grace is when you put back into the equation that there has to be a reasonable likelihood or expectation that of this finite number of solutions to the problem at least one is likely to work. So when you put the rabbit back in the hat, the problem goes away. 27 Metabolite Labs., Inc. v. Lab. Corp. of Am. Holdings, 370 F.3d 1354, 1358–62, 71 U.S.P.Q.2d 1081, 1084–87 (Fed. Cir. 2004), reh’g en banc denied, No. 03-1120, 2004 U.S. App. LEXIS 17408 (Fed. Cir. June 8, 2004), available at http://www.ll.georgetown.edu/Federal/judicial/fed/opinions/03opinions/03-1120.pdf.

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So I think as a matter of law it changes almost nothing. I think it was essentially based on a false image of what our case law was as a result of the way that it was briefed and argued in the Court. The real impact will be that the Patent Office will be reinvigorated. How they lost their vigor in the first place, I can’t imagine, because before the Supreme Court opinion in KSR I think our case law was very clear over a thirty-year period and entirely consistent with everything that Justice Kennedy said, with the one exception I mentioned. But in any event, they apparently did misread our case law, and now they are encouraged to be more robust, which is all to the good. So it solved the problem in the Patent Office but nowhere else that I can see. MR. RICHARDS: Charles? MR. ELOSHWAY: A couple of observations. I think the fact that we have a number of Federal Circuit judges and a prominent professor, none of whom can put their finger on what obviousness should or should not be, illustrates the point that Judge Hand made a number of years ago when he said that invention (by which in common parlance we mean obviousness) is the most elusive phantom in the law.28 I think that seventy, eighty years later it remains the case. The way I see this is that you essentially have a patent cycle triumvirate: You have the CAFC in one corner, the USPTO in another, and then applicants and patentees in the other. The goal of the obviousness challenge is to get as close to the center of that triangle as you can in order to make the system the most fair for all of the players involved. If you lean too heavily towards the side of applicants and patents, then you get this problem about “Well, are we churning out too many patents of questionable inventive activity?” If you go too far in the corner of the USPTO, you get the problem of maybe putting a brake on innovation and the patent system. If you go too far towards the CAFC, then it creates problems for the USPTO. JUDGE RADER: You’re not saying the Patent Office doesn’t follow the Federal Circuit, are you? I don’t think you would want to say that. MR. ELOSHWAY: No. I’m saying it creates problems for the USPTO. JUDGE RADER: But you are not saying the Patent Office is different from the CAFC standard, are you? You wouldn’t want to say that, would you? MR. ELOSHWAY: What I am saying is that patentees and the USPTO are, unfortunately, in a reactive position to the CAFC, meaning that we have to wait year after year after year, pronouncement upon pronouncement upon pronouncement, to figure out what it is that the CAFC thinks is the appropriate scope of obviousness. This creates downstream problems for USPTO and for applicants and patents. JUDGE MICHEL: How can that be? MR. ELOSHWAY: Again, I come back to the point that I think the issue is to try and center the focus as much as possible, given three different components. JUDGE MICHEL: How can it be that with a series of panel decisions over thirty years, none of which any later panel is permitted to overrule, since it is not an en banc court, there could be much doubt or dependence on waiting for the next so-called pronouncement from the Federal Circuit? All the prior holdings still stand and the newest holding doesn’t change any of that. So it is not like every time we have a Section 103 decision we have changed the law and announced something new. The whole continuum of cases still applies. So how the Patent Office could have been confused about that eludes me. MR. ELOSHWAY: I wonder, though, if that is truly the case, why it is that every 103 decision the CAFC has introduced, since maybe the first one the Court of Customs and Patent Appeals (CCPA) ever did, has been precedential or has not been non-precedential. In other words, if 28

Nichols v. Universal Pictures Corp., 45 F.2d 119, 122 (2d Cir. 1930) (Hand, J.).

354 CHAPTER V: PATENT LAW there has been no change in the law for fifty years, then why have any of them been precedential decisions? Obviously, there has been a change in the law to which we have to accommodate our practice in order to be in conformance with what it is that the CAFC and sometimes the Supreme Court have said. MR. RICHARDS: Judge Newman? JUDGE NEWMAN: It is a digression, but this is the common law. The law evolves on different facts. As the decisions are based on myriad specific facts, they evolve and set the platform and the tradition. I am sort of surprised. If in fact the PTO feels that somehow it is not getting appropriate guidance, we’ll fix that right away. MR. ELOSHWAY: We certainly appreciate that. MR. RICHARDS: Five things have been mentioned as perhaps coming out of KSR where we need to look at it: (1) who is the person of ordinary skill in the art; (2) obvious to try; (3) hindsight; (4) extrinsic evidence of obviousness; and (5) predictability. I am going to open this up generally now to see if anybody in the audience wants to raise any issues on any of those five topics coming out of KSR. QUESTION: The color of my hair might indicate that I am Ichabod Crane, but I had the privilege in October forty-two years ago, with my partner John Riley, to present one of the trilogy cases, which in the October Term decisions of 1966 seemed to have settled obviousness.29 But for the fact that I have been practicing for forty-some years since, to hear again people on the panel say, “Well, it’s what the trilogy sets it out,” it seems like we’ve been a rabbit or a mouse chasing its tail for forty-some years. Is the trilogy still good law, or has it been changed or overruled? That is my question. JUDGE RADER: The Supreme Court answered that. It said clearly Graham v. Deere is the law and should be followed.30 The Federal Circuit has reiterated that as well in subsequent cases. But I appreciate the tenor of your commentary. It suggests that there hasn’t been the confusion that some commentators seem to find. MR. RICHARDS: The trilogy goes as much to methodology as to what the standard is, I think. Maybe we are getting into trying to define what the standard is now, which is proving problematical. We get back to the person having ordinary skill in the art, a key element of the trilogy. I don’t think we have ever really properly defined, in my view, who the “person of ordinary skill in the art” is. We have said what their education should be, we have said that they are this, they are that. We never indicated how inventive they are supposed to be. This is something that KSR touches upon but does not give us an answer, in my view. MR. BLOCH: It says something along the lines of “one of ordinary creativity.” MR. RICHARDS: “Ordinary creativity.” Well, can you please tell me what that means? MR. BLOCH: It is fairly Delphic. JUDGE RADER: I appreciated one of the comments made earlier. It actually is not something that flows from KSR. One of the sad parts of KSR is that it presented no secondary considerations at all. Because of the record as it came from a non-precedential case that was not developed, it left the Supreme Court with nothing to work with, just as our court had nothing to work with. But I think that there is insight in the idea that the secondary considerations can be a marvelous additional resource for measuring inventive step. MR. ELOSHWAY: From the USPTO perspective, I would second that ― obviously, I made the point before — because in my experience (I was an examiner for a number of years before my current position), I think it has been the general case that secondary considerations are not something that are either presented or end up winning the day pre-KSR. It was something that, 29 Graham v. John Deere Co., 383 U.S. 1 (1966); Calmar v. Cook Chem. Co., 383 U.S. 1 (1966); United States v. Adams, 383 U.S. 39 (1966) (John A. Reilly, counsel for respondents). 30 See supra note 2.

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as Judge Rader said, never really got so much to that phase. It was usually something that was just decided on the prima facie case. To the extent that any secondary considerations were presented, sometimes they carried the day in terms of weighing the balance and sometimes they didn’t. I think that you are going to start seeing an increase in usage of secondary considerations. Again, I point to the LeapFrog case31 and a couple of important decisions from the Board of Patent Appeals that have cited that case and made reference to those sorts of findings. MR. RICHARDS: I think one of the problems with KSR is that it says you have to look at everything. That is fine in litigation. It is not so easy in prosecuting an application before the PTO. That I think is going to be a real problem. MR. ELOSHWAY: Although I think that is the direction the Court was going anyway, when you take a look at, for example, the McKesson Information Solutions, Inc. v. Bridge Medical, Inc. case,32 the expanded scope of that which must be considered. MR. MURPHY: John, I would like to just make one comment. In terms of the issue of the appropriate level of ordinary skill, at least it has always been my understanding — and KSR I think reaffirmed this — that there is a certain amount of creativity associated with a person of ordinary skill. For common sense, at least in a litigated case, evidence is supposed to come in through experts, and perhaps the inventors, explaining the background, the contextual technical state of the art just prior to the application filing date. That is often critical to the district court or other fact finder in terms of trying to determine what is the appropriate level of skill. What I have also seen, at least in my personal take on some of the reported decisions, is that there are also occasions where the inventor’s own invention record, whether it be internal memoranda, deposition, trial testimony, from what the inventor expected can also be used both ways, both for plaintiff and for defendant, to address what the appropriate level of skill in the particular art at issue in the case was. I think that is a highly effective technique. MR. RICHARDS: In the second half of this session, we will be looking at the impact of KSR internationally (see Chapter V.B.1(b), infra this volume). Certainly in the United Kingdom, for example, when you get to litigation, “common general knowledge” is the key really to determination of obviousness. You can do that in a court setting. It is much more difficult to do it in the PTO. In other countries, we have a situation where basically the benefit of the doubt is given at the PTO stage and the court can have a higher standard. Here, because we have a presumption of validity, you cannot do that, which I think creates a tension that maybe other countries do not have. Anybody else want to comment on that? MR. ELOSHWAY: We have done a number of comparative studies between USPTO, Japan, and Europe. That has generally been the case, which is that a lot of times the fact finder at the granting authority level is given more deference than is seemingly given to the USPTO here. Again, it remains to be seen post-KSR how things may shake out. It is not only limited to Japan and Europe. I think this is generally the standard, for instance, in Australia as well. QUESTION [Kathleen Paisley, White & Case LLP, London]: I had a follow-up question for Judge Rader. No one answered your question, which I think is, at least in my mind, the question after KSR. All innovation today is really iterative. I mean if you look at semiconductor patents, it is a little tiny piece in a very big puzzle. So I think this is one of those cases where the Court almost can’t have meant what it said. But from the perspective of your job as decision maker or our job as advisors, what do we tell our clients about iterative inventions after KSR? What’s the answer? 31 32

LeapFrog Enters., Inc. v. Fisher-Price, Inc., 485 F.3d 1157 (Fed. Cir. 2007). 487 F.3d 897 (Fed. Cir. 2007).

356 CHAPTER V: PATENT LAW JUDGE RADER: Well, if you are challenging me to answer my own question, which I don’t have a complete answer for, I think I left out a key component. You are not only gauging the trajectory of the change and seeing if the claimed invention lies on that vector; you are also gauging the pace, and it can be very relevant that they are investing enough money to advance the pace of that incremental advance. And it can be very relevant that others have not discovered something for a long period of time, suggesting that the pace is advanced by someone who makes an incremental advance on that vector but does it at a different timing. Of course, that challenges the judicial process considerably to immerse itself in the art enough to know not only the trajectory of change but the pace and the effect of, as my economic genius colleague says, the economics on that, the investment, the entire business cycle in that pace and trajectory. That is at least somewhat of an attempt. MR. RICHARDS: Judge Newman. JUDGE NEWMAN: I just wanted to comment. It isn’t as if we are speculating here on some kind of a blank slate. We have a powerful crucible in which to measure what happens when the incentive to invest in even minor aspects of technological change is diminished because of judicial activity. That was the situation in the 1970s, when we saw a combination of forces. It wasn’t just the patent system of course, it wasn’t just the judges, but it is generally accepted that this was a contribution. We saw in the United States mass layoffs of scientists and engineers in industrial research laboratories. We saw a diversion of potential research investment into other areas. Because, again, incremental advance and technological competitiveness did not provide an adequate opportunity, including the risk factor of judicial attitudes, to warrant the investment. Nothing that one does in industry is risk-free. You do not know, even for the kinds of obvious advances that we are talking about, until you try it whether in fact it will fulfill what you fully expected when you tried it in the first place. So there is a lot of history as to the situation that we were in before the imposition of judicial precision, which has now been quite significantly wiped out by KSR. That is really why the Federal Circuit in its early days, even before I was on the court, eliminated such things as synergism. They developed and worked very hard, really sweated through, finding these words — “suggestion, teaching, motivation,” and so on — for which they have been now criticized, rather than “I know it when I see it,” sort of like pornography. The court tried to provide the objective standards, which perhaps do not quite suit the scholarly atmosphere that has since developed in this area of law, but which at the time did significantly affect the nation’s economy and technological structure. Those are the kinds of comparisons I think we should make again. Science has changed, technology has changed, the nature of some of our leading industry has changed, biological sciences as well as the information and computer sciences. Maybe these facts, which are part of my background, do not fit anymore. But at least we should think about them. JUDGE MICHEL: John, I would like to suggest that the debate has been skewed, maybe not so much here today, although perhaps a little bit. The whole public debate has been skewed by the slogan “questionable patents.” I have been on the court twenty years exactly this month. I am not sure I have ever seen a questionable patent. I have indeed seen lots of questionable claims; I have seen lots of claims that looked to me plainly invalid; and in virtually every patent, I have seen some claims that were definitely valid and not obvious. So when the debate is over questionable patents, it cannot go anywhere, because any patent is going to be questioned in a litigation. That is the defendant’s job. Any application is going to be questioned in the PTO. That is their job. So when we talk about “questionable patents,” we are just talking a nonsense term. We will never get any traction and arrive at any kind of useful destination when we talk in those kinds of vague terms.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 357 MR. RICHARDS: Thank you.

There is one gentleman here who has been waiting to ask a question for a long time. This will probably have to be the last question. QUESTION: Thank you. I would like to speculate, if I may, on an answer to Judge Rader’s question by extending the analogy to the sciences and Einstein. We have Einstein, who completely changes his entire field. We have all recognized that is a breakthrough, that is a recognizable development. Then we have what you’ve labeled as “incremental changes” within the existing field. I would like to make a distinction between very small incremental changes, which experimentalists would call “stamp collecting,” and incremental changes, which, although they do develop an existing field of research, do require some inventiveness; they require some creativity and some nonobvious, if you will, step to arrive at. You can quite easily say that stamp collecting, which is perhaps directly implied by the things that you already have, is obvious. And then over here you have actual inventions, which are not directly implied by the things you already have. JUDGE RADER: You realize what you are doing is using obviousness to define obviousness. QUESTIONER: Yes. JUDGE RADER: You have not given us anything to help us, but you have helped define the problem. QUESTIONER: Well, when I say “directly implied,” I mean you have an invention and then you have a number of very simple variations on that invention. JUDGE RADER: You can give us synonyms for obviousness, but still you have not told us why incremental changes along that vector should or should not be patentable. QUESTIONER: I guess the essential problem I have is conceiving the field as a graph, as a two-dimensional graph, whereas I see it more as being an entire plane. Over here you have an invention and the things around that invention, and over here you have something much different. While it is still in the same body of knowledge and still covers the same fundamental principles, it represents different ideas. While they could still be considered, if you portrayed it on a two-dimensional graph, incremental changes, they are not directly implied by one another. JUDGE MICHEL: I hope we do not go down the road of incremental versus pioneering, because that is definitely the road to hell. We have already tried that. We know that is a deadend. So we should not go down that one again. This isn’t the Nobel Prize in Science we are giving out. This is commercial law. This is real-life stuff. This is about sales and investments and ordinary mundane things. So whether the invention is incremental (two inches long) or moderate (twenty inches long) or huge (three meters long) is entirely beside the point. What we are looking at in the obviousness standard is a proxy: that it likely took some ingenuity, it likely took some effort, it likely took some money, it likely took some research. It will not be true every time because it is only a proxy, it is an approximation. That is the best you can do in law. It is not perfect. It is not the Nobel Science Prize. MR. RICHARDS: Judge Newman, did you want to say something? Then I think that is going to have to be it. JUDGE NEWMAN: Let me just point out that this isn’t different from any other area of law. Most of the situations one encounters are not right here, in the midst of this gray area. What happens is that there are situations from time to time, a minority of situations, which are very close questions. In trying to decide those close questions, one comes up perhaps with generalizations, which then you spend the rest of your career explaining away, because we are still just talking about a relatively few narrow situations.

358 CHAPTER V: PATENT LAW However, those are the ones that end up in litigation. So if you just look at the litigation record, you get a distorted feeling. You get the feeling that all patentees are overreaching, you get the feeling that all infringers are greedy copyists looking for a free ride, and you get the feeling that all inventions could go either way and are marginal and that everything the Patent Office does is suspect. That isn’t the real world, but it is a picture that judges get, it is a picture that litigators get, it is a picture that sometimes, for one reason or another, is presented to legislators. You and this group, the leaders of this community, know how to put it back into perspective. I think we really need to work on that. MR. RICHARDS: Thank you very much indeed.

CHAPTER V

Patent Law Part B: Nonobviousness/Inventive Step Section 1(b): KSR and its Aftermath in Europe and Asia Moderator JOHN RICHARDS

Ladas & Parry (New York) Speakers JOHN RICHARDS

PETER VERMEIJ

Ladas & Parry (New York)

Vice President, European Patent Office, DG 2 (Munich) Panelists

PROF. MARTIN J. ADELMAN

JOHN PEGRAM

George Washington University Law School (Washington, D.C.)

Fish & Richardson P.C. (New York)

HON. KEN ASAI

HON. RANDALL R. RADER

IP High Court (Tokyo)

Court of Appeals for the Federal Circuit (Washington, D.C.)

MR. RICHARDS: We will now turn to the effect of KSR1 in the international situation. I will

begin with a very quick overview of the law on obviousness in a few countries that seem to be important and then we will get into more detailed discussion. 1 KSR Int’l v. Teleflex, Inc., 127 S. Ct. 1727 (2007) (holding that Graham v. John Deere Co., 383 U.S. 1 (1966), controls obviousness; that “the results of ordinary innovation are not the subject of exclusive rights under the patent laws”; and warning that a rigid application of teaching/suggestion/motivation (TSM) as a litmus test for obviousness is inconsistent with the Graham framework, but stopped short of rejecting the TSM test outright. Thus, the TSM shortcut for an obviousness analysis is no longer available. The Court’s decision immediately focuses the obviousness spotlight back onto the framework that has controlled the issue for more than forty years, forcing everyone who has grown...

360 CHAPTER V: PATENT LAW

Comparative Obviousness What is the Purpose of the Nonobviousness Requirement? How do the EPO, UK, Germany and Japan Approach the Question? John Richards* I. BACKGROUND

The idea that a patent needed to be nonobvious was not originally in patent statutes. What is the purpose of the inventive step requirement? (1) Some subjective reward for brilliance. (2) To prevent patents from being granted for what naturally lies in the road of development (ob via). (3) To cut down on the number of patents. Traditionally, the idea was that invention in itself carried with it the idea that something should not be obvious, as in this quote from Hotchkiss v. Greenwood: “unless more ingenuity and skill [is applied in the new invention] … than were possessed by an ordinary mechanic acquainted with the business, there was an absence of that degree of skill and ingenuity which constitute essential elements of every invention.”2 Similar idea in England, in Harwood v. Great Northern Railway: “I think the law is well and rightly settled, for there would be no end to the interference with trade and liberty of adopting any mechanical contrivance, if every slight difference in the application of a well-known thing should be held to constitute the ground for a patent.”3 Both of those cases were decided long before we had any requirement for nonobviousness or inventive step as such. In the early days in the United States, the requirement was that something was “new” and useful.”4 In the United Kingdom, it was simply that it needed to have “a manner of new manufacture.”5 The law in most countries did not specifically address the question of nonobviousness until the mid-twentieth century. The first attempt to formulate a test for obviousness in England that I am aware of was in 1928, in Sharpe & Dohme v. Boots, the so-called “Cripps Question”: “Was it for all practical purposes obvious to [the skilled worker in the field concerned], in the state of knowledge existing at the date of the patent [the filing date], which includes the literature then available to him and his general knowledge, that he could [make the invention claimed]?”6 A fairly low standard to satisfy obviousness. As a student, I always thought this was totally meaningless — it says “it’s obvious if it’s obvious.” But Cripps had been British Ambassador to Moscow during World War II, Chancellor of the Exchequer, very eminent. So what did I know? comfortable with the TSM test (including the Federal Circuit, the Patent and Trademark Office, and the patent bar) to return to full and proper Graham analyses when assessing the obviousness of patent claims. Importantly, the Court’s opinion touches on several other issues, including the roles of “hindsight bias” and common sense in an obviousness inquiry, a question about the rationale for affording a presumption of validity to the patent-in-suit, which avoided a Graham analysis during prosecution, and a rejection of the rigid rule that “obvious to try” is per se insufficient to show obviousness), available at http://www.supremecourtus.gov/opinions/06pdf/04-1350.pdf. * Ladas & Parry LLP, New York. 2 Hotchkiss v. Greenwood, 52 U.S. (11 How.) 248 (1851). 3 Harwood v. Great N. Rw., 11 H.L. Cas. 654 (1865), per Lord Westbury. 4 Patent Act of 1790, ch. 7, 1 Stat. 109-112 (Apr. 10, 1790). 5 See, e.g., Losh v. Hague, 1 Webster’s Pat. Cas. 202, 208 (1838). 6 Sharp & Dohme Inc. v. Boots Pure Drug Co. Ltd., (1928) 45 RPC 153.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 361

The U.K. Patents and Designs Act of 1932 was the first attempt at a statutory definition or a statutory requirement. It said that a patent could be revoked if “the invention is obvious and does not involve any inventive step having regard to what was known or used prior to the date of the patent.”7 The U.K. Patent Office was not at that time given the right to look at obviousness. Obviousness was considered far too important to entrust to civil servants; it could only be dealt with by the courts. We might want to bear that history in mind. In Germany, the Imperial Patent Act of 1877 simply talked about “novelty” and “industrial applicability.”8 In the early days of German law, two specific tests were required: “technical advance in the art” (technischem Fortschritt) and a degree of “inventivity” (erfindung shöhe) — nonobviousness in the sense that we are using it today. By the 1930s, it became clear that both were required for a patent to be valid. The Patent Office in Germany was entrusted with the task of assessing these requirements. Then we get the “flash of creative genius” requirement for patentability in the U.S. Supreme Court’s Cuno Engineering v. Automatic Devices Corp. decision, which took things to a totally different level for a while. In 1952, 35 U.S.C. § 103 brought it back, overruling Cuno, and said that the method or manner in which the invention was made is irrelevant: “A patent may not be obtained though the invention is not identically disclosed or described as set forth in section 102 of this title, if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains. Patentability shall not be negated by the manner in which the invention was made.”9 Graham v. John Deere in 1966: “While the ultimate question of patent validity is one of law, the section 103 condition lends itself to several basic factual inquiries. … the scope and content of the prior art are to be determined; the difference between the prior art and the claims at issue is to be determined; and the level of ordinary skill in the pertinent art resolved.”10 Such secondary considerations as commercial success, long felt but unsolved needs, failures of others, etc., might be utilized to give light to the circumstances surrounding the origin of the subject matter sought to be patented. As indicia of obviousness or nonobviousness, these inquiries may have relevancy. II. EUROPEAN PATENT CONVENTION

The European Patent Convention (EPC) definition became effective in 1978: “Under Article 52, to be patentable, an invention must be susceptible of industrial application, new, and involve an inventive step.”11 Patents and Designs Act 1932, 22 & 23 Geo. 5, c. 32 (Eng.). Patentgesetz [Patent Act], May 25, 1877, RGBI I at 501 (F.R.G.). 9 Patent Act of 1952, Pub. L. No. 593, 66 Stat. 792, 798 (1952), 35 U.S.C. § 103. 10 Graham v. John Deere Co., 383 U.S. 1, 17–18 (1966) (Test for Obviousness: (1) Determine the scope and contents of the prior art; (2) ascertain the differences between the prior art and the claims at issue; (3) resolve the level of ordinary skill in the pertinent art; (4) consider objective evidence present in the application indicating obviousness or unobviousness). 11 Convention on the Grant of European Patents, signed at the Munich Diplomatic Conference for the Setting up of a European System for the Grant of Patents on Oct. 5, 1973, 13 I.L.M. 270 (1974), 1160 U.N.T.S. 23, available at http://www. epo.org/atents/law/legal-texts/epc.html [hereinafter EPC 1973]; The European Patent Convention, revised by the Act revising the EPC, Nov. 29, 2000, entered into force, Dec. 13, 2007. Upon entry into force of the revised text of the Convention, the text valid until that time (EPC 1973) ceased to apply. Cf. Revision Act art 8(2), available at http://documents.epo.org/projects/babylon/eponet.nsf/0/E4F8409B2A99862FC125736B00374CEC/ $File/EPC_13th_edition.pdf: § 1 European patents shall be granted for any inventions which are susceptible of industrial application, which are new and which involve an inventive step. 7 8

362 CHAPTER V: PATENT LAW Article 56 defines inventive step in the following terms: “An invention shall be considered as involving an inventive step if, having regard to the state of the art, it is not obvious to a person skilled in the art.”12 So basically here the EPC was putting inventive step and obviousness back together again. It is important to note that the German and French texts of the EPC do not use the words “inventive step.” They talk about an “inventive activity.”13 “Inventive step,” I think, was incorporated into the English version of the EPC because of the U.K. Patents and Designs Act 1932 definition. In France, there was no requirement for a nonobviousness/inventive step until the 1968 statute,14 but prior to that the French courts had created a concept of “patentable novelty.” Patentable novelty was not strict novelty, in the sense that the Anglo-American tradition looks at it and determines that something is new if it is not specifically disclosed in prior art. The French concept of novelty has a penumbra of things that were evident from the prior art included within what is regarded as lacking in novelty. Germany took the view that it did not wish to be bound by previous decisions on “inventive activity” and deliberately chose a different German term, Erfiderische Tatigkeit, to implement the EPC in 1981,15 rather than the previous traditional term, Erfindungshöhe,16 (1) to avoid implicit incorporation of specific national traditions into the interpretation of the EPC and (2) to avoid the possibility that literal translation of the term as “inventive height” would set the bar too high. During the late 1970s, outside the United Kingdom, the European national laws that were amended to conform with the language of the EPC — and most European laws were — were written on a new slate. As will be seen later, however, this has not resulted in them all taking the same approach. In the United Kingdom, unfortunately, because we continued to use the same language as we had done previously, we have some residue of prior law.17 III. EUROPEAN PATENT OFFICE

The European Patent Office (EPO) very early on adopted the so-called “problem-and-solution” approach to inventive activity: 18 To assess inventive step on an objective basis, it is necessary to identify the problem and then look to see whether what is done creates a solution to that problem. However, the EPO says that the problem to be solved can change as you go § 2 The following in particular shall not be regarded as inventions within the meaning of paragraph 1 • discoveries, scientific theories and mathematical methods; • aesthetic creations; • schemes, rules and methods for performing mental acts, playing games or doing business, and pro-grams for computers; • presentations of information. § 3 The provisions of paragraph 2 shall exclude patentability of the subject-matter or activities referred to in that provision only to the extent to which a European patent application or European patent relates to such subjectmatter or activities as such. EPC 1973, art. 52. 12 EPC 1973, art. 56. 13 The German text, Erfinderische Tätigkeit, and the French text, activité inventive, both effectively mean “inventive activity” rather than “step.” 14 Law No. 68-1, Journal Officiel de la République Française [J.O.] [Official Gazette of France], Jan. 3, 1968, ¶ 13, translated in 67 PAT. & TRADE MARK REV. 100, 100–09, 128–36 (1969). 15 Patentgesetz (Patent Act) 1981, available at http://www.uni-regensburg.de/Einrichtungen/FUTUR/PatG.pdf. 16 Patentgesetz (Patent Act) 1936, RGBI II at 117 (F.R.G.). 17 Patents Act 2004 (Commencement No. 2 and Consequential, etc. and Transitional Provisions) Order 2004 (entered into force Jan. 1, 2005), available at http://www.opsi.gov.uk/ACTS/acts2004/en/ukpgaen_20040016_en_1. 18 See Case T 1/80, 1981 O.J. 206.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 363

through the case, so if different additional prior art comes up of which the inventor was not aware at the time the application was written, then you can redefine the problem; and as long as you can derive the problem somehow from the documents filed, then you have a problem that needs to be solved. You then look at the knowledge of one skilled in the art and see whether there is something that bridges that gap. Rule 42(a)(c) states: “The description shall … disclose the invention, as claimed, in such terms that the technical problem, even if not expressly stated as such, and its solution can be understood, and state any advantageous effects of the invention with reference to the background art.”19 The EPO Technical Board said in Fibre Reactive Compounds/Bayer: “It is necessary to identify the closest piece of prior art as the starting point, to determine in the light thereof the ‘technical problem’ which the invention addresses, to verify that the technical problem is solved by all embodiments encompassed within the claimed solution, and to examine whether the claimed solution is obvious or not in view of the state of the art.”20 What is the closest prior art? According to the EPO Guidelines: “The closest prior art is that combination of features, disclosed in one single reference, which constitutes the most promising starting point for an obvious development leading to the invention. In selecting the closest prior art, the first consideration is that it should be directed to a similar purpose of effect as the invention, or at least belong to the same or a closely related technical field to the claimed invention.”21 Thus, the Guidelines place a crimp there on what the starting point is. According to the Guidelines, “In practice, the closest prior art is generally that which corresponds to a similar use and requires a minimum of structural and functional modifications to arrive at the claimed invention.”22 Who is the “person skilled in the art?” My reading of it is that we basically have not really gotten into the degree of competence of the person skilled in the art to any serious extent yet in Europe. The best definition is probably: “Whilst … generally accepted definitions of the notional ‘person skilled in the art’ do not always use identical language to define the qualities of such a person, they do have one thing in common, namely that none of them suggests that he is possessed of any inventive capability. On the contrary, it is the presence of such a capability of the inventor which sets him apart from the notional skilled person.”23 Thus, the person skilled in the art has to have some sort of “inventive capability,” but not enough to make him an inventor. So not too helpful. The EPO Guidelines set out a test of obviousness: “The term ‘obvious’ means that which does not go beyond the normal progress of technology but merely follows plainly or logically from the prior art, i.e., something which does not involve the exercise of any skill or ability beyond that to be expected of the person skilled in the art.”24 IV. GERMANY

Germany basically has a problem-and-solution approach similar to the EPO, but with less emphasis on identifying a particular piece of prior art as the closest in order to start the EPC 2000, Rule 42(1)(c). See T 1059/95, Fibre reactive compounds/Bayer (EPO Tech. Bd. App. 1995); see also T 641/00, COMVIK GSM AB v. DeTeMobile Deutsche Telekom Mobile Net GmbH (EPO Tech. Bd. App. 2002), 2003 O.J. EPO 319, available at http://legal.European-patent-office.org/dg3/pdf/t0064lep1.pdf. 21 Guidelines for Examination in the European Patent Office ch. IV, 11.7.1 (Dec. 2007), available at http://documents. epo.org/projects/babylon/eponet.nsf/0/4C0AAA2182E5D2F2C125736700567D71/$File/guidelines_2007_ complete_en.pdf [hereinafter EPO Guidelines]. See also T 20/81, 1982 O.J. EPO 217; T 24/81, 1983, 133. 22 EPO Guidelines, supra note 21, ch. IV 11.7.1; see also T 606/89 (not published in O.J.). 23 T 39/93, Allied Colloids Ltd. (EPO Tech. Bd. App. Feb. 14, 1996), 1997 O.J. EPO 134. 24 EPO Guidelines, supra note 21, ch. IV, 11.4. 19 20

364 CHAPTER V: PATENT LAW problem-and-solution analysis.25 There is a tendency to look for creative achievement as well as technical progress and other objective factors as primary indicia of inventive activity. The German Supreme Court, which has its own Patent Chamber, is probably the highestranking patent tribunal in the world. It typically sends cases out to have an expert provide a report to the court. It requests information on the steps the person skilled in the art had to do in order to get the solution of the patent, whether the person skilled in the art has a reason to start in the direction of the steps that are leading to the invention and what are the pros and cons that the person skilled in the art would evaluate in getting to the solution of the patent on the basis of these kinds of considerations. One issue that is raised is precisely what Judge Rader was talking about previously, namely: what is the trajectory of the art and how fast is the art moving? V. ENGLAND

England, as I said previously, is bedeviled by the fact that the language of the present statute harks back to language of an earlier statute, which was aiming to do something different. The current test, based on Windsurfing v. Tabur Marine26 and Pozzoli v. BDMO, a Robin Jacob decision of last year,27 is: 1(a) - Identify the notional “person skilled in the art”; 1(b) - Identify the relevant common general knowledge of that person; 2Identify the inventive concept of the claim in question; or if that cannot be done, construe it; 3Identify what, if any, differences exist between the matter cited as forming part of the “state of the art” and the inventive concept of the claim or the claim as construed; 4Viewed without any knowledge of the alleged invention as claimed, do those differences constitute steps which would have been obvious to the person skilled in the art or do they require any degree of invention?” So in England the test requires two different assessments of what has occurred prior to the filing of the patent application. We have to look at the art twice to determine: (1) what is common general knowledge forming part of the background against which obviousness is to be judged; and (2) the piece of prior art that is to be considered in making the definitive determination of obviousness.28 Expert evidence on what is common general knowledge is crucial. Once the common general knowledge is established, the prior art (possibly including combinations if they can be put together by an unimaginative man with no inventive capacity, but often a single reference) is reviewed in the light of that common general knowledge. Identifying the knowledge of one skilled in the art has seemed to take an enormous amount of time and effort in any piece of English litigation. So again, as I was saying before, there is a problem in doing this at the Patent Office level. It is fine for the courts to do this, but it is not so easy when you are prosecuting an application. VI. JAPAN

In Japan, Patent Law Section 29(2) says that a patent shall not be granted “when an invention could easily have been made, prior to the filing of the patent application, by a person of ordinary 25 See Richtlinien für die Prüfung von Patentanmeldungen (Prüfungsrichtlinien) P2796 [German only], available at http://www.dpma.de/formulare/patent.html. 26 Windsurfing Int’l Inc. v. Tabur Marine (Great Britain) Ltd., [1985] R.P.C. 59, 73 n.74. 27 Pozzoli v. BDMO SA, [2007] EWCA (Civ) 588 (Jacob, J.). 28 See U.K. Intell. Prop. Off., Manual of Office Practice (last updated July 2008), available at http://www.ipo.gov. uk/p-law-manual-practice.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 365

skill in the art to which the invention pertains, on the basis of an invention or inventions [in the prior art].”29 The Japanese Patent Office Guidelines say you have to look at whether one skilled in the art has: (1) common general knowledge; (2) the ability to carry out ordinary technical means for research and development; (3) the ability to exercise ordinary creativity in selecting materials and changing designs. The rejection is proper when: (1) the invention is selection of an optimal material, workshop design modification, or mere juxtaposition of features; (2) there is probable cause or motivation to make the invention.”30 However, advantages set out in the specification can be used to substantiate inventivity. This will go a long way towards rebutting a case of obviousness, weighting towards obviousness on the other side. I also understand that in Japan – Judge Rader will be upset – not much weight is put on “objective indicia” (secondary factors) of nonobviousness, unless you can show that you have disadvantage. JUDGE RADER: Don’t be too quick. They do consider some of them. MR. RICHARDS: Yes, to some extent, but not to the extent that I think you, at least, would like. JUDGE RADER: That is true. MR. RICHARDS: In the United States, a patent is presumed valid. Clear and convincing evidence is needed for a court to hold a patent invalid. Contrary to Europe, therefore, the U.S. Patent and Trademark Office (USPTO) has the burden of getting it right. The U.S. Supreme Court in KSR v. Teleflex stated: “… as progress … is expected in the normal course, the results of ordinary innovation are not the subject of exclusive rights under the patent laws. Were it otherwise, patents might stifle rather than promote the progress of the useful arts.”31 That is a brief overview of the international situation. You can see that there are a number of different ways of approaching obviousness around the world. I will now turn things over to Peter Vermeij of the European Patent Office.

Raising the Bar Peter Vermeij* My name is Peter Vermeij. I work for the European Patent Office. I started the same date as Alison Brimelow, our president, nine months ago. I. INTRODUCTION

We are, indeed, studying at the moment the quality of patents. That was initiated after the scenario study that was conducted under the presidency of Alain Pompidou showed very much that we consider the patent system as it stands is probably not in very calm waters. As Alison Brimelow, our president, says, it’s a bit like global warming: it is changing; you don’t know where it is going; you don’t know what the problems are. Patent Act, Act No. 121 of 1959, § 29(2), translated in http://www.cas.go.jp/jp/seisaku/hourei/data/PA.pdf. Japan Patent Office (JPO), Examination Guidelines for Patent and Utility Model pt. II, ch. 2, § 2.4 (Dec. 28, 2000), available at http://www.jpo.go.jp/tetuzuki_e/t_tokkyo_e/1312-002_e.htm [hereinafter JPO Guidelines]. 31 KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727, 1735 (2007). * Vice President, DG Operational Support, European Patent Office, Munich. 29 30

366 CHAPTER V: PATENT LAW The patent system is increasingly used as a business tool, as an economic weapon, irrespective of the merit or quality of patents. This results in the perception that the value of patents as decreased. Therefore, we consider this to be a situation that we would like to address. There is also the perception that current quality standards are inappropriate for society’s needs. There has been increasing criticism from applicants, Member States, and academics. You might think that we are very keen to get as many patents as we can. Well, the answer is absolutely not. We do not consider more patents to be better. We simply are a patent authority, and we would like to grant patents of good quality. We are a little worried that, when you look at European numbers for R&D and the numbers of patents, we get many more patents than there is an increase in R&D. That is something that is worrying us. Our goal is: Grant patents only for innovations with sufficient inventive merit meeting needs of “society.” What are we doing at the moment? We have a special program, which is part of EPO’s strategic renewal process. We launched a couple of months ago three projects. We are calling them “The Domain: Raising the Bar.” I am the project leader. The three projects are the following: (1) Changes to our existing practices within the current legal framework: no amendments to the EPC; main focus on internal quality. (2) Changes to our legal framework, the EPC. The main focus is on inventive step and the “skilled person.” (3) Last, but certainly not least, is the greater involvement of applicants, representatives, and third parties. We consider this very important. The work starts not when an application arrives at our office; it starts with industry and the representatives. The aim is to ensure that applicants adhere to appropriate quality standards. I am not from the patent world. I worked most of my life in the Dutch government. This is my first experience with IP. It is a bit a surprise for me that, after thirty years, we are talking about these internal practices. II. IMPROVEMENTS TO INTERNAL PRACTICES

A brief overview of the first part, improvements to internal practices, which we consider to be the things we would like to take up. A. Communication of Quality Results The first is communication of quality results. Results of quality control allow identification of specific issues where quality of searches and granted patents can be improved. This requires better communication of quality results at the examiners’ level. Yes, we do a lot of quality control. But as it stands, in fact, the information we get from our systems goes to the managers, but it does not go to the examiners. That is a bit strange. You would think that examination is a nice job, but you would like to improve your work, and therefore you might want to know what is actually going around in the office, also with your colleagues. But my feeling is that being an examiner in the EPO is a very lonely job. People do it by themselves. Of course, we have the Examining Division. But, in fact, we can do a lot better if we share the information on quality control issues with the examiners. So this is on the top of our list. The goal is to increase awareness on existing quality problems and discuss possible solutions to “raise the bar” of searches and granted patents.

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B. Search Documentation The second part is search documentation. Documentation of search process is a valuable means of assessing the quality of searches, but a record of search strategy is not always provided. We will include documentation of how the search has been performed in every search report. Our goal is to ensure the completeness of the search. This is also a part where you can say: “Well, it’s strange that you have not done it.” In fact, when our examiners start a search, they do it on their own. They come up with a good document at the end, the search report. But there is not a systematic approach in how the search has been done. I am responsible in the office for quality management, so I think it makes sense to share this information as well and to make sure that examiners can benefit from the simple fact that if you can prove that a certain strategy is successful, certain queries are successful, then you might want to give that information to your colleagues so that we can improve overall our system. The discussion in the office is: “Well, this might take some time, and time is scarce.” So this is not welcomed immediately by staff representatives or examiners, but I think we have a case here. Also, because we are embarking on a route that many offices in the world have already done, we would like to be certified with an ISO 9001 certificate. This is simply a fact of life. We should do this. C. Harmonized Practice in Grant Procedure The third part is more harmonized practice in our grant procedure. We see that there are problems in the later stage of examination proceedings leading to unjustified delays (e.g., late-filed claims, auxiliary requests, non-appearance at oral proceedings). We have no straightforward procedure in the office. Examiners attempt different solutions. Therefore, on the top of the list — and this initiative comes also from our examiners — is to define a common and uniform procedure within the present legal framework. Our goal is to improve the harmonization and efficiency of the grant procedure. Part of our ongoing discussions is looking at ways to strengthen the role of the examining division. I simply mention this because it is obvious to use the term that this is a debate, but this is, let’s say, under discussion. III. STUDY LEGAL FRAMEWORK

The second part is to study our legal framework. In our evaluation of the right patentability standards, we look at: • EPO case law and its integration into guidelines and internal instructions. • Standards and practice in Member States. • Standards and recent developments in our colleague offices in the world (the USPTO and Japan Patent Office (JPO)). • Reasonable needs of the user community. • The right benchmarks for inventive step. Before the end of 2008 we will submit concrete proposals for internal approval. We do not have real studies yet, but we have done some homework. The first results of the reviews indicate: • The role of the “skilled person,” his knowledge and capabilities: When we look at the case law, we see that in many cases there are good examples of what is considered to be the “skilled

368 CHAPTER V: PATENT LAW person.” The law was written a long time ago. Lucky me, the lawyer who drafted the EPC (a German, by the way) is also my director who did the reviews. • In his opinion, our Guidelines can benefit from an update. Our Guidelines have not been changed over the recent years on this point. We have seen case law that very clearly indicates that the “skilled person” is presumed to be an ordinary practitioner, aware of what is common general knowledge in the art at the relevant date. What is interesting is that in the case law it is not forbidden that he crosses the corridor in his office to consult with a neighbor who might be a specialist in another technical field, which means that the “skilled person” may be a skilled group. When we look at the case law in biotech, it is very obvious that the “skilled person’s” attitude is considered to be very conservative. Such a person would not go against an established prejudice. • The yardstick is not only related to inventive step (Article 56 EPC) but also to sufficiency of disclosure (Article 83 EPC). However, you need to be aware that if you make a change, for instance, in one part of the EPC, that requires, by definition, making a change in another place, which might not lead to a higher standard. So we need to be very careful. IV. FOCUS ON INVOLVEMENT OF APPLICANTS, REPRESENTATIVES AND THIRD PARTIES

The third part focuses on involvement of applicants, representatives, and third parties. When I make my presentation to examiners on this issue, I always start with quotations from third parties. Examiners always feel that maybe it’s me or Alison Brimelow who is very keen to make some changes. But in fact, no. Industry is keen, as the following quotations indicate: Applicants must take responsibility for quality patent preparation and prosecution and not rely solely on the examiner. (Marc S. Adler, Former President, Intellectual Property Owners, USA. “What is Quality Patent Prosecution?” FICPI/AIPLA Colloquium, Amsterdam, June 8 & 9, 2007.) Inventors should be encouraged to have their applications drafted in a format which meets the EPO Guidelines. (Chris Mercer, President of European Patent Institute (EPI), “Point of View from the Patent attorney profession: All that Glitters Is Not Gold”, pp. 27–34 of Quality Matters: Conference Proceedings. Quality in the European Patent System, A Conference at the EPO, The Hague, November 21 & 22, 2005.) Reduce the time limit for requesting examination following publication of the European Search Report and oblige the applicant to react to the Extended European Search Report (EESR). (The Representative of Business Europe, December 2007, Administrative Council Meeting.)

So this initiative is not solely coming from me or Alison Brimelow. This is very encouraging. I think this is much appreciated also by our examiners, who are not always aware of this. I think this shows that we are in a good position to try to influence the debate and the quality of patents. Which brings me to the last part, what we consider to be the four top priorities when it comes to involvement of applicants: (1) At the search stage, apply Rule 43(2) EPC — search only one independent claim per category. This is greatly appreciated by our examiners when we mentioned this. (2) When entering the examination phase, the applicant must react to the Written Opinion of the International Search Authority (WOISA) or European Search Option (ESOP) by making amendments or providing justification for not doing so. It is not always the case, but it will be very helpful to get a reaction.32 32 See Jeremy R.M. Scott, “When Is a Search Not a Search? The EPO Approach”, 29 World Pat. Info. 108–116 (June 2007).

PART B: NONOBVIOUSNESS/INVENTIVE STEP 369

This will be, of course, debated with EPI and with Business Europe, among others. We foresee that this summer we will have some talks also with our Member States who are very interested in this issue. In fact, this is part of our workload study. It started with the Member States, so we will present this to them as well. (3) In examination, applicants must state what amendments have been made, where the bases for the changes are, and what relevance the amendments have with regard to patentability. (4) Implement a Code of Practice for applicants and representatives. In my previous job, I worked for the Ministry of Economic Affairs, and I saw that in some situations it was very hopeful to work together on the basis of a kind of “code of practice” with industry. We will see how far we can go here. I presume that having a better understanding of what is beneficial for the whole system is a good way forward.

MR. RICHARDS: Thank you very much.

I know Judge Rader has to leave. Do you want to make some quick comments? JUDGE RADER: Just a couple quick comments. First, I would like to build on something that one of the more eminent patent scholars in the room, whom I greatly respect, my brother, Jay Thomas, commented in the previous panel (see Chapter V.A, supra this volume), the problem-solution approach and the potential difficulties that presents. It also prompts a word of caution. Very often, the inventive step itself is wrapped up in defining the problem. If you presuppose the definition of the problem, you have engaged in a pretty sophisticated form of hindsight. You have written out a good deal of the conception of that particular invention. That might be one thing to consider as we move forward. The other comment, very quickly, is to build again on something we talked about last year. As we try to deal with defining what makes an advance inventive, particularly when it takes an incremental form, we always come back to talking about amounts of investment and pace and things that we might generally throw into the category of secondary considerations, or objective criteria. I find myself once again suggesting that might be a productive way for us to direct our inquiries as to how to define the inventive step. Now, if you are quick, you will say: “A lot of those things happen after the time of invention. Aren’t you yourself now importing evidence post-invention into an analysis of something that happened before that evidence arose?” The answer is: “Yes, with some exceptions.” Unexpected results probably fall into the other category. And by the way, the Japanese accept that form of secondary-consideration evidence because it occurs before the time of invention. But that would put a particular emphasis on the nexus requirement of secondary considerations, ensuring that this evidence, which has arisen after the time of invention, can be tied to the claimed features. MR. RICHARDS: Thank you, Judge Rader. MR. PEGRAM: Before Judge Rader leaves, I would like to ask him one question: If you are going to look at secondary considerations, how can the Patent Office do that when they are examining up-front, where there is a presumption of validity, and yet you have this hindsight occurring later in the litigation? How does that all match up? JUDGE RADER: In re Dillon33 set forth the procedural way in which that would happen: The Patent Office would make the rejection on the prima facie case and then you would come back with your rebuttal evidence. I am also suggesting that there will be an additional step where the Patent Office might question the nexus, if you have not adequately established it, and there 33

919 F.2d 688 (Fed. Cir. 1990) (en banc).

370 CHAPTER V: PATENT LAW might be a great deal of inquiry that happens then. In any event, the entire record would be developed when it comes up to the Federal Circuit. MR. PEGRAM: Yes. But there is one gap there, and that is the Patent Office does not have real means for challenging the secondary considerations. JUDGE RADER: You are correct that they are not going to have a way of testing whether those secondary considerations are accurate or not, but it is all a part of the record and the prosecution history. Believe me, if it is not accurate, it will be nailed as soon as at patent is issued that has been granted on the basis of false evidence. MR. RICHARDS: Sometimes the secondary considerations do not emerge until after the patent prosecution is completed. So you then get into a situation where you have to delay prosecution — and there are ways of doing that at the moment in this country — until you have your secondary evidence. Then industry is up in arms, saying, “We don’t know what the patents are going to be.” So we have that problem. JUDGE RADER: Yes, I concede those are procedural difficulties. MR. RICHARDS: Anything more for Judge Rader? JUDGE ASAI: I have one comment to Judge Rader’s comment. Some judges of the IP High Court of Japan are discussing the adoption of secondary consideration, but I am opposing it. JUDGE RADER: Thank you very much. JUDGE ASAI: The second point is that Mr. Richards discussed the JPO Guidelines.34 I am not an officer of the JPO, but I think it may have been misleading. He said “rejection is proper when (1) the invention is selection of an optimal material, workshop design modification, or mere juxtaposition of features; (2) there is probable cause or motivation to make the invention; however, advantages set out in the specification can be used to substantiate inventivity.” But this is an exceptional exception. This exception is rarely applied. This exception may be applied only to pharmaceutical inventions. MR. RICHARDS: I am a pharmaceutical practitioner, so my views may be slanted somewhat. MR. PEGRAM: I have a few comments. First, with respect to Peter’s commentary on raising the bar, I would hope that we are not trying to eliminate good inventions, but, rather, that we are trying to raise the quality of the examination. Of course, one way would be to simply have a quota; you could only have so many patents issue per year. That might push a lot of people to do a better job in their applications because they would be competing with other applicants for the few available slots. But, having made that facetious remark, I would like to make a few more practical points. As to the international harmonization, one of the things that has troubled me for many years is that we do have different standards in the area of inventive step – obviousness, etc. There is certainly a lot to be done there in search sharing, and I compliment the patent offices for what they have been doing. There is a great concern, however, in the United States about presenting one independent claim per category. This flies in the face of certain types of applications that have been traditional in this country. It is a problem now. I think this needs to be addressed by the Trilateral Offices, including the USPTO. Second, the substantive standards differ. For example, the problem-solution approach and the greater focus in Japan on the objectives and the advantages are certainly narrower than the analysis that is done in the United States. U.S. protection traditionally has given broader protection to an inventor, up to the full scope that the prior art permits. Now, maybe that is a good thing and maybe that is a bad thing, in terms of efficient operation of patent offices. I think the inventive step is conceptually different from obviousness. You are dealing with the same prior art under the different systems. But, in my understanding, evaluating 34

JPO Guidelines, supra note 30.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 371

obviousness in the United States looks to the claimed invention as a whole, much more so than the inventive step analysis in other countries. The U.S. courts also look at the secondary considerations having a nexus to the invention. As we said in the dialogue with Judge Rader a few minutes ago, my feeling is that the patent offices lack a practical way to evaluate the secondary considerations. I have a concern over the inclusion of secondary considerations and giving a presumption of validity in one form or another to a patent that has been issued without consideration of the secondary considerations. MR. RICHARDS: Marty, are you going to tell us we are all wrong? PROF. ADELMAN: No, I really do not want to do that. I do want to talk more about Asia. We have talked about Japan, which has undergone rather dramatic change in the way it treats patents. Perhaps it is too difficult. The inventive step bar may be too high. But there is a certain way these things go — it may get higher, then it may get lower. I think it is critically important now in Asia to look at India. India is creating a new patent system. It has 1.3 billion people and a great deal of technology. India recently created an IP appellate board. The Patent Act was amended in 2006 to deal with inventive step, so that essentially you can pass the inventive step standard but not quite meet the standard in infamous Section 3(d) of the Indian Patent Act of 2005.35 Now, I do not have time to go into the details, but there is evidence that this is spreading, at least in Asia, and is being talked about as the way things should go. It is fundamentally a way to weed out particularly pharmaceutical patents; in other words, take good patents and say they are not very good. The best example of this is in the Delhi High Court right now.36 It involves the Roche drug Tarceva®, which is a new drug used for treating cancer. I have looked at the patents on Tarceva. I have looked at the prior art. It is plainly a valid patent, no question about it. No serious court would challenge it. Nevertheless, Cipla has hired one of the leading barristers in India, who is arguing in the Delhi High Court that it is a derivative of an earlier drug and, therefore, does not meet the standard of Section 3(d). So far, the preliminary injunction has been denied in that very recent case, but it will go to trial. This case really ought to be watched, because it is probably far more important than the minor arguments we might have about validity, which at the end of the day is a judgment call, no matter what the words say. But this is a direct attack by the generic pharmaceutical companies, particularly Cipla, on the patent system, using the Section 3(d) argument that it is evergreening. I will not give you all of the spurious arguments that they are making. But I will tell you that right now Cipla is on the market. It is running a risk that it is going to lose its company, but it believes that it will get away with this theft ― there is no other way to describe it — and so far Cipla has prevailed. MR. RICHARDS: Thank you, Marty. One comment on India. Outside of the Section 3(d) area, which deals specifically with chemical/ pharmaceutical patents, my experience with the new Indian law, under which the examiners are now examining for inventive step, is that if you can show that the difference in the prior art is important (and it doesn’t really matter why it is important), then the patent will be allowed. That seems to be as far as the obviousness analysis has gone so far. See Patents Amendment Rules 2006, 455 The Gazette of India 1 (May 5, 2006), available at http://patentofficenic. in/ipr/patent_rules_2006.pdf. The 2005 amendments are available at http://patentoffice.nic.in/ipr/patent/patent_2005. pdf. Section 3(d) denies patents for minor or trivial improvements to known drugs. 36 On Mar. 19, 2008, the Delhi High Court granted a temporary reprieve to Cipla to manufacture and sell its generic version of Erlotinib (Tarceva®) in India. See Shaleen Agrawal, “HC Allows Cipla to Sell Roche Drug”, DNA Money, Mar. 20, 2008, available at http://sify.com/finance/equity/fullstory.php?id=14626687. 35

372 CHAPTER V: PATENT LAW Peter, do you want to make a comment? MR. VERMEIJ: Just another observation. We can discuss prior art and inventive step as much as we want, but I cannot access Chinese prior art. That is a concern at the moment. So it is nice to have a patent system, but if you cannot access information, you are out of business. MR. RICHARDS: I think the most useful thing that could be done internationally would be to set up an international organization whereby the Russians search the Russian literature, one of the East Asian countries searches the East Asian literature, the EPO searches European literature, and the USPTO searches U.S. literature. If they could put all that into one organization, that would do much more to improve the quality of the patent system worldwide than anything else that we could do. That is my personal view. Anything from the audience? Jeremy? QUESTION [Jeremy Brown, Howrey LLP, London]: A comment for Peter. We have heard today how different countries treat the evidence of the state of the art. In the EPO, the emphasis is on printed publications, particularly on the closest printed publication, and you ignore everything else. In the United Kingdom, the crucial evidence is the state of the art; although what is printed may be part of it, it is really what people skilled in the art knew. John commented that across the board the evidence would be very much the same in each country. But in fact that is not the case. It would be very different in the United Kingdom, say, compared to a typical continental European forum. Now, Peter, you say that the EPO is considering modifying its treatment of obviousness, looking more at the role of the skilled man. That means bringing in evidence as to who is the relevant skilled man and what his knowledge would be. You would then get into a complicated examination procedure where you end up with disputes over these issues. Isn’t there a great risk there that you will slow down things rather than speed them up? And is there really a danger at the EPO that you are getting these so-called “bad” patents, which seem to be more bad press rather than the reality? MR. PEGRAM: Are you speaking of the differences in connection with litigation or in connection with the Patent Office? QUESTIONER [Mr. Brown]: Well, if you say that the Patent Office should do a better job, and you have the problem in the United States that there is a presumption of validity, then you need some harmony. At the moment you have the problem that there are different tests at the Patent Office and in the courts. It is only the court that matters at the end of the day. You should be saying: “Well, let’s forget about all this at the Patent Office. Let’s go back to the old British system — if it’s novel let it go, and then let the courts decide — so at least there is harmony.” MR. PEGRAM: I was specifically asking whether the prior art looked at was the same or different. You were talking about the courts? QUESTIONER [Mr. Brown]: Both at the EPO level and in a lot of the courts in continental Europe, the focus is on printed literature, with less (or little) evidence as to who is the skilled person, the knowledge of the skilled person, and the common general knowledge. In the United Kingdom, all the emphasis is on what the skilled person knew and the common general knowledge. If there is multi-jurisdictional litigation, you may well try to bring that evidence into continental Europe. But, on balance, that evidence is not sought out or relied on in the same way as it is in the United Kingdom or in the United States. The published references ultimately relied on may or may not be the same. MR. PEGRAM: John, what is your experience? My experience, and what we are hearing from the Trilateral Offices, is that they are all interested in the same references. MR. RICHARDS: Yes. But then you have the background against which you apply those references, which is where the difference comes. MR. PEGRAM: That was my point as well.

PART B: NONOBVIOUSNESS/INVENTIVE STEP 373 MR. VERMEIJ: Picking up on this point, at our recent strategic working group meeting in Munich we discussed quality issues. My feeling is that the word “standards” can create difficulty. I noticed that when my principal director of quality was discussing this with a colleague from the USPTO, the word “standard” seemed to lead to the inference that this is written down somewhere, that this has some kind of legal effect. In fact, what we are looking at is respecting the differences in the systems that exist, which will not go away. I do not see that we are going to change our laws immediately, to have a better understanding of what we are doing. That is the starting point. We have to understand the work examiners do in our offices based on the different laws, and what is the effect, what is the way of thinking, and what is the way of reporting. That will be a big help. But if the effect would be that this should lead to a standard – well, we have Geneva,37 we have the World Intellectual Property Organization, we have the PCT.38 That would be a much more logical approach, in my opinion. But yes, we will discuss quality matters. We will take the initiative, and do it this year. We will visit USPTO and JPO. This apparently has not been done previously. It is a valid point. MR. RICHARDS: We have time for one more question from the audience. PARTICIPANT: Responding to Judge Rader’s comment, I can tell him that the problemsolution approach is just a suggestion, like in many countries a red light is a suggestion — you may go or not. You can also, of course, prove inventive step in the EPO by using another system, which is applicable if you have a so-called “problem” invention. Where the problem already is the invention, how can you apply the problem-solution approach? In many cases, the opposition division or the examining division suggests adopting the problem-solution approach. But this is not the Bible. MR. RICHARDS: Thank you very much indeed.

37 Scientific discoveries, the remaining area mentioned in the WIPO Convention, are not the same as inventions. The Geneva Treaty on the International Recording of Scientific Discoveries (1978) defines a scientific discovery as “the recognition of phenomena, properties or laws of the material universe not hitherto recognized and capable of verification.” Art. 1(1)(i). Inventions are new solutions to specific technical problems. Such solutions must, naturally, rely on the properties or laws of the material universe (otherwise they could not be materially or “technically” applied), but those properties or laws need not be properties or laws “not hitherto recognized.” An invention puts to new use, to new technical use, the said properties or laws, whether they are recognized (“discovered”) simultaneously with the making of the invention or whether they were already recognized (“discovered”) before, and independently of, the invention. WIPO, Geneva Treaty on the International Recording of Scientific Discoveries 1978 [location: JX7770 A2 G45 1978 - 3Anx]. 38 Patent Cooperation Treaty, June 19, 1970, 28 U.S.T. 7645, 1160 U.N.T.S. 231, 9 I.L.M. 978 (1970), amended on Sept. 28, 1979, modified on Feb. 3, 1984 and Oct. 3, 2001 (as in force from Apr. 1, 2002), available at http://www. wipo.int/pct/en/texts/pdf/pct.pdf.

CHAPTER V

Patent Law Part C: U.S. Patent & Trademark Office USPTO Rules Changes: Should the PTO Have Substantive Rulemaking Authority? One aspect of the proposed patent reform legislation would give the USPTO authority to issue substantive rules interpreting U.S. patent law, which it has never had before. Should the PTO be permitted to make rules on substantive patent law; and, if so, what effect would this have on patent policy and innovation in the United States? Moderator NICHOLAS GROOMBRIDGE

Weil, Gotshal & Manges (New York) Speaker PROF. JOHN R. THOMAS

Georgetown University School of Law (Washington, D.C.) Panelists CHUCK FISH

DAVID JONES

Vice President & Chief Patent Counsel, Time Warner (New York)

Senior Attorney, Microsoft Corp. (Redmond, WA)

Q. TODD DICKINSON

Vice President & Chief Intellectual Property Counsel General Electric (Fairfield, CT)

376 CHAPTER V: PATENT LAW MR. GROOMBRIDGE: We are the proud possessors of the coveted 6:00 p.m. slot here.

I will very briefly introduce people. I’m Nick Groombridge from Weil Gotshal. It is my pleasure to be moderating this panel. We have Professor Jay Thomas, who was aptly described as one of the sharpest commentators and scholars on patent law here. PROF. THOMAS: The person who said it left the room immediately. MR. GROOMBRIDGE: He left because there was nothing further to say. The panel members are: Dave Jones, who is with Microsoft and is deeply involved in the dialogue on patent reform on behalf of Microsoft and others. Previously to that, he has had an illustrious career on Capitol Hill. Next to him is Chuck Fish, Chief IP Counsel for Time Warner. At the end, Todd Dickinson, who is a former Director of the USPTO, and is now Chief IP Counsel for General Electric. Jay is going to give us a presentation here outlining the issues. We are going to talk about whether the USPTO should have substantive rulemaking authority and why that matters, because it could have profound implications on intellectual property policy in the United States. With that, Jay.

U.S. Patent and Trademark Office Reforms: Regulatory Impacts Upon Innovation and Competition John R. Thomas*

SUMMARY

The interest of the 110th Congress in the patent system has been evidenced by the advancement of substantial reform bills in both the House and Senate. Alongside these congressional proposals, the United States Patent and Trademark Office (USPTO) has engaged in a significant rule-making effort in recent years. This process culminated in new rules that would make several significant changes to the patent acquisition process. First, the rules would limit the number of “continued applications” that could be filed, absent a petition and showing by the patent applicant of the need for such applications. Stated generally, a continued application is one that has been re-filed at the USPTO, commonly following an examiner’s rejection. The USPTO has justified this limitation on the basis that the increasing number of continued examination filings is hampering its ability to review new applications. Second, the rules would limit the number of “claims” that can be filed in a particular patent application, unless the applicant supplies the USPTO with an “Examination Support Document” in furtherance of that application. The USPTO asserts that these rules would lead to a more effective examination process. Critics of the new rules contend that they will negatively impact the ability of innovators to obtain effective proprietary rights. Legal challenges to the rules resulted in the April 1, 2008 decision in Tafas v. Dudas. There, the U.S. District Court for the Eastern District of Virginia concluded that the USPTO claims and continued application rules were substantive in nature. * Visiting Scholar, Resources, Science and Industry Division Congressional Research Service, CRS Report for Congress, Published by the Congressional Research Service, The Library of Congress, Order Code RL34422 (updated Apr. 4, 2008), available at http://www.ipmall.info/hosted_resources/crs/RL34422_080404.pdf.

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Because Congress has not granted general substantive rulemaking power to the USPTO, the District Court declared that the rules were void and therefore unenforceable. At the time of the publication of this report, the USPTO retains the option of appealing this judgment. In addition, the USPTO has proposed reforms that would impose additional applicant disclosure obligations with respect to “Information Disclosure Statements” filed in support of a particular patent application. The USPTO has not yet taken action concerning this rule. Should Congress conclude that the current situation with respect to claims and continued application practice at the USPTO is satisfactory, then no action need be taken. If Congress wishes to intervene, however, a number of options present themselves. In the 110th Congress, H.R. 1908 would expressly provide the USPTO with regulatory authority to specify the circumstances under which a patent applicant may file a continued application. Other possibilities include providing the USPTO with substantive rulemaking authority and more specific reforms directed to the relevant substantive provisions of the Patent Act. I. U.S. PATENT AND TRADEMARK OFFICE REFORMS: REGULATORY IMPACTS UPON INNOVATION AND COMPETITION

Legislative interest in the patent system has been evidenced by the advancement of substantial reform bills in both houses of the 110th Congress.1 Some of the reforms currently under consideration by Congress would impact the United States Patent and Trademark Office (USPTO). Among these proposals are the adoption of patent opposition proceedings,2 changes to the rules governing the publication of pending patent applications,3 and third party submission of information to the USPTO that may be pertinent to the decisions whether to allow a patent to issue or not.4 Alongside these congressional proposals, the USPTO itself has engaged in a substantial rulemaking effort in recent years. This process culminated in new rules that would make several significant changes to the patent acquisition process. First, the rules would limit the number of “claims” that can be filed in a particular patent application, unless the applicant supplies the USPTO with an “Examination Support Document” in furtherance of that application.5 Second, the rules would limit the number of “continued applications” that could be filed, absent a petition and showing by the patent applicant of the need for such applications.6 In addition, the USPTO has proposed reforms that would impose additional applicant disclosure obligations with respect to “Information Disclosure Statements” filed in support of a particular patent application.7 The USPTO rules concerning claims and continued applications are controversial. Some patent professionals are concerned that the rules would make the process of patent acquisition more costly, impede the ability of innovators to protect their inventions adequately, and 1 See John R. Thomas & Wendy H. Schacht, Congressional Research Service, CRS Report for Congress, Patent Reform in the 110th Congress: Innovation Issues. 2 H.R. 1908 § 6; S. 1145 § 5. 3 H.R. 1908 at § 9; S. 1145 at § 7. 4 Id. 5 See Dep’t of Commerce, U.S. Patent and Trademark Office (USPTO), Final Rule Change to Practice for Continued Examination Filings, Patent Applications Containing Patentably Indistinct Claims, and Examination of Claims in Patent Applications, 72 Fed. Reg. 46716 (Aug. 21, 2007) [hereinafter USPTO Rules]. 6 Id. 7 Dep’t of Commerce, USPTO, Changes to Information Disclosure Statement Requirements and Other Related Matters, 71 Fed. Reg. 38,808 (July 10, 2006) [hereinafter IDS Notice]. In addition to the reforms with respect to claiming, continued applications, and IDS practice, the USPTO has also proposed changes to the rules governing claims that define alternative inventions, see Dep’t of Commerce, USPTO, Examination of Patent Applications That Include Claims Containing Alter-native Language, 72 Fed. Reg. 44,992 (Aug. 10, 2007), and has also provided for accelerated examination in certain circumstances, see Dep’t of Commerce, USPTO, Changes to Practice for Petitions in Patent Applications to Make Special and for Accelerated Examination, 71 Fed. Reg. 36,323 (June 26, 2006).

378 CHAPTER V: PATENT LAW ultimately harm innovation. Some have also opined that the rules are inconsistent with the provisions of the governing patent legislation, the Patent Act of 1952. On the other hand, other observers believe that current claiming and continued application practices are subject to abuses that can potentially place undue burdens upon the USPTO during its examination tasks, be harmful to competitive industry, and at times work against the public interest.8 These observers favor reforms that would limit what they see as applicant abuses of the current system. Criticisms of the USPTO rules have led to legal challenges before the U.S. District Court for the Eastern District of Virginia. The result was the April 1, 2008 decision in Tafas v. Dudas.9 There, the U.S. District Court for the Eastern District of Virginia concluded that the USPTO claims and continued application rules were substantive in nature. Because Congress has not granted general substantive rule-making power to the USPTO, the District Court declared that the rules were void and therefore unenforceable. At the time of the publication of this report, the USPTO retains the option of appealing this judgment. Congressional response to the claims and continuing application rules has thus far been limited. In the 110th Congress, H.R. 1908 would expressly provide the USPTO with regulatory authority to specify the circumstances under which a patent applicant may file a continuing application.10 That bill passed the House on September 7, 2007, as the “Patent Reform Act of 2007.” No other pending legislation — including S. 1145, the Senate legislation also titled the “Patent Reform Act of 2007” — addresses the new USPTO rules. This report reviews the USPTO rules that would restrict claims and continuing applications. It begins by offering a summary of the patent system and the role of patents in innovation policy. The context, details, and legal challenges to the new USPTO rules are then explained. The report then offers both the policy justifications for the new rules, as well as concerns that patent professionals and other observers have expressed over their effectiveness and impact. The report closes by identifying congressional issues and options. II. PATENTS AND INNOVATION POLICY

A. The Mechanics of the Patent System The U.S. Constitution provides Congress with the power “To promote the Progress of Science and useful Arts, by securing for limited Times to … Inventors the exclusive Right to their … Discoveries … .”11 In accordance with the Patent Act of 1952 (the “Patent Act”),12 an inventor may seek the grant of a patent by preparing and submitting an application to the USPTO. USPTO officials known as examiners then determine whether the invention disclosed in the application merits the award of a patent.13 In determining whether to approve a patent application, a USPTO examiner will consider whether the submitted application fully discloses and distinctly claims the invention.14 In particular, the application must enable persons skilled in the art to make and use the invention without undue experimentation.15 In addition, the application must disclose the “best mode,” or preferred way, that the applicant knows to practice the invention.16 See Mark A. Lemley & Kimberly A. Moore, Ending Abuse of Patent Continuations, 84 B.U. L. REV. 63 (2004). See Tafas v. Dudas, Case No. 1:07cv846 (E.D. Va. 2007); Smithkline Beecham Corp. v. Dudas, Case No. 1:07cv1008 (E.D. Va. 2007). 10 H.R. 1908, § 14. 11 U.S. Const. art. I, § 8, Cl. 8. 12 P.L. 82-593, 66 Stat. 792 (codified at Title 35 of the United States Code). 13 35 U.S.C. § 131 (2006). 14 35 U.S.C. § 112 (2006). 15 See Invitrogen Corp. v. Clontech Labs., Inc., 429 F.3d 1052, 1070–71 (Fed. Cir. 2005). 16 See High Concrete Structures, Inc. v. New Enter. Stone & Lime Co., 377 F.3d 1379, 1382 (Fed. Cir. 2004). 8 9

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The examiner will also determine whether the invention itself fulfills certain substantive standards set by the patent statute. To be patentable, an invention must meet four primary requirements. First, the invention must fall within at least one category of patentable subject matter. According to the Patent Act, an invention which is a “process, machine, manufacture, or composition of matter” is eligible for patenting.17 Second, the invention must be useful, a requirement that is satisfied if the invention is operable and provides a tangible benefit.18 Third, the invention must be novel, or different, from subject matter disclosed by an earlier patent, publication, or other state-of-the-art knowledge.19 Finally, an invention is not patentable if “the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.”20 This requirement of “nonobviousness” prevents the issuance of patents claiming subject matter that a skilled artisan would have been able to implement in view of the knowledge of the state of the art.21 If the USPTO allows the patent to issue, its owner obtains the right to exclude others from making, sing, selling, offering to sell, or importing into the United States the patented invention.22 Those who engage in those acts without the permission of the patentee during the term of the patent can be held liable for infringement. Adjudicated infringers may be enjoined from further infringing acts.23 The patent statute also provides for an award of damages “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.”24 The maximum term of patent protection is ordinarily set at twenty years from the date the application is filed.25 At the end of that period, others may employ that invention without regard to the expired patent. Patent rights do not enforce themselves. Patent proprietors who wish to compel others to respect their rights must commence enforcement proceedings, which most commonly consist of litigation in the federal courts. Although issued patents enjoy a presumption of validity, accused infringers may assert that a patent is invalid or unenforceable on a number of grounds. The Court of Appeals for the Federal Circuit (Federal Circuit) possesses nationwide jurisdiction over most patent appeals from the district courts.26 The Supreme Court enjoys discretionary authority to review cases decided by the Federal Circuit.27 B. Innovation Policy Patent ownership is perceived to encourage innovation, which in turn leads to industry advancement and economic growth. One characteristic of the new knowledge that results from innovation is that it is a “public good.” Public goods are non-rivalrous and non-excludable, 35 U.S.C. § 101 (2006). Id.; see In re Fischer, 421 F.3d 1365, 1371 (Fed. Cir. 2005). 19 35 U.S.C. § 102 (2006). 20 35 U.S.C. § 103(a) (2006) 21 See KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007). 22 35 U.S.C. § 271(a) (2006). 23 35 U.S.C. § 283 (2006); see eBay, Inc. v. MercExchange LLC, 126 S. Ct. 1837 (2006). 24 35 U.S.C. § 284 (2006). 25 35 U.S.C. § 154(a)(2) (2006). Although the patent term is based upon the filing date, the patentee obtains no enforceable legal rights until the USPTO allows the application to issue as a granted patent. A number of Patent Act provisions may modify the basic twenty-year term, including examination delays at the USPTO and delays in obtaining marketing approval for the patented invention from other federal agencies. 26 28 U.S.C. § 1295(a)(1) (2006). 27 28 U.S.C. § 1254(1) (2006). 17 18

380 CHAPTER V: PATENT LAW for use of the good by one individual does not limit the amount of the good available for consumption by others, and no one can be prevented from using that good.28 The lack of excludability, in particular, is believed to result in an environment where too few inventions would be made. Absent a patent system, “free riders” could easily duplicate and exploit the inventions of others. Further, because they incurred no cost to develop and perfect the technology involved, copyists could undersell the original inventor. Aware that they would be unable to capitalize upon their inventions, individuals might be discouraged from innovating in the first instance. The patent system corrects this market failure problem by providing innovators with an exclusive interest in their inventions, thereby allowing them to capture their marketplace value.29 The patent system purportedly serves other goals as well. The patent law encourages the disclosure of new products and processes, for each issued patent must include a description sufficient to enable skilled artisans to practice the patented invention.30 At the close of the patent’s twenty-year term,31 others may employ the claimed invention without regard to the expired patent. In this manner the patent system ultimately contributes to the growth of the public domain. Even during their term, issued patents may encourage others to “invent around” the patentee’s proprietary interest. A patentee may point the way to new products, markets, economies of production, and even entire industries. Others can build upon the disclosure of a patent instrument to produce their own technologies that fall outside the exclusive rights associated with the patent.32 The regime of patents has also been identified as a facilitator of markets. Absent patent rights, an inventor may have scant tangible assets to sell or license. In addition, an inventor might otherwise be unable to police the conduct of a contracting party. Any technology or know-how that has been disclosed to a prospective licensee might be appropriated without compensation to the inventor. The availability of patent protection decreases the ability of contracting parties to engage in opportunistic behavior. By lowering such transaction costs, the patent system may make transactions concerning information goods more feasible.33 Through these mechanisms, the patent system can act in a more socially desirable way than its chief legal alternative, trade secret protection. Trade secrecy guards against the improper appropriation of valuable, commercially useful, and secret information. In contrast to patenting, trade secret protection does not result in the disclosure of publicly available information. That is because an enterprise must take reasonable measures to keep secret the information for which trade secret protection is sought. Taking the steps necessary to maintain secrecy, such as implementing physical security measures, also imposes costs that may ultimately be unproductive for society.34 The patent system has long been subject to criticism, however. Some observers have asserted that the patent system is unnecessary due to market forces that already suffice to create an optimal level of innovation. The desire to obtain a lead time advantage over competitors, as well as the recognition that passive firms may lose out to their more innovative rivals, 28 See Dotan Oliar, “Making Sense of the Intellectual Property Clause: Promotion of Progress as a Limitation on Congress’s Intellectual Property Power”, 94 Geo. L.J. 1771 (2006)”. 29 See Dan L. Burk & Mark A. Lemley, “Is Patent Law Technology-Specific?”, 17 Berkeley Tech. L.J. 1155 (2002). 30 35 U.S.C. § 112 (2006). 31 35 U.S.C. § 154 (2006). 32 See Rebecca Eisenberg, “Patents and the Progress of Science: Exclusive Rights and Experimental Use”, 56 U. Chi. L. Rev. 1017 (1989). 33 Robert P. Merges, “Intellectual Property and the Costs of Commercial Exchange: A Review Essay”, 93 Mich. L. Rev. 1570 (1995). 34 David D. Friedman et al., “Some Economics of Trade Secret Law”, 5 J. Econ. Persps. 61 (1991).

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may provide sufficient inducement to invent without the need for further incentives.35 Other commentators believe that the patent system encourages industry concentration and presents a barrier to entry in some markets.36 Because the relationship between the rate of innovation and the availability of patent rights is not well understood, we lack rigorous analytical methods for studying the impact of the patent system upon the economy as a whole. As a result, current economic and policy tools do not allow us to calibrate the patent system precisely in order to produce an optimal level of investment in innovation. Thus, each of these arguments for and against the patent system remains open to challenge by those who are unpersuaded by their internal logic. III. CONTINUING APPLICATION PRACTICE REFORM

A. Continued Application Practice The Patent Act allows inventors to file “continued applications.”37 Stated generally, a continued application is one that has been “re-filed” at the USPTO, commonly following the rejection of some or all of its claims. Continued patent applications allow inventors to extend the period of examination at the USPTO in order to negotiate further with a patent examiner, amend claims, submit new claims, and gain additional time to prepare evidence to be submitted to the USPTO in support of their applications, among other potential benefits.38 Under current patent practice, several different types of continued applications exist. A “continuation” application discloses the same subject matter as the original application.39 A “continuation-in-part” application, or CIP, adds some additional subject matter to the original application.40 Finally, a “request for continued application,” or RCE, allows applicants to request additional examination of an application without the need to file a continuation application.41 A simple example illustrates continuation practice. Suppose that an inventor files a patent application on January 1, 2000. After the USPTO examiner subsequently issues a “final rejection” of that application, the inventor files a continuation application on February 1, 2004. The continuation application includes the same disclosure as the 2000 application. By filing it, the inventor may continue to assert to the USPTO that a patent should issue on that invention. If the USPTO approves the continuation application, it will issue as a patent that expires on January 1, 2020 — twenty years from the date of filing of the original or “parent” application. Section 120 of the Patent Act imposes several technical requirements that must be met with respect to continuation applications. First, the continuation application must be filed prior to the patenting, abandonment, or termination of proceedings of its predecessor application. Second, the predecessor and continuation application must have at least one inventor in common. Third, the continuation application must expressly identify the predecessor application.42 Finally, to be entitled to the benefit of the predecessor application, claims within the continuation application must be fully supported by the technical disclosure found within the predecessor application. Claims that reference “new matter” found in the continued application, See Frederic M. Sherer, Industrial Market Structure and Economic Performance 384–87 (1970). See John R. Thomas, “Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties” U. Ill. L. Rev. 305 (2001). 37 35 U.S.C. § 120 (2006). Continued applications are also commonly termed “continuing” applications. 38 See Gary C. Ganzi, “Patent Continuation Practice and Public Notice: Can They Coexist?”, 89 J. Pat. & Trademark Off. Soc’y 545, 574–80 (July 2007). 39 See Transco Prods., Inc. v. Performance Contracting, Inc., 38 F.3d 551, 555 (Fed. Cir. 1994). 40 Id. 41 35 U.S.C. § 132(b) (2006). 42 35 U.S.C. § 120 (2006). 35 36

382 CHAPTER V: PATENT LAW but not in the predecessor application, are entitled only to the actual filing date of the continued application. As noted earlier, such an application is termed a “continuation-in-part,” or CIP.43 It should be appreciated that an applicant may file a continuation application even though the “parent” application has resulted in an issued patent itself. Even in circumstances where the USPTO examiner has allowed all of the claims of a patent application to issue, the inventor may nonetheless file a continuation application. He may do so in order to obtain broader claims, to obtain claims that more closely track his competitor’s products, or for any other reason. Continued applications are widely used in modern patent practice. In 2006, about 29.4 percent of the applications filed at the USPTO were continued applications, as compared to approximately 18.9 percent in 1990 and approximately 11.4 percent in 1980.44 Furthermore, the relevant provisions of the Patent Act place no numerical limits upon the number of continued applications that may be filed. Many existing U.S. patents have relied upon a chain of four, five, or even greater number of continuations, CIPs, and RCEs.45 B. The USPTO Continued Application Rules As part of its rules announcement of August 21, 2007, the USPTO imposed some limitations upon the number of continued applications that could be filed absent a petition by the applicant. In particular, the USPTO rules stipulate that applicants may file only two continuations or CIPs, plus one RCE, with respect to an original application as a matter of right. In order to file additional continued applications, the applicant must submit a petition showing an amendment, argument, or evidence that could not have been previously submitted. The USPTO issued the rules on August 21, 2007, and followed them with an additional “clarification” memorandum on October 10, 2007.46 The rules were to apply to applications filed after November 1, 2007. In addition, the rules were to apply to applications that had been filed at the USPTO prior to November 1, 2007, provided that they had not yet been reviewed by the USPTO. The USPTO rationalized its rule in part on the basis of administrative efficiency. As explained by the USPTO: The volume of continued examination filings … is having a crippling effect on the Office’s ability to examine “new” (i.e., non-continuing) applications. … The cumulative effect of these continued examination filings is too often to divert patent examining resources from the examination of new applications disclosing new technology and innovations, to the examination of applications that are a repetition of prior applications that have already been examined and have either issued or become abandoned.47

The USPTO has also explained that the public interest lies in knowledge of the scope of patent claims. According to the USPTO, the filing of a sequence of continued applications leaves the 43 See also Leesona Corp. v. Varta Batteries, Inc., 522 F. Supp. 1304, 1335 n.153 (D. Del. 1981) (“[B]y definition continuation-in-part applications add matter not disclosed in earlier applications. But, in the face of intervening art, any “new matter” disclosed in a continuation-in-part application cannot be accorded a filing date earlier than the date of filing of the continuation-in-part application.”). 44 USPTO Rules, supra note 5, at 46,718. 45 See, e.g., Hyatt v. Dudas, 492 F.3d 1365, 1367 (Fed. Cir. 2007) (observing that the five applications at issue in the litigation were “all continuation applications with lineages that can be traced back for decades”). 46 USPTO, Clarification of the Transitional Provisions Relating to Continuing Applications and Applications Containing Patentably Indistinct Claims (Oct. 10, 2007), available at http://www.uspto.gov/web/offices/pac/dapp/ opla/preognotice/ clmcontclarification.pdf. 47 USPTO Rules, supra note 5, at 46,718; see also Bruce A. Kaser, “Patent Application Recycling: How Continuations Impact Patent Quality & What the USPTO Is Doing About It”, 88 J. Pat. & Trademark Off. Soc’y 426 (2006).

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public “with an uncertainty as to what the set of patents resulting from the initial application will cover.”48 Academics have also criticized continued application practice. Mark Lemley and Kimberly Moore, then members of the Berkeley and George Mason law school faculties respectively,49 stated that continued application practice has introduced a number of deleterious consequences into the patent law: First, at a minimum, continuation practice introduces substantial delay and uncertainty into the lives of a patentee’s competitors, who cannot know whether a patent application is pending in most circumstances. Second, the structure of the PTO suggests that continuations may well succeed in “wearing down” the examiner, so that the applicant obtains a broad patent not because he deserves one, but because the examiner has neither incentive nor will to hold out any longer. Third, continuation practice can be — and has been — used strategically to gain advantages over competitors by waiting to see what product the competitor will make, and then drafting patent claims specifically designed to cover that product. Finally, some patentees have used continuation practice to delay the issuance of their patent precisely in order to surprise a mature industry, a process known as “submarine patenting.”50

On the other hand, critics of the USPTO rules explain that continuation practice has a number of beneficial attributes. First, some observers believe that continued application practice allows inventors to pursue a cautious, deliberate strategy before the USPTO, allowing them to obtain robust patent rights. This tactic may be appropriate in view of recent judicial opinions that have emphasized the doctrine of “prosecution history estoppel.”51 Broadly stated, this principle allows courts to consider negotiations between the applicant and the examiner when determining the scope of rights associated with a particular patent. In view of these judicial developments, some patent practitioners believe that it is unwise to make certain concessions to the examiner during the course of prosecution. The ability to file a continued application supports this strategy by allowing additional opportunities for discourse between the applicant and examiner.52 Second, critics of the USPTO Rules state that continued applications allow innovative firms to procure patent claims that relate to the products that they will ultimately market. For example, a pharmaceutical and biotechnology firm may file a patent application incorporating claims directed towards a broad category of compounds. At the time of the initial filing, however, that firm may not have conducted the extensive testing and research that is often needed to identify the particular member of that category that will be brought to market. Under current law, once that particular compound has been identified, the firm may file a continuation application specifically claiming it.53 Should administrative rulemaking impose limitations upon continuing applications, some observers believe that pharmaceutical and biotechnology firms in particular may potentially be unable to obtain claims that both cover their marketed products and be able to withstand validity challenges on a reliable basis.54 This tendency could potentially diminish the effectiveness of USPTO Rules, supra note 5, at 46,718. Professor Lemley has since joined the faculty of the Stanford Law School, while Professor Moore has been appointed as a Circuit Judge of the United States Court of Appeals for the Federal Circuit. 50 Mark A. Lemley & Kimberly A. Moore, “Ending Abuse of Patent Continuations”, 84 B.U. L. Rev. 65 (2004). 51 See Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 532 U.S. 722 (2002). 52 See Letter to the Honorable Jon Dudas, Under Secretary of Commerce and Director of the USPTO, from Michael Kirk, Executive Director, American Intellectual Property Law Association (Apr. 24, 2006), at 5, available at http:// www. uspto.gov/web/offices/pac/dapp/opla/comments/fpp_continuation/aipla.pdf. 53 See Letter to the Honorable Jon Dudas, Under Secretary of Commerce and Director of the USPTO, from David E. Korn, Assistant General Counsel, Pharmaceutical Research and Manufacturers of America (May 2, 2006), at 3, available at http://www.uspto.gov/web/offices/pac/dapp/opla/comments/fpp_continuation/phrma_con.pdf. 54 Id. 48 49

384 CHAPTER V: PATENT LAW patent protection within industries where the patent system is widely acknowledged as crucial to innovation.55 Third, critics of the USPTO Rules have asserted that some examiners at times do not understand the invention presented to them, in particular applications. The use of continued applications is, in their view, necessary to obtain a competent examination.56 In addition, some observers believe that certain examiners have encouraged the filing of continued applications in order to inflate statistics pertaining to their workplace productivity.57 IV. PATENT CLAIMING PRACTICE REFORM

A. Patent Claiming Practice In addition to addressing continued applications, the USPTO Rules also announced changes to claiming practice. As noted previously, the Patent Act requires each patent to include “one or more claims particularly pointing out and distinctly claiming the subject matter which the applicant regards as his invention.”58 The claims set forth the proprietary rights that the patent owner asserts for itself. In particular, the words of a patent’s claims are compared to the physical features of an accused product to determine whether infringement has occurred.59 As well, the teachings of earlier publications, patents, and other relevant “prior art” are compared to a patent’s claims in order to decide whether the patented invention has been anticipated or would have been obvious.60 Claims may be drafted in either “independent” or “dependent” format. A dependent claim references an earlier claim, but then provides additional limitations upon the scope of that claim. Claims 1 and 2 of U.S. Patent No. 4,161,079, which relate to traps for mice and other pests, provides an example of independent and dependent claims: 1. A trap for rodents or like pests comprising: an enclosure for the pest to enter; means for ensnaring the pest in the enclosure; a charge of separately covered bait material mounted to the enclosure; means for uncovering said covered bait material within the enclosure, said means for uncovering being operable externally of said enclosure; whereby covered bait material may be stored for a long period of time and yet easily released when desired. 2. The invention of claim 1 wherein: said enclosure includes a window through which a user may look to see if a mouse or like pest is entrapped therein. The use of dependent claims is largely a drafting convenience for patent applicants. In the mousetrap example, rather than reciting each of the features of claim 1 once more, claim 2 merely references them but also incorporates an additional limitation.61 55 See Claude E. Barfield & Mark A. Groombridge, “Parallel Trade in the Pharmaceutical Industry: Implications for Innovation, Consumer Welfare, and Health Policy”, 10 Fordham Intell. Prop. Media & Ent. L.J. 185 (1999). 56 See Letter to the Honorable Jon Dudas, Under Secretary of Commerce and Director of the USPTO, from Marc S. Adler, President, Intellectual Property Owners (May 3, 2006), at 3, available at http://www.uspto.gov/web/offices/ pac/ dapp/opla/comments/fpp_continuation/ipo_con.pdf. 57 See Memorandum to the Honorable Jon Dudas, Under Secretary of Commerce and Director of the USPTO, from Graciela Cowger, Director, Oregon Patent Law Association (May 3, 2006), at 3, available at http://www.uspto.gov/ web/ offices/pac/dapp/opla/comments/fpp_continuation/opla_con.pdf. 58 35 U.S.C. § 112 (2006). 59 See Roger E. Schechter & John R. Thomas, Intellectual Property: The Law of Copyrights, Patents, and Trademarks § 20.2 (2003). 60 Id. § 16.4. 61 Id. § 18.2.2.1

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In practice, most patents contain multiple claims. Each claim is ordinarily viewed as presenting a separate statement of the patented invention. It is possible that the patent proprietor’s competitor may infringe some of the patent’s claims, but not others, depending upon the precise wording of the claim. Similarly, a court may declare that some of the patent’s claims are invalid, but uphold other claims, in view of novelty, nonobviousness, or other legal requirements to obtain a patent.62 For the most part, then, each claim in a patent affords the patent owner separate proprietary rights that must be judged on its individual merits.63 Determination as to the precise number of claims that a particular patent contains falls largely within the discretion of the individual who drafted the patent. As Paul Janicke, a member of the University of Houston law faculty, has explained: No limit is placed on the number of claims that can be included in an application. Most good patent attorneys write many of them of varying scope, in case the broadest turn out to be invalid because they cover some unknown piece of prior art, and in case the narrowest fail to provide commercially effective scope because they are easily designed around. Each claim is judged for validity and infringement as though it were a sort of mini-patent unto itself. To win an infringement case, the patentee need only establish infringement of one claim that the defendant is unable to invalidate. Such a system encourages the most diverse possible claiming. It is a good system for protecting inventions.64

The USPTO fee schedule provides some financial incentives to limit the number of claims in a particular patent. The basic filing fee for patent applications is currently $310.65 For each independent claim in excess of three, the USPTO imposes a surcharge of $210. In addition, for each claim in excess of twenty, whether dependent or independent, the USPTO imposes a surcharge of $50.66 As a result, incorporating large numbers of claims within a patent may lead to a substantial increase in the official fees associated with its acquisition. Empirical studies have arrived at varying results on the average number of claims per patent, depending on the sampling technique employed and the time frame under consideration. Patent lawyer Peter L. Giunta reported an average of 3.09 independent claims and 18.15 total claims per patent issued in 2003.67 John Allison and Mark Lemley, members of the faculties of the University of Texas and Stanford University respectively, sampled 1,000 patents issued between 1976 and 1978, and another 1,000 patents issued between 1996 and 1998. Allison and Lemley reported an average of 9.94 claims per patent for the 1970s’ patents, and 14.87 claims per patent for the 1990s’ patents.68 Both the Giunta and Allison-Lemley studies agreed that the average number of claims per patent has increased over time. It should be appreciated, however, that some patents incorporate considerably more claims than average. For example, in the well-known patent litigation involving the BlackBerry® mobile communications device,69 the patent proprietor asserted charges of infringement based upon five patents. The first of these patents to issue incorporated eighty-nine claims; the See 35 U.S.C. § 282 (2006). Schechter & Thomas, supra note 59, § 18.2. 64 See Paul Janicke, “Heat of Passion: What Really Happened”, Graver Tank, 24 Am. Intell. Prop. L. Ass’n Q.J. 1 (1996). 65 It should be appreciated that the USPTO will ordinarily charge additional fees during the course of the patent acquisition process beyond the assessment for filing the application. Among these are a $510 search fee, $210 examination fee, and $1,440 issuance fee. See USPTO, FY2008 Fee Schedule, available at http://www.uspto.gov/web/offices/ ac/qs/ope/fee2007september30.htm. 66 Id. 67 Peter L. Giunta, “Quid Pro Whoa!: An Exponential Fee Structure for Patent Applications”, 25 Cardozo L. Rev. 2317 (2004). 68 John Allison & Mark Lemley, “The Growing Complexity of the United States Patent System”, 82 B.U. L. Rev. 77 (2002). 69 NTP, Inc. v. Research in Motion, Ltd., 418 F.3d 1281 (Fed. Cir. 2005); see Gerard N. Magliocca, “Blackberries and Barnyards: Patent Trolls and the Perils of Innovation”, 82 Notre Dame L. Rev. 1809 (2007). 62 63

386 CHAPTER V: PATENT LAW remaining four included 276, 223, 341, and 665 claims respectively.70 As a general matter, one empirical study has concluded that patents of greater value to their owners tend to have a larger number of claims than average.71 B. The USPTO Claim Rules Following issuance of notice and a period of public commentary, the USPTO promulgated rules that would impose an obligation upon inventors who file patent applications that have more than five independent claims, or more than twenty-five total claims (dependent or independent).72 That obligation consists of the duty to prepare and file an Examination Support Document, or ESD. The ESD contains information about the claimed inventions that may assist the USPTO in conducting its examination tasks. In order to prepare the ESD, the applicant must conduct a search of data-bases of patents and the scientific literature. The applicant must then provide a detailed explanation of why the submitted claims are patentable over the prior art discovered during the search, as well as provide additional information pertinent to the patentability determination.73 The USPTO is concerned that applicants might attempt to file multiple applications directed toward the same or similar inventions in order to avoid the obligation to submit an ESD. The USPTO rules therefore require applicants to disclose all applications that are commonly owned and have at least one inventor in common.74 If the examiner determines that the applications have “substantially overlapping disclosures,” the examiner may presume that the claims are not “patentably distinct” and will apply the 5/25 claim limitation to the total number of claims in the relevant applications. The USPTO further “cautioned” applicants from attempting to avoid this rule by filing separate applications outside the two-month window.75 On the other hand, the USPTO has recognized that applicants may permissibly file continued applications in order to obtain additional claims without the filing of an ESD. As the new continuation rules allow applicants to file two continuation applications and one RCE without special justification, applicants may potentially obtain fifteen independent claims, and seventyfive total claims without the filing of an ESD.76 As with the rules with respect to continued applications, the claiming practice rules were to apply to applications filed after November 1, 2007. In addition, the rules were to apply to applications that had been filed at the USPTO prior to November 1, 2007, provided that they had not yet been reviewed by the USPTO. The USPTO justified these restrictions upon claiming practice on a number of grounds. One rationale was that these reforms would lead to a “better focused and effective examination process” that would allow examiners to concentrate upon a smaller number of claims, or in the alternative be assisted by an ESD.77 According to the USPTO, the result would be a reduction 70 The five patents asserted in the NTP v. RIM litigation were U.S. Patent Nos. 5,436,960; 5,625,670; 5,819,172; 6,067,451; and 6,317,592. 71 John R. Allison et al., “Valuable Patents”, 92 Geo. L.J. 435 (2004). 72 USPTO Rules, supra note 5, at 46,721. 73 More specifically, an ESD must include (1) a statement explaining that a prior art search was done; (2) a listing of the search results most closely related to the subject matter of each claim; (3) identification of all the limitations of each claim that are disclosed by the prior art; (4) a detailed explanation particularly pointing out how each of the independent claims is patentable over the prior art; and (5) a showing where each limitation of each of the claims is supported by the patent’s specification. Id. at 46,741 (discussing Rule 265). 74 Id. at 46,721. 75 Id. at 46,722. 76 Id. at 46,721. 77 Id. at 46,717.

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in “the large and growing backlog of unexamined applications,” while “the quality of issued patents” would be maintained or possibly improved.78 The USPTO also expressed concerns that, absent rule changes, the public would face difficulty in analyzing numerous claims in issued patents that were directed towards “patentably indistinct inventions.”79 Patents are often complex, technical instruments that may prove difficult to parse.80 It is not uncommon for jurists who frequently adjudicate disputes concerning patents to disagree on their appropriate construction.81 The transaction costs and uncertainty surrounding determinations of patent scope may be further exaggerated if the patent includes a large number of claims. These circumstances may not favor the ability of others to innovate themselves, and also to compete in the marketplace. Although the USPTO Rules place no absolute restrictions upon the number of claims that may be incorporated within a particular application, they were subject to negative commentary by many patent professionals. In particular, some observers viewed the filing of an ESD as a costly, time-consuming, and potentially risky endeavor. Patent attorneys John Pegram and Ronald Lundquist opined that preparing an ESD may require more technical and legal effort than drafting its associated patent application.82 Submitting an ESD might therefore significantly increase the costs of procuring patent rights in the United States. In addition, some observers believe that ESDs will commonly incorporate statements and disclosures that might potentially be viewed as admissions. An ESD might therefore limit the scope of protection and enforceability of any patent that resulted from its application.83 Other observers believed that the claim rules would negatively impact patent rights without meaningfully serving the goals identified by the USPTO. As explained by patent attorneys John R. Harris and Daniel E. Sineway: For the USPTO to claim that an ESD will “improve examination quality” seems disingenuous — the improvement in quality will likely result not from any greater scrutiny or effort by the patent examiner, but from patent applicants providing the examiner with the ammunition to reject the application. The ESD will give examiners the information and reasoning needed to deny a patent, and/or force the applicant to fill the file history with information that helps infringers avoid liability in later litigation.84

As a result, patent attorney Kevin Noonan opined that “an applicant should avoid filing an ESD under any circumstances.”85 If inventors widely subscribe to this view, then they will be practically limited in the number of claims that they can obtain from the USPTO. This effect may limit the extent of patent protection an inventor may effectively procure, particularly in view of a number of judicial opinions that have stressed that inventors possess the ability to draft claims using words of their own choosing.86 Courts have further observed that a patent’s claims are intended to provide notice to third parties of its owner’s proprietary rights.87 If the claims do not match 78

Id. Id. at 46,718. 80 See Allison & Lemley, supra note 68. 81 See Andrew B. Dzeguze, “Did Markman and Phillips Answer the Right Question? A Review of the Fractured State of Claim Construction Law and the Potential Use of Equity to Unify It”, 15 Tex. Intell. Prop. L.J. 457 (2007). 82 John B. Pegram & Ronald C. Lundquist, USPTO Final Rule Changes for Continuations and Claims (Sept. 6, 2007), available at http://www.fr.com/news/2007/Sept/v3%209%206%2007%20Rules%20Webinar.pdf. 83 John R. Harris & Daniel E. Sineway, “New USPTO Rules Will Significantly Affect Patent Strategy: Several New Rules Create Sweeping Changes in Patent Office Procedure” (Sept. 27, 2007), available at http://www.mmmlaw.com/ downloads/ clientalerts/NewUSPTORulesMaySignificantlyAffectProsecutionStrategy.pdf. 84 Id. at 3. 85 Kevin E. Noonan, “An Analysis of the New Rules: USPTO Releases ESD Guidelines” (Sept. 17, 2007), available at http://www.patentdocs.us/patent_docs/2007/09/ananalysis-o-8.html. 86 See Sage Prods., Inc. v. Devon Indus., Inc., 126 F.3d 1420, 1425 (Fed. Cir. 1997). 87 See Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 28–29 (1997). 79

388 CHAPTER V: PATENT LAW the accused infringer’s product or process literally, then courts may be reluctant to employ equitable principles such as the “doctrine of equivalents” to reach a finding of infringement.88 As the Federal Circuit explained, “as between the patentee who had a clear opportunity to negotiate broader claims but did not do so, and the public at large, it is the patentee who must bear the cost of its failure to seek protection for [a] foreseeable alteration of its claimed [invention].”89 Some observers believe that the combination of judicial stress upon precise claim drafting and administrative limitations upon claims will make the patent system less attractive, thereby decreasing investment in R&D, diminishing innovation, and encouraging use of trade secret law.90 V. THE TAFAS v. DUDAS LITIGATION

Criticisms over the propriety of the claims and continued application rules led to litigation against the USPTO in federal court. Legal challenges to the rules resulted in the April 1, 2008 decision in Tafas v. Dudas.91 There, the U.S. District Court for the Eastern District of Virginia concluded that the USPTO claims and continued application rules were substantive in nature. Because Congress has not granted general substantive rulemaking power to the USPTO, the District Court declared that the rules were void and therefore unenforceable. At the time of the publication of this report, the USPTO retains the option of appealing this judgment. The Tafas v. Dudas ruling arose from lawsuits filed by two separate plaintiffs: (1) individual inventor Triantafyllos Tafas, and (2) the multinational pharmaceutical enterprise organized as Smithkline Beecham Corp. and Glaxo Group Limited. The plaintiffs requested a permanent injunction that would prevent the USPTO from implementing the claims and continued application rules.92 Although a number of arguments were before the District Court, Judge Cacheris confined his ruling to the issue of whether the USPTO claims and continued application rules were substantive or not. He concluded that the rules were indeed substantive because they would “affect[] individual rights and obligations.”93 In particular, Judge Cacheris observed that the Patent Act placed no strict limitations upon the number of claims or continuing applications that an inventor could pursue. Because the rules would deprive inventors of these rights, they were substantive in nature and thus beyond the ability of the USPTO to enact.94 In keeping with its opinion, the District Court issued an order permanently enjoining the USPTO from implementing its claims and continued application rules. At the time this report was published, the USPTO retains the option of pursuing an appeal of this ruling to the Federal Circuit. It is not currently known whether the USPTO will continue to pursue this litigation or not.

88 See Stumbo v. Eastman Outdoors, Inc., 508 F.3d 1358, 1364 (Fed. Cir. 2007) (“A finding of infringement under the doctrine of equivalents requires a showing that the difference between the claimed invention and the accused product was insubstantial.”). 89 Sage Products, 126 F.3d at 1425. 90 See Letter to the Honorable Jon Dudas, Under Secretary of Commerce and Director of the USPTO, from E. Anthony Figg, Chair, American Bar Association Section of Intellectual Property Law (May 3, 2006), available at http://www.uspto. gov/web/offices/pac/dapp/opla/comments/fpp_claims/aba-ipl.pdf. 91 See Tafas v. Dudas, 541 F. Supp. 2d 805 (E.D. Va. 2008) (Tafas v. Dudas, No. 1:07cv846, consolidated with Smithkline Beecham Corp. v. Dudas, No. 1:07cv1008 (E.D. Va. 2007)). 92 Tafas v. Dudas, 511 F. Supp. 2d at 810. 93 Id. at 814 (quoting Chrysler Corp. v. Brown, 441 U.S. 281, 302 (1979)). 94 Id. at 814–15, 816–17.

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VI. IDS PRACTICE REFORM

Although patent professionals have focused attention upon the claims and continued application rules, the USPTO has proposed additional reforms as well. One of these reforms relates to the so-called Information Disclosure Statement, or IDS.95 An IDS is a document submitted to the USPTO that discloses all journal articles, patents, and other “prior art” of which a patent applicant is aware.96 The USPTO has expressed concerns that applicants too frequently include numerous “irrelevant or marginally relevant” prior art reference that not only fail to bring the most relevant material to the attention of examiners, but also require them to sort through dozens or hundreds of documents that are not pertinent to the question of patentability.97 As a result, the USPTO has proposed rules that would impose additional applicant responsibilities with respect to IDS filings. In particular, the USPTO proposes that if more than twenty documents are disclosed in an IDS, the applicant must provide an explanation of each cited document. That explanation consists of “an identification of a portion of a document that caused it to be cited, and an explanation of how the specific feature, showing, or teaching of the document correlates with language in one or more claims.”98 If an IDS contains fewer than twenty documents, the applicant would be required to provide an explanation only for documents not published in English, or for English-language documents over twenty-five pages in length.99 Critics of the proposed IDS rules assert that “their practical effect will be to dramatically increase the cost of obtaining patent protection” and “make it much more difficult for inventors and innovators to protect their legitimate intellectual property rights … .”100 At present time, the USPTO has not taken final action with respect to the proposed IDS rules. VII. CONGRESSIONAL ISSUES AND ALTERNATIVES

Should Congress conclude that the current situation with respect to the USPTO rulemaking is satisfactory, then no action need be taken. If Congress wishes to intervene, however, a number of options present themselves. In the 110th Congress, H.R. 1908 would expressly provide the USPTO with regulatory authority to specify the circumstances under which a patent applicant may file a continued application.101 That bill passed the House on September 7, 2007, as the “Patent Reform Act of 2007,” and was referred to the Senate. No other pending legislation — including S. 1145, the Senate legislation also titled the “Patent Reform Act of 2007” — addresses the subject matter of the claims or continuation rules. One possibility would be to provide the USPTO with substantive rulemaking authority. In the 110th Congress, an earlier version of H.R. 1908 would have granted the USPTO Director the authority to “promulgate such rules, regulations, and orders that the Director determines appropriate to carry out the provisions of this title or any other law applicable to the United States Patent and Trademark Office.”102 This provision was ultimately removed from the bill in favor of a more narrow grant of authority with respect to continued applications. 95 Dep’t of Commerce, USPTO, Changes to Information Disclosure Statement Requirements and Other Related Matters, 71 Fed. Reg. 38,808 (July 10, 2006) [hereinafter IDS Notice]. 96 See Black’s Law Dictionary 795 (Thomson-West, 8th ed. 2004). 97 IDS Notice, supra note 95, at 38,809. 98 Id. at 38,810. 99 Id. 100 See Letter to the Honorable Susan E. Dudley, Administrator, Office of Information and Regulatory Affairs, Office of Management of Budget, from David E. Boundy, Cantor Fitzgerald L.P. (Oct. 17, 2007) at 2, available at http://www. whitehouse.gov/omb/oira/0651/comments/477.pdf. 101 H.R. 1908, § 14. 102 H.R. 1908, § 11 (as originally introduced).

390 CHAPTER V: PATENT LAW More specific legislative amendments provide another option. Amendments to the relevant provisions of the Patent Act could confirm that no limitations should be imposed upon the number of claims or continuations that applicants may file. They could also address IDS filing requirements or other aspects of USPTO procedures. Alternatively, amended statutory provisions could impose such limitations, or grant the USPTO the authority to do so. Patent administration has becoming increasingly difficult as the USPTO faces both a rising number of filings and more technologically complex applications. On the other hand, many patent professionals have viewed both judicial and legislative developments as emphasizing well-crafted applications.103 Limitations upon claims and continued application practice have been widely viewed as constraining the ability of patent professionals to achieve this goal.104 Establishing the appropriate balance of rights and responsibilities between applicants and the USPTO forms an important consideration in maintaining a fair and efficient patent system. MR. GROOMBRIDGE: Thank you, Jay. I know you may be under a little time pressure, so I wanted to start by asking you, as a former Director of the PTO, what effect would substantive rulemaking have on the operations of the Office, and would it in your view impact the perception in some parts, which Jay just alluded to, that there is a quality problem with U.S. patents? MR. DICKINSON: A number of comments come to mind as a function of that question. It seems to be somewhat of a dichotomy to suggest that the Office has a quality problem and then is denied the ability to try to fix the quality problem. I think a lot of the tension I see — and maybe I filter it through political issues a little bit too much — is the traditional political challenge that the Office has, where many of its constituents and stakeholders have a traditional anti-government/anti-big-agency kind of viewpoint in certain ways, but it is the agency they love. It is kind of like everyone hates Congress but loves their congressperson. It is a challenge to try to convince the stakeholder community of the efficacy of the rules. I think in large part what we are seeing recently, with all due deference to my former colleagues, is a challenge in how these rules have been promulgated and how they have rolled out politically. When the rulemaking process occurs internally, it is subject to an ongoing and extensive process through various bodies of the Office. They do not spring full-blown, at least they didn’t when I was there. I was there, for example, during the creation of the large rule package that implemented the American Inventors Protection Act (AIPA).105 The fun part is when they distilled it down, they would come in with like ten decisions I had to make every time. Some of them I actually ended up making myself, one of which was the creation of Rule 105, which I’m fairly partial to. I’m a little worried that the GSK/Tafas106 litigation will take us to a point where we try to draw too bright a line between what is a substantive rule and what is a procedural rule. I am not sure that line can be drawn. I think to draw it too narrowly, as this litigation would probably potentially lead to, would impair the Office’s ability to do what it needs to do. So while I really would not take a position one way or the other on the continuation rule package, I am very concerned about the direction that the litigation is taking. 103 See, e.g., Paul Gillette, “‘Maximum Security’: Continuation and Reissue as Means of Obtaining Optimum Patent Protection After Festo”, 27 T. Jefferson L. Rev. 371 (2005). 104 See, e.g., Mary Ann Liebert, “The Comments of the Biotechnology Industry Organization on the United States Patent & Trademark Office Proposed Rules Changes Concerning Continuation Practice and Claim Limitations”, 25 Biotech. L. Rep. 473 (2006). 105 The American Inventors Protection Act was enacted Nov. 29, 1999, as Public Law 106-113, and amended by the Intellectual Property and High Technology Technical Amendments Act of 2002 (Public Law 107-273), enacted Nov. 2, 2002, available at http://www.uspto.gov/web/offices/dcom/olia/aipa/index.htm. 106 Tafas v. Dudas, 541 F. Supp. 2d 805 (E.D. Va. 2008).

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I think the Star Fruits case107 is illustrative, in that it suggested clearly that the director had broad rulemaking authority. To the extent that GSK/Tafas challenges that, I think Star Fruits may stand as a certain precedent there. I told Judge Newman I would quote from her dissent, which is I think interesting too, when she says, maybe a little out of context, “With respect, I know of no reason for denying to the invention community the full scope of APA procedures now that the Court has confirmed in Dickinson v. Zurko [527 U.S. 150, 119 S.Ct. 1816, 144 L.Ed.2d 143 (1999)] that the APA applies to the PTO.”108 That was a dissent against the interpretation of the Office, not necessarily against the rule itself. Finally, to move along to a slightly other point, I have a curiosity about what might happen if GSK/Tafas ever gets up to the Supreme Court. Let me just be provocative and put this out there a little bit. Two things: First, Zurko,109 where the Supreme Court showed broad deference to the PTO. It overturned — with again due respect, Judge — a twelve-to-nothing en banc opinion of the CAFC, I would suggest in large part because at least two of the members from opposite ends of the political spectrum, Justice Scalia and Justice Breyer, were former administrative law professors and wrote books, and I think Scalia chaired the ABA Section on Administrative Law, and I think they view this through the administrative law filter in many ways. So you take that part of Zurko and you combine it with the recent trend in Supreme Court appellate litigation, which everybody is now using as an arrow in their quiver, that there should not be special rules for patents, there should not be special rules for IP, they shouldn’t have special injunction rules (eBay110), and the Supreme Court might show that substantive rulemaking might be more appropriate for a body. Certainly Congress tended to feel that way. While it did get introduced, and I grant you that it got introduced, it pulled back very rapidly because of the strong pushback. I would wonder — and maybe Dave will comment on this — if Congress is probably eager to get rid of some of the lobbying and other pressures that come around this kind of rulemaking. I think they didn’t like a lot of the pressure around the continuation package. I think they would like to defer to the experts, they would like to defer to the PTO by and large, but the political pressure was just not there, except for the interesting irony that the current legislation contains something called an Applicant Quality Submission (AQS) — you have to do a search, you have to describe a search, this sort of thing. Some cynics have suggested that the PTO, because they have gotten in such a bind over GSK, have to get Congress to get them out of the hole by putting rules in that they could have otherwise put in themselves and have Congress put them in affirmatively. I think the idea, though, is don’t be afraid of what the PTO is going to do. They make Section 101 decisions every day of the week. They make Section 102 decisions every day of the week. Just to wrap up with one idea, one particular rule was very popular, namely that 101 does not include human beings, we cannot patent a human being. Well, that is the PTO making an allegedly substantive rulemaking. I suppose somebody could challenge it on that ground. But that is a point. MR. GROOMBRIDGE: Thank you. Dave, could you maybe just comment on Todd’s question about lobbying pressure? Also, I think it would be useful for us to hear who is for this and who is against it and why, from the perspective of industry. MR. JONES: I’d be happy to. Star Fruits N.C. v. United States, 393 F.3d 1277 (Fed. Cir. 2005). Id. at 1370 (Newman, J., dissenting). 109 Dickinson v. Zurko, 527 U.S. 150 (1999). 110 See eBay, Inc. v. MercExchange LLC, 547 U.S. 388 (2006). 107 108

392 CHAPTER V: PATENT LAW There is a strange situation. I should provide some context. A lot of people assume the PTO went to Congress and asked for substantive rulemaking authority. In fact, interestingly, something close to the opposite is the case. They almost lobbied against the initial broad grant of substantive rulemaking authority. They didn’t want to be on the hook. They thought it would cause problems with various constituencies. So it was largely driven by a couple of staffers, one of them being me. The members of Congress were not apathetic, but did not see it as a big issue, and it was mostly because of the “why not?” argument. They are familiar with substantive rulemaking out of the Federal Communications Commission (FCC), out of the Federal Trade Commission (FTC), out of all the agencies, and there is basically only one agency out there that has no substantive rulemaking authority. Most members of Congress, I think, to the extent that they actually consider these things, find that slightly anomalous and don’t find for the most part the arguments against it particularly persuasive. You could argue many ways against it. You can say, “Patents are just too important.” Well, the FCC’s licensing procedures are pretty important, hundreds of millions of dollars at stake; the type of censorship that they exert on uses of the public airways implicate core constitutional rights that some would think are more important than patents. So a lot of the arguments in Congress, I think, did not ring true either with the staff or with the members. In terms of the retraction, I was not there. I was there for the introduction of the first bill, where I drafted a very broad substantive rulemaking provision. I do not know why it was not in the second Senate bill that was introduced in the subsequent Congress, so I cannot really comment on that. My sense is it largely was not due to political pressure. With the flip in Congress, Chairman Leahy had the drafting pen on that one, and he is not generally swayed by the constituencies that were most opposed to it, although maybe prudence played a part in terms of the overall picture. MR. DICKINSON: No PTO support, as you suggested, combined with the fact that broader support was limited. MR. JONES: The last question is hard to answer. Most of the advocates of PTO rulemaking authority may indeed be on this panel. In terms of who is for it and who is against it, I think pretty much everyone is against it in industry, in the user community. MR. GROOMBRIDGE: Why? MR. JONES: It has never been altogether clear to me why that is. MR. GROOMBRIDGE: There is an awful lot of disagreement about patent policy, but there seems to be, if not unanimity, then close to it, that we cannot trust the Patent Office to be making rules that establish patent policy. Why? MR. FISH: There is a W.C. Fields aspect to it ― “I wouldn’t be a member of a club that would let me in” sort of thing. So if you are familiar with these people, that is part of it. I think there is also an ignorance problem. I mean, except for Arti Rai,111 who else is an academic who does patents and administrative law? Not very many people. Practitioners, I think, probably did not even take administrative law when they were in law school and probably didn’t have to deal with it. And we are a conservative bunch, patent lawyers. We do not like things changing, and a lot of us have a lot of good reasons not to see them change. I would say that one issue has already been identified, and actually Professor Dreyfuss talked about it this morning. I think there is a real patent exceptionalism angle here. I mean here is one of the oldest agencies. When the Patent Office was founded, we were still sort of in the state of freedom that the Founders endowed us with. That certainly ended when Franklin Roosevelt was president, probably even when his cousin was president. But if we are not 111 See Arti Rai & Stuart Benjamin, “Who’s Afraid of the APA? What the Patent System Can Learn from Administrative Law”, 95 Geo. L.J. 269 (2007).

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going to go back to the state of freedom that the Founders gave us, if we are going to live in an administrative state, then I think there is a good question: Why should patents be different? There are all the administrative law arguments ― that they can respond quicker than Congress, that they can narrowly tailor things, that they can come up with rules just like the FCC comes up with rules, and if they are wrong the courts will fix them. There are differences, however. If you look at the Patent Office and if you look at the agencies ― looking at the Interstate Commerce Commission (ICC) or the FTC or the FCC or any of these alphabet-soup agencies — the structural differences between them and the Patent Office are substantial. You do not have multiple commissioners at the Patent Office. You do not have a clear delegation of authority to these multiple commissioners, who were picked in ways that Congress feels good about delegating authority to them. You have a different kind of expertise at the Patent Office. I would suggest that actually the best analogy is the Patent Office is to patent law as the Coast Guard is to admiralty law. It is an executive agency essentially. There is one person at the top of it. They make rules that are related to what is going to go on there, but they do not control it, the same way that the Coast Guard puts out buoys and they stop people for not driving on the right side of the street but they do not create all the other rules. So maybe there are good reasons why the Patent Office structurally is different from the agencies that have that sort of authority. MR. DICKINSON: But consider the Food and Drug Administration (FDA) or the Federal Aviation Administration (FAA). They both have single heads and they put out rules similarly. MR. FISH: That’s true enough. MR. DICKINSON: The Department of Transportation puts out rules regulating how you can drive a truck and what hours and that sort of thing, which have huge economic impacts. Yet the Secretary of Transportation doesn’t get treated similarly. MR. FISH: I think that’s well stated. The last thing to say is I think people understand the notion of “be careful what you wish for.” I mean look at what is happening at the FCC today and ask yourself if you would really like that to be happening in the patent world. I think that is a fair question. MR. GROOMBRIDGE: Is that, though, a fair analogy? When you look at the patent system, what you are doing, you have a granting agency and then you have a vast body of activity that is around enforcement that is entirely removed from the agency. Is there any other agency where there is a comparable situation? What is making people pause about this is whether the Patent Office should have more influence over that part of the patent system that goes beyond the conduct of its own affairs. MR. FISH: Well, it is certainly different from the Securities and Exchange Commission (SEC), for example, in the way that it grants all these things and then it polices them, or the FCC. MR. DICKINSON: Another question to ask is: What is the worry about certain substantive rulemaking? It usually gets down to things like “We do not want the Office to determine what Section 101 means; we want the courts to determine what 101 means.” Well, two things. One, they do it every day. They do it at a very granular level. There are 101 panels and there are 101 guidelines. The Office has a lot of stuff around what you might call substantive interpretation. Secondly, what intrigues me a little bit is there is some kind of underlying theme that the notice-and-comment period doesn’t exist, that the Office does not change their mind about rules. I proposed a rule for a search that I got my head handed to me on and I pulled it back. I then proposed a rule that said you had to do a search or you had to say “I didn’t do a search” for the record. They didn’t like that either. They pulled it back.

394 CHAPTER V: PATENT LAW I once kidded Mike Kirk, who’s the Executive Director of the American Intellectual Property Law Association (AIPLA). The first rule package I was partially responsible for was a collection of things. There were maybe fifty or sixty different rules. It was kind of a clean-up collection of things. I kidded him the other day. I said, “Mike, the only one of those rules you liked would allow color photographs in plant patents to be used. There was something wrong with every single other rule we proposed.” I quickly learned that that disconnect between the stakeholder community and the Office was a key factor. I wonder at the moment if one of the biggest challenges we have is that there is a much broader disconnect between the stakeholder community and the Office at a lot of levels. This is probably a major but a single reflection of that. MR. GROOMBRIDGE: I think Jay’s point about Rule 56 is well taken. Rule 56 has become completely ingrained in the fabric of U.S. patent law. Why isn’t that an example of substantive rulemaking that has worked? MR. DICKINSON: Someone should go to the CAFC and ask them whether that is. Maybe they should void Rule 56 if that is the case. PARTICIPANT [Prof. Martin Adelman, George Washington University Law School, Washington, D.C.]: They do not follow it. The materiality rule has been ignored. Now the Federal Circuit says “the old materiality rule or the new materiality rule, take your pick. So they do not follow it. MR. RICHARDS: But you’re not saying there’s anything wrong with the rule. PARTICIPANT [Prof. Adelman]: They don’t follow it. MR. FISH: And district court judges may be even less close to following it than the Federal Circuit. MR. GROOMBRIDGE: We are conscious that time is wearing on. Let’s open it up to questions. QUESTION: There is a general feeling, a point that has been referenced several times today, that the quality of the patents coming out of the Patent Office has not been good. So you have an agency that arguably is not producing what it should be producing by way of quality. That is a strong argument not to give them a solution to the problem. They are the problem perhaps. If they are saying the rules are what’s making that bad quality, that may be poor workmen blaming their tools. MR. GROOMBRIDGE: Maybe, Todd, that falls naturally to you. MR. DICKINSON: I’m the head workman, I guess, the foreman. MR. GROOMBRIDGE: I was going to say most workmen have the chance to pick their tools. MR. DICKINSON: Well, it is a multivariant issue. I don’t disagree with the general premise necessarily. The challenge of quality is a function of workload and pendency, and increased complexity of technology is a real one. But there other issues, like the Office needing, for example — we would really appreciate it if the Congress would pass the Coburn Amendment112 this year, which would once and for all, hopefully, give full fee funding to the Office and they wouldn’t defer the Office’s fees. We could probably go along with a substantial increase in fees if we did that and we would get more additional revenue. There is that issue. There is the issue of giving them more authority to be able to manage their own problems. I think the challenge is that there is also a disconnect that I think may go to the question between the Office’s knowledge of the practitioners’ world and what, in somewhat of a vacuum inside the Office, looks like a pretty good idea around a rule. It is very self-serving of me to say this, but I would hope that we get back to a point where there are senior managers and senior political leadership in the Office that has experience writing a patent application and 112 See Patent Reform Act of 2007, S. 1145, 110th Cong. (2007), available at http://www.govtrack.us/congress/bill. xpd?tab=speeches&bill=s110-1145.

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prosecuting one. Now, that’s a little bit mom and apple pie. I don’t mean to take the current administration on that much. The first rule package, Nancy Linck was the Solicitor, I was the Deputy Commissioner, and Phil Hampton, who used to be at Kenyon & Kenyon, was over at the Trademark Office, but he was sitting in on the rule package at the Patent Office because he’s a patent practitioner. The three of us knocked out at least a third of the rules that the staff originally proposed, I guess because we just said, “Those aren’t going to work in the real world. That is just not going to happen.” We need more of that back in the Office as well, I think. MR. GROOMBRIDGE: More questions? It looks like everyone is anxious to test how the chardonnay is. Thank you very much, everyone.

CHAPTER V

Patent Law Part D: Patent Infringement Section 1: Willful Patent Infringement: Seagate and Its Aftermath An analysis of the development of the willful infringement standard and associated adverse inference related to the failure to rely upon an opinion of counsel. A look at the law before In re Seagate, what the Federal circuit did in Seagate, and how district courts are answering the numerous questions raised by Seagate Moderator JOHN PEGRAM

Fish & Richardson (New York) Speakers BRIAN NOLAN

McDermott, Will & Emery (New York) JOHN PEGRAM

Fish & Richardson (New York) Panelists Q. TODD DICKINSON

KENNETH HERMAN

Vice President & General Patent Counsel, General Electric (Fairfield, CT)

Ropes & Gray (New York)

EDWARD W. MURRAY

Managing Counsel, Intellectual Property Litigation, Merck & Co. (Rahway, NJ)

398 CHAPTER V: PATENT LAW MR. PEGRAM: Good morning. I’m pleased to be introducing our panel discussion on “Willful Patent Infringement: Seagate and its Aftermath.” With us today is Brian Nolan, who helped prepare this program. He is with McDermott, Will & Emery. He will be introducing the subject along with me. The commentators that we are scheduled to have today include Todd Dickinson, Vice President and General Patent Counsel of General Electric Company; Ken Herman from Ropes & Gray; and Edward W. Murray, Managing Counsel, IP Litigation, Merck & Co.

Willful Infringement Case Law John Pegram* I am very briefly going to mention a few cases. These are some leading cases through the years, going back to 1964, dealing with willful infringement. The case back in 1964 was Swofford v. B&W in the Fifth Circuit.1 The holding in that case was that willfulness findings are to be made by the judge and that such findings should be deferred. Back in that era, or shortly thereafter when I was practicing, that was the way it was done. However, when the Federal Circuit was established, Underwater Devices2 established a duty of due care to avoid infringement, including a duty to obtain competent legal advice, before initiating possibly infringing activity. Then we had a case that I think is worth touching on, Richardson v. Suzuki, in 1989 from the Federal Circuit, in which there was a holding that willfulness findings are to be made by a jury.3 That is precedent today, I believe, probably in the Federal Circuit. In a case that I was involved in 1991, Quantum v. Tandon,4 we asked the Federal Circuit on an interlocutory appeal to please postpone the consideration of willfulness, as had been done in the past in the Swofford case. The court did not accept our appeal. However, it did recommend that willfulness be considered in every case. As the Chief Judge said in a recent program, many district judges do not find that practical to do. In the Knorr-Bremse case in 2004,5 an en banc decision of the Federal Circuit, the court said that no adverse inference should be drawn from the defendant’s claim of privilege. We started moving on in the EchoStar Communications case in 2006,6 where more definition was given to the scope of waiver of privilege when someone is relying on an opinion to defend against the assertion of willful infringement. Finally, in the Seagate Technology case,7 there was an overruling of the Underwater Devices duty of due care8 and defined a new two-step test for objective recklessness for establishing willful infringement.9 * Fish & Richardson (New York). 1 Swofford v. BMW, Inc., 366 F.2d 406 (5th Cir. 1964). 2 Underwater Devices, Inc. v. Morrison-Knudsen, 717 F.2d 1380 (Fed. Cir. 1983). 3 Richardson v. Suzuki Motor Co. Ltd., 868 F.2d 1226 (Fed. Cir. 1989). 4 Quantum Corp. v. Tandon Corp., 940 F.2d 642 (Fed Cir. 1991). 5 Knorr-Bremse Sys. Fuer Nutzfahrzeuge GMBH v. Dana Corp., 383 F.3d 1337, 1344 (Fed. Cir. 2004). 6 In re EchoStar Commc’n Corp., 448 F.3d 1294 (Fed. Cir. 2006). 7 In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). 8 The court held: In contrast, the duty of care announced in Underwater Devices sets a lower threshold for willful infringement that is more akin to negligence. This standard fails to comport with the general understanding of willfulness in...

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At this point, we are going to pass it to Brian, who will briefly discuss with us the cases from Seagate up to the present.

WILLFUL INFRINGEMENT AND ATTORNEY OPINIONS AFTER SEAGATE — WHAT’S NEXT? Brian W. Nolan* In August of last year, the Federal Circuit, in an en banc decision, rewrote the willful infringement standard that had stood for almost twenty-five years.10 In re Seagate came before the Federal Circuit as a mandamus petition objecting to a district court’s order requiring the disclosure of privileged communications and work-product of any Seagate counsel, including Seagate’s trial attorneys and in-house counsel, relating to infringement, invalidity, and enforceability of the patents-in-suit.11 Sua sponte, the Federal Circuit took up the case en banc and expanded the scope of review by requesting that the parties also consider the propriety of the court’s willfulness standard articulated in Underwater Devices, Inc. v. Morrison-Knudsen Co.12 In Seagate the Federal Circuit overruled Underwater Devices by discarding the affirmative duty of due care and instituting an objective recklessness standard.13 The Federal Circuit’s decision also re-emphasized that there is no affirmative duty to obtain an opinion and clarified the scope of waiver when a defendant does rely on an opinion from counsel.14 Clearly, Seagate announced a sea change in the consideration of willful infringement and has left numerous questions for district courts to answer. I. THE DEVELOPMENT OF THE WILLFUL INFRINGEMENT STANDARD AND ASSOCIATED ADVICE OF COUNSEL INFERENCE

Less than a year after its creation, the Federal Circuit imposed an affirmative duty on all to avoid infringement of valid patents in Underwater Devices. The case presented quite egregious facts concerning the defendant’s respect for the patent-in-suit. Despite the acquiescence of several companies in the industry to the patent-in-suit through the acceptance of a license, the civil context. … Accordingly, we overrule the standard set out in Underwater Devices and hold that proof of willful infringement permitting enhanced damages requires at least a showing of objective recklessness. Because we abandon the affirmative duty of due care, we also reemphasize that there is no affirmative obligation to obtain opinion of counsel. Id. at 1371 (citations omitted). 9 The court concluded that the test for recklessness is a two-step test: First, “to establish willful infringement, a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted an infringement of a valid patent.” Second, “If this threshold objective standard is satisfied, the patentee must also demonstrate that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.” Id. at 1371 (citing W. Page Keeton et al., Prosser and Keeton on Torts § 34, p. 212 (William Lloyd Prosser ed., 5th ed. 1984)); Safeco Ins. Co. of Am. v. Burr, 127 S. Ct. 2201 (2007); Farmer v. Brennan, 511 U.S. 825, 836 (1994)); see also Restatement (Second) of Torts, § 500 (1963–1964). * Mr. Nolan is a partner at McDermott Will & Emery LLP in New York City, where he practices in the area of intellectual property litigation and counseling. The views expressed are solely those of the author and should not be imputed to his firm, clients or any other party. Brian may be reached at [email protected] or 212.547.5400. 10 See Seagate, 497 F.3d at 1360, 1371. 11 Id. at 1366–67. 12 717 F.2d 1380 (Fed. Cir. 1983). 13 Id. at 1371. 14 Id. at 1374–75.

400 CHAPTER V: PATENT LAW the defendant in Underwater Devices refused the patentee’s licensing offer. The defendant based its refusal on bald assertions of patent invalidity and the general assertion that courts, in recent years, had invalidated about 80 percent of the patents in litigation.15 The defendant further believed that if the patentee sued, it could then negotiate a royalty equivalent to its cost of defending the litigation at that time.16 The defendant received this advice from a non-patent attorney in-house counsel who had not reviewed the patent’s file history. After reviewing these facts, the Federal Circuit held that a defendant with actual notice of another’s patent rights has an affirmative duty to exercise due care to determine whether or not its activities infringe the patent.17 This duty includes “the duty to seek and obtain competent legal advice before the initiation of the possible infringing activity.”18 In determining the competency of the advice, courts could consider whether the attorney was an in-house counsel, was a patent attorney, and had reviewed the file history.19 These factors are not determinative, but are important to the determination of whether the defendant had exercised due care. Underwater Devices discussed neither the scope of waiver of the attorney-client privilege associated with the reliance on an opinion of counsel as a defense to a willfulness allegation nor any inference or presumption when a party asserted privilege and shielded the opinion from disclosure. The Federal Circuit addressed the latter issue in a subsequent case. In Kloster Speedsteel AB v. Crucible Inc.20 the Federal Circuit stated that if a defendant does not rely upon the advice of counsel to refute a charge of willful infringement, the “silence on the subject … would warrant the conclusion that it either obtained no advice of counsel or did so and was advised that its importation and sale of the accused products would be an infringement of valid U.S. patents.”21 In a later case, the Federal Circuit revisited this issue and clearly stated that a trial court must be free to infer that the defendant failed to obtain an opinion or the opinion was negative if a defendant fails to introduce an exculpatory opinion.22 Thus, the adverse inference was born. II. THE PENDULUM SWINGS BACK ON THE WILLFUL INFRINGEMENT STANDARD AND ADVERSE INFERENCE

By 1988, the Federal Circuit had clearly established that a defendant had an affirmative duty to avoid the infringement of known patents. The duty included a requirement to obtain an exculpatory opinion of counsel. Not surprisingly, a requirement that a defendant obtain, and eventually disclose, advice of counsel to avoid an adverse inference created a tension with a defendant’s right to shield discussions with its counsel under the attorney-client privilege and the work-product doctrine. Nevertheless, as case law developed, courts found that a defendant’s reliance on and disclosure of advice of counsel waived the privilege associated with that advice.23 This waiver extended not only to the opinion itself but to other privileged Underwater Devices, Inc. v. Morrison-Knudsen, 717 F.2d 1380, 1385 (Fed. Cir. 1983). Id. 17 Id. at 1389. 18 Id. at 1390. 19 Id. 20 793 F.2d 1565 (Fed. Cir. 1986). 21 Kloster Speedsteel AB v. Crucible, Inc., 793 F.2d 1565, 1580 (Fed. Cir. 1986). 22 Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1572–73 (Fed. Cir. 1988) (“Where the infringer fails to introduce an exculpatory opinion of counsel at trial, a court must be free to infer that either no opinion was obtained or, if an opinion were obtained, it was contrary to the infringer’s desire to initiate or continue its use of the patentee’s invention.”). 23 See, e.g., Fort James Corp. v. Solo Cup Co., 412 F.3d 1340, 1349 (Fed. Cir. 2005); Abbott Lab v. Baxter Travenol Lab, Inc., 676 F. Supp. 831, 832 (N.D. Ill. 1987); McCormick-Morgan, Inc. v. Teledyne Indus., Inc., 765 F. Supp. 611,... 15 16

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communications that related to the advice communicated.24 Courts, following the dictates of the Federal Circuit, applied these standards for over fifteen years. However, four years ago the Federal Circuit began to swing the pendulum back in favor of the defendants. In 2004 the Federal Circuit, acting en banc, overruled Kloster Speedsteel AB and its progeny and held that a defendant’s reliance on the attorney-client privilege or work-product doctrine to prevent the disclosure of an opinion of counsel did not result in an adverse inference with respect to willful infringement.25 Further, the Court stated that potential infringers did not have a duty to seek advice of counsel to avoid an adverse inference that such advice would have been negative.26 Although the Federal Circuit’s Knorr-Bremse decision began to swing the pendulum in alleged infringers’ favor, the decision was not a complete victory for potential infringers. In the final question presented, the Federal Circuit rejected the argument that a substantial defense to infringement sufficed to defeat liability for willful infringement where a party did not seek prelitigation advice.27 Instead, the Court held that this was simply one factor to consider as part of the “totality of circumstances” and did not override the other factors used to determine whether a prudent person would have a sound basis to believe that the patent was not infringed, invalid, or unenforceable.28 Interestingly, Judge Dyk’s concurrence-in-part indicated a willingness to swing the pendulum further in the defendant’s favor when he suggested that the duty of due care conflicted with Supreme Court precedent that holds punitive damages can only be awarded in situations where the conduct is reprehensible.29 Considering that the duty-of-care standard conflicts with this Supreme Court precedent and, in Judge Dyk’s view, does “nothing to benefit the patent system,” Judge Dyk suggested proclaiming this duty a relic of the past and eliminating it as a factor in the willfulness analysis.30 Although the removal of the adverse inference associated with the failure to obtain or turn over opinions of counsel alleviated some burdens upon the defendant, Knorr-Bremse had not relieved a defendant of its affirmative duty of due care to avoid infringement. Since KnorrBremse rejected the argument that a substantial defense at trial negated a finding of willful infringement, in many instances, defendants still chose to waive the attorney-client privilege by providing exculpatory opinions to refute claims of willful infringement. In re EchoStar Communications Corp.31 presented the Federal Circuit with a case where a defendant decided to rely upon an opinion of counsel. In that matter, the Federal Circuit confronted the scope of waiver associated with the advice of counsel defense. The defendant relied upon the advice of counsel to refute the patentee’s willful infringement claim. Before the institution of the infringement action, the defendant obtained and relied upon the advice of in-house counsel. After the filing of the action, the defendant sought additional advice from outside counsel concerning the patent, but choose not to rely upon that advice at trial.32 The Federal Circuit held that defendant’s reliance on any advice of counsel waived the attorneyclient privilege for all communications relating to the same subject matter, including communications with counsel other than those providing the opinion upon which the defendant relies.33 The Federal Circuit went on to define the categories of information that a defendant waives when relying upon advice of counsel. 613 (N.D. Cal. 1991); Thorn EMI N. Am., Inc. v. Micron Tech., Inc., 837 F. Supp. 616, 622 (D. Del. 1993); Micron Separations, Inc. v. Pall Corp., 159 F.R.D. 361, 363–65 (D. Mass 1995). 24 Id. 25 Knorr-Bremse Sys. Fuer Nutzfahrzeuge GMBH v. Dana Corp., 383 F.3d 1337, 1344 (Fed. Cir. 2004). 26 Id. 27 Id. at 1347. 28 Id. 29 Id. at 1348. 30 Id. at 1350–52. 31 448 F.3d 1294 (Fed. Cir. 2006).

402 CHAPTER V: PATENT LAW The disclosure of a privileged opinion presents courts with a decision as to whether that disclosure waives the following categories of work-product: (1) documents that embody the communications between the attorney and the client on the subject matter in question; (2) documents analyzing the subject that reflect the attorney’s mental impressions that were not shared with the client; and (3) documents that discuss the communications between the attorney and the client, but were not shared with the client.34 Having found a waiver of the first type at the outset of its opinion in EchoStar, the Federal Circuit addressed the remaining two categories. The Court determined that the reliance on an opinion of counsel waived the third category. But the Court protected the sanctity of an attorney’s analysis of the law, facts, and trial strategy that was not shared with the client when it refused to extend the waiver to the second category.35 As such, reliance on advice of counsel waives the “immunity for any document or opinion that embodies or discusses a communication to or from [the defendant] concerning whether the patent is valid, enforceable, and infringed.”36 The waiver applies to both the attorney-client privilege and work-product immunity. With this understanding, the Federal Circuit defined the waiver to include communications with attorneys other than the attorney upon whose opinion the defendant relies. Since EchoStar defined the waiver to include attorney opinions other than those upon which the defendant relies, many trial courts began to extend the waiver of the attorneyclient privilege and work-product immunity to not only opinion counsel but to trial counsel also.37 Such a ruling led to the mandamus petition in In re Seagate Technology LLC.38 The defendant in Seagate had informed the patentee that it intended to rely upon three opinions of counsel provided by an outside attorney.39 The patentee then moved the district court for an order requiring that the defendants produce any communications and associated work product of Seagate’s other counsel, including trial counsel. The district court granted this request and Seagate filed a mandamus petition.40 Although Seagate directed the mandamus petition only to the scope of waiver, the Federal Circuit decided, sua sponte, to address, en banc, the scope of waiver and the correctness of the affirmative duty of due care standard established in Underwater Devices. The Federal Circuit outlined three questions that it would address: (1) Should a party’s assertion of the advice of counsel defense to willful infringement extend the waiver of the attorney client privilege to communications with that party’s trial counsel?41 (2) What is the effect of any such waiver on work-product immunity? (3) Given the impact of the statutory duty of care standard announced in Underwater Devices, Inc. v. Morrison-Knudsen Co.42 on the issue of waiver of attorney-client privilege, should this court reconsider the decision in Underwater Devices and the duty of case standard itself?43 Id. at 1297. Id. at 1299. 34 Id. at 1302. 35 Id. at 1303. 36 Id. at 1304. 37 See, e.g., Lifenet, Inc. v. Musculoskeletal Transplant Found., Inc., 490 F. Supp. 2d 681, 688 (E.D. Va. 2007); Informatica Corp. v. Bus. Objects Data Integration, Inc., 454 F. Supp. 2d 957 (N.D. Cal. 2006). 38 497 F.3d 1360 (Fed. Cir. 2007) (en banc). 39 Id. at 1366. 40 Id. at 1366–67. 41 See In re EchoStar Commc’n Corp., 448 F.3d 1294 (Fed. Cir. 2006). 42 717 F.2d 1380 (Fed. Cir. 1983) 43 Seagate, 497 F.3d at 1367. 32 33

PART D: PATENT INFRINGEMENT 403

After tremendous interest through amicus briefs and at the oral argument, the Federal Circuit issued an opinion on August 20, 2007, in which all of the participating jurists agreed to do away with the affirmative duty of care standard.44 In coming to this conclusion, the Court began by analyzing the term “willful.” Since the term “willful” is not unique to patent law, the Court reviewed willful acts in other contexts.45 The Federal Circuit found that in these contexts the term “willful” related to reckless behavior and that the duty of care standard announced in Underwater Devices inappropriately set a lower threshold that was more akin to negligence.46 Thus, the Federal Circuit expressly overruled the affirmative duty of care standard and provided a new standard to determine willful infringement.47 The new standard for willful infringement announced by the court requires two specific findings. A patentee must show by clear and convincing evidence that the defendant acted despite an objectively high likelihood that its actions constituted infringement of a valid patent. The defendant’s state of mind is irrelevant to this threshold objective inquiry. If the patentee establishes the objective inquiry, then the patentee must show that the defendant knew or should have known of this objectively defined risk.48 Although the Federal Circuit articulated a new standard, it neither provided many clues as to the application of this standard nor explained the applicability of the existing totality of circumstances test to the new standard.49 The court did note Judge Newman’s suggestion in her concurrence that courts should consider as one factor the standards of commerce in judging a defendant’s actions. Judge Newman’s concurrence, however, did not define “standards of commerce.”50 The Federal Circuit left this and the other factors for future courts to develop. After announcing a new standard to adjudge willful infringement, the Federal Circuit reviewed the scope of the waiver associated with an advice of counsel defense. The Court concluded that, considering the significantly different functions of trial counsel and opinion counsel, the waiver should not extend to trial counsel.51 Therefore, the waiver of the attorneyclient privilege and work-product immunity related to a separate counsel’s opinion does not extend to trial counsel, absent exceptional circumstances or chicanery.52 More importantly, when discussing the applicability of the waiver to trial counsel, the Federal Circuit noted that willfulness allegations ordinarily are grounded exclusively on pre-litigation conduct.53 This renders trial counsel’s opinion inapplicable to whether the defendant had willfully infringed a patent because post-filing conduct is irrelevant to willful infringement. To the extent that the conduct by a defendant after initiation of the case is reckless, a patentee should rely upon a preliminary injunction motion to combat such conduct — not allegations of willful infringement.54 These statements appear to set as Id. at 1371 (Chief Judge Michel and Judge Moore did not participate in the decision of the court). Id. at 1370. 46 Id. at 1371. 47 Id. The court reinforced its previous decisions that a defendant does not have an obligation to obtain an opinion of counsel. 48 Id. 49 Traditionally, when applying the Underwater Devices’ standard, courts looked at the “totality of the circumstances.” In Read Corp. v. Portec, Inc., 970 F.2d 816, 826–27 (Fed. Cir. 1992), the Federal Circuit identified many of the factors considered in analyzing the totality of the circumstances. 50 Seagate, 497 F.3d at 1371, n.5. 51 Id. at 1373. 52 Id. at 1374–75. 53 Id. at 1374 54 Id. The en banc Seagate panel appears to have borrowed from Judge Dyk’s concurrence-in-part and dissentin-part in Knorr-Bremse Sys. Fuer Nutzfahrzeuge GMBH v. Dana Corp., 383 F.3d 1337, 1351 (Fed. Cir. 2004). In that opinion, Judge Dyk stated that it was unnecessary to stretch willful infringement to protect a patentee because a patentee can secure a preliminary injunction upon learning of the infringement. If the patentee cannot secure a... 44 45

404 CHAPTER V: PATENT LAW a prerequisite a motion for a preliminary injunction before a patentee can seek enhanced damages for post-filing conduct.55 Further, the failure of a patentee to succeed on such motion because the defendant has raised a substantial question with respect to infringement or validity, in many instances, will foreclose a finding of willful infringement.56 This holding shows a reversal by the Federal Circuit of its view of a mere three years earlier in KnorrBremse.57 Considering the Federal Circuit’s view that post-litigation conduct is of little relevance to the willfulness analysis, the Court, not surprisingly, found communications with trial counsel of little relevance to the advice of counsel defense. The lack of relevance of this information led the Federal Circuit to state that defendant’s reliance on opinions generated after filing of a complaint are of little significance to a defendant’s support of its defense against willful infringement.58 Following the dictates of the Federal Circuit in Seagate, district courts now must define the factors to consider when analyzing willful infringement and clarify the scope of waiver associated with the reliance on advice of counsel defense. III. QUESTIONS REMAINING AND WHAT COURTS HAVE DONE SINCE SEAGATE

Seagate created a new standard and clarified the scope of the waiver as applied to trial counsel. The decision, however, has created a litany of questions including: • The applicability of the totality of the circumstance test; • The definition of standards of commerce; • The need for an opinion to refute willful infringement; • Whether the failure of a defendant to obtain an opinion should be placed before a jury; • The interplay between the lowered threshold of declaratory judgment jurisdiction recognized SanDisk Corp. v. STMicroelectronics, Inc.59 and the need to show prelitigation activity by a defendant with knowledge of the patent to support a finding of willful infringement; • Whether trial strategy supports the receipt of an opinion if the defendant receives notice of the patent through a complaint; • Whether a patentee can fail to obtain a preliminary injunction but still succeed in its willful infringement argument; • What type of activity by the trial counsel can result in the waiver of the trial counsel’s advice along with the opinion counsel’s advice; and • Can trial counsel and opinion counsel be from the same firm and still fall under the protection stated in Seagate. Considering that the application of the Seagate opinion is still in its nascent stage, only a few courts have addressed willful infringement issues. However, some of these courts have articulated positions on a few of the issues above. Some of the early post-Seagate willful infringement cases have addressed the applicability of the totality of circumstances test. Absent a set of standards from the Federal Circuit, not surprisingly, the majority of district courts confronting willful infringement allegations post-Seagate have found that the Read Corp. factors associated with the totality of circumstances are still applicable to the willful preliminary injunction because it cannot show a likelihood of success on the merits, then a substantial defense to infringement exists. The presence of a substantial defense should negate any basis for punitive damages. Id. 55 Seagate, 497 F.3d at 1374. 56 Id. 57 See Knorr-Bremse, 383 F.3d at 1347 (rejecting that the mere existence of a substantial defense to infringement defeats the liability for willful infringement). 58 Id. at 1374. 59 480 F.3d 1372 (Fed. Cir. 2007).

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infringement analysis.60 Nevertheless, at least one court has questioned the applicability of the totality of circumstance test.61 That court did not announce the test abrogated, however. Therefore, it appears courts have resoundingly answered the first question by finding the totality of the circumstances test alive and well. Although several courts have validated the applicability of the totality of circumstances test, most courts have made little mention of standards of commerce. Thus, the answer to the second question remains unclear. Considering that courts still approve of the totality of the circumstance test, one wonders if the associated factors for that test will morph into standards of commerce factors. This appears to be the case in at least one case.62 After stating that the Federal Circuit left open the method of applying the new standard, the court in Lucent Technology, Inc. v. Gateway, Inc.63 noted that the Federal Circuit had identified standards of commerce as a guidepost. From there, the court launched into its analysis by focusing on the Federal Circuit’s citation of Safeco Insurance Co. of America v. Burr64 and the existing “totality of circumstances test.” Following the reasoning of Safeco, the district court analogized that “an objectively high likelihood of infringement may require a risk substantially greater than that associated with a merely careless reading of the patent.” Further, the court noted that nothing in Seagate appeared to abandon the Read Corp. factors of the totality of circumstances test. This approach seems to suggest that standards of commerce may be highly similar to these existing factors. Thus, to support a willful infringement finding, these factors must show that a defendant ignored a risk substantially greater than that associated with a merely careless reading of the patent. Alternatively, district courts may discard some of the Read Corp. factors in defining “standards of commerce.” This would follow Judge Dyk’s opinion in Knorr-Bremse. Judge Dyk, relying on Federal Circuit case law that discussed willful infringement as a measure of reasonable commercial behavior, suggested several circumstances that warrant a finding of willful infringement.65 These circumstances include “deliberate copying, concealing 60 In Read Corp. v. Portec, Inc., 970 F.2d 816, 826–27 (Fed. Cir. 1992), the Federal Circuit listed nine nonexclusive factors that could be considered in determining whether an infringer acted in such bad faith as to merit enhanced damages: (1) whether the infringer, after learning of another’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or not infringed; (2) Whether the infringer deliberately copied the ideas or design of another (ideas and design would encompass, for example, copying the commercial embodiment); (3) the infringer’s behavior as a party to the litigation; (4) the defendant’s size and financial condition; (5) the closeness of the case; (6) the duration of the defendant’s misconduct; (7) remedial action taken by the defendant; (8) the defendant’s motivation for harm; (9) whether the defendant attempted to conceal its misconduct. See Rhino Assocs., LP v. Berg Mfg & Sales Corp., 531 F. Supp. 2d 652, 658 (M.D. Pa. 2007) (“To determine whether an infringement is willful or in bad faith, the court must look at the totality of the circumstance”); Lucent Tech., Inc. v. Gateway, Inc., No. 03-cv-1108, 2007 U.S. Dist. LEXIS 95934, at *11 (S.D. Cal. Oct. 30, 2007) (“Seagate does not suggest that the Federal Circuit intended to jettison the general approach of viewing willfulness under the totality of the circumstances”); Trading Techs. Int’l, Inc. v. eSpeed Int’l, Ltd., No. 04-cv-5312, 2008 U.S. Dist. LEXIS 295, at *4 (N.D. Ill. Jan. 3, 2008) (“We agree with plaintiff that the court’s decision in Seagate did not alter the requirement that the totality of the circumstances must be taken into account when determining whether infringement was willful”); Broadcom Corp. v. Qualcomm, Inc., No. 05-cv-467, 2007 U.S. Dist. LEXIS 86627, at *11 (C.D. Cal. Nov. 21, 2007) (“The Court’s conclusion is that the absence of an opinion is one factor the jury may consider in reviewing the totality of circumstances in determining whether the alleged inducement was knowing”); Energy Transp. Group, Inc. v. William Demant Holdings A/S, 05-422 GMS Docket Entry No. (D. Del. Jan. 4, 2008). 61 See Depomed, Inc. v. IVAX Corp., 532 F. Supp. 1170, 1177 (N.D. Cal. 2007) (“It is unsettled whether the Federal Circuit’s prior “totality of the circumstances” test is now abrogated, or whether the factors identified in Read Corp. v. Portec, Inc., 970 F.2d 816, 826–27 (Fed. Cir. 1992), remain relevant to the willfulness inquiry.”). 62 See Lucent Techs., Inc. v. Gateway, Inc., No. 03-cv-1108, 2007 U.S. Dist. LEXIS 95934, at *10–11 (S.D. Cal. Oct. 30, 2007). 63 No. 03-cv-1108, 2007 U.S. Dist. LEXIS 95934, at *10–11 (S.D. Cal. Oct. 30, 2007). 64 127 S. Ct. 2201 (2007). 65 See Knorr-Bremse, 383 F.3d at 1348–49 (citing Hoechst Celanese Corp. v. BP Chems. Ltd., 78 F.3d 1575, 1583 (Fed. Cir. 1996); L.A. Gear, Inc. v. Thom McAn Shoe Co., 988 F.2d 1117, 1127 (Fed. Cir. 1993); Read Corp. v. Portec, Inc., 970 F.2d 816, 827 (Fed. Cir. 1992); Kaufman Co. v. Lantech, Inc., 807 F.2d 970, 978–79 (Fed. Cir. 1986)).

406 CHAPTER V: PATENT LAW infringing activity, infringement where the infringer knows that it is infringing or where it knows it has only frivolous defenses, infringement designed to injure a competitor, etc.”66 These circumstances appear to mirror Read Corp. factors numbers 1, 5, 8, and 9, but do not include such factors as the need for an exculpatory opinion, the financial size of the defendant, the duration of the infringement, or the remedial acts of the defendant.67 Considering that most courts have found the factors articulated in the totality-of-circumstances test still relevant, it is not surprising that a few courts have found the presence or absence of an opinion post-Seagate still relevant.68 The totality-of-the-circumstances factors include whether a defendant sought an opinion of counsel.69 Although the courts have allowed juries to consider the presence or absence of an opinion, it is clear from Knorr-Bremse and Seagate that neither the court nor the patentee can suggest that the defendant had an obligation to obtain an opinion or that its failure to do so requires a negative inference.70 Considering the heightened standard for willful infringement and the clear statements by the Federal Circuit extinguishing any duty to obtain an opinion, one wonders whether, as case law evolves, the presence of an opinion will strongly support a defendant’s arguments against willful infringement, while the absence of an opinion will fade away as a factor supporting a finding of willful infringement. At least one court has suggested that, although still relevant, an opinion only matters to the second question defined in Seagate.71 Further support for the potential diminishment of the need for an opinion is the “substantial defense” argument to willful infringement. Following the dictates of Seagate, several courts have ended willfulness inquiries upon determining that the defendant had articulated a substantial defense.72 Thus, the identification of any substantial defense may negate the need for a defendant to obtain a formal opinion. The development of this defense may be akin to obtaining a less formal opinion of counsel, e.g., identification of defense by an in-house patent counsel. The defense need not result in that in-house counsel providing a formal opinion, but Knorr-Bremse, 383 F.3d at 1348–49. See Read Corp., 970 F.2d at 827. 68 Energy Transp. Group, Inc. v. William Demant Holdings A/S, 05-422 GMS Docket Entry No. (D. Del. Jan. 4, 2008) (“[T]he court further concludes that nothing in Seagate forbids a jury to consider whether a defendant obtained advice of counsel as pert of the totality of the circumstances in determining willfulness”); Franklin Elec. Co., v. Dover Corp., No. 05-cv-598, 2007 U.S. Dist LEXIS 84588, at *22 (W.D. Wis. Nov. 15, 2007) (“Plaintiff points to defendant’s failure to seek advice of counsel prior to selling the accused device”); Lucent Techs., Inc. v. Gateway, Inc., No. 07-cv2000-h, 2007 U.S. Dist LEXIS 95934, at *11 (S.D. Cal. Oct. 30, 2007) (“Even advice of counsel may remain relevant, at least as a defense to willfulness, though no linger an affirmative duty”); Broadcom Corp. v. Qualcomm, Inc., No. 05cv-467, 2007 U.S. Dist. LEXIS 86627, at *11 (C.D. Cal. Nov. 21, 2007) (“The Court’s conclusion is that the absence of an opinion is one factor the jury may consider in reviewing the totality of circumstances in determining whether the alleged inducement was knowing.”). 69 Read Corp., 970 F.2d at 826–27 (“[W]hether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed.”). 70 See, e.g., Seagate, 497 F.3d at 1369–70. 71 Franklin Electric, 2007 U.S. Dist LEXIS 84588, at *22 (“All of the evidence advanced by plaintiff goes to the second component of the Seagate test — what defendant knew or should have known with respect to the likelihood of infringement.”). 72 Resqnet.com, Inc. v. Lansa, Inc., No. 01-cv-3578, 2008 U.S. Dist. LEXIS 7908, at *50 (S.D.N.Y. Feb. 1, 2008) (“[I]ts arguments in these areas were substantial, reasonable, and far from the sort of easily-dismissed claims that an objectively reckless infringer would be forced to rely upon”); TGIP, Inc. v. AT&T Corp., No. 06-cv-105, 2007 U.S. Dist. LEXIS 79919, at *37 (E.D. Tex. Oct. 29, 2007) (“even if the jury’s finding of infringement is ultimately upheld, it was, at best, a very close call”); Franklin Electric, 2007 U.S. Dist LEXIS 84588, at *23 (“Given the significant support in the language of the patent, the specification and prosecution history the defendant’s non-infringement position, plaintiff cannot meet its burden to prove objective recklessness by clear and convincing evidence”); Trading Tech. Int’l., Inc. v. eSpeed Int’l, Ltd, 04-cv-5312, 2008 U.S. Dist. LEXIS 295, at *4, 7–8 (N.D. Ill. Jan. 3, 2008) (“Furthermore, validity of plaintiff’s patents has been hotly contested in this litigation. We find on this record that defendants sufficiently asserted defenses to infringement and those defenses were neither unreasonable nor frivolous.”). 66 67

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may only appear at trial in the form of a defense to patent infringement allegations. Further development of the case law is required, however, before companies modify the practice of obtaining opinions of counsel. The failure to get an opinion, although not resulting in an adverse inference, may still support a finding of willful infringement. For the time being, companies should get an opinion. This opinion may be from in-house counsel or external opinion counsel. To avoid potential waiver of litigation strategy, it should not be from trial counsel. Hopefully, the development of case law will clarify the role of opinions, while also answering the numerous questions above which courts have not reviewed yet. IV. CONCLUSION

In re Seagate ushered in a sea change in patent law, but equally ushered in numerous questions that companies and their counsel must attempt to answer when considering another’s patents. District courts that have performed willfulness inquires since Seagate have provided some insights that will allow attorneys to advise clients regarding some of these questions. Many questions still remain, however, and hopefully the district courts will answer these questions as more opportunities to consider willful infringement arise. MR. PEGRAM: Thank you very much, Brian.

Before we go to Todd Dickinson and discuss the legislative proposals that are now pending, I just wanted to mention some thoughts on why willful infringement contentions are so common. They are easy to plead — maybe; there is a chance of enhanced damages — maybe two or three times the damages; there is a chance of attorney’s fees; and there is an opportunity to make the defendants look bad in front of a jury. For all of those reasons, a charge of willful infringement is very tempting. At this time, Todd, I would like to ask you to tell us about the current legislative proposals addressing the willful infringement issue. What is it, or what are they, and will it solve some or all of the problems? MR. DICKINSON: The issue of willfulness is, obviously, of great concern, and has been one that a number of entities and a number of individuals, in the current round of patent reform legislation that has been pending, sought to address through legislation.73 This went somewhat in timing parallel with the Seagate case. As with couple of other issues, I think it is interesting that the courts have either taken the legislation off the table or have significantly reduced the legislative tension around them. A good example there, just parenthetically, would be injunctions. Probably the most difficult issue was how to address perhaps moderating injunctions in the early stage of the legislative process. Totally off the table now after eBay.74 Willfulness is somewhat similar, although it is not completely off the table. There was a long provision drafted on willfulness in the original bill.75 It was modified somewhat over 73 S. 1145 & H.R. 1908, 110th Cong., 2d Sess., Patent Reform Act of 2007 (to amend title 35, United States Code, to provide for patent reform). The texts of both bills and current legislative action are available at http://www.govtrack.us/ congress/bill.xpd?bill=s110-1145. 74 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 75 S. 1145, supra note 73, §284. Damages: (e) Willful Infringement: (1) INCREASED DAMAGES — A court that has determined that an infringer has willfully infringed a patent or patents may the increase damages up to 3 times the amount of the damages found or assessed under subsection (a), except that increased damages under this paragraph shall not apply to provisional rights under section 154(d). (2) PERMITTED GROUNDS FOR WILLFULNESS — A court may find that an infringer has willfully infringed ... a patent only if the patent owner presents clear and convincing evidence that —

408 CHAPTER V: PATENT LAW time. After Seagate, there was a fair amount of discussion about whether it should remain in the current legislation or not. The current draft of the Senate version, which is primarily the version we are working from at the moment, is likely to come up some time in mid-April.76 We will probably see what is called the Manager’s Amendment, or the substitute version, of the bill at that time. With willfulness, we have already seen the proposal that Senator Leahy, the Chair of the Committee, has put forward.77 Basically, what they are suggesting is to keep the original language, which codified in many ways what Seagate was about, and to increase the challenge in finding willfulness, to move towards the “objectively reckless” standard, which is encompassed by Seagate. So that language is specifically being inserted, if this passes, into the legislation and, in essence, it will be codified. MR. PEGRAM: Todd, am I correct that the legislation would procedurally make two changes: (1) that it would be decided by the judge and not by the jury; and (2) that it would push it to after the trial when there had been a success on finding infringement? MR. DICKINSON: That’s correct, John. Those changes, I think, are ones that, again, were urged by many of the participants in the debate. All of this has generated fairly little debate during the pendency of the legislation, so I think these are changes that are likely to proceed and go through if the legislation goes through. I would say there is a very good chance it will, depending on how the damages provision comes out. I think these will be codified. (A) after receiving written notice from the patentee — (i) alleging acts of infringement in a manner sufficient to give the infringer an objectively reasonable apprehension of suit on such patent, and (ii) identifying with particularity each claim of the patent, each product or process that the patent owner alleges infringes the patent, and the relationship of such product or process to such claim, the infringer, after a reasonable opportunity to investigate, thereafter performed 1 or more of the alleged acts of infringement; (B) the infringer intentionally copied the patented invention with knowledge that it was patented; or (C) after having been found by a court to have infringed that patent, the infringer engaged in conduct that was not colorably different from the conduct previously found to have infringed the patent, and which resulted in a separate finding of infringement of the same patent. (3) LIMITATIONS ON WILLFULNESS — (A) IN GENERAL — A court may not find that an infringer has willfully infringed a patent under paragraph (2) for any period of time during which the infringer had an informed good faith belief that the patent was invalid or unenforceable, or would not be infringed by the conduct later shown to constitute infringement of the patent. (B) GOOD FAITH ESTABLISHED — An informed good faith belief within the meaning of subparagraph (A) may be established by — (i) reasonable reliance on advice of counsel; (ii) evidence that the infringer sought to modify its conduct to avoid infringement once it had discovered the patent; or (iii) other evidence a court may find sufficient to establish such good faith belief. (C) RELEVANCE OF NOT PRESENTING CERTAIN EVIDENCE — The decision of the infringer not to present evidence of advice of counsel is not relevant to a determination of willful infringement under paragraph (2). (4) LIMITATION ON PLEADING — Before the date on which a court determines that the patent in suit is not invalid, is enforceable, and has been infringed by the infringer, a patentee may not plead and a court may not determine that an infringer has willfully infringed a patent. The court’s determination of an infringer’s willfulness shall be made without a jury. 76 Statement on Introduced Bills and Joint Resolutions, Apr. 18, 2007, available at http://thomas.loc.gov/cgi-bin/ query/ R?r110:FLD001:S04687; Mark-up of S.1145.RS, reported by Senate Judiciary Committee Apr. 18, 2007, available at http://thomas.loc.gov/cgi-bin/query/D?c110:2:./temp/~c110hd8wb9::. 77 See Press Release, Sen. Patrick Leahy, Senate Patent Reform Leaders Release Amendments In Advance Of Patent Reform Debate (Mar. 12, 2008), available at http://leahy.senate.gov/press/200803/031208e.html (“Further amendments to address issues including venue, post grant review, damages and inequitable conduct are expected to be released in the coming weeks. The amendments released Wednesday include: … ‘Objective Recklessness’ — codifies the Federal Circuit court’s ruling in Seagate, holding that infringement is only willful if the infringer acts with objective recklessness of the patent.”).

PART D: PATENT INFRINGEMENT 409 MR. PEGRAM: And now your opinion. Will it solve some or all of the problems? MR. DICKINSON: I think that in any new legislation that is always one of those issues where

you say it will somewhat depend on how the courts interpret it. Given the fair confluence of Seagate itself, the decision that the Supreme Court ought to take it, and the reduced debate, the consensus around this issue, it is going to go a long way towards solving the problem, in my opinion. MR. PEGRAM: We are going to proceed with the discussion. We will give some of the other panelists an opportunity later to comment, if they wish to, on the legislation. Ed, I would like to ask you a few questions here. Maybe I will ask them all at once. Some people are telling Congress that the legislation is unnecessary. Was the Underwater Devices78 standard a problem for you as a litigation manager? Have Knorr-Bremse,79 EchoStar,80 and Seagate81 solved your problems? And how does Seagate’s change of the focus from a competent opinion to an objective recklessness standard affect you in obtaining opinions and advising your company? MR. MURRAY: I think some of those questions are very easy to answer. Working under the Underwater Devices standard made my job fairly easy. When you had a situation where you were concerned about freedom of operation and it looked serious, you contracted an opinion. It created an environment where there is a neat little industry of patent attorneys who specialize in opinion writing. They are often in firms that do not do litigation, or separate from litigation. You had these two camps of firms that people like me resorted to. You had your opinion counsel and you had your trial counsel. That not only deal with getting competent opinions, it also dealt with the waiver issue as well, because you tried to keep the two separated. If you did have to disclose the opinion in trial, you were fairly well insulated, until the EchoStar case and its progeny, from waiving communications with trial counsel. In the Seagate era, I think it does change things, and it does make my job as in-house counsel somewhat more difficult. I think it changes the focus from an opinion, a document, and the attorney who did it, and the competency of the opinion, to the overall conduct of the company faced with the issue of freedom of operation, which I think puts more focus internally within the company than externally. So I can see instances where decisions I make, or the general counsel of my company makes, could become questioned in trial. I have not gotten to the point where I have nightmares over being a witness and trying to defend my decisions, but I do think an in-house counsel does face that in some instances. So that is how I view the post-Seagate world right now. Just to give my two cents on the question of legislation, I think both components of it, the judge’s determination of willfulness and putting it post determination of infringement, are positive principles, mainly because of the issue of laymen making the decision. It has been my professional experience that people who do not practice in the patent field often look upon the concept of literal patent infringement as being theft or dishonest in and of itself, rather than a technical decision of merely coming within the scope of patent claims. If that is the perspective, then once you make the determination of infringement, it is not a great leap to say that it was willful. I think that it makes good practical sense to separate the two, to leave the determination of infringement to be one of a technical decision, scope of claims interpretation and evaluation of the device or practice that is accused, and then deal with the willfulness as a separate substantive conduct determination. MR. PEGRAM: Thanks very much, Ed. Underwater Devices, Inc. v. Morrison-Knudsen, 717 F.2d 1380 (Fed. Cir. 1983). Knorr-Bremse Sys. Fuer Nutzfahrzeuge GMBH v. Dana Corp., 383 F.3d 1337, 1344 (Fed. Cir. 2004). 80 In re EchoStar Commc’n Corp., 448 F.3d 1294 (Fed. Cir. 2006). 81 In re Seagate Tech., LLC, 497 F.3d 1360, 1371 (Fed. Cir. 2007) (en banc). 78 79

410 CHAPTER V: PATENT LAW Ken, I would like to move to you next. How have Knorr-Bremse, EchoStar, and especially Seagate, affected litigation? And do these decisions really change what happens at trial? MR. HERMAN: I think the answer to the second question is no. In theory, the standards of what you have to do, or what the adverse inference requires you to do, suggest that as the law has changed trial strategies have changed as well. But I think that is not true, and it is not true for a couple of reasons. If you are the defendant, it can be very helpful to you to have an opinion of counsel and the ability to call the writer of that opinion to testify. He becomes a well-spoken advocate for your position. Whether or not you actually had a duty to get the opinion, it is a benefit to you to have somebody on the stand who can persuade either the judge or the jury that you are right. The second reason is that, whether or not there is an adverse inference to be found, an opinion is the best way, I believe, to overcome a willfulness charge. If you put somebody on the stand, you have an opinion, that is how you win. If you do not have an opinion, even though there is no adverse inference, at least under the current state of the law, somebody is going to ask whether you got an opinion, or at a minimum make the argument at the close of trial that you never got an opinion. The jury sits there and says, “Well, they never got an opinion.” The judge can instruct them until the cows come home that they should not draw any conclusions from that fact. But juries are human, and so they are going to go back into the jury room and they are going say, “They never got an opinion.” So for both of those reasons I think that the strategy has not changed, albeit some of the law around it has. MR. PEGRAM: Ken, how do you feel about the legislative proposal, both in an objective view and then one as colored by what your clients’ views might be and success in the case? MR. HERMAN: I am not sure what the legislation is really going to do. MR. PEGRAM: Well, for one thing, it is going to take it out of the trial before the jury. MR. HERMAN: I was going to get to that. I would like to have the willfulness taken away from the jury, because I believe that there are two problems with having the jury decide willfulness. One, it encourages the jury to split the baby. So they sit there and say, “Well, we are not sure what to do here, so we will find that there is infringement, but we will not find that it was willful.” They pat themselves on the back. They think that they have now done something for everybody, not realizing that they have just put the defendant out of business. So I would rather not have the jury in that situation. The second problem is that if you are in a situation where the opinion that you have relies upon a claim construction, for example, which turns out to be the wrong claim construction, the jury just may look at that and conclude that you could not possibly have had a good-faith belief that you did not infringe. Judges are more sophisticated. The judge can look at the opinion and say, “Even though I, the judge, decided the claims did not mean that, a reasonable person could have reached the other conclusion; therefore, I am going to find that there was a good-faith reason to do it.” But in terms of whether the legislation will affect the decision to get an opinion, I do not think it does. I think that having the opinion remains as a valuable thing. If you are not going to try it to the jury and you do not get to put your advocate position on the stand, the fact remains that having the opinion may well influence the judge in terms of whether or not he is going to enhance damages even if he finds willfulness. Judges are human too. If you have an opinion that looks good, I think that is better than having no opinion at all. As a litigator, I would like to have the opinion there. MR. PEGRAM: I am going to ask our timer to put sixteen minutes on the clock. We will have a little more general discussion. I am going to ask people in a minute or two to raise their

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hands, so please pay attention. I am going to suggest to you, as a devil’s advocate, that we have a total hypocrisy with the way we have been handling opinions because of the use of separate opinion counsel. I would, first of all, like to ask our two corporate representatives: Whose opinion do you really rely on, the opinion counsel or the person that you have hired to defend your company? Ed? MR. MURRAY: In many instances, what you end up with is a conspiracy of dunces. You pick your trial counsel and your opinion counsel with the view that they are going to endorse an in-house opinion that you have already developed in somewhat an infantile form. But you rarely go out and hire counsel who is going to differ in view from the opinion counsel you have had. And you are very careful in hiring opinion counsel, at least in my case, because we have a fairly sophisticated in-house department to prepare the groundwork. My view would be entirely different if I were just the sole general attorney sitting in a small company and had to literally rely more heavily on outside counsel for that. So I do not see there being a conflict between the two. MR. PEGRAM: Todd, any comment? MR. DICKINSON: I agree with that almost totally. We have a large operation at General Electric and we are very sophisticated. So we have a good crack at the first opinion internally. Do we go outside to get that ratified? I would agree also with Ken that it is not going to change our practice too much ― maybe at the margins, but not a lot ― in terms of whether we seek an opinion or not. The little wrinkle, I guess, is more of a practical one receiving the opinion. If you are in a gray area where there are some problems, the usual practice, for good or bad, is to receive the initial opinion orally and, if it is a negative one, you may not get it formalized, you may not get it in writing; you may proceed on a different track. So some people have often suggested that you get opinions just to confirm things or you always get an opinion that comes out the way you want. Well, you often get the written opinion the way you want, but I am not sure that is always the case. I think it is still valuable to get. With regard to trial counsel, I think, again, it is not black or white. There are going to be times when you may get a nuanced version from the trial counsel that is somewhat different. You may get a highlighting of certain issues. You may get a little bit of a difference. How do you deal with that? That is not necessarily a bad thing. I think that gives you a more rounded view of your case and how you should proceed and maybe how you should settle. MR. PEGRAM: Our “fifth panelist,” Judge Rader. PARTICIPANT [Judge Randall Rader, Federal Circuit Court of Appeals, Washington, D.C.]: Todd, now that you know that you do not have to produce that opinion letter, has it changed the nature of those letters? Would it change the way you would write one? Would you be a little bit more blunt in saying, “You may infringe”? MR. DICKINSON: The short answer is “yes” on both issues. I have written many opinion letters as well. I think I would not go all the way to the final statement quite that completely. But I think it does give a little more leeway. I am not sure it gives a lot more leeway, nor does it give it in every case. I think also, frankly, it is a little early. Even as long as we have had so far, it is still a little early to see whether it is going to make a material difference or not. There have not been a lot of letters yet. The letters I have seen have tended to look like the old letters. I think people were waiting to see, frankly, what the Supreme Court was going to do on some other things. MR. PEGRAM: Ken doesn’t look like he agrees. Ken, what do you think? Should the opinions be more frank than they have been in the past? MR. HERMAN: Maybe in theory, yes, but in practice I am not sure that they will be, because there is always the risk, particularly in terms of the written opinion. The oral opinion is a little

412 CHAPTER V: PATENT LAW bit different, and I agree you might get a more honest oral opinion. But in terms of a written opinion, I think you have to assume that whatever you write is going to end up on the front page of The New York Times somehow. Therefore, you ought to write having that in mind. Whether you have to produce it or you do not have to produce it becomes theoretical and illusory. I think you have to have in mind the practicality of life. MR. DICKINSON: Can I turn the question around to our “fifth panelist?” MR. PEGRAM: No, I don’t think that is permitted. We have a couple of other things and we have to move along. PARTICIPANT [Judge Rader]: I’ll answer the question. MR. PEGRAM: Okay. I wasn’t going to put you on the spot. PARTICIPANT [Judge Rader]: I think the court was very concerned about the candor of opinions and very anxious to free people up to give more honest assessments of both validity and infringement. MR. DICKINSON: If the opinion writers knew that that was now going forward, might know that that is the case, I think you might see a little bit more movement in that direction. PARTICIPANT [Judge Rader]: I can remember us discussing in chambers that several of us had had the experience of being told by corporate counsel that they instructed their engineers to not consult patents because they feared a patent would show up in a file somewhere and lead to a willful infringement allegation. That was the sort of thing that I think the court hoped very much to do away with. MR. PEGRAM: That was Todd’s predecessor, in fact. MR. DICKINSON: I think that is a good point. I had clients when I was in private practice in the software industry who took exactly that position. No amount of my counseling could talk them out of it, even though there was a big downside to not doing that, in terms of knowing what the state of the art was. Hopefully, we can push this forward with that understanding. MR. PEGRAM: Let’s just try the other side of it. Brian, you haven’t had a chance to talk for a while, so we will give it to you next. Would the legislation perhaps make it easier for you and your clients to have more frank opinions and to use those? MR. NOLAN: I think the legislation will allow for more frank discussions between an attorney and the client. There are several reasons that will lead to increased discussion. First, the proposed legislation removes the fear that a jury may bundle the infringement and willfulness issues as one. A party may fear that a jury will assume the infringement was willful simply because the party had identified the prior art during the process of receiving a frank opinion. If the willfulness determination falls to the court after a jury’s infringement finding, this fear is removed. Second, the legislation sets a higher standard for willful infringement. The higher standard will reduce the risk of a willful infringement finding. This reduced risk will lower a client’s fear of identifying relevant art by participating in frank discussions with counsel. This fear was quite prevalent in the days before Seagate and the proposed legislation. I think that you are going to see fewer window-dressing opinions coming out after Seagate and, in light of the proposed legislation. I think that companies will do more along what Todd is talking about, or maybe Ed is talking about, which is to obtain freedom to operate opinions because they do not want to spend a large amount of capital and research time to develop things that may be barred later. But they will not necessarily be as driven to get an opinion simply to try to prevent a willfulness finding. In summary, I think that the legislation and Seagate will allow people to have more frank discussions because they are going to have discussions from a business perspective, on whether “as a company do we want to go forward with this?” as opposed to “do we just want to insulate ourselves from potential treble damages down the line?”

PART D: PATENT INFRINGEMENT 413 MR. PEGRAM: Now I would like to ask the panel as well as the audience: Does it make sense that we waive privilege or we say we waive privilege — because I have some questions as to whether these things really should be privileged — as to the opinion counsel’s opinion, but we are not doing it for the trial counsel’s opinion and we are maintaining the separate worlds? Does that make sense as a system? Raise your hands. Does it? [No response] How about those who feel it really does not make a lot of sense to be trying to draw the line between the two different opinions that every company is getting? [No response] Okay. The answer is nobody is willing, with Judge Rader in the room, to say. Or maybe it is with me in the room, because I tend to keep raising these. Well, this is not a typical Fordham class, I must say, because the students here generally will express their opinions. MR. DICKINSON: I have a small question, maybe on the macro level, as to the effect of both Seagate and the possible effect of the legislation. In companies and with clients, there is in recent years, unfortunately, increased skepticism about the efficacy of the patent system in a lot of ways. I think that is well noted. A question I have is whether, when you go back to senior management and you don’t have to say, “I’ll get another $50,000 opinion, another $50,000 opinion,” to kind of buffer yourself as insurance, you can be a little more circumspect, a little more nuanced, in how you approach that. I think it might help with senior management, in terms of how they view the system as a whole, I hope. I wouldn’t hold out a big hope, but I hope that as we continue to reform the system there is a possibility there. QUESTION [Prof. Martin Adelman, George Washington University, Washington, D.C.]: John, I can’t understand why anybody would care about trial counsel’s opinion. You are hiring those people to litigate. MR. PEGRAM: Come on, Marty. Why are they hiring the opinion counsel, and why is it that I have never seen a written negative opinion? QUESTIONER [Prof. Adelman]: Stop, stop. You’ve spoken. Now, with opinion counsel, if it were me, because I have done it, I think it is very dangerous to allege willfulness, because if you do allege willfulness and the defendant is smart — not too many lawyers are this skilled, but Ken Herman suggested it — that is a setup. Now you have this opinion counsel’s opinion. If it is pretty good, you put him on the stand he can argue the case. I have done it. We have won. It was because the people were so greedy that they wanted treble damages, so then that opened everything up, and then we could explain why the patent was clearly invalid, blah, blah, blah, stuff that you could never get in otherwise, and it turned out to be a disaster for the plaintiff. If it were me and I thought I was going to get sued, and I thought it was going to be probably improper that I am getting sued, I would get an opinion counsel because I would want to hire that person to testify if the plaintiff was foolish enough to allege willfulness. MR. PEGRAM: Thanks very much, Marty. People are going to think that you’re my plant out there, or the “sixth panelist.” I appreciate it, because it moved us into the other area that I wanted to talk about, which is the pleading and trial of this issue. I would like to ask the litigators on the panel, first Ken: Should you plead willful infringement before you actually have the evidence of bad conduct by the infringer? That is what a lot of people do. Is that proper? MR. HERMAN: I don’t think so. I don’t think you ought to be pleading things that you are not confident you are going to prove. I feel that way about willfulness and I feel that way about unenforceability. If during discovery you learn enough to give you a reason to think there is willful infringement or you learn enough to think that there is unenforceability, then you can go ahead and plead it. You can make a big splash by bringing a motion and educating the court as to what your position is.

414 CHAPTER V: PATENT LAW The point that Marty made about charging willfulness I think is sound. There have been times when I have deliberately not charged willfulness because I knew what was going to happen, and I did not want to have some good-looking, attractive witness get up on the stand and explain why. MR. PEGRAM: Marty will love you for that. Your Honor? QUESTION [Judge Rader]: I have heard a contrary comment, that if you allege willfulness you get a lot more discovery, and there are then a lot more things you can look at. Is that true? MR. PEGRAM: Brian, do you want to take that one? MR. NOLAN: Just briefly, to go back to what Ken said, I agree with him completely that there is going to be lower instances of willful infringement pleadings and findings. This will result from the statements made by the Federal Circuit in the Seagate opinion. The court noted that a patentee has a Rule 11 obligation to have a good-faith basis to go forward with allegations of willful infringement.82 Therefore, patentees must identify a reasonable basis, under the heightened standard established by Seagate, before pleading willful infringement. Judge Rader is correct in his statement that willful infringement allegations increase the area of relevant discovery. Since the subjective intent of the alleged infringer is at issue, at least with respect to the second prong of the Seagate test, there are more areas that a patentee might want to delve into, which is not just purely, “Let me look at the engineering records to see how the device works to prove infringement.” Under a willfulness inquiry a patentee can access the business reason under which the alleged infringer operated and a patentee may get access to privileged communications. Overall, in light of the heightened standard established in Seagate, along with the Federal Circuit’s reminder to patentees of their Rule 11 obligation, patentees will be less likely to plead willful infringement allegations. I think that the pleading of willful infringement will follow the trend of reduced pleading of inequitable conduct after the Federal Circuit noted that it was becoming a problem in the industry. Inequitable conduct is a little different than willful infringement, because Rule 9 requires practitioners to plead a fraud claim, such as inequitable conduct, with specificity.83 Therefore, I think that, even though patentees may get more discovery by including allegations of willful infringement, patentees will reduce their claims of willful infringement in light of the heightened standard. MR. PEGRAM: I would just mention that I suspect that the new willfulness will be actively inducing infringement. If people cannot get the willfulness before the jury, they will plead that they were actively inducing so they can get some of that evidence of bad intent or something in that way. We have about a minute left. If we have any non-panelist questions, we will try to take them now. Does anybody in the audience want to comment? Seeing no one in the audience who wants to speak, I will go to Ed first. Anything more, Ed? 82 Rule 11 — Judgment of the Rules of the Court of Federal Claims (RCFC) is patterned after Rule 11 of the Federal Rules of Civil Procedure. Judin v. United States, 110 F.3d 780, 784 (Fed. Cir. 1997). The Federal Circuit has held that its rulings under Rule 11 of the Federal Rules are applicable to RCFC 11. Id. The Rule requires that every pleading filed by a party be signed by the party’s attorney. RCFC 11(a) (“Every pleading, motion, and other paper shall be signed by or for the attorney of record in the signing attorney’s own individual name … .”). The attorney’s signature acts as a certification that the pleading is well-grounded in fact, has a basis in law, and is not filed for an improper purpose. View Eng’g, Inc. v. Robotic Vision Sys., 208 F.3d 981, 984 (Fed. Cir. 2000), available at http://www.uscfc. uscourts.gov/rule-11-judgment. 83 Rule 9 — Pleading Special Matters, Rules of the Court of Federal Claims, available at http://www.uscfc. uscourts.gov/rule-9-pleading-special-matters.

PART D: PATENT INFRINGEMENT 415 MR. MURRAY: One thing that I have seen in some of the commentaries about Seagate, one that I thought was kind of unusual, was that a plaintiff patentee could use the decision affirmatively by raising the level of objective conduct that a defendant would have to meet, which I find interesting, because usually you don’t try to develop your case that much. You rely on notice pleading if you know someone is infringing. It is virtually inconceivable to me that I could see that in my practice, but I think that is something I would be concerned with in the area of patent trolls or patents that cover a broad industry, where the patentee might line up a few licensees, line up a good body of evidence, and then start knocking down successive defendants by presenting them with a package and saying, “Look, either you sign up and license or you are going to get hit with a willfulness charge. And oh, by the way, I have all these licensees here, and there is a pretty high standard if you are going to attack my patent now.” MR. PEGRAM: Thanks very much, Ed. We have run out of time. We have managed to avoid having the alarm go off in our face today, for which I compliment the members of the panel. I thank you all for your attention.

CHAPTER V

Patent Law Part D: Patent Infringement Section 2: Injunctive Relief in the United States — eBay and its Aftermath; Effect on ITC Proceedings Moderator PROF. MARTIN J. ADELMAN

George Washington University Law School (Washington, DC) Panelists HON. RANDALL R. RADER

HERBERT F. SCHWARTZ

Court of Appeals for the Federal Circuit, (Washington, D.C.)

Ropes & Gray LLP (New York)

DANIEL B. RAVICHER

PROF. JOHN R. THOMAS

President and Executive Director, Public Patent Foundation (New York)

Georgetown University School of Law (Washington, D.C.)

PROF. ADELMAN: We are going to be discussing eBay, Inc. v. MercExchange, LLC,1 when

injunctions are appropriate, etc. eBay is actually an interesting case. If you look at it cold-bloodedly, there was no right to an injunction at all, because he asked for a jury trial. Of course, that was a legal action; therefore, no right to an injunction at all. But this is me talking — nobody agrees with me; they’re all wrong — in fact, there was never any right to an injunction. You can’t have both. That was clearly the law in the United States prior to 1938, and was held constitutional by the United States Supreme Court. There really was no change in 1938.2 So there was in this case, I would assert, no right to an injunction. 547 U.S. 388 (2006). In 1938 the Federal Rules of Civil Procedure established one system for processing both law and equity cases. Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure: Civil § 1002, at 10 n.2 (3d ed. 2002) (quoting § 2 of Process Act of 1792). The federal courts maintained different procedural rules for their law and equity sides until the adoption of the Federal Rules of Civil Procedure in 1938. Id. § 1004, at 21–28. Since 1938, the law/equity distinction in federal law has retained its relevance mostly for purposes of determining whether a claim constitutes... 1 2

418 CHAPTER V: PATENT LAW But beyond that, historically, of course, injunctions were only available in the equity courts, when you went into the federal court on the equity side. Damages were available in equity in the United States after about 1870 in patent cases, but you were in equity, with all of the equitable rules. The interesting case that eBay dealt with was Continental Paper Bag.3 If you go back to Continental Paper Bag, it involved the question of somebody, who was using one patent and had a competing patent, essentially wanted to suppress, for obvious reasons, the competition with the patent owner’s patent that he was in fact using. So the issue was: Can you get an injunction in that kind of case? I happen to think the Supreme Court was wrong in that case as well, but you can argue that point. So there is plenty to argue about. We have a very distinguished panel: Judge Rader needs no introduction; Daniel Ravicher, well known, from the Public Patent Foundation; Herb Schwartz, one of the best-known litigators in patents in the United States — and we go back to the Polaroid/Kodak case,4 so it is wonderful to have him on the panel; and my co-author, Jay Thomas from Georgetown. Why don’t we start with the academics? Jay? PROF. THOMAS: I somehow always get picked out first. But okay. Good. PROF. ADELMAN: It’s because of our casebook. PROF. THOMAS: Very well. So Marty put the squeeze on me again. I started teaching at law school. As you know, in the United States there are a number of mandatory classes in the first of the three years — property, contracts, criminal law. The problem is, nobody really wants to teach the classes, and nobody really knows any of the topics very well. So I got stuck teaching contracts, which was very tough because I don’t know any contract law. But you know a little bit more than the students. One thing I learned from the beginning, from contracts, is in fact injunctions as a remedy are very limited. You can only get an injunction in a contract good with a unique good or very specific product, very unusual circumstances. So when it came to me to teach patents the next semester, it was really no surprise that eBay might yet come, because in fact injunctions remain an exceptional remedy, not just in rhetoric but in reality. Also, when working on the Hill over the past few years, injunctions were a big topic of legislative reform discussion. So the notion was: How do we change the statute to have a more equitable balancing when it comes time to award an injunction? We looked at the statute, which I think still says “may award an injunction” effectively, and we didn’t know what to do. We were like “do we just bolt in the word ‘may,’ underscore it, do something like that, to make sure everyone understands it is “may” and not “shall?” We didn’t know what to do. Then eBay came along.5 Obviously, it is a short opinion. We are grateful for that. But, despite that, it is a set of opinions that offers something for everyone. No matter what your view of the world is, you can point to some part of that language. What I recall especially about KSR6 are all the predictions of doom and gloom that surrounded it. It was going to be the decline of the patent system, and there will be more litigation because a suit at “common law” for purposes of the Seventh Amendment’s right to trial by jury, see, for example, Curtis v. Loether, 415 U.S. 189, 194–95 (1974) (no constitutional right to a jury for a pure equity claim), or whether a claim satisfies the discretionary criteria necessary for imposing prospective relief, see, for example, Beacon Theatres v. Westover, 359 U.S. 500, 506–07 (1959) (injunctive relief unavailable unless legal remedies inadequate). 3 Continental Paper Bag Co. v. E. Paper Bag Co., 210 U.S. 405. (1908). 4 Polaroid Corp. v. Eastman Kodak Co., 641 F. Supp. 828 (D. Mass. 1985). 5 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). 6 KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007).

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no one can settle. All these predictions that trade secrets will become more attractive and no one will be filing for patents. Right now we’ve got a 4.6 percent increase in litigation from last year in the United States. These are actually 31.5 percent more defendants than last year.7 So we are seeing the patent system reach down to affect individual actors, no longer the realm of elite industry exclusively.8 The Eastern District of Texas, which is the notorious magnet jurisdiction — it is considered very pro-plaintiff in patent cases — issued two of the early opinions not allowing injunctions in the post-eBay era.9 But, in fact, they still have a 37.9 percent increase in filings over last year.10 So it seems to be “business as usual” in litigation. In terms of patent applications filed, in 2007 in the United States it was 467,000, as compared to 445,000 the year before.11 So again, a very dramatic increase in patent applications, consistent with earlier trends. It is hard to say eBay has really made much of a change in the basic working. It seems to be “business as usual.” From my perspective — as lawyers, we have to be used to the second- or third-best solution — I see it as the fifth-, sixth-, or seventh-best solution that we could possibly come up with. Obviously, the patent system is a blunderbuss. It is a “one size fits all” system. It has very little sensitivity to innovation environments. It does not offer any kind of grace period, in the sense that when we impose the patent system on, for example, our tax professionals, or impose it upon new areas of endeavor (business methods), we do not offer any kind of waiver or grace period. Everyone just has to come up to speed immediately. There is no sense of the need for the patent incentive in particular markets. There is no sense of information distribution norms in particular markets. So we might need the patent system to fulfill that function. So where are we stuck doing it? With our statute. That is very short. The United States offers very few user privileges. In fact, it offers basically no user privileges. We end up doing it now in the worst possible place, the last possible place, which is the remedial stage of infringement litigation. And we are left with Supreme Court Justices telling us, “Well, we’ve already got a business method patent that has been upheld in litigation, held not invalid, and found infringed, but we still are concerned about granting an injunction because of the suspect validity and potential vagueness of the patent. That is a determination that was already made. The validity is not suspect; it has been upheld. And it is not vague, because it survived a challenge under our claim definitive statute.” So again, we are left doing it at the last possible place. I think that is really not a great place, although I am grateful that there is more of a public policy/innovation policy discussion in patent law. I just think it is occurring at the wrong spot. Thank you very much for hearing me out. I know you have been patient listeners in a few panels. Thank you. PROF. ADELMAN: Herb? MR. SCHWARTZ: Injunctive relief is a topic that has interested me for a long time. I wrote a law review note on injunctive relief when I was in law school. I was involved personally in some of the more interesting cases. One of them was Foster v. AMF,12 in which the Second 7 See Joe Mullin, “Blast From the (Recent) Past — Troll Tracker’s Take on 2007”, Prior Art, July 21, 2008, http:// thepriorart.typepad.com/the_prior_art/2008/07/ptt-on-2007-patent-litigation.html. 8 Id. 9 See z4 Techs. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006); Finisar Corp. v. DirecTV Group, No. 1:05-CV-264, 2006 U.S. Dist. LEXIS 76380 (E.D. Tex., July 7, 2006). 10 See Mullin, supra note 7. 11 See USPTO, Calendar Year Patent Statistics 1963–2007, available at http://www.uspto.gov/web/offices/ac/ido/ oeip/taf/us_stat.htm. 12 Foster v. Am. Mach. & Foundry Co., 492 F.2d 1317 (2d Cir. 1974).

420 CHAPTER V: PATENT LAW Circuit really did what the Supreme Court did in eBay: It refused to grant an injunction to what was essentially a patent troll. I was involved in Polaroid v. Kodak,13 which was probably the first injunctive case there ever was in terms of shutting a major business down. There are five major issues that come out of eBay14 that are worth at least highlighting, so you might have some idea of the scope of it. The first issue in eBay is: Who gets an injunction and who doesn’t? To me, there are two easy answers and one middle ground for litigation. I think between competitors, you still get an injunction. If competitor A sues somebody else and wins, he or she gets an injunction. On the other hand, someone who is demonstrably what is now called in the literature a patent troll doesn’t get an injunction. Then there is a vast middle ground. The middle ground is different types of people who hold patents. For instance, what about university professors who do university research? Should they still get an injunction? I think the Federal Circuit has said that yes, they can. But one of the queries is, why? So there is a large ground for litigation as to what type of person now is entitled to an injunction. The reason for that is that there is no longer a presumption of irreparable harm, so you have to prove irreparable harm. The question is, which of the categories is entitled to it? So that’s one issue: Who gets an injunction? The second issue, to me, now is: What does a patent owner have to prove to get an injunction? That is a whole new ground of litigation that is about to start up. It used to be that the injunctive part of a lawsuit was never tried. You tried validity and infringement, and if you won, you got your injunction — or at least people did not litigate the pieces of irreparable harm. Now it is a whole new ballgame. It will be interesting to see what happens. In one lawsuit that I was involved in recently, Judge Robinson, the district judge in Delaware, refused to give an injunction between two competitors, but she hedged her bet and said, “I’ll revisit it after the appeal is over.”15 I said, “Well, what does that mean?” So that is a really strange result. That is still on the books for the moment. What is going to happen with that? Who knows? It was a lawsuit with just two competitors in one industry. We prevailed on the merits of it. She said, “I am not going to grant injunction, but I am not sure what we really ought to do. We’ll see what happens in the appeal.” I think that is sort of strange. In any event, that is now a second ground for litigation: What does the patent owner have to prove? A third, very important, issue, which people don’t focus on is: What about stays of injunctions? This is really what gave injunctive relief its bite. I was involved in the first case — there was a stay denied — which was Polaroid v. Kodak.16 It involved Kodak being put out of the business. At that time, I urged to the district court that it is a question of who would bear the risk on appeal on some obviously good patents. I said Polaroid should not have to wait two years to get its injunction. The district judge agreed, and the Federal Circuit agreed. Now the law is sort of in turmoil. It is going back the other way. If you think about it, it is almost a two-year time period from a decree in the district court until cert is denied. (I am assuming now that it is not a certworthy case.) So you really have a two-year time period in which to design around a patent. That was very impressive, I think, to Judge Zobel at the time, and it was impressive to the Federal Circuit. Right now it is sort of a gray area that people are not focusing on. It is very, very important. I have been involved in a case that is the reverse, which is TiVo v. EchoStar, where the injunction Polaroid Corp. v. Eastman Kodak Co., 641 F. Supp. 828 (D. Mass. 1985). eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 15 Praxair, Inc. v. ATMI, Inc., 445 F. Supp. 2d 460 (D. Del. 2006). 16 Polaroid, 641 F. Supp. 828. 13 14

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was granted and then it was stayed by the Federal Circuit. TiVo prevailed on appeal.17 TiVo still does not have its injunction. They are still fussing around with it. It is a very, very important issue, what happens with a stay. The fourth issue that is very important — and there is a little light being shed on it now — is: What happens if you deny an injunction? What is the amount of money paid to let the person stay in business? Who fixes it? There has been one decision rendered, in the Toyota case, and there have been a couple of disparate opinions.18 It is a very interesting question. How do you fix the ongoing royalty? Is it a reasonable royalty? Is it what the damages were in the case that was just decided? Do you have a separate hearing in which you litigate it? There is something inherently unfair in telling a patent holder that “if you go through the whole travail of trying the case and winning the case, when all is said and done, you get the same five-cent-a-unit royalty that you would have gotten if you had never gone to trial.” There is a tremendous disincentive there for patent holders, if that is what the result is going to be. I think that area of the law is not clear at all. It has not been sorted out. It is very, very important. I don’t know where it will end up. In Toyota19 the court fixed a royalty, which is the result that we achieved many, many years ago in Foster v. AMF.20 We persuaded the court to grant the plaintiff the running royalty the same way as the damages, which was a low number. I query whether that is really very fair, basically. A fifth area that is important, and seems to get the back of the hand, is: How does this impact preliminary injunctions? Since then, one of the recent cases is the Apotex case,21 in which the Federal Circuit, sort of in a footnote, affirmed the grant of preliminary injunction to Bristol-Myers against Apotex. It did not pay much attention to it. But if it is going to be so hard to get a permanent injunction, what is going to happen if you want a preliminary injunction? Maybe no one will get them anymore. I think that would be a terrible result. I do not think that has been thought through at all, as to where that is going to end up. If you are entitled ordinarily to a preliminary injunction based on the merits of the case — on the probability that you would prevail on the merits — and you also have a case in which the equities would normally warrant a preliminary injunction, you ought to get it, regardless of eBay. That is essentially what the Federal Circuit did in the Apotex case. They affirmed the grant of a preliminary injunction, where they, at least on the merits, thought that the plaintiff was likely to prevail, and on the equities, they thought that it was a travesty to let the defendant stay in business. But I think in a lot of cases it is going to be much more complicated as to when you would get a preliminary injunction. To me, those are really the five main areas of importance that it raises. Ebay is a very, very important decision. Thank you. PROF. ADELMAN: Daniel? MR. RAVICHER: For me, the one probably most interesting question that eBay raises is whether permanent injunctions should ever be granted in patent cases. To answer this question, 17 TiVo, Inc. v. Echostar Commc’ns Corp., 446 F. Supp. 2d 664 (E.D. Tex. 2006), aff’d in part, rev’d in part, remanded, 516 F.3d 1290 (Fed. Cir. 2008). 18 Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211-DF, 2006 U.S. Dist. LEXIS 61598, at *4 (E.D. Tex. Aug. 16, 2006), aff’d in part, vacated in part, remanded, 504 F.3d 1293 (Fed. Cir. 2007). 19 Id. 20 Foster v. Am. Mach. & Foundry Co., 492 F.2d 1317 (2d Cir. 1974). 21 Sanofi-Synthelabo, Inc. v. Apotex, Inc., 470 F.3d 1368 (Fed. Cir. 2006).

422 CHAPTER V: PATENT LAW we have to think about what the underlying basis for patents is. Are patents justified on an economic basis, are they justified on a civil liberty basis, or on a hybrid of the two?22 On this point, I see a sharp disagreement amongst the Justices in eBay. On the one hand, we have a concurrence by Justices Roberts, Scalia, and Ginsburg, which argues that equitable discretion should be exercised pursuant to the “long tradition” of equity practice wherein courts have granted injunctions in a vast majority of patent cases.23 This seems to trigger a sense of upholding the expectation of entitlement possessed by property holders. It does not seem to be based in any explicit economic underpinning, and, thus, I would characterize it as an opinion supporting the belief that patents are based on concepts of civil liberty and, specifically, property ownership. In stark contrast to the Roberts concurrence, we have the Kennedy, Stevens, Souter, and Breyer concurrence, which says the economic function of patent holders today presents considerations quite unlike earlier cases and that “[when] the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient” to compensate for the infringement, and an injunction may not serve the public interest.24 Thus, the Kennedy group seems to express a belief that patents are economic tools and that, as such, economic considerations are most relevant. The relevant ramification for the answer to the subsidiary question — whether patents are based in economic theory, civil liberty theory, or both — to this conversation is to then ask: What forms of remedies are appropriate, as has already been discussed? If patents are based on economic theory, then legal remedies may be sufficient to address our public policy goals for determining infringement? The now-uncontroversial concept of efficient breach in contract law places the goal of society to be free from economic waste above the rights of any particular contract participant 22 The Patent Act of 1952, as amended, provides the currently controlling law governing the issuance of patents. See 35 U.S.C. § 1 et seq. The Patent Act confers on a patent recipient, “[a]s a reward for inventions and to encourage their disclosure,” Universal Oil Prods. Co. v. Globe Oil & Refining Co., 322 U.S. 471, 484 (1944), the “right to exclude others from making, using, offering for sale, or selling the invention throughout the United States.” 35 U.S.C. § 154(a) (1) (2006). To protect and enforce that right, the Patent Act further provides that the patentee “shall have remedy by civil action for infringement of his patent.” 35 U.S.C. § 281 (2006). The Patent Act guarantees to prevailing patentees “damages adequate to compensate for the infringement,” which “in no event [shall be] less than a reasonable royalty for the use made of the invention by the infringer,” and which may, in appropriate cases, be multiplied up to three times. 35 U.S.C. § 284 (2006). The successful patentee is entitled to costs and interest as a matter of course, id., and “in exceptional cases,” may recover reasonable attorney fees, 35 U.S.C. § 285 (2006). The Patent Act also authorizes the district courts to protect a patentee’s rights through injunctive relief. 35 U.S.C. § 283 (2006). Congress first authorized injunctive relief as a permissible remedy for patent infringement more than 185 years ago, providing that the federal courts adjudicating patent dispute “shall have authority to grant injunctions according to the course and principles of courts of equity.” Act of Feb. 15, 1819, ch. 19, 3 Stat. 481. Although Congress has regularly revisited the patent laws, it has left that grant of equity jurisdiction essentially unchanged. In its current iteration, adopted in 1952, the Patent Act authorizes district courts to grant injunctive relief in the following terms: The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable. 15 U.S.C. § 283 (2006). 23 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). To be sure, the Patent Act also declares that “patents shall have the attributes of personal property,” § 261, including “the right to exclude others from making, using, offering for sale, or selling the invention,” § 154(a)(1). According to the Court of Appeals, this statutory right to exclude alone justifies its general rule in favor of permanent injunctive relief. 401 F.3d at 1338. But the creation of a right is distinct from the provision of remedies for violations of that right. Indeed, the Patent Act itself indicates that patents shall have the attributes of personal property “[s]ubject to the provisions of this title,” 35 U. S. C. § 261 (2006), including, presumably, the provision that injunctive relief “may” issue only “in accordance with the principles of equity,” § 283. Id. at 1841 (Roberts, C.J., concurring) (quoting Weinberger v. Romero-Barcelo, 456 U.S. 305, 320 (1982)). 24 Id. at 1842 (Kennedy, J., concurring).

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facing breach by the other party to the contract.25 Although arguably controversial in its day, the Law and Economics movement influenced contract law doctrine to express the principle that non-breaching parties should be placed in the position that they would have been absent any breach, and that any additional compensation to them for such breach would result in economic waste to society.26 One could ask whether a similar rule would make sense in patent law, if patents are based on purely economic theory. Encouraging efficient infringement of patents may very well serve the public good, in that it would compensate patent holders to the fullest extent that they would have been compensated without such infringement. Yet inefficient avoidance of practicing particularly patented technology would be avoided. As I hope is clear, this proposal, while precluding the issuance of permanent injunctions, would absolutely preclude permanent injunctions on a de facto basis. To the contrary, if the amount of compensation necessary to put a patentee in the same position she would be absent infringement is more than any potential infringer could itself afford to pay, then it obviously would not exercise such infringement. So, for example, if the lost profit to a patentee from infringement due to market erosion, convoyed sales, etc., was one dollar, no rational actor would infringe the patent unless it could make a profit of more than one dollar from such infringement, because it would have to pay the patentee at least the one dollar that it otherwise would have recovered from an absence of infringement. This result in a de facto permanent injunction is economically rational and efficient. One difficulty in reaching this result under current patent law doctrine is the Federal Circuit’s recent Seagate decision, which limits enhanced damages to only cases with proven willful infringement.27 In that case, Judges Gajarsa, and Newman issued a separate opinion saying that requiring willfulness to award enhanced damages prevents district court judges from finding, as per eBay, that enhanced damages may be more appropriate than the issuance of a permanent injunction.28 I agree with that opinion and believe that if the use of enhanced damages is limited to only use as a deterrent to willful infringement, district court judges may very well be forced to implement economically inefficient final remedies in patent cases, either by compensating patentees too little by denying an injunction or by granting patentees too much by allowing it. 25 Efficient breach theory in contract law is “the view that a party should be allowed to breach a contract and pay damages, if doing so would be more economically efficient than performing under the contract.” BLACK’S LAW DICT. 190 (7th ed. 1999); see also Robert Birmingham, “Breach of Contract, Damage Measures, and Economic Efficiency”, 24 Rutgers L. Rev. 273, 284 (1970) (“Repudiation of obligations should be encouraged where the promisor is able to profit from his default after placing his promisee in as good a position as he would have occupied had performance been rendered.”); Sidney W. DeLong, “The Efficiency of a Disgorgement as a Remedy for Breach of Contract”, 22 Ind. L. Rev. 737, 742–45, 775 (1989). 26 See, e.g., Richard Posner, Economic Analysis of Law (1st ed. 1972). His classic example is: Suppose I sign a contract to deliver 100,000 custom-ground widgets at $.10 apiece to A, for use in his boiler factory. After I have delivered 10,000, B comes to me, explains that he desperately needs 25,000 custom-ground widgets at once since otherwise he will be forced to close his pianola factory at great cost, and offers me $.15 apiece for 25,000 widgets. I sell him the widgets and as a result do not complete timely delivery to A, who sustains $1000 in damages from my breach. Having obtained an additional profit of $1250 on the sale to B, I am better off even after reimbursing A for his loss. Society is also better off. Since B was willing to pay me $.15 per widget, it must mean that each widget was worth at least $.15 to him. But it was worth only $.14 to A — $.10, what he paid, plus $.04 ($1000 divided by 25,000), his expected profit. Thus the breach resulted in a transfer of the 26,000 widgets from a lower valued to a higher valued use. Id. at 57. 27 In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). 28 Id. at 1377 (Gajarsa, J., concurring) (advocating the elimination of “the grafting of willfulness onto section 284”); id. at 1385 (Newman, J., concurring). In Judge Gajarsa’s view, enhanced damages should not be limited to instances of willfulness, but left to the discretion of the trial judge based on the circumstances of each case. Id. at 1377 (Gajarsa J., concurring).

424 CHAPTER V: PATENT LAW Another difficulty is being able to determine the amount of economic harm caused to a patentee by infringement. The courts have called things like loss of reputation,29 price erosion,30 lost opportunities to sell other products and services to the lost customers31 as bases for irreparable harm. But these issues are perhaps more properly characterized as indeterminable bases of economic injury, which economists may someday soon be more capable of assisting our legal system in determining. We already put dollar values on things like pain and suffering and other intangible consequences of harmful behavior. So I think it is more likely than not that the category of items sufficient to prove irreparable harm will actually decrease with time, thus sidelining it as a relevant issue in the eBay four-factor test for determining whether to grant permanent injunctions.32 Of course, this all assumes patents are only justified on an economic basis. There are, however, legitimate arguments that patents are either alternatively or additionally justified on a civil liberty basis; namely, perhaps the most important civil liberty of individuals, having the right to possess property. On this basis, even if economic concerns are satisfied through the legal remedy of financial damages, judges may be correct in nonetheless granting permanent injunctions. However, if civil liberty issues are indeed relevant to patents, then judges may need to consider the rights of not only defendants, but also the general public, in making such decisions. In fact, this is the direction in which the Supreme Court took a step in eBay, where it held that both balance of hardships and public interest concerns should influence the ultimate decision of whether to grant or deny a permanent injunction. However, that may not be the last step towards considering civil liberties of defendants and the general public when deciding whether to grant permanent injunctions in patent cases. For example, with the expansion of patentable subject matter to “include anything under the sun that is made by man,”33 there may very well come a day in the not-too-distant future when a patent claim reads on an individual’s constitutionally protected rights. The Lab Corp case34 tangentially raised potential issues in this vein by involving a claim essentially on the mental step of correlating a medical diagnosis to the physical state of a patient. While correlating may not itself trigger First Amendment issues, it is not hard to fathom how such a claim could restrain content-based discussions between a doctor and a patient. Another example of a potential First Amendment issue relating to the assertion of a patent is the current In re Bilski case,35 where the claim at issue is limited to an extreme extent by initiating certain types of transactions. To the extent that claim was asserted against an individual for initiating certain types of transactions by directly speaking with another person, enjoining such behavior could be seen as a content-based regulation on speech. 29 See, e.g., Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211-DF, 2006 U.S. Dist. LEXIS 61598, at *6 (E.D. Tex. Aug. 16, 2006) (loss of reputation); z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437, 440 (E.D. Tex. 2006) (loss of name brand recognition). 30 See, e.g., Sanofi-Synthelabo, Inc. v. Apotex, Inc., 470 F.3d 1368 (Fed. Cir. 2006). 31 See, e.g., Abbott Labs. v. Andrx Pharm., Inc., 452 F.3d 1331, 1348 (Fed. Cir. 2006); CSIRO v. Buffalo Tech., Inc., 492 F. Supp. 2d 600 (E.D. Tex. June 15, 2007). 32 The traditional four-factor test applied by courts of equity when considering whether to award permanent injunctive relief to a prevailing plaintiff applies to disputes arising under the Patent Act. That test requires a plaintiff to demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 1360 (2006) (citing Weinberger v. Romero-Barcelo, 456 U.S. 305 (1982)). 33 Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980) (quoting S. REP. NO. 82-1979, at 5 (1952); H.R. REP. NO. 82-1923, at 6 (1952)). 34 Laboratory Corp. of Am. Holdings v. Metabolite Labs., Inc., 126 S. Ct. 2921 (2006) (Breyer, Souter, and Stevens, J.J., dissenting), available at http://www.supremecourtus.gov/opinions/05pdf/04-607.pdf. 35 In re Bilski, 545 F.3d 943 (Fed. Cir. 2008) (en banc) (patent eligibility under § 101).

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In the end, I candidly admit to being a strong believer in the economic utility basis for patents, although I do also think that civil liberty concerns are relevant to the administration of a fair and publicly beneficial patent system. As for my original question, whether a permanent injunction should be granted in patent cases, I think eBay may very well be just the tip of the iceberg on that discussion. Thank you. PROF. ADELMAN: Let’s turn to Judge Rader. JUDGE RADER: I was in India just a few weeks after the eBay decision issued. My good friend Sir Hugh Laddie rose to give a speech and he said, “I’d like to address the eBay opinion.” Of course, my ears immediately tuned in. Hugh said something to the effect that “you can call it balancing the interests all you want; it is still just another word for a compulsory license.” I have impeached my own originality. A few months later, I wrote an opinion in a case involving Toyota Motors in which I said, “You can call it a continuing royalty if you want; it’s still just a compulsory license.”36 I did not drop a footnote and say, “I am plagiarizing Hugh Laddie.” But the only reason I didn’t do that is that I didn’t want to be faulted for consulting foreign sources. I guess the comment I would make is that, of course, the exact parameters of what eBay is going to cause are not evident yet. I did take a look before I came up here at the most recent statistics. Since eBay, according to the statistics I had — and they are already a couple of months old — there were thirty-seven instances of eBay being invoked after a finding of infringement.37 In twenty-seven of them, the district court continued to impose a permanent injunction;38 in ten of them, it did not.39 In each of the ten — I had my law clerks take a quick look — you could find pretty clear evidence that there were a large number of other entities involved in the production of a large product, and this was a small component thereof. That Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1316–17 (Fed. Cir. 2007) (Rader, J., concurring). By last (and certainly unscientific) count, there were about thirty cases (including the decision of the District Court on remand in MercExchange, LLC v. eBay, Inc., 500 F. Supp. 2d 556 (E.D. Va. 2006)), and in excess of 115 articles and studies addressing the eBay case. For a list of twenty-three cases, see Darryl J. Adams & Victoria Wicken, “Permanent Injunctions After eBay v. MercExchange: The Year in Review”, 5 Tex. Intell. Prop. L. J. 417 (2007). See generally, Robert I. Reis, “Rights and Remedies Post-eBay v. MercExchange — Deep Waters Stirred”, 2 Akron Intell. Prop. J. 133 (2008), available at http://www.ssrn.com/abstract=1116684; Lisa A. Dalok, “eBay and the BlackBerry®: A Media Coverage Case Study”, 2 Akron Intell. Prop. J. 1 (2008); Jay Dratler, Jr., “eBay’s Practical Effect: Two Differing Visions”, 2 Akron Intell. Prop. J. 35 (2008); Sheri J. Engelken, “Opening the Door to Efficient Infringement: eBay Inc. v. MercExchange, L.L.C.”, 2 Akron Intell. Prop. J. 57 (2008); Thomas C. Folsom, “Truth in Intellectual Property Revisited: Embracing eBay at the Edge”, 2 Akron Intell. Prop. J. 69 (2008); Richard S. Grunner, “Constructed and Enhanced Equities under eBay: Whose Right is it Anyway”, 2 Akron Intell. Prop. J. 107 (2008); Liam O’Melinn, “The Effects of eBay: Injunctions, Statutory Damages and the Public Interest”, 2 Akron Intell. Prop. J. 119 (2008); Sandra L. Rierson, “IP Remedies After eBay: Assessing the Impact on Trademark Law”, 2 Akron Intell. Prop. J. 163 (2008); Tracy A. Thomas, “eBay Rx”, 2 Akron Intell. Prop. J. 187 (2008). 38 See, e.g., Wald v. Mudhopper Oilfield Servs., Inc., No. CIV-04-1693-C, 2006 U.S. Dist. LEXIS 51669 (W.D. Okla. July 27, 2006); 3M Innovative Props. Co. v. Avery-Dennison Corp., No. 01-1781, 2006 U.S. Dist. LEXIS 70263 (D. Minn. Sept. 25, 2006); Am. Seating Co. v. USSC Group, Inc., No. 01-00578, 2006 U.S. Dist. LEXIS 59212 (W.D. Mich. Aug. 22, 2006); Black & Decker, Inc. v. Robert Bosch Tool Corp., No. 04 C 7955, 2006 U.S. Dist. LEXIS 86990 (N.D. Ill. Nov. 29, 2006); MPT, Inc. v. Marathon Labels, Inc., 505 F. Supp. 2d 401 (N.D. Ohio 2007); Novozymes A/S v. Genencor Int’l, Inc., 474 F. Supp. 2d 592 (D. Del. 2007); Rosco, Inc. v. Mirror Lite Co., No. CV-96-5658, 2006 U.S. Dist. LEXIS 73366 (E.D.N.Y. Sept. 28, 2006); Smith & Nephew, Inc. v. Synthes (U.S.A.), 466 F. Supp. 2d 978 (W.D. Tenn. 2006); Telequip Corp. v. Change Exch., No. 5:01-CV-1748, 2006 U.S. Dist. LEXIS 61469 (N.D.N.Y. Aug. 15, 2006); TiVo Inc. v. Echostar Commc’ns Corp., 446 F. Supp. 2d 664 (E.D. Tex. 2006); Transocean Offshore Deepwater Drilling, Inc. v. GlobalSanteFe Corp., No. H-03-2910, 2006 U.S. Dist. LEXIS 93408 (S.D. Tex. Dec. 27, 2006); Visto Corp. v. Seven Networks, Inc., No. 2:03-CV-333-TJW, 2006 U.S. Dist. LEXIS 91453 (E.D. Tex. Dec. 19, 2006). 39 See, e.g., z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006) (Davis, J., presiding); Finisar Corp. v. DirecTV Group, Inc., No. 1:05 Civ. 264, 2006 U.S. Dist. LEXIS 76380 (E.D. Tex. July 6, 2006) (Clark, J., presiding); Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211-DF, 2006 U.S. Dist. LEXIS 61600 (E.D. Tex. Aug. 16, 2006) (Folsom, J., presiding). 36 37

426 CHAPTER V: PATENT LAW factor alone presents lots of problems. But at least there was some sense in which there were more interests to be considered than just that of the individual patent owner. In each of those ten, there were some clear reasons why the court had felt that damages would be an adequate remedy under the circumstances — or an “ongoing royalty,” as our Court has called it. The interesting issue I would pose is the problems that I see coming for us in the future as we impose these ongoing royalties. We impose a royalty today that is going to stretch, I guess, for the remaining life of the patent. We have not really specified that, but I suppose that is what it is supposed to do. What if the economic realities change and the value of the intellectual property either goes up appreciably or down significantly? I guess you are going to have to bring another suit, aren’t you, to revise the ongoing royalty? I do not think the district court could retain jurisdiction to amend its own ongoing royalty, because in that case you would not have a final judgment. It could not even be appealed to the Federal Circuit. So the district court has to issue a final judgment, give an ongoing royalty. Doesn’t that suggest some difficulty with assessing the value of that intellectual property as economic circumstances change in the future? It seems to me that there are some questions like that that eBay has not sufficiently grappled with, but I think the Federal Circuit will. Thank you, Marty. PROF. ADELMAN: Comments? Jay, do you want to make a comment on the other presentations? PROF. THOMAS: Fair enough. In terms of nuanced damages awards for future infringements, I think it is fair enough to say that courts do not now, when they look backwards, so customize the damages award. It is usually a jury picking a number. Maybe we should be doing better there as well, for sure. So I guess I am a little less concerned about that. I think, obviously, an issue courts are grappling with is: What ought the damages award to be during the injunction period in general? Why put a coin into the parking meter when the fine is the same as the amount of the parking fee? Those are concerns. I think, obviously, fee shifting is an answer to that. But I certainly hope we don’t see an elevated damages award resume in this country. Right now we’ve got an average royalty rate of 10.8 percent for cases overall, which strikes most observers as pretty high. So I am not sure that upward movement there is an appropriate answer. PROF. ADELMAN: Herb? MR. SCHWARTZ: Only a couple of comments. I have looked a little at the statistics that you have looked at too and read the cases for other reasons. One of the questions on the cases is: it is easy to see why the injunctions were granted in the twenty-seven, but there is really very little guidance as to why they were not granted in the other ten. It is a very gray area. In terms of the law promoting certainty, it is really very hard to say how it does promote certainty in this area. To me it is a very fertile area for lots more litigation. As I said in my earlier talk, if you take someone who is plainly what the literature likes to call a “patent troll”40 — never worked it, never will work it, bought the patent from someone 40 For more information on patent trolls, see Mark A. Lemley, “Are Universities Patent Trolls?”, 18 Fordham Intell. Prop., Media & Ent. L.J. 611 (2008); John M. Golden, “‘Patent Trolls’ and Patent Remedies”, 85 Tex. L. Rev. 2111 (2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=991698; Alexander Poltorak, “On Patent Trolls and Injunctive Relief”, IPFrontline.com, May 12, 2006, http://www.ipfrontline.com/depts/article. asp?id=10854& deptid=4; Joe Beyers, “Rise of the Patent Trolls”, CNET News, Oct. 12, 2005, http://news.cnet.com/ Rise-of-the-patent-trolls/2010-1071_3-5892996.html; Thomas Reed Powell, “The Exclusive Right of the Patentee—...

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else just to assert it — that is one thing. But there are a lot of situations that are a lot more complicated. Before I got here, I talked about your Toyota decision.41 That interests me greatly. I think that the damages question is possibly, if not the most important, one of the most important, things that has come out of eBay, and there has really not been a lot of thought given to it at all. The consequences are immense, in terms of an award a ten-year future royalty based on what happened in litigation four years ago. It just doesn’t make a lot of sense. It’s just a mess. PROF. ADELMAN: Judge Rader can comment on this. That patent in Toyota was probably invalid, and it certainly was not infringed. If you read this case, the jury wanted to give them a token prize. They only upheld two claims.42 JUDGE RADER: Were you an expert in this case? PROF. ADELMAN: No. I had nothing to do with it. I read this case. JUDGE RADER: I just wanted full disclosure. PROF. ADELMAN: I said obviously the jury knew there was nothing here, and so they gave them a few pennies, which is what it was. I’m sure the judge realized that. The claims didn’t read and the prior art was all over it. Toyota had other ways. I just think that affected what happened. JUDGE RADER: There is another interesting area of debate here. That is, the two factors mentioned by the Kennedy concurrence that ought to be considered when reaching the decision not to grant a permanent injunction after a finding of infringement for a small component of a larger device or process.43 Implicit in that is there are many aspects of this machine that are owned by different companies and there is some difficulty in arriving at a single royalty for each small component. The other one is that you don’t practice the invention. Now, that’s an interesting and troubling component. Every university, of course, is involved heavily in inventing. They are not going to be involved in producing any products. They don’t manufacture. They are going to have to license. Are we removing them from the category of litigant that can qualify for a permanent injunction? The implications of that could be, just looking at it from the economic standpoint again, you have reduced the value of the intellectual property for all categories of people who do not necessarily manufacture. They do not make products. Many of them are a mainstay of our innovation economy — the universities — but there are many clinics and other research entities that deserve an equal value for their intellectual property as a manufacturing inventor. Any thoughts on that? MR. SCHWARTZ: To me, the other way to put it is really you change the U.S. patent system to have compulsory licensing for anyone who is not working the invention. JUDGE RADER: But some of them cannot. I mean a university cannot make cars. MR. SCHWARTZ: But that makes them have to take a compulsory license. I think that is a bad thing. JUDGE RADER: And we would all recognize, as Dan was saying, it is economics. You have reduced the value of their intellectual property. MR. RAVICHER: I was really concerned when I saw the Eastern District of Texas take a completely different answer between z444 and CSIRO.45 It said CSIRO had some value in Should the Right or Power To Exclude Others Be Dependent on Sale or Licensing by the Patentee?”, 58 Harv. L. Rev. 726, 728 (1945); Brenda Sandburg, “You May Not Have a Choice: Trolling for Dollars”, Recorder, July 30, 2001, available at http://www.phonetel.com/pdfs/LWTrolls.pdf. 41 Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007). 42 Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211-DF, 2006 U.S. Dist. LEXIS 61600, at *7 (E.D. Tex. Aug. 16, 2006). 43 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 1842 (2006) (Kennedy, J., concurring). 44 z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437 (E.D. Tex. 2006). 45 CSIRO v. Buffalo Tech., Inc., 492 F. Supp. 2d 600 (E.D. Tex. 2007).

428 CHAPTER V: PATENT LAW maintaining its reputation as a university in licensing and all this. I said, “Well, why are we trashing on z4, just because they’re a small business?” I didn’t see why the two of them were treated differently. I personally hate the term “patent troll.” I don’t understand (a) what it means, and (b) I don’t think it’s helpful to coming to the resolution of important issues. I think it is marketing spin to try to get someone to have a bad taste in their mouth without addressing the issue on the merits. So I am very concerned about that as well. PROF. ADELMAN: What if we have this situation: We have a non-working patentee, but the patent is out there. The infringer knows about the patent and has had plenty of time to adjust its business model. So it’s not one where the patent has issued and I have committed $300 million to a plant and there is nothing I can do about it; so if I get an injunction I can hold this person up because I can shut down a $300 million plant over a $10 item. None of that. This is a situation where the infringer just says, “I’m going to continue to infringe,” for whatever reason. Is there any basis for denying that person an injunction? Any reasoning? JUDGE RADER: We are going to hear arguments that they don’t practice the invention. PROF. ADELMAN: But I made the invention. I did what the system said I should do, make inventions. We all agree, in contrast to the Toyota case, that the patent is valid and clearly infringed. The defendant knows that and has plenty of time to adjust its business model. MR. RAVICHER: The impacting factor I’ve seen in a couple of cases, like BlackBerry46 and Cipro,47 is public outcry or political pressure, which is a factor that doesn’t get recognized in any opinion but has an influence. PROF. ADELMAN: Wait. Cipro is totally different. Obviously, the buyer had Cipro. So it was a question of money. MR. RAVICHER: Right. PROF. ADELMAN: It was simply a question of money. They negotiated a deal. But I guess the U.S. government could have just bought from the generic manufacturers and then had Judge Rader adjust the price, which would have been worse. That is why they went along with what they did. It was found money for the buyer. MR. RAVICHER: I guess my answer to your question is the injunctions will be denied when there is a political situation that usurps the interests advanced by the patent system by some other interest, like public health or Congress people wanting to have their BlackBerries, or some other political situation like that, where people come in and say: “Yeah, yeah. Despite what patent law says, it’s just not doable in this situation” — like the cure for AIDS, if someone said they’re not going to make the cure for AIDS and they’re not going to let anyone else make it. PROF. ADELMAN: Is BlackBerry a good example? One, the judge was furious at them because apparently they had — I got this from the Canadians — come in and lied to the district judge. That made an angry man out of the judge. And besides, I don’t know that that fits my model, because it might have been that they invented independently BlackBerry, and maybe they did put hundreds of millions in before they found out that this patent issued. MR. RAVICHER: I don’t think there has been a situation yet that fits your profile perfectly. But I think these other things are somewhat related and may be precursors to something that does. PROF. ADELMAN: Herb? MR. SCHWARTZ: If you go back over time, the statute says “may grant injunctions according with the principles of equity.”48 It has said that for 150 years. There always was a public health NTP Inc. v. Research in Motion Ltd. (RIM), 418 F.3d 1282 (Fed. Cir. 2005), cert. denied, 546 U.S. 1157 (2006). Bayer AG v. Schein Pharms., Inc., 301 F.3d 1306, 1325 (Fed. Cir. 2002) (Rader, J., concurring). 48 35 U.S.C. § 283 (2006). 46 47

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exception. There was the Milwaukee/Sludge49 case and there were others. So there has been a public health exception in the law in that sense of the word. And there were other exceptions that judges would write when they just thought an injunction was not appropriate in a particular case. So I think that has always been there, and it has always been assumed that to really get the full value of your property right you need at least the threat of an injunction in most cases. JUDGE RADER: Let me make this difficult. Jay, you and Herb represent Georgetown University, which is the patent owner, and what they have invented is a small component of a larger machine. What will you argue to get an injunction, and thereby realize the value? Let’s also assume that your university worked for years and years to reach that invention and invested a great deal of money to get it, and so it is very important for you to recover that investment. What would you argue? MR. SCHWARTZ: I would argue exactly what you just said, which is that the reason that the university needs the injunction is that it needs it in order to get the money and get the people and the wherewithal to do the research. JUDGE RADER: I am going to be the devil’s advocate here. I am going to come back and I am going to say, “But we will give you a reasonable royalty. We will give you a 1 percent royalty. You can recover it over the time of your patent.” PROF. THOMAS: As a member of a university faculty — JUDGE RADER: You can’t recuse. PROF. THOMAS: — I certainly hope that my institution would espouse other values, such as volunteerism and sharing, which members of the private sector may not embrace to the same extent. JUDGE RADER: Can I dismiss counsel? PROF. THOMAS: I think that, as universities, we have been letting our technology managers speak for us overmuch. I think universities profit more by partnering with the private sector, not by suing them. Obviously, I don’t speak for the Association of University Technology Managers. But in answer to your question, I would say we are in a tough spot. There are some cases where the trial court has granted a permanent injunction to a non-practicing patentee. One of the factors cited was simply reputation as an innovator. I think that is a factor I would add as well. MR. RAVICHER: I think my response, if I was going to play the defendant — and I hate to base my legal argument off of movies, but I think it is appropriate here: “Georgetown University, are you willing to license your technology to the defendant for $1.00?” “Absolutely not. We have reputation,” etc. “Well, Georgetown University, are you willing to license this technology to the defendant for $5 trillion?” “Maybe. Five trillion dollars might be enough that it’s worth it.” So now we at least have the boundaries. If we get a de facto injunction because the judge says, “A fair amount of money to compensate for the infringement is $5 trillion, and as soon as the defendant can post $5 trillion they can go forth.” So I really think it is metering the economic aspect of the compensation. There are situations, I’m sure, where there is no amount of money possible that someone would take. But I think in this situation of a university there is some amount of money, even if it is an ungodly sum, that they would eventually take. So now we are just talking about where within that range. 49

City of Milwaukee v. Activated Sludge, 69 F.2d 577 (7th Cir. 1934).

430 CHAPTER V: PATENT LAW JUDGE RADER: I understand that you are shifting the hypothetical a little bit. But now I am sitting as the judge. How do I decide what that number is? MR. RAVICHER: This reminds me of the first day of law school, where I was told: “You will forever be involved in the war between fuzzy standards and hard-and-fast rules. Hard-and-fast rules are easy to administer but not always correct. Fuzzy standards are more often correct but impossible to administer. So you’ll always be in this battle.” I don’t know what I would say. That’s why I’m glad I don’t have Herb’s job. MR. SCHWARTZ: As someone who has been involved in the dirty business of litigating patents for a lot of years, which is different than the academic part of this, the practical piece of it is if you know that at the end of the day you are only going to have to pay — it’s really the compulsory licensing story — 1.5 percent, no matter what, your bargaining position isn’t as strong. It is really not that the university needs an injunction; it needs the threat of an injunction, or it needs the threat of something more, to give it an adequate monetary reward. I think when you just look throughout the world, plain compulsory licensing does not come down to be the be-all and end-all in the patent world, the same way it’s not in other areas. I don’t think there’s a simple answer to it other than that. I don’t think that the Supreme Court in eBay took that away. It remains to be seen how it plays out over a period of time. MR. RAVICHER: I think the problem is the limit on enhancing damages for these reasons. I think Judge Gajarsa got it right in Seagate, where he said that judges should be free to enhance damages to three times, or even more.50 If the right answer is $5 trillion, which is a 400 percent royalty, or whatever, then that’s the right answer. Why don’t we allow judges to do that? We are forcing judges to choose between the very small remedies allowed by law and the gigantic remedy of an injunction, where it’s basically like baseball arbitration — “pick one of the two, whichever is best” — and we are not letting them meter in between the two. MR. SCHWARTZ: I really think the parties ought to ultimately pick the number. It is the question of what weapons they possibly have available to them. To me, at least the threat of an injunction is really what makes the system work, not the imposition of it basically. I think where the trolley went off the track in the past fifteen years is the injunctions that were granted in certain cases where the harm outweighed the good. It really forced ultimately the Supreme Court to come down hard on it, because there was a black-letter rule in the Federal Circuit. I don’t mean to criticize the Federal Circuit, but in terms of the language that was used in the case law, the language got a lot more absolute in the Federal Circuit than it was in the earlier days. In fact, there were times when you persuaded regional courts not to grant injunctions. As I said, in the case that I was involved in, Foster v. AMF,51 we persuaded the district court in the Second Circuit that, for the reasons that are now being advanced, an injunction shouldn’t have been granted that time. They went along with it. I think that that’s where we are going to be back to now. There will be a little more discretion, but they will be granted in most of the cases. PROF. ADELMAN: We have a few minutes. Are there some questions for the panel? QUESTION [David Brennan, University of Melbourne University, Australia]: I have a question for Daniel about the dichotomy painted between hard rules and fuzzy standards. In private law, I always thought that hard rules are orientated towards market efficiency and fuzzy standards are orientated more to justice between the two litigants. Here it seems that there is a choice between a hard rule, such as the status quo of an entitlement to an injunction, or a 50 51

In re Seagate Tech., LLC, 497 F.3d 1360, 1377 (Fed. Cir. 2007) (en banc) (Gajarsa, J., concurring). Foster v. Am. Mach. & Foundry Co., 492 F.2d 1317 (2d Cir. 1974).

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fuzzy rule, like an entitlement to a fair price. Why is it that you think that a fuzzy rule, such as an entitlement to a fair price, somehow facilitates efficiency, whereas it seems to be more orientated towards justice between the two parties? MR. RAVICHER: I didn’t mean to say that fuzzy standards are always better than hard-andfast rules. I think I agreed with what I was taught on the first day, that some situations mandate hard-and-fast rules and some situations mandate fuzzy standards, and that is an ongoing war that will survive everyone in this room. I think that’s just a battle. You have to have a legal system that allows all interests to represent their viewpoints so that we can have decision makers come to what they think is the best decision for that point in time. PROF. ADELMAN: Another question? QUESTION [Lois Matelan, Jack Schwartz & Associates, New York]: Herb, you brought up as your last of the five issues how the permanent injunction issued in eBay would affect the preliminary injunctions. You mentioned the Bristol-Myers case.52 I would like to ask Judge Rader about another case, a moot court case that was heard right next door here at Fordham last fall, in which he denied a preliminary injunction on a patent that had already gone through a reexamination and where the district court had considered the factor of the validity of the patent, although that was the issue that was raised in denying the preliminary injunction. JUDGE RADER: I’m sorry, I don’t recall that case. But just from your quick description, if validity was in question, I think we have said that where there is a substantial question of invalidity, there is almost never going to be enough strength to justify a preliminary injunction. You have to show a likelihood of success both on validity and infringement. Does that answer help you? QUESTIONER [Ms. Matelan]: Actually, that was the grounds that were cited in your opinion. It was Judge Dyke’s opinion, I believe, that there was a substantial question. JUDGE RADER: I’m glad I got it right. I don’t always. QUESTIONER [Ms. Matelan]: But the question didn’t rise to the level of likelihood of success on the merits as far as the opinion went. It seemed as if you’d established a new standard that was less than likelihood of success. It was just that there was a question. JUDGE RADER: We wouldn’t have wanted to establish, nor would we have been authorized to establish, a new standard. I don’t remember the case, but I’m sure that if I did I would argue that it fits well within our established rules requiring us to assess the likelihood of success and so forth. PROF. ADELMAN: Ed? QUESTION [Edward Handler, Kenyon & Kenyon, New York]: One of the threads that I picked up in the last decade perhaps, is that America has traditionally been the home of the small inventor, the individual inventor, etc. We hear now the derogatory or pejorative term “troll” used. Every entrepreneur needs some sort of an exit strategy. I’m talking about not working an invention. That’s corporate mentality. The small inventor goes to GM, goes to Pfizer, goes to Intel, with a significant invention, without the threat of an injunction. They do a risk study in-house and say, “This guy hasn’t got the $3 million to bring a lawsuit. Tell him to get stuffed.” Then he is left with no remedy, absent the people in Chicago who sometimes will take a contingency case. But most firms won’t, and so he is denied justice. Why shouldn’t the system start to be oriented as it is in the rest of the world towards corporate invention: “Work it big; otherwise we really don’t want to know you.” JUDGE RADER: That was really a comment, not a question, wasn’t it? QUESTIONER [Mr. Handler]: Is my analysis wrong? 52

Sanofi-Synthelabo, Inc. v. Apotex, Inc., 470 F.3d 1368 (Fed. Cir. 2006).

432 CHAPTER V: PATENT LAW JUDGE RADER: I think you’ve made your comment. QUESTIONER [Mr. Handler]: I’ll get off my soapbox. PROF. ADELMAN: Brian? QUESTION [Brian Nolan, McDermott Will & Emery LLP, New York]: I agree with what

Herb said earlier about Paice v. Toyota.53 One of the interesting parts, I thought, was going to be the damages aspect for the post-verdict activity. The Federal Circuit said the judge hadn’t established a sufficient record to say whether the post-verdict damages should be the same as the pre-verdict damages. I know the panel has been talking about whether there should be enhanced damages or not after a court finding of infringement. But I submit, whether you call it enhanced damages or not, hasn’t the situation changed? You know this person is going to go forward infringing a valid patent. How can the damages and the royalty rate be the same? I think, Jay, you indicated that you thought the royalty rates were too high and you shouldn’t have any elevated royalty rates. Irrespective of the assumptions in the reasonable royalty calculation, why shouldln’t we when the facts have changed? There is infringement. The patent is valid. If anyone has a comment on that, I’d like to hear it. MR. SCHWARTZ: It really goes back to the notion of a reasonable royalty and some of the things that Judge Markey said.54 It is one thing to have a royalty negotiated between two people when you don’t know whether the patent is going to be sustained. It’s another thing to go back to some hypothetical royalty negotiation after you win the trial, which is called a “reasonable royalty,” when the patent is presumed valid and the defendant is presumed to lose. The numbers are very different basically. I think that “reasonable royalty” is a term that has different meanings in different contexts and you have to be careful how you use it. I think that’s another part of the problem with judicially imposed royalties afterwards, as opposed to applying additional considerations for value changes in the future, which is what Judge Rader was talking about. PROF. THOMAS: Time is short, but damages are high in this country. The United States has a well-deserved reputation simply for awarding higher damages for comparable extents of infringements compared to jurisdictions to which we usually invite comparison. JUDGE RADER: Is that because we are too high or they are too low? PROF. THOMAS: I think it is because we are too high. Right now the average royalty rate in this country is 10.8 percent. When I was in practice, if I had gone back to one of my partners and said, “Oh, I just got a royalty rate of 10.8 percent,” I think I would have exited to academia even more quickly than I did. I think we have to be wary of making patent infringement a crime. It is an economic decision and we ought to evaluate the value of the invention fairly. But it ought to be based on what is the comparative value of that technology, not as some punitive norm. Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007). See Chief Judge Markey’s comments in Fromson v. Western Litho & Supply Co., 853 F.2d 1568, 1572–73 (Fed. Cir. 1988), expressing his views in connection with the statutory language “damages adequate to compensate for the infringement” and in any event “not less than a reasonable royalty”: As used in Section 284 “reasonable royalty” is handy shorthand for damages. As the statute provides, the royalty is “for the use of the invention by the infringer.” Thus the calculation is not a mere academic exercise in setting some percentage figure as a “royalty.” The determination remains one of damages to the injured party. Reasonable royalty was defined in Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152 (6th Cir. 1978), as “an amount which a person desiring to manufacture and sell a patented article, as a business proposition, would be willing to pay as a royalty and yet be able to make and sell the patented article in the market at a reasonable profit.” The determination of a reasonable royalty between the patentee and a would-be licensor in the absence of an arm’s-length agreement is a matter of much dispute. Reasonable royalty may be based upon an established royalty, or if an established royalty does not exist, reasonable royalty may be determined based upon a hypothetical negotiation between a willing licensor and willing licensee. See Hanson v. Alpine Valley Ski Area, Inc., 718 F.2d 1087 (Fed. Cir. 1983). 53 54

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I think it’s early days and I think there will be a lot of discussion about that. I am looking forward to learning more from people who have other views. PROF. ADELMAN: I want to hear from Hugh Laddie. QUESTION [Prof. Hugh Laddie, University College London]: The trouble is, of course, that eBay has come as a shock to the system, because in this country injunctions have been granted almost as a matter of course, just as they have in the United Kingdom. That is very standard in common-law jurisdictions. But two comments. First of all, Herb, in a way, gave away the game when he said, “There have always been exceptions, like the health exception in this country.” That means that the rule has never been rigid. Then, the question is how far you extend the exception to granting an injunction. The second thing I think is really worth bearing in mind is that in the United States and in the United Kingdom we think of injunctions as being determinative. That means that the defendant stops, whatever the consequences commercially may be, and that’s it. But remember, for example, in Germany when they grant injunctions and the defendant refuses to stop, you don’t sequestrate them; you don’t send them to prison. They get ordered to pay a financial penalty for continuing to operate notwithstanding the injunction. Effectively, in Germany if you carry on you pay for it. It has not brought the patent system to a grinding halt in Germany. Far from it. The threat of an injunction exists, even if the court has jurisdiction to refuse injunctions in specific cases. As Judge Rader has made clear, even in the recent history since eBay, threequarters of the cases where eBay has been cited have still resulted in injunctions.55 So if you go into litigation, even in the fresh-blooded atmosphere of eBay, you know that if you lose you are much more likely to be injuncted than not. The system won’t come to an end if eBay is given effect to. In a way, eBay is merely a response to the growth of the patent system. There are now technologies where there are multiple patented ingredients in single products. Unless you have some residual right in a court to say “no” to an injunction, an individual patentee may bring industries to their knees. So it is there as a safeguard. In the end, frankly, if I was in the United States, I would be happy to have Judge Rader and his colleagues deciding which cases were those where it would be in the overall interest of everybody that the defendant should pay but not be stopped. PROF. ADELMAN: I think we should end this session with the comments of Sir Hugh Laddie. I want to thank everybody.

55

See, e.g., cases listed supra note 38.

CHAPTER V

Patent Law Part E: Patent Law World Developments Section 1: European Union’s Agenda for Patents Last year an EPO-convened conference in Munich included a section called “Scenarios for the Future.” An envisioned “blue sky scenario” featured the concept of a new kind of IP that would feature strong protection like today’s patent right, but instead of an injunction as the ultimate relief for infringement, would instead employ licensing, with licenses made available to all requestors. This session expands on the blue-sky scenario and the concept of soft-IP, filing in the details to advocate a new kind of licensee-of-right patent having pan-European scope and cost-effective features. Moderator PROF. JOHANNA GIBSON

Co-Director, QMIPRI Queen Mary, University of London Speakers HARRIE TEMMINK

DAVID J. KAPPOS

Industrial Property Unit, DG Internal Market and Services, European Commission (Brussels)

Vice President & Assistant General Counsel, Intellectual Property Law, IBM Corp. (Armonk, NY) Panelists

PROF. ALAIN STROWEL

DAVID PERKINS

Covington & Burling, Saint-Louis University (Brussels)

Milbank Tweed Hadley & McCloy LLP (London)

HON. ROBERT VAN PEURSEM

Vice President, District Court The Hague (The Netherlands)

436 CHAPTER V: PATENT LAW PROF. GIBSON: Good morning. My name is Johanna Gibson. I am very pleased to moderate this session on the European patent agenda. The two papers are quite distinct in their approaches and their subject matter, but in other ways they actually have quite a lot in common. Partly because of time, we have decided to run the papers one after the other and then take discussion. I think that there are also some more interesting aspects of the relationship between the two papers. Harrie Timmink’s presentation looks specifically at recent proposals beyond the European Patent Litigation Agreement (EPLA),1 which raises some interesting issues. The original proposals deal with substantive issues, and what we have before us now is really not dealing with these in the same way. So very interesting questions of how we determine applicable law, what does it mean for harmonized patent law in Europe, and so on, which also have a substantial cultural dimension. Which is what takes us to the “Scenarios for the Future” project of the European Patent Office (EPO), which actually is a kind of mainstreaming of these policy issues and user issues, including inventors and consumers. This major study included an ambitious program of interviews towards the “Scenarios for the Future” Report, including the question of creativity in patent law and the legitimacy of patent law for the users of the system.2 The Report is also particularly noteworthy for the way also it considers and deals with issues of the rhetoric surrounding these debates. Yesterday we had a very interesting session [see Chapters V.A, V.B.1(a)-(b), V.C, supra this volume] in which we looked at the rhetoric of the crisis in patent quality, the crisis in patent law, and the imprecise nature of the rhetoric itself and how that may actually cloud some of the issues and confuse some of the concerns. Specifically, in this session we will be looking at the “Blue Skies” scenario in that Report,3 which, loosely speaking, looks at when the system really breaks down because of society’s increased reliance on high technology and driving towards cumulative innovation, as distinct from innovation that is captured and recognized as a distinct item in itself. That, I think, is very interesting also in light of some comments yesterday from Judge Rader, when he talked about all scientific endeavor being incremental, and how the patent system can come to grips with that. Is it interfering with that tradition of scientific endeavor?4 In some ways, the “Scenarios for the Future” project is very interesting, looking at incremental innovation and how the question of the efficacy of the patent system is also one of the interpretations of the system itself. I am going to donate one minute and forty seconds to our speakers and introduce our first speaker. Harrie, would you like to kick us off?

1 European Patent Office (EPO), Patent Litigation Agreement (EPLA), available at http://www.epo.org/patents/law/ legislative-initiatives/epla.html (last updated Apr. 5, 2007). 2 In the course of a two-year project, the EPO interviewed around 150 key players, including critics, from the fields of science, business, politics, ethics, economics, and law, seeking their opinions on how intellectual property and patenting might evolve over the next fifteen to twenty years. Four scenarios — relevant and plausible stories about the future — were developed in a series of workshops from their answers. The results have been published as a compendium, including the full set of interviews. European Patent Office, Scenarios for the Future (2007), available at https://secure.epo.org/ topics/patent-system/scenarios/index.en.php [hereinafter Scenarios]; see also EPO, Scenarios for the Future, http:// www.epo.org/topics/patent-system/scenarios-for-the-future.html. 3 EPO, Blue Skies, Scenario 4, http://www.epo.org/topics/patent-system/scenarios-for-the-future/scenario4.html. 4 See Chapter V.B.1(a), “KSR and its Aftermath”, infra this volume.

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Towards an EU-Wide Patent Jurisdiction the European Union Patent Court Harrie Temmink* Yesterday I gave a general introduction and some indications about the process, as such, the events of the past, etc.,5 so I can easily skip them and go straight to the core of the business, which is the text that we have now on the table. I. COMMISSION COMMUNICATION AND FOLLOW-UP

The Commission Communication is a working document that was issued on March 19 of this year.6 It contains a set of provisions, of articles, for a future European Union Patent Court. It is based on previous working documents, including the Commission Communication of April 2007.7 The Commission proposed a litigation system strongly inspired by EPLA, but integrated in a Community jurisdiction. In the next twelve minutes I am going to explain how we are trying to do that. First, a remark which is, I think, important. The documents that we are discussing in the Council working parties are all available on the Internet, even before the working party takes place. There is no such thing as secrecy here. The document that I am now discussing can be obtained from the EPO Web site, www.epo.org. II. ARCHITECTURE OF THE EU PATENT JURISDICTION

What is the architecture of this EU Patent Court? It may not surprise you that it will have a first instance court and a second instance court that will be a court of appeal. Now, we are already entering into some tricky business. It is clear that, on the one hand, each of the twenty-seven Member States very much likes to have a court on its own soil. That would mean that we would already have twenty-seven first instance courts in the European * Industrial Property Unit, DG Internal Market and Services, European Commission. Brussels. 5 See Chapter II.A, “The European Union and IP Law”, infra this volume. 6 Council of the European Union, Working Party on Intellectual Property (Patents), Working Document 7728/08, European Union Patent Jurisdiction — Preliminary Set of Provisions for the Future Legal Instrument (Mar. 19, 2008), available at http://register.consilium.europa.eu/pdf/en/08/st07/st07728.en08.pdf. 7 Communication from the European Parliament and the Council — Enhancing the patent system in Europe, COM(2007)0165 (final) (Mar. 29, 2007), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM: 2007:0165:FIN:EN:HTML; see also The Working Party on European Patent Law, First Working Draft (1962); Commission Proposal for a Council Regulation on the Community Patent, COM(2000)412 (final) (Jan. 8, 2000), available at http:// mineco.fgov.be/intellectual_property/presidency/patent_reglement_en.pdf; Proposal for a Council Regulation on the Community Patent (revised text) 859/03 (Apr. 29, 2003), available at http://register.consilium. europa.eu/servlet/driver?lang=EN&typ=Advanced&cmsid=639&ff_COTE_DOCUMENT=8539/03&ff_COTE_ DOSSIER_INST=&ff_TITRE=&ff_ FT _TEXT=&ff_SOUS_COTE_MATIERE=&dd_DATE_DOCUMENT=&dd_ DATE_REUNION=&dd_FT_DATE=&fc=REGAISEN&srm=25&md=100&ssf=&rc=2&nr=2&page=Deta il; European Council, Community Patent, Common Political Approach, Doc. 7159/03, (Mar. 7, 2003), available at http://ec.europa.eu/internal_market/indprop/patent/index_ en.htm; Results of the Competitiveness Council of Ministers (Mar. 3, 2003) (including Community Patent and COMPAT EU litigation system), available at http:// europa.eu/rapid/pressReleasesAction.do?reference=MEMO/03/47; Commission Consultation and Public Hearing on Future Patent Policy in Europe, Brussels, launched July 12, 2006, Agenda, Speeches and PowerPoint Presentations, Preliminary Findings, and Final Report available at http://ec.europa.eu/internal_market/indprop/ patent/hearing_ en.htm (stakeholders want COMPAT and EPLA); European Council, Presidency Conclusions (Dec. 14–15, 2006) (clash between supporters of EPLA vs. Community Patent jurisdiction), available at http://www.libertysecurity.org/ article1222.html.

438 CHAPTER V: PATENT LAW Union, all divisions of this European Union patent jurisdiction. That sounds a bit awful for big parts of industry. Industry actually wishes to have a very limited number of first instance courts. How are we going to reconcile these two options? As it stands now, we will have a central division of the Court of First Instance and also regional and local divisions. Any Member State can ask for setting up a local division of the First Instance Court. But, of course, we would all like all Member States that do not have a critical mass of first instance cases — a critical mass being around fifty cases per year — to join hands and be part of a regional division. How are we going to do that? That is, of course, a matter of politics. But we can help here and there. For example, in the system it is foreseen that if a Member State wants to set up a first instance division on its own soil, it will get less financial contributions of the Community budget for it. Also, informally of course, we try to convince Member States that it may be better for the quality of the patent system that they join hands. There are ways to achieve that. Instead of asking a country like Malta or Luxembourg to set up a local first instance court, only having one or two cases per year, we ask that they join regional divisions. The latest thing we introduced in the text is that there will be a transitional period of ten years — perhaps more, perhaps less — in which it will be absolutely clear that the first instance divisions will have fifty cases per year, or at least have judges with the required experience. The first instance divisions will have three judges, the central court of appeal five judges. There will be a registry and a sub-registry, where there is a local or a regional division. Now, it is my strong personal belief — probably shared by many others — that the quality of the court depends on the quality of the judges. If the judges are good, that is the essential start, actually, to have good-quality decisions. In the document that we have now on the table, there is an enormous amount of attention on the quality of judges. For example, even though these judges will be appointed by the Council, there will be an advisory committee that will make a short list of candidates, in order to avoid political decisions on the appointment of judges. We foresee a training framework for judges, more than what is done already, for example, in the context of the EPO. There is an EPO Patent Academy, which is doing a good job. But what we foresee is something that even goes beyond that. We will have a pool of judges, for reasons I will explain in a moment, where judges will be able to be mobile. We want to combine within the panels, on the one hand, experienced judges and, on the other hand, less experienced judges. III. COMPOSITION OF PANELS AND SELECTION CRITERIA FOR JUDGES

Any panel — and this is a novelty as well, I think — will have a multinational composition. It doesn’t matter which one. In the Court of First Instance local division, for those Member States that want to have a local division, they can have two national judges of their own nationality, but they should have one judge with a different nationality from that pool of judges. A Court of First Instance regional division will have two permanent regional judges and one from the pool of judges of a different nationality. A Court of First Instance central division will always have judges from different nationalities. We will develop eligibility criteria to become a judge. We foresee that there will be both legally qualified judges as well as technically qualified judges. All of them will, obviously, have to guarantee judicial independence and they should not be partial. Article 10 of the present text states that these judges should ensure “the highest standards of competence and they should have proven experience in patent litigation.” This may be difficult, perhaps, for some countries if they only have one or two cases per year. We are trying to get as experienced judges as possible in the panels.

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IV. JURISDICTION AND THE EFFECT OF DECISIONS

A. Infringement and Validity The local/regional Court of First Instance is competent for any actions related to infringement and validity. If there is a direct action for revocation, then the case would go straight to the central division of the Court of First Instance. That is a system that is well known in Germany, less so in other countries. That is the state of play where we are now. Infringement actions would go to the local or the regional divisions of the First Instance Court. That is the principle. But there are exceptions. One important exception is if you would have a counterclaim for invalidity in an infringement case before a local or a regional division, then the system foresees now that the local or regional division has to assess whether there are serious doubts about the validity of the patent. If there are no serious doubts, then the local or regional division can take the case itself. But if there are serious doubts about the validity of the patent, then either the local or regional court sends the case to the central division or it will utilize an additional technical judge from the pool of judges. B. Allocation of Cases Allocation of cases is mainly based on Brussels I.8 That means that, in principle, the cases should go to the court where the defendant is domiciled or where the infringement takes place. That is the basic principle. Obviously, parties can agree on any other local division or regional division, or even the central division, of the First Instance Court. C. Effect of Decisions An added value is this court is able to provide for EU-wide injunctions, for example, for Community patents and for European-wide injunctions for European patents, but of course limited to those countries where the European patent has been allocated. D. Arbitration and Mediation Arbitration and mediation are very important for us at the Commission, particularly because of the input that we have gotten, for example, from small and medium enterprise (SME) organizations. A mediation center/arbitration center will be set up. Also within the system, there should be a time, between the oral and written procedure, where the judge, with the rapporteur, will have to see whether a reconciliation and amicable settlement is possible. V. RULES OF PROCEDURE

Rules of procedure are based on work that has already been undertaken. For example, we have in Europe already the EU Enforcement Directive.9 We have the work that has been undertaken in the context of the EPLA. We have the work of the Venice judges under the umbrella of the EPO.10 8 Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, 1927 O.J. (L 299) 32, amended by 1978 O.J. (L 304) 77, amended by 1989 O.J. (L 285) 1 (full text, English version, at 1978 O.J. (L 304) 77). 9 Council & Parliament Directive 2004/48/EC, Enforcement of Intellectual Property Rights, 2004 O.J. (L 195) 32–36, available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_157/l_15720040430en00450086.pdf. 10 Principles Relating to the Rules of Procedure of the European Court (“The Rules of Procedure”), San Servolo, Nov. 4, 2006 (“Second Venice Resolution”), available at http://ipgeek.blogspot.com/2006/11/european-patent-judgesagree-on-rules.html.

440 CHAPTER V: PATENT LAW We have already rules of procedure of the Court of Justice.11 So most of the rules of procedure that we have so far are based on existing material — of course, fine-tuned for patent litigation and for this particular court as much as possible. There are always interesting questions: • Do license holders have the right to go to court immediately? We have sort of an inbetween solution now, which I will not mention. • Do European patent attorneys have the possibility to solely represent parties before the court? We say yes, but there are some conditions, and exclusively when it is a direct action for revocation. • The producing of evidence. We have introduced now the possibility for the saisiecontrefaçon, which means the inspection of premises of the alleged infringer. This is a very wide-ranging instrument. But, of course, as with all the provisions that we have included so far, we try to balance that with some securities for the alleged infringer. • Experts. • Injunctions. VI. LANGUAGE OF PROCEEDINGS

I will not leave you without some observations about the language of proceedings, which is another very delicate issue. Obviously, English-only is not an option in the European Union, where we have twentyseven Member States and twenty-three official languages. Even the option of having the three EPO languages (English, French, and German) as languages of proceedings is not an option for the Member States. So the system goes as follows: • Local and regional divisions: In principle, the language of the proceedings should be the official language of the Member State or Member States concerned. But there are exceptions. For example, parties can agree on the language of the patents. If the division would not agree with that, then it would be forced to send the case to the central division, where the language of proceedings would be the language of the patent. At the central division, the proceedings will be in the language in which the patent has been granted. • Court of Appeal: In principle, the language of the proceedings will be the language of proceedings of the Court of First Instance, but also with exceptions. For example, if parties agree, or in exceptional cases, and on the basis of fairness and convenience, a court may decide on a different language of proceedings. • Other language arrangements: For example, local divisions of the court can decide to dismiss certain language obligations — for example, translation of documents. In overall standards, this may seem to be a fairly complicated system, but it is a flexible system, in the interest of the quality of the cases, because it will be impossible, as I said, to have English-only or to have only three languages. But it is also impossible to have full respect and full equality of all the twenty-three languages of the EU Member States. So the system is somewhere in between.12 11 See Proposal for a Council Decision Conferring Jurisdiction on the Court of Justice in Disputes Relating to the Community Patent, COM (2003) 0827 final, CNS 2003/0326, available at http://eur-lex.europa.eu/LexUriServ/ LexUri Serv.do?uri=CELEX:52003PC0827:EN:HTML; Proposals before the Council (May 2004), available at http:// ec.europa.eu/ internal_market/indprop/patent/index_en.htm. 12 See Council of the European Union, Towards a Community Patent — Translation Arrangements and Distribution of Fees (Working Document 8928/08, Apr. 28, 2008), available at http://register.consilium.europa.eu/pdf/en/08/st08/ st08928. en08.pdf

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VII. TRANSITIONAL PERIOD

As I said, we are in favor of having a critical mass. Those countries that do not have more than fifty cases per year for three years will have a choice: • If creating a local division, the panel, instead of having two national judges and one foreign judge, should consist of one local judge and two judges from the pool; or • They should join a regional division with a critical mass of more than fifty cases per year. Last but not least, there will be an opt-out system for the holders of existing European patents. They can choose whether they want to join the system or not. I’m sorry to have taken too much time, but I did have to say something about the proceedings. Thank you. PROF. GIBSON: Perhaps I could raise some questions with the panel while we are swapping things around. One is a point regarding the different experience of each Member State with respect to the number of cases that they might be seeing and this question of the experience of the judges and the quality of the court. Just picking on Malta again, a question was raised about the training of judges. I know that the panelists have some interesting comments that they may wish to raise about whether training can really correspond to experience and whether this might have repercussions for the quality of the courts themselves. And also, this question of the split action in Germany is one that is quite interesting, I think, which maybe the panelists could address. It is something that other Member States are not really willing to adopt, and yet it seems to have implications for the fact that we are meant to be having courts that are equal and with the same procedures. Perhaps the panelists might quickly address those points. JUDGE VAN PEURSEM: If I could start there, a key concern with this new plan would be to ensure the necessary quality of the regional and local divisions, how to avoid inexperienced local divisions getting their hands on patent infringement or patent validity. It indeed seems that a critical mass would be required for in the order of fifty or a hundred cases a year. And again, I would suggest and submit to you that you look at EPLA. That was an optional system. There you could start with countries that had vested experience in patent litigation. I think there are two possible ways out of this. Why can’t you make the start of the local divisions dependent upon having a critical mass? So if you have proven a record of fifty cases a year, you can get a local division; otherwise you can’t and should go to central. Or there is another alternative to that: you could say it is only inter partes in those kinds of cases. As an absolute minimum, I would say in every local division there should be a participant from the pool of experienced judges. If you see how it is done now, you have a split between a direct action and a counterclaim. In cases of counterclaims of validity, you can opt for — the system, as I understand it, does not have now an obligation to have a German split, but you can opt for it — and then you have to evaluate whether it is a strong validity case or not. As Dutch and English judges would say, “How can you evaluate that if you don’t get into the case?” The Germans say, “Well, we do that all the time, and we have the majority of infringement cases in European patents in Europe.” So there you have one Court of First Instance that will operate completely differently in different countries, which is, I think, a risk for the quality of the judgments you will get there. As for training, I think every judge and every petitioner having any experience in patents will explain to you that any sort of training or courses can never be an alternative for general experience as a judge. So I think that is a dangerous scheme, to think that you can provide experienced judges by training them and sending them away to experienced courts.

442 CHAPTER V: PATENT LAW PROF. GIBSON: David, would you like to comment? MR. PERKINS: Just a very quick point. It seems to me the danger is there are already two

classes of judges at the Court of First Instance: you have the first class in central court and the second class in the local or regional courts. I think the real danger is that it is the secondclass judges who make the preliminary assessment on the counterclaim, whether it is serious or not, and decide either to pull in a first-class judge to help them deal with it or to stay the infringement case and push it off to the central court. I think it is deeply flawed. But it’s early days, so I guess some good sense will prevail. JUDGE VAN PEURSEM: Just one more point. In the last draft, in Article 48, it is foreseen that the European Court of Justice (ECJ) can have a cassation kind of role, a review role. Well, that is a big concern, I would say, to put it mildly, for every petitioner in the patent field. The ECJ is a very well-qualified and well-equipped administrative court but hasn’t a clue about material patent law. So that, I think, is a real danger here. We have seen what the ECJ has done with material trademark law. Let’s say opinions are split there about the quality. But this should have been different. This should have been just limited to European constitutional and procedural law, in my opinion, not material patent law. PROF. GIBSON: Alain, would you like to comment? PROF. STROWEL: That is obviously one of the points I had as well. The new litigation system ought to ensure that the judges at the ECJ have the experience that is needed in patent litigation. I think it is still a question mark. I have other issues that relate to the language of proceedings and to the right scope of competence. Let’s start with the scope of competence. In the text that was released last week, the new patent court is competent for actions for infringement, declaratory actions for non-infringement, direct actions, counterclaims for invalidity, and so on. But what about all other issues? I am still concerned about other related issues that you cannot completely put aside, like the issues of entitlement, ownership; what about the patent exceptions, compulsory licensing, or contractual issues? What do we do with those issues that are linked with all the other patent issues? Then what about a case which is not only based on patent but might be based on other bodies of law, like other IP rights, breach of contract, trade secrets? Again, there is apparently no competence in those areas. So how do you solve that? In practice, it could mean that you have to start another proceeding based on those cases, and that is definitely, I think, not costeffective. Cost-effectiveness should be one of the two main objectives of the litigation system, apart from quality. On the issue of the language of proceedings, you clearly presented the issue. But it results in the fact still that there is a presumption that the language of the local division is and will be the language of the procedure, unless, as you said, there is an agreement between parties. A defendant who tries to block a case will eventually not agree on a language, thus forcing the plaintiff to have a case heard in a country whose language might not be one of the three European Patent Convention languages. That would complicate the litigation of patents. PROF. GIBSON: I think it was very useful to have that discussion hot on the heels of the paper. We will move straight on to David’s presentation now, and then we will take some general comments at the end as well. So feel free to address both papers.

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Soft IP and the Possibility of Finally Realizing a Pan-European Patent Applying Open Source Principles to Patent Licensing David J. Kappos* Thank you, and good afternoon. Thanks to the organizers again, Hugh and team, for inviting me to come and speak again this year here at the Fordham Conference. It’s always a wonderful, wonderful event. You have just heard about, in the context of litigation, how language is a major issue. I am about to tell you a way that language can be a much less major issue, even in Europe, where there are so many languages to contend with. But to do that, I am going to scope away from litigation and talk about the granting process, the vision that many of us in this room have had for years, if not decades or multiple decades, of one day having a Community-wide patent grant that could cover all of Europe. The stumbling blocks that have been in the way, you all know, include languages, very centrally, among some others. I start out by asking where we are today and where we have been recently. I track the history back. Actually, it goes back decades. But if you look at the London Agreement on translations, which came out in 200013 and will go into force very soon — and move from there, you see that there have been a whole raft of proposals and attempts: • The Community Patent “Common Political Approach” in 2002–2003.14 • Community Patent Regulation.15 • The EC VP’s statement in 2007, about a year ago, that we will have a Community patent in five years. (It’s one of those things that we hope aren’t famous last words.) • The EU patent jurisdiction court system. • The Community patent translation and fees proposal. There have been many, many proposals, lots of activity, but very little accomplishment in the area of moving towards a Community patent in Europe, for lots of reasons. The vision of the Community patent, certainly in the term of my involvement, has been: • A unitary patent covering all twenty-seven EU countries. • Something that has the same scope in every country. • Something that produces or can fuel a reliable litigation system, going back to our earlier discussion. • Something that has reasonable cost for applicants, in contrast to the current system, which can be explosively expensive if we try to get patent protection in many countries.16 • Something that produces high-quality patents. • A system that permits these patents to be granted and managed largely by the EPO. Hold for a moment how the national patent offices play in that mix, because I think they can have a role. * Vice President and Assistant General Counsel, Intellectual Property Law, IBM Corp., Armonk, NY. 13 The London Agreement: European Patents and the Cost of Translation, Agreement on the Application of Article 65, EPC (Oct. 17, 2000), available at http://www.epo.org/about-us/publications/general-information/londonagreement.html. 14 European Council, Community Patent, Common Political Approach, Doc. 7159/03, (Mar. 7, 2003), available at http:// ec.europa.eu/internal_market/indprop/patent/index_en.htm. 15 Implementing Regulations to the Convention of the Grant of European Patents, 13 I.L.M. 310 (1974), available at http://www.european-patent-office.org/legal/epc/e/ma2.html. 16 For studies of cost of obtaining a patent in European Member States, see European Commission, Results of the Competitiveness Council of Ministers, Memo 03/47 (Mar. 3, 2003), available at http://europa.eu/rapid/pressReleases Action.do?reference=MEMO/03/47; Bruno van Pottelsberghe & Didier Francois, The Cost Factor in Patent Systems (CEPR Discussion Paper No. 5944, Nov. 2006), available at http://ssm.com/abstract= 954607.

444 CHAPTER V: PATENT LAW So that’s the vision. That’s the system that we would all love to have, I think, if we could get it in Europe. But then enter the language challenge. It has been discussed a little bit already. It has been a major stumbling block. There have been several approaches that have been suggested towards addressing the language challenge, and all of them have had major disadvantages to them: • The flexible Community patent approach that was suggested would have geographic coverage and translation in only the desired countries. • An automated central translation service. Someday maybe we will have machine translation that’s good enough to produce a really viable translation for some kind of central approach, but we don’t have it today and we are nowhere near having it. • Alternatively, limited translations. This could lead to the problem of inadvertent infringement by those who don’t have access to a translation but need it. So lots of attempts; no way around the language problem. Enter the idea of soft IP. As was mentioned previously, this came from the EPO’s “Blue Skies” scenarios for the future, which was unveiled in Munich about May 2007.17 It was a very, very interesting set of ideas that attempted to address the language problem, along with some other issues: • The advent and increasing importance of patent pools. • The advent and increasing importance of open standards, of product interoperability as being major issues. • Trying to leverage some of the experiments in corporate goodwill and collaborative development that have occurred over the last several years in donating patents or pledging patents in various ways. • Lastly, trying to respond to the change in the United States after the eBay case,18 which, I will say, returned a significant element of discretion and equity to the granting of injunctions, something that, it is feared, leaves Europe a little bit more vulnerable than the United States now in terms of its injunctive regime. So the “Blue Skies” scenarios set out to try to navigate all of those issues. However, it needed to be filled out. There has been some effort to fill it out since then. I want to a few minutes to tell you what is going on in that regard. The effort has been captured under the name of “soft IP,” the idea being to find a way to realize those advantages that I just mentioned in a patent that is automatically endorsed licenses of right. That’s a successful system that already exists in Europe. My client uses it; other companies in Europe use it. The idea is, we give up the ability to get an injunction. We endorse licenses of patent right in exchange for lower fees. The idea of soft IP is that you can extend the licenses-of-right regime for patents endorsed licenses of right. There is no injunctive threat; therefore, much less need for translation. Even if an innocent infringer is found to later infringe, that party always has the ability to get a license. So the idea is, if you take down the injunctive issue, you take down the need for translation, you can take down the cost structure very, very, very substantially, and you could possibly have a system that could be a first step towards a Community-wide patent. There is something that I haven’t said yet that I need to bookmark very heavily, which is that we recognize that there are industries that are heavily dependent on having the right to exclusion in their patents. As a result, the soft IP concept is not envisioned as a new system to the exclusion of existing systems. It’s envisioned as a new system that is additive to the existing systems, meaning that anyone who wants to get a patent that still has a strong injunctive right 17 See Scenarios, supra note 2; Blue Skies, Scenario 4, available at http://www.epo.org/topics/patent-system/ scenarios-for-the-future/scenario4.html. 18 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006).

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to it can use all the current approaches that they have. They can file with national patent offices. They can file through the EPO. They can file through the WIPO Patent Cooperation Treaty (PCT)19 route and have the national patents spring up in whatever countries they want in Europe, and they can still get their injunction. Of course, you have to translate. You have to go through all the costs that you currently have with current systems. On the other hand, anyone who wants to get a less expensive patent that in one prosecution becomes valid and enforceable across the entire community could go the soft IP route. The soft patent does not have the injunctive right, but it has all the same other rights, especially remuneration for infringement — in other words, to gain licenses. It is much more streamlined, much more cost-effective, and a system that can work in harmony alongside the current systems — and there are many of them — where the patent that is sought can be much more effectively had under a single regime where injunctions are not needed and where it is perfectly fine to make licenses available. So that is the idea. In the interest of time, I will stop now. I would be happy to take any questions for discussion. IBM Research and Intellectual Property

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Fordham IP Law Conference

© 2008 IBM Corporation

IBM Research and Intellectual Property

IBM Research and Intellectual Property

Benefits of Soft European Community Patent

Soft Community Patent Community patent

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 Community-wide coverage from

Translated into all EU languages

single filing and prosecution

 Reasonable costs Native Language Application

Soft community patent endorsed LOR

No translations, lower renewal fee

National patents

Translated, injunctions available

 Licenses available  Standards-friendly

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Fordham IP Law Conference

© 2008 IBM Corporation

 Community patent and national patents still available

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Fordham IP Law Conference

© 2008 IBM Corporation

PROF. GIBSON: I will open it straight up to our panelists. Alain? PROF. STROWEL: Yes. Soft IP came last year out of the blue — of course out of “Big Blue”

[IBM]. It is quite far-reaching, so quite interesting for that reason. As you said, soft IP is a COMPAT, which is an automatically endorsed license of right; thus, a form of compulsory licensing. There are a lot of legal issues, of course. First of all, whether it is compatible with TRIPs Article 28 on the exclusive rights that patents should grant.20 There are issues about the 19 Patent Cooperation Treaty, June 19, 1970, 28 U.S.T. 7645, 1160 U.N.T.S. 231, amended Sept. 28, 1979, modified Feb. 3, 1984, and Oct. 3, 2001 (as in force from Apr. 1, 2002), available at http://www.wipo.int/pct/en/texts/pdf/pct. pdf. 20 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 [hereinafter TRIPs Agreement], available at http://www. wto.org/english/tratop_e/trips_e/t_agm0_e.htm. ...

446 CHAPTER V: PATENT LAW application of Article 31 of TRIPs for compulsory licensing, because I think this last provision could apply.21 There are many legal issues that I do not want to discuss here. I think it is more interesting to discuss the rationale of the soft IP proposal. Why would we like to have this? You mentioned the issue of translation. I suppose it is linked to the problem of SMEs, that they cannot “read” the full patents because only the claims of the specifications are translated in the language compromise on the Community Patent, not the whole patent. Art. 28, Rights Conferred: 1. A patent shall confer on its owner the following exclusive rights: (a) where the subject matter of a patent is a product, to prevent third parties not having the owner’s consent from the acts of: making, using, offering for sale, selling, or importing for these purposes that product; (b) where the subject matter of a patent is a process, to prevent third parties not having the owner’s consent from the act of using the process, and from the acts of: using, offering for sale, selling, or importing for these purposes at least the product obtained directly by that process. 2. Patent owners shall also have the right to assign, or transfer by succession, the patent and to conclude licensing contracts. 21 Id. art. 31. Other Use Without Authorization of the Right Holder: Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected: (a) authorization of such use shall be considered on its individual merits; (b) such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use. In situations of national emergency or other circumstances of extreme urgency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public non-commercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly; (c) the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive; (d) such use shall be non-exclusive; (e) such use shall be non-assignable, except with that part of the enterprise or goodwill which enjoys such use; (f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use; (g) authorization for such use shall be liable, subject to adequate protection of the legitimate interests of the persons so authorized, to be terminated if and when the circumstances which led to it cease to exist and are unlikely to recur. The competent authority shall have the authority to review, upon motivated request, the continued existence of these circumstances; (h) the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization; (i) the legal validity of any decision relating to the authorization of such use shall be subject to judicial review or other independent review by a distinct higher authority in that Member; (j) any decision relating to the remuneration provided in respect of such use shall be subject to judicial review or other independent review by a distinct higher authority in that Member; (k) Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f) where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive. The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases. Competent authorities shall have the authority to refuse termination of authorization if and when the conditions which led to such authorization are likely to recur; (l) where such use is authorized to permit the exploitation of a patent (“the second patent”) which cannot be exploited without infringing another patent (“the first patent”), the following additional conditions shall apply: (i) the invention claimed in the second patent shall involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent; (ii) the owner of the first patent shall be entitled to a cross-licence on reasonable terms to use the invention claimed in the second patent; and (iii) the use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent.

PART E: PATENT LAW WORLD DEVELOPMENTS 447

I think that the machine translation system can help. I just got an interesting feedback from Harrie Temmink, who said that those machines now available online are apparently used intensively, with more than 50,000 hits a month. I am sure that they could still be improved. The translation issue, or part of it, could probably be solved with improved translation software. So we do not need a new soft IP, but in fact a new software for patents. Something more on the soft IP concept. In principle, this system of automatically endorsed license of rights should only apply to software patents. But how can you limit the system to a product or limit it to software applied to the desktop? Software is used in many different industries. To completely review the patent regime for software patents has very far-reaching consequences, because it will not only apply for IT. It goes well beyond. If soft IP means compulsory licensing for all software patents, it would, of course, affect the medical equipment industry, the car industry, many other industries that are using software. So basically it is farreaching; it is not focused on the desktop. Now, there is another problem of spillover with this proposal, which is quite interesting to discuss. You want to limit soft IP to Community Patents. But what is included in the Community Patent will at some point in the future become enshrined in the European Patent Convention (EPC),22 because the twenty-seven Member States at some point will probably incorporate — it will take time, of course — the Community Patent’s substantive rules at the level of the EPC. So we will have something that not only applies to the Community Patent but might as well apply at some point in time to European patents. Only national patents would be covered by the classic system. Concerning injunctions, I think that more should be done. In the text of one of the working documents under the Slovenian presidency, there was a reference to the possibility to have an injunction even without having the defendant present, so inaudita altera parte (ex parte). In relation to patents, contrary to other IP rights, that goes quite far. On this, we should eventually “soften” — to use the “soft” catchword — the system. This challenges the standard approach of injunctions in the patent field. JUDGE VAN PEURSEM: It is already there under the Enforcement Directive. MR. PERKINS: And TRIPs. JUDGE VAN PEURSEM: And enforced in our country. PROF. GIBSON: David, do you have some comments? MR. PERKINS: Just one comment. What goes around comes around. If you are as incredibly old as me and you had practiced under the 1949 English Patents Act,23 we had voluntary endorsement for licenses of rights. I do not think it was used very much. I can barely remember any. Can you remember any, Trevor? No. Jolly good idea. Am I allowed a couple of other quickie comments on the other topics? PROF. GIBSON: Go ahead. MR. PERKINS: You know, this topic is really a resurrection, because at Fordham last year we declared the Community Patent and a Community Patent litigation system as officially dead.24 So it is very comforting to see that it is back with us. Just a couple of very quick points, two questions I don’t expect an answer to but I will raise, and one comment. First question: Because a plaintiff who wants to revoke a patent is entitled to bring a revocation case without having first brought an EPO opposition, is this potentially the end of EPO opposition procedure? 22 European Patent Convention (EPC) (revised text EPC2000), available at http://www.epo.org/patents/law/legaltexts/ html/epc/2000/e/ma1.html. 23 Patents Act 1949, 12, 13 & 14 Geo. 6 (Eng.). 24 See Session V, 10 Intellectual Property Law & Policy 337–52 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham International Intellectual Property Law & Policy Conference, Apr. 12–13, 2007).

448 CHAPTER V: PATENT LAW Second question: A super-provision, called Article 44, for the impoverished litigants legal aid will be available. Well, we had legal aid in the United Kingdom. We can’t afford it now. So the second question is: Who pays? The comment I will leave you with is that mediation and arbitration are, and I quote, “to be developed.” You already have a mediation-and-arbitration setup run by WIPO since, I think, 1998. It is there, waiting for you, to resolve your European patent litigation. For those of you who have seen the latest European Central Bank case,25 which is Improver Mark II — where the European Patent for preventing counterfeit banknotes has been revoked in France, revoked in the United Kingdom, upheld in Holland, and of course found infringed in Germany because they haven’t looked at validity yet ― consider mediation, consider arbitration. PROF. GIBSON: Harrie, would you like to comment? You can have two and a half minutes. MR. TEMMINK: Two and a half minutes is obviously not enough to cover everything that was said here, however interesting it may be. But let’s start with the last comments. For example, legal aid. It is a fairly common instrument in any court system that there is a provision for legal aid. Who will pay? That is of course the system, the Community budget. As far as the issue of the scope of the court, yes, it is true that some parts of industry are very much in favor of extending the scope of the court to, for example, competition law issues, civil law issues. But on the other hand, if that would be the case, that would require much more of the judges. As I said before, we are trying to find, first of all, good patent judges. And indeed, it would mean that if you would have other actions not related to infringement or validity, you should have to go to the national courts again. About whether in the present proposal there are two classes of judges in the Court of First Instance — on the one hand, judges that are in the central division; on the other hand, judges at the local and regional divisions — hopefully not. That is exactly what we want to avoid, actually. We want to have high-quality panels throughout the first instance, and of course also in the second instance. But the reason why there is this difference, I suppose, is the split, which is the German system, where the Germans tell us that it works marvelously. Why not take that as the best practice? That is the idea that is now on the table. There are, of course, many countries that do not know that system now but who are in favor of adopting it. I think at the end of the day it is a matter of what you are used to. I don’t think that one system is good and the other system is bad, but it is just a different system. I know that Robert disagrees with me. If we speak to German judges, they say the split is wonderful and we should never have it differently. If we speak to the Dutch and U.K. judges, they tell us the opposite. Of course we have to strike a balance at a certain moment. PROF. GIBSON: I think that’s one for lunch. We have to give David an opportunity to reply. He has been waiting patiently. David, as a formal representative of “Blue Skies” thinking, you have the last word. MR. KAPPOS: Thank you very much. I’ll just give a couple of comments and what I’ll call factual corrections. Here’s a fact. At least within my client, we have done some heavy looking at the machine translation capability. We have invented a lot of machine translation capability. The stuff out of Europe right now is good, but it is not anywhere near where it needs to be, especially when it comes to providing translations of legal texts such as patent claims. I think it is probably decades away from being suitable for legal texts, and at least five years from being really usable for understanding complex technical documents. So I suggest that people who think it is good enough to compete with good human translation need to actually spend some time with the automated translation capability. 25

European Cent. Bank v. Document Security Sys. Inc., [2008] EWCA (Civ) 192.

PART E: PATENT LAW WORLD DEVELOPMENTS 449

Second factual correction. The “Blue Skies” proposal and the soft patent idea are not about software patents. It can be used in any technical area — in fact, we have spoken with pharmaceutical companies in Europe who have said, “This is pretty cool. We like the idea that we can still get our normal patents and our injunctions where it makes sense with our core pharma products, but we also like the idea that for our test tools and other forms of inventions that we are creating we might be able to put them into the soft IP regime and get a new patent that is much more cost-effective for us.” So the soft patent regime isn’t about software patents; it’s about any kind of invention that benefits from being subject to a system that is put into licensing and not into injunctions. Lastly, in labeling this as a system of compulsory licenses, I think that is actually just attaching a pejorative. It is a system that sits next to the existing systems. Injunctions are still available under the existing systems. It is similar to any company that chooses to grant licenses under its patents. If a company chooses to grant licenses, does that company become subject to compulsory licensing? I don’t think so. It is just a choice that has been made. It is also worth commenting that the Licenses of Right system in the United Kingdom and Germany is used more than one might expect and it is used by large companies. The current draft version of the Community Patent Regulations26 includes provisions on Licenses of Right; we are looking to make use of the Community patents and the licenses of right attractive to patentees and also providing protection to potential infringers. Similarly with the soft IP idea, it is a choice that each of us can make. We can put a patent under that system or we can leave our patent under the existing system. I don’t equate that to compulsory licensing. PROF. GIBSON: Excellent timing. Thank you very much. See you all at lunch.

APPENDIX A Applying Open Source Principles To Patent Licensing David J. Kappos* Since patents are open, what needs to be opened to apply open source principles to patents? Of course, patents are already “open” in the sense that they are openly published and available for all to view as to their content. However, patents are not open in the sense of permitting practice of patented concepts without restriction, in a way analogous to the relatively unrestricted practice available through open source software licensing. What “needs to be opened” are licenses that exempt one who wishes to use code developed by an open source project from patent infringement during the patentee’s exclusionary period. What would an open source patent license look like? COMPONENTS OF AN OPEN SOURCE PATENT LICENSE

In order to provide a “framework of certainty,” an open source patent license should include language which unambiguously covers seven points: purpose; licensor grant; parties, projects, and products covered; patents subject to the license; any essentiality requirements; defensive termination; grantbacks. 26 See European Patent Convention (EPC 1973), http://www.european-patent-office.org/legal/epc/e/ma2.html. * Vice President & Assistant General Counsel, Intellectual Property Law, IBM Corp. (Armonk, NY)

450 CHAPTER V: PATENT LAW 1. The purpose of the license This, in effect, is a simple recital. E.g., We are making patents available for the development, implementation and use of selected open source [projects]. E.g., We are offering this license to encourage additional innovation on open platforms. 2. What the licensor grants or promises to do or promises to refrain from doing (including any terms and conditions of the license). E.g., Each [party who distributes the original program and changes/additions] grants [to anyone who receives the program and changes/additions] a non-exclusive, worldwide, royaltyfree patent license [under patents which are necessarily infringed by the use or sale of the program and changes/additions] to make, use, sell, import and otherwise transfer [the program and changes/additions] in source code and object code form. No hardware per se is licensed hereunder. E.g., We grant to you an irrevocable, non-exclusive, worldwide, royalty-free license [to specified patents] to the extent necessary to make, use, sell, offer to sell and import [a specified open source program]. E.g., We promise not to assert our rights under any of the patents [identified below]. 3. The open source parties/projects/products covered by the license terms and conditions. a. This involves defining what is considered to be an acceptable project/product. E.g., This license applies only to developers who contribute code to [specified open source projects]. E.g., This license applies to any Open Source Software (where Open Source Software is precisely defined, e.g., any computer program whose source code is published and available for inspection and use by anyone, and is made available under a license agreement that permits recipients to copy, modify and distribute the program’s source code without payment of fees or royalties). Note that in this approach “license agreement” would have to be precisely identified, e.g., all Open Source Software licenses which have been certified by opensource.org and listed on their website as of a [specific date]. 4. Which patents are to be licensed. a. This item is met by simply enumerating the licensed patents. Of course, it is also prudent to indicate whether or not counterpart patents are to be licensed. 5. Whether all claims in each patent are licensed, or only “essential” or “necessary.” a. This item principally requires defining what is meant by “essential” or “necessary.” E.g., We will license any “necessary” patent claims that are fully compliant with all required portions of a Covered Standard. For this approach, Covered Standard must be defined so that it is clear the standard specification must comply with the Scope of Work of the Working Group responsible for the standard, and is approved or recommended by, and published as final by, the standards organization. 6. Whether defensive termination applies. Defensive termination refers to a right for the Licensor to terminate the license if attacked first by the licensee. Defensive termination clauses can employ various triggers as well as various consequences. E.g., This license is irrevocable except that we reserve the right to terminate with regard to any party who files a lawsuit asserting patents or other intellectual property rights against [the project or products]. E.g., This license applies only if you abstain from filing, maintaining, or voluntarily participating in a lawsuit that asserts patents or other intellectual property rights against others for their implementation of a [covered standard]. Note that “covered standard” would have to be clearly defined.

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If the open source license is offered by a member of a patent commons, it may also be desirable to specify whether the licensor’s patents may be used by other members of the commons for defensive purposes and how that will be accomplished. 7. Whether the licensee is required to grant back a license under licensee patents that would be infringed by use of [a specified open source product]. WHO WOULD WANT TO USE AN OPEN SOURCE PATENT LICENSE AND WHY?

Clearly, anyone who wants to use, contribute to and distribute open source code would want to receive an open source patent license in order to avoid being charged with infringement of the licensed patents. On the other hand, anyone who wants to encourage innovation within an open source software project would want to offer a patent license structured to provide a measure of protection to those who want to contribute to or otherwise advance the desired project. The licensed patents are used to establish a platform for further innovation in the desired open source project, benefiting the licensor as well as others. Patent holders who wish to promote the advancement of an open source project may either pledge not to assert their patents against the project or grant a royalty-free patent license. Such action encourages further development of the desired technology. Are open source concepts and advantages applicable in non-software settings? The open model can be application in a non-software environment in which contributors/ participants seek to use their patents to advance the objective at hand, rather than prevent others from reaching that objective. If the advantages of an open, collaborative development environment outweigh the benefits of proprietary control, and the possible costs of patent litigation would be a deterrent to contributors/participants in a technical setting, then we’d have a situation that would be somewhat similar to the open source environment. Will an open source patent model democratize the R&D process and produce new participants and methodologies, or will it be one more tool for the current players? The open source model benefits both new participants and current players. It will “democratize” the software development process by facilitating the creation of widely available and useful software by a broad range of participants, and will provide another tool for the current players. An open source patent license helps to “level the playing field” for all participants, bringing patents to bear for the benefit of open collaborative projects that all participants are free to use. WHAT IS THE CAMBIA BIOS INITIATIVE?

CAMBIA is an international, independent non-profit research institute (headquartered in Australia) that promotes the Biological Innovation for Open Society (BIOS) initiative as well as tools which provide access to relevant patent information. BIOLOGICAL INNOVATION FOR OPEN SOCIETY (BIOS)

The BIOS initiative aims to extend the concept of open source software to applications of the life sciences. It is the intent of the BIOS initiative to enhance patent transparency, accessibility (primarily for the benefit of “disadvantaged” communities in the life sciences area), and open uses for patent technology and know-how. As stated by CAMBIA’s CEO: “For the past twentyfive years, the life sciences sector has focused on controlling the [enabling] tools of innovation through the patent system, rather than sharing broad access to these tools. This has resulted in huge inefficiencies and costs in these sectors, and there are countless lost opportunities for innovating for neglected priorities.”

452 CHAPTER V: PATENT LAW The BIOS initiative is expected to resolve major uncertainties that can discourage investment in biotechnology, by providing not only licenses (between CAMBIA and others) which support the growth of a technology of interest, but also by providing support for the growth of a “community” (a “protected commons”). PROTECTED COMMONS

This “protected commons” is intended to provide a secure platform where information about an invention can be shared and openly discussed without concern that the information will be appropriated or proprietized by other members of the commons. Patents and patentable technology will be placed in the protected commons for use by members of the commons. A member who develops an improvement may wish to patent the improvement, but the improvement must be made available to other members. The member who patents an invention cannot attempt to prevent other members from using the patented invention. The purpose is for members of the commons to contribute improvements to teach other in order to enhance a technology of interest. BIOFORGE

The sharing of information among members of the commons is facilitated by BioForge, which is a portal for patent-related information sharing, comments on patents, and discussion tools. PATENT LENS

Patent Lens is a tool of the BIOS initiative intended to ensure patent transparency. Patent Lens contains all published U.S. patent applications as well as U.S. and European patent documents. It provides analysis of critical patents that impact the use of new technologies. Eventually it will be possible to annotate, link to prior art, and comment on patents and patent applications, thereby increasing the transparency of patent rights worldwide. Patent Lens is not limited to the life sciences. CONCLUSION

There is much to recommend the open source model of collaboration. Open source patent licenses have come about in an effort by patent holders to turn their patents into “tools of inclusion” rather than “tools of exclusion.” There is reason to believe, and every reason to hope, that the tremendous advantages and power of the open source development model — and likewise open source patent licensing — will take root in technologies beyond software development.

CHAPTER V

Patent Law Part E: Patent Law World Developments Section 2: Japanese Patent Law Developments Moderator PROF. MARTIN ADELMAN

George Washington University Law School (Washington, D.C.) Speakers MASAYUKI SHINOHARA

HON. KEN ASAI

Assistant Director, Japan Patent Office (Tokyo)

Judge, IP High Court (Tokyo) Commentators

PROF. KAZUO MAKINO

JOHN PEGRAM

Shiba International Law Offices, Omiya Law School (Tokyo)

Fish & Richardson P.C. (New York)

PETER VERMEIJ

Vice President, European Patent Office, DG 2 (Munich)

PROF. ADELMAN: We have a very interesting program this morning that will deal with Japanese patent law and the issues surrounding Japanese patent law. It is terribly important for those of us who go around the world lecturing. Particularly in Asia, if you talk about IP law or patent law, you are better off talking about Japan than the United States, or perhaps Europe. Japan is more important than simply what happens inside Japan. It affects the attitude outside of Japan. This morning we have Mr. Masayuki Shinohara, a distinguished member of the Japanese Patent Office, one of the world’s most important patent offices, and The Hon. Ken Asai, a

454 CHAPTER V: PATENT LAW judge in the Japanese Intellectual Property High Court. As I think all of us here know, in April 2005 Japan established this court in Tokyo that hears all IP appeals. So obviously it is a terribly important court and it is a very prestigious court. If it is a little bit too rough, then not many things get patented, and maybe that is not very good. If it is too easy, that creates its own problems. Obviously, it is just really getting started now. We will hear from Judge Asai about developments with respect to that court. Our own Judge Rader is credited by the former chief judge of the IP High Court — and you can find this on the Web site of the IP High Court in English — with stimulating the Japanese politicians and influential decision-makers to create such a court.1 With that, I will turn it over to our first speaker, Mr. Shinohara. Then we will hear from Judge Asai. Our panelists will follow up with brief comments.

The Japan Patent Office Initiative for Work Sharing Among IP Offices Masayuki Shinohara*

Thank you. Good morning, everyone. My name is Masayuki Shinohara. I am from the Japan Patent Office. Today I would like to introduce to you the activities of the Japan Patent Office, especially the promotion of international work sharing. I. BACKGROUND

The globalized economy has led to the need for the strong protection of patents abroad, especially for international enterprises. There were 1.66 million patent applications filed in the world in 2005. In 2006, 970,000 applications were filed with the Trilateral Offices — the Japanese Patent Office (JPO), the U.S. Patent and Trademark Office (USPTO), and the European Patent Office (EPO). Moreover, approximately 240,000 of those applications filed with the Trilateral Offices are duplicate applications. The mutual Exploitation of Search and Examination Results among IP offices will reduce workload and cost, improve patent quality, and expedite the examination process.2 The JPO has been advancing the Mutual Exploitation of Search and Examination Results among IP offices in order to avoid duplicated work and enhance examination quality. In this regard, I will talk about Common Application Format, Electronic Priority Document Exchange, the Dossier Access System, JP-FIRST, and the Patent Prosecution Highway. With these measures, the JPO is enhancing global work sharing, from filing to the granting of a patent. Now let me talk about the measures to advance work sharing among IP offices.

1 See Intellectual Property High Court, “Judge Randall R. Rader of United States Court of Appeals for Federal Circuit and Other Distinguished Guests Visited IP High Court”, http://www.ip.courts.go.jp/eng/documents/ topics_050704.html. * Assistant Director, Japan Patent Office, Tokyo. 2 See U.S. Patent & Trademark Office, Proposed Procedures to Implement Exploitation of Search and Examination Results, available at http://www.uspto.gov/web/offices/com/strat21/action/ws1p36.htm (last modified Sept. 20, 2007).

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II. COMMON APPLICATION FORMAT

First I will touch upon the Common Application Format. Its purpose is to provide applicants with the common format that is acceptable to each of the Trilateral Offices. Description, claims, abstract, and drawings are the subjects of the Common Application Format. The Common Application Format will reduce the burden on applicants by eliminating the need to draft a different application for each office due to the difference of the format among the offices. The Trilateral Offices reached an agreement on the Common Application Format in consultation with users in November 2006.3 The agreement is available on the Trilateral Web site.4 An application that complies with the Common Application Format will be accepted without any further amendment by any of the Trilateral Offices as a national/regional application as far as the agreed-upon formal requirements are concerned. The JPO is preparing for the introduction of the Common Application Format in 2009, with some exceptions, and its full introduction is expected in 2011.5 III. ELECTRONIC EXCHANGE OF PRIORITY DOCUMENTS

Next I will touch upon our project for establishing the electronic exchange of priority documents as one part of our approach to simplifying the procedure for filing a foreign application. Under this project, IP offices electronically and directly exchange priority documents submitted by applicants. We have already been exchanging priority document data online with the Korean Intellectual Property Office (KIPO), the EPO, and the USPTO. Such data exchanges will reduce the procedural burden on applicants and simplify the business processes in IP offices because the offices will no longer have to convert paper priority documents into electronic versions. The framework for the electronic exchange of priority documents may be implemented on a global scale. In recent years, a number of studies and research projects have been conducted on Digital Access Service (DAS), which enables patent offices worldwide to enjoy Priority Document Exchange via the World Intellectual Property Office (WIPO) Digital Access Service. If WIPO DAS is realized, both patent offices and applicants can reduce the procedural and financial cost of priority document exchange further. IV. DOSSIER ACCESS SYSTEM AND AIPN

I would now like to talk about the dossier access system. The JPO has established a system that allows examiners to access the file wrapper dossier of the EPO, the USPTO, and the KIPO. The JPO is providing a total of thirty-one patent offices with its examination information. 3 The Standard Format of patent application was agreed upon at the Trilateral Conference held in November 2006. The Trilateral Offices conducted a pilot program from a practical perspective with the cooperation of users during 2007. The Standard Format is scheduled to come into use in April 2009. 4 See Trilateral Co-operation, available at http://www.trilateral.net/news/20080425/index.php. 5 The EPO is planning to implement the (CAF) in the beginning of 2009. Paper, PDF and XML format will be accepted. The USPTO confirms that the Common Application Format is consistent with current USPTO rules and procedure, and, while some of the requirements of the Common Application Format (CAF) go beyond what the USPTO requires, the USPTO will accept an application in the Common Application Format.

456 CHAPTER V: PATENT LAW The Advanced Industrial Property Network (AIPN) is an Internet Web service for the Patent Office with Japanese-to-English machine translation. The dossier access system and AIPN are essential to avoid redundant searches in IP offices and to advance international work-sharing, such as the Patent Prosecution Highway. V. JP-FIRST

Next I would like to introduce the Japan Fast Information Release Strategy (JP-FIRST).6 In April 2008, the JPO will launch a program to release its examination results (first office actions) to the rest of the world for applications first filed with the JPO and thereafter filed with foreign patent offices (“basic applications claiming priority under the Paris Convention”7). The essence of JP-FIRST is as follows: The JPO will give examination priority to applications (1) first filed with the JPO (and then filed via the Paris route with other offices) and (2) an examination of the application is requested within two years from the filing date with the JPO. The examination should start within thirty months from the date of filing. The JPO expects the following benefits from the implementation of JP-FIRST: • Assistance to applicants in obtaining appropriate rights in foreign countries. • Reduction of the examination workload in other IP offices in the world. VI. PATENT PROSECUTION HIGHWAY

Finally I would like to talk about the Patent Prosecution Highway (PPH).8 The PPH is a framework of cooperation on patent examination between IP offices. If a patent application has been determined to be patentable in an office of first filing, the corresponding application is qualified for accelerated examination in an office of second filing. Under the PPH, applicants can more easily apply for an accelerated examination and more quickly obtain patent rights. The PPH is also advantageous to IP offices because an office of second filing is able to exploit the reliable search and examination results obtained in an office of first filing. This means that the office of second filing is able to reduce the workload and to improve quality of its examination. The PPH provides three big advantages: • First, an applicant obtains a patent in a timely manner. • Second, the quality of a patent is enhanced. • Third, duplicated work is avoided in the patent offices. The JPO started the PPH with several offices, including the USPTO, the U.K. Intellectual Property Office (UKIPO), KIPO, and the German Patent and Trademark Office GPTO). Patent Cooperation Treaty (PCT)9 applications are also eligible for PPH, and the Global Network of PPH is expanding. Thank you for your attention. 6 See Press Release, METI, Launch of a Program for the Early Start of Examination of Basic Applications for Priority (JP-FIRST) — Promoting International Work Sharing in Patent Examination (Dec. 28, 2007), available at http://www.meti.go.jp/english/newtopics/data/nBackIssue20071228_01.html. 7 Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, 13 U.S.T. 1, T.I.A.S. No. 4931, revised, July 14, 1967, 21 U.S.T. 1583, 423 U.N.T.S. 305, available at http://www.wipo.int/treaties/en/ip/paris/trtdocs_ o020. html. 8 For information on detailed procedures for applying the PPH pilot program before the JPO, see http://www.jpo. go.jp/ torikumi/t_torikumi/pdf/highway_pilot_program/1e.pdf. 9 Patent Cooperation Treaty, 28 U.S.T. 7645, 1160 U.N.T.S. 231, June 19, 1970, amended Sept. 28, 1979, modified Feb. 3, 1984, and Oct. 3, 2001 (as in force from Apr. 1, 2002), available at http://www.wipo.int/pct/en/texts/pdf/pct. pdf [hereinafter PCT].

PART E: PATENT LAW WORLD DEVELOPMENTS 457 PROF. ADELMAN: Thank you.

With that, Judge Asai.

Strict Scrutiny? IP High Court Of Japan—Judicial Review of the JPO Decisions Hon. Ken Asai*

Good morning. I am Ken Asai, Judge of the IP High Court of Japan. I am very happy to be at this distinguished international conference on IP law. This morning I would like to make a brief speech regarding an issue that seems to cause criticism of our court. That is, “the IP High Court’s judgments are too strict and not friendly to patent holders.” Just take a look at this graph [See all graphs at the end of this chapter]. Do you think the ratio of cancellations is too high? Ordinarily, in general, in the administrative cases the cancellation ratio is less than 20 percent. This is data regarding the one type of JPO decisions that I will mention later. In this type of case, approximately half of the JPO decisions were canceled. At this stage, I would like to explain our court’s jurisdiction. In Japan we have fifty district courts, eight high courts, and one Supreme Court. A high court acts as the second instance. The IP High Court is also a high court. Ordinarily, we are a high court and act as the second instance, dealing with appeals from district court decisions. But today’s topic is not about this type of suit. Under the Japanese Patent Act,10 the JPO panel has semi-judicial authority and can render many kinds of decisions prescribed by the Act. For this semi-judicial power of the JPO panel, only the IP High Court has jurisdiction on appeals from a JPO decision. This is shown in the right part of the figure. In this type of suit, the IP High Court acts as the first instance, like a district court. I will introduce the typical JPO decision that we are usually handle: refusal of a patent application, invalidation of a patent based on a motion, and dismissal of the motion to invalidate. • Refusal of a patent application: Where an examiner of the JPO refused a patent application, the applicant may request that the JPO panel cancel the examiner’s decision and grant the patent. But where the JPO panel affirmed the examiner’s decision of refusal, the applicant may appeal to the IP High Court. In this case, the plaintiff is the applicant and the defendant is the commissioner of the JPO. I will mention this type of case as “a refusal case.” • Invalidation of a patent: Under the Japanese Patent Act, any person may request that the JPO panel invalidate a patent. Where the JPO panel affirms the motion and invalidates the patent, the patent holder may appeal to the IP High Court. In this case, the plaintiff is the patent holder and the defendant is the requesting party. I will cite this type of case as “an invalidation case.” • Dismissal of a motion: Where the JPO panel dismissed a motion to invalidate a patent, the requesting party may appeal to the IP High Court. I will cite this type of case as “a motiondismissal case.” These data concern appeals of refusal cases. Please note that the IP High Court was established in 2005. The prior data are for the IP divisions of the Tokyo High Court. The average ratio of cancellations during 2003–2007 is 11.9 percent. * Judge, IP High Court, Tokyo, Japan. 10 Japan Patent Law, Law No. 121 of Apr. 13, 1959 (as amended), available at http://www.wipo.int/clea/docs_new/ pdf/ en/jp/jp006en.pdf.

458 CHAPTER V: PATENT LAW With regard to appeals of invalidation cases, the average ratio of cancellations during these five years is 7.5 percent. In these two types of cases, the total average ratio of cancellations during these five years is 10.1 percent. As you can see in the slide with which I began my presentation, regarding appeals of motiondismissal cases in comparison with refusal and invalidation cases, these data are quite peculiar. The average ratio of cancellations during these five years is as high as 48.5 percent, almost 50 percent. From these data, we can simply say that where the JPO said no (denied patentability), the IP High Court, in about 90 percent of cases, also said no. But where the JPO said yes, the IP High Court, in about 50 percent of cases, said no. This simple analysis is shown as a double circle. The circle of the court is small indeed. Based on this double circle, some people say the IP High Court adopts too strict a standard and is not friendly to patent holders. I think that this criticism is derived only from the data for motion-dismissal cases, and other factors are not considered. I would like to emphasize that there is “another yes” by the JPO. Every year more than 100,000 patents were granted and registered during these five years. The average number is approximately 120,000 per year. To the contrary, the IP High Court rendered only about 120 judgments per year — this is the average number — that decided the validity of a registered patent, as shown in “Statistics (JPO invalidated)” and “Statistics (JPO sustained).” I think that cases before us are for extremely selective patents, and it is difficult to decide the validity thereof. If there had been two JPO panels, they might have reached different conclusions. Such difficulty may cause the high ratio of different conclusions between the JPO and the IP High Court. Furthermore, the number of judgments that denied validity of a patent is also shown in this graph (seventy, ninety, fifty-one, seventy-three, eighty). The average number is about seventy judgments to 120,000 granted patents, a ratio of 0.06 percent. I think this is an almost meaningless number. Second, judicial review of the JPO decisions is ex post facto. If, for example, there is a logical mistake in the JPO decision, we have to cancel the decision. In other words, a judgment to cancel the JPO decision that sustained a patent does not always mean that the patent is invalid. If the patent is substantively valid, but where the JPO panel made a logical mistake in the decision, we have to cancel the decision. Third, under the Japanese Patent Act, the JPO panel may consider arguments that both parties do not plead and, moreover, the JPO panel may collect evidence on its own. I would like to believe that in almost all cases, this system works appropriately, but I am afraid that in a very small number of cases the system may incorrectly lead the JPO panel to sustain a patent. Of course, we do not have such ex officio powers. All we can do is to hear the case from both sides. I think that difference of a fact-finding and decision-making system — i.e. between the JPO and the IP High Court — is one of the reasons for the high ratio of cancellations. To answer the question “Does the IP High Court adopt a too strict standard?” my answer is, maybe no. As I mentioned, there are other reasons for the high ratio of cancellations in motiondismissal cases. What I would strongly like to say is that the average number of judgments that cancelled the JPO decision in motion-dismissal cases is too small, only sixteen per year. Considering the number of patents granted per year, 120,000, I think that small number has no statistical meaning. I am afraid that only the ratio, 50 percent, is over-emphasized and spread as propaganda. Thank you so much.

PART E: PATENT LAW WORLD DEVELOPMENTS 459

Cases Handled by the IP Court Civil cases relating to intellectual property

Suit against appeal/trial decision made by JPO

(Final instance)

(Final instance)

Supreme Court

Supreme Court

(Second instance)

(First instance)

Relevant high court with jurisdiction over the area where the court of the first instance is located

IP High Court

Cases handled by the district courts under the jurisdiction of the Tokyo High Court

Cases handled by the district courts under the jurisdiction of the high courts other than the Tokyo High Court

IP High Court - patent rights - Utility model rights - Design rights - Trademark rights

(First instance)

Tokyo/Osaka District Courts

Tokyo/Osaka District Courts or any district courts in Japan

Technological cases - Patent rights - Utility model rights - Rights of layout-designs of integrated circuits - Rights of the authors of a program work

Non-technological cases - design rights - Trademark rights - Copyrights (excluding rights of the authors of a program work) - Breeders´ rights - Infringements of business interests by acts of unfair competition

From IP High Court HP

460 CHAPTER V: PATENT LAW PROF. ADELMAN: We can proceed with our panelists. Why don’t we have Mr. Makino go first, because he is a practitioner who can give us his view? PROF. MAKINO: Good morning. My name is Kazuo Makino. I teach IP law in Japan at Omiya Law School. Simultaneously, I am a practicing attorney in Japan. I was previously working as in-house counsel for major large companies, like General Motors or Apple Computer. Thank you for giving me a wonderful opportunity to be here to speak at this wonderful conference, an excellent opportunity. Thank you also for wonderful presentations by Mr. Shinohara and Judge Asai — very informative and wonderful presentations. As you know, Japan started a national pro-patent strategy back in 2002. The IP High Court in Japan was established in accordance with such a national strategy. The Japan IP High Court looks very conservative in sustaining patent validity. Today we have obtained a clear answer from Judge Asai. Out of all the registered patents, the invalidation rate is still very low. Let me introduce my observations with some statistics. In total, the JPO board reviews approximately 130 cases per year (approximately 100 JPO Invalidated cases and approximately thirty JPO Sustained cases). This is based on Judge Asai’s presentation statistics. Out of 130 cases per year, the JPO said no — i.e. it invalided the patent — in approximately 100 cases per year, while in approximately ten cases the IP High Court disagreed and sustained the patent. So the court’s disagreement rate is less than 10 percent in this category. On the other hand, the JPO said yes (sustained patent validity) in approximately thirty cases per year. However, the court disagreed (cancelled) in ten-to-twenty cases; the disagreement rate is roughly 50 percent (ten-to-twenty cases divided by thirty cases). This 50 percent appears to be very high. However, I think that out of the overall cases that the JPO reviewed, the disagreement rate, especially the court invalidation rate, is very small. In other words, ten-to-twenty cases divided by 130 cases equals approximately 13 percent. From this standpoint, the disagreement between the JPO and the IP High Court is not so large, and is close to the average in administrative cases. This is my statistical observation. Statistics are very tricky sometimes, and we can make a different story with the same data. So we have to be very, very careful. However, if we look at this Judge Asai’s statistics from this aspect, the disagreement rate between JPO and IP High Court is not so high. PROF. ADELMAN: Well, do you disagree with Judge Asai or do you agree with him? PROF. MAKINO: I agree with Judge Asai’s observation. PROF. ADELMAN: So the court isn’t too tough on patents. PROF. MAKINO: Yes. That is my observation. PROF. ADELMAN: Now I want John Pegram to comment. Do you agree with Judge Asai? MR. PEGRAM: Yes, I do. The IP High Court in Japan is a fine model of experienced IP judges. But they have a rotation system. I would just say that the opportunity to look at the statistics really shows that the JPO is doing a good job. Because I agree with Judge Asai, if I may, I will just take a couple of minutes to talk about Mr. Shinohara’s presentation and the JPO. I consider Japan to have the leading patent office in the world. They have been making very focused progress in the last ten to fifteen years. They have been very user-sensitive and harmonization-sensitive. They have come forward with some very interesting proposals, some of which have really had legs, in terms of cooperation with other offices, particularly the Trilateral Offices. The Patent Prosecution Highway, in particular, is something that originated with the Japanese. It really has the opportunity to work on the Japan end. If you are going into Japan, they will give you acceleration without giving you the burden of explaining the prior art. You only have to give the prior art to them. Unfortunately, we don’t have that opportunity in the United States. When you try to come to the United States under the Prosecution Highway, you

PART E: PATENT LAW WORLD DEVELOPMENTS 461

still have the burden of an accelerated application, explaining the art, which you may not wish to do for litigation-related reasons. This is the first time I have heard — and I have been very active in keeping up with what is going on in Japan — about JP-FIRST. This seems to be a derivative of what had been proposed before from Japan, which was called the New Route. We didn’t hear the New Route today.11 JP-FIRST appears to be a unilateral use of the New Route. The New Route did not gain wide acceptance politically, in part because it was bypassing WIPO. It was focused on Paris Convention applications and using a PCT-like approach. It appears that what Japan is doing with JP-FIRST —– this is the first time I have seen it — is that they are going to be giving benefits both to Japanese applicants who do not want to use the PCT and also to other offices of a cooperative program. It will be very interesting to see how that progresses. Thank you very much. PROF. ADELMAN: Let’s now turn for a few minutes to Mr. Vermeij for his comments on the European Patent Office perspective. MR. VERMEIJ: Thank you very much. I will give some comments based on the presentation from Mr. Shinohara, a very good overview of work that we also share in our Trilateral meetings. We had just a strategic working group in Munich. We are looking forward to working together, especially when we are talking about workload. Reducing workload is very important for all of us. Some of these proposals to try to reduce workload are very interesting. On the other hand, I have to say that our Member States are getting lost in all the terminology and all the proposals that are currently on the table. We have Triway, New Route, PPH; and we talk about Share. So I find myself in the position, as I have to deliver a nice paper to our Member States in June, of having to explain where we are. Given the fact that we worked together in the Trilateral for twenty years, we are still in a trial-and-error process. This means that for a certain industry these routes are effective, they have some advantages. On the other hand, this is not the solution for our enormous backlogs. That is a frightening thought. A small comment on PPH. When you saw the slide on PPH, you missed the name “EPO” on the slide. That is because PPH is about an application that has been determined to be patentable in an office of first filing and then it qualifies for accelerated examination in the office of second filing. Given the fact that in Japan the examination phase is not in the very early stage, it doesn’t bring much to our office. In addition, the examination report we produce is not seen as proof that an application is patentable. Therefore, we are not working together in PPH with the Japanese Office. On the other hand, my personal view is that if for some industry this is beneficial, why not? The official situation is that we are currently embarking on a proposal to work together with the USPTO to see how it can work out. They are willing to consider our research report as a basis for PPH. That is where it stands from our viewpoint. Thank you very much. PROF. ADELMAN: Let’s throw it open to the audience for questions, comments. QUESTION [John Mills, Senior Patent Counsel, U.S. Navy, Patuxent River, MD]: Good morning. I was curious to know what the length of time of pendency is in one of the district courts listed. This is directed to Judge Asai. Perhaps he doesn’t know about district courts. But if not the district court, then what is the length of time of pendency of a case in your court? 11 See Japan Patent Office, Outline of the New Route Proposal for Applications Abroad (Nov. 2005), available at http://www.jpo.go.jp/torikumi/kokusai/kokusai3/pdf/3kyoku_200511_munich/file.pdf.

462 CHAPTER V: PATENT LAW JUDGE ASAI: We dispose of appeal cases from JPO decisions in, on average, 8.6 months. For infringement cases it is almost the same, 8.45 months. This is 2006 data. I’m sorry I don’t have data after that. PROF. ADELMAN: That’s pretty quick. QUESTIONER [Mr. Mills]: The question was based on recent commentary I had read that pendency of cases for infringement in the Japanese court system was rather lengthy, in fact so lengthy that often it was best to settle the case out of court. PROF. ADELMAN: I think that data is very old that you were looking at. Maybe when you were in high school. QUESTIONER [Mr. Mills]: More recent than that. PROF. ADELMAN: This is very modern data, 2006. Any other questions for our distinguished panel? We still have a couple minutes. Any comments from the panelists on pendency and on speed? This is rather quick and is a rather radical change from prior Japanese practice. MR. PEGRAM: Japanese court procedure, of course, is a very different procedure from what we experience in the United States. It is a series of hearings, which typically may be fifteen minutes or a half-an-hour, in which the judges receive written submissions. The judges say what they would like to do next and typically they may set another hearing date and say, come back with this evidence or that. It is much more on the civil law model, in terms of the judges running things; rather than the judge not becoming seriously involved until either the time of motions or at the pretrial hearing, as we do in the United States So the length of time of that the case is pending can depend, in part, on the motion practice and whether the judge feels that there is a need for more information in order to make an accurate decision. It will also depend upon the burden of the particular district court. The other thing I would mention — and perhaps Judge Asai can supplement this — is that Japanese patent cases typically have a three-judge panel, as distinguished from the single judge in U.S. district courts. I had the opportunity to take a visiting judge from Japan who was conducting a study of our jury system and our “rocket docket” courts to visit Judge Farnan in Delaware. When Judge Farnan explained to him what the scope of his authority was, the Japanese judge said, “I would like to be a U.S. district judge.” Perhaps you can supplement that with a little more about the procedure in a district court in Japan. JUDGE ASAI: Today this is a conference on IP law, so I explained the IP case situation in the High Court. I don’t have experience as a district court judge in the IP region. Typically, we have two preparatory hearings, and then we make a deliberation and make a document judgment. About three or four months later from the end of the second hearing, we have an oral argument hearing. Then, maybe two weeks later, we render the judgment. PROF. ADELMAN: Thank you. Let’s thank the panel.

CHAPTER VI

Trademark Law Part A: Trademark and Design Law Developments in the European Union European Commission’s Agenda, European Court of Justice, Court of First Instance, and OHIM Moderator PROF. MARSHALL LEAFFER

Indiana University School of Law (Bloomington, IN) Speakers DAVID KEELING

WILLIAM ROBINSON

Board of Appeal, Office of Harmonization for the Internal Market (OHIM) (Alicante)

Freshfields Bruckhaus Deringer (London)

HARRIE TEMMINK

Industrial Property Unit, DG Internal Market and Services, European Commission (Brussels) Panelists PROF. DAVID LLEWELYN

PROF. SPYROS MANIATIS

Kings College, London; External Director, IP Academy, Singapore

Queen Mary, University of London

PROF. LEAFFER: Let’s begin. This is Session VII, Trademark Law. Today’s subject is “Trademark and Design Law Developments in the European Union: European Commission’s Agenda, European Court of Justice, Court of First Instance, and OHIM.” We have a blue-ribbon panel today. I am not going to say too much. I am going to let these guys go at it.

464 CHAPTER VI: TRADEMARK LAW My name is Marshall Leaffer. I will be moderating the panel. I am going to basically let these people have their due. Our first speaker is David Keeling, Board of Appeal, OHIM in Alicante. He is going to speak about “Design Developments in the OHIM.” David, it’s all yours.

Trademark and Design Law Developments in OHIM David Keeling* I. COMMUNITY DESIGNS

As I’m sure you are all aware, next Tuesday is April Fools’ Day. It will also be the fifth birthday of the Registered Community Design, which came into being on April 1, 2003, seven years to the day after the Community Trademark became operative. I am not sure if it is just coincidence, but the European Union has this strange habit of setting up IP registration systems on April Fools’ Day. The basic regulation governing the Community Design is Regulation No. 6/2002 on Community Designs.1 It does two things. First, it creates a Registered Community Design (RCD), an IP right that you obtain through registration with the organization that I work for, the Office for Harmonization in the Internal Market (OHIM). The Regulation also provides for protection of designs throughout the European Union without any sort of registration, an Unregistered Community Design (UCD). The conditions for protectability and the scope for both the registered and the unregistered design right of protection are essentially the same. There are minor differences. The important thing to remember about the UCD is that it is very short-term. It comes into being automatically when you make available to the public a product that is different from everything that has gone before. It only lasts for three years. The RCD can last quite a bit longer, up to twenty-five years. Looking at filings of Community Trademarks per country of origin for the period April 1, 2003 through February 29, 2008, the United States has led the way in filing Community Trademarks from day one. The United States has filed more Community Trademark applications than any other country: When I say “the United States,” of course I mean companies based in the United States. Altogether, we have had about 80,000 applications for RCDs in these five years, for a total of over 300,000 designs. Remember you can file multiple applications. That is one of the attractive features of the system. In the field of design the situation is rather different. I have some figures here to show you what I mean. • Leading the way is Germany, which has filed 72,922 (24.02 percent) of the applications we have received so far. This may be quite surprising, because we do not normally think of Germany as a country of designers. • Italy is in second place, with 45,879 (14.98 percent). • The United States is in third place, quite a long way behind, at 26,860 (8.78 percent). One reason why I have come here today is to do a little bit of publicity for the RCD. It is all very well being in third place. You are getting a bronze medal. But since when has the United States ever been satisfied with bronze medals? It seems to me that possibly the Community design system is not sufficiently well known in the United States, and that is something I want to do something about today. * Board of Appeal, Office for Harmonization in the Internal Market (OHIM), Alicante, Spain. 1 Council Regulation 6/2002, Community Designs, 2002 O.J. (L 3) 1.

PART A: TRADEMARK AND DESIGN LAW DEVELOPMENTS IN THE EUROPEAN UNION 465

• France, 25,472 (8.53 percent). • The United Kingdom, 22,143 (7.22 percent). • Spain, 19,890 (6.56 percent). The definition of a “design” is found in Article 3 of Regulation 6/2002: “The appearance of the whole or a part of a product resulting from the features of, in particular, the lines, contours, colors, shape, texture and/or materials of the product itself and/or its ornamentation.” Basically, a design is the visual appearance of a product. I couldn’t put it in simpler terms. This of course raises a question: what is a “product?” The definition in Article 3 is: “Any industrial or handicraft item, including inter alia parts intended to be assembled into a complex product, packaging, get-up, graphic symbols and typographic typefaces, but excluding computer programs.” This definition means that a product can be just about anything, including one or two things that we do not normally think of as products. Even get-up is treated as a product, which I find rather surprising. I thought get-up was part of the appearance of a product, but, according to this definition, it can actually be a product. So can a graphic symbol and a typographic typeface. I was working on a case recently in which Microsoft registered a whole set of characters for the Korean alphabet. That, apparently, is also a product. Anything, except a computer program, can be a product, according to this definition. Computer programs, of course, have other forms of protection, in particular via the Software Directive.2 The requirements for protection: Must • be a design • have novelty (twelve-month grace period) • have individual character (twelve-month grace period) • be visible in normal use (if a component part) Must not • be dictated by the technical function of the product • be necessary for mechanical connection to other product • be contrary to public policy or morality

I could easily speak for about three hours about basic requirements for protection. In fact, I have ten minutes and forty-three seconds left, so I will be very brief and will not talk about all the requirements. I will focus on the first two, novelty and individual character. These two requirements overlap to a very large extent, in my opinion. A design is novel if it is not identical to any design that has previously been made available to the public. In assessing identity, you disregard immaterial details. You measure novelty by reference to what is known as the prior art, of course. Individual character is also measured by reference to the prior art. A design has individual character if the overall impression that it makes on the informed user is different from the overall impression made on the informed user by anything else that belongs to the prior art. As you can see, there is a lot of overlap between those two requirements. I ask you to bear in mind the twelve-month grace period that applies to both novelty and individual character. This is very important. What the legislation says, essentially, is that acts that have been done by the designer in the twelve months prior to filing are disregarded when it comes to assessing novelty and individual character. This has very important practical consequences. It means that you can design your product, you can get ready for launching it, you can advertise your product, you can in fact launch it, you can sell a million copies of it, in 2

Council Directive 91/250, Legal Protection of Computer Programs, 1991 O.J. (L 122) 42.

466 CHAPTER VI: TRADEMARK LAW the twelve months following the date when you first make it available to the public. Nothing that you do in those twelve months will destroy novelty. But do get your application in within those twelve months, because after that date it will no longer be possible; the design will not be novel. As for the duration of protection, the UCD is very short-term. It is protected for three years from the first disclosure to the public in the European Union. That is essentially intended for the fashion industry. The RCD can enjoy much longer protection. The RCD is protected for five years from the filing date, renewable up to a total term of twenty-five years. What protection do you get? You get the usual sort of protection that you would expect with a registered IP right. The right holder may prevent third parties using the design in six ways: making, offering, putting on the market, exporting, using, or stocking products in which the design is incorporated or to which it is applied. There is a curious little provision that broadens the scope of protection.3 It says that “the scope of protection includes any design which does not produce a different overall impression on the informed user.”4 What happens, in fact, is that we have exactly the same test to determine whether the design qualifies for protection in the first place and then to determine what level of protection the protected design gets. That is quite an interesting feature of this system. It is a non-examination system. This is one of its attractions, I believe. Basically, if you fill your application in properly, send it off to OHIM, and pay the relevant fee, as long as your design is a design, and as long as it is not obscene or blasphemous or anything like that, it will be registered. It will go on the register very quickly, in a matter of weeks rather than months. It is much faster than registering a Community Trademark. The important thing is that the Office does not check for novelty, individual character, technical necessity, must-fit, or any of the other substantive conditions of protectability. Of course, the consequence of that is that an awful lot of invalid designs get registered — that is inevitable with any non-examination system — which means, of course, that we need to have provisions providing for the possibility of declaring a registered design invalid. On this slide you have there all the conditions on which you can get a design invalidated. The grounds of invalidity include: • Not a design • Not new • No individual character • Dictated by technical necessity • Caught by “must-fit” exception • Not visible in normal use (component parts) • Contrary to public policy or morality • Right holder not entitled • Infringes a trade mark or copyright • Improper use of flags, emblems, etc. There are two types of invalidity procedure. You can either apply directly to the Invalidity Division of OHIM, or you can get the UCD declared invalid by the Community Design Court. If you are sued in an infringement action for infringing a design, you can raise a counterclaim that the design is invalid. Surprisingly, we have not actually had that many applications for invalidity. Out of 80,000 applications for RCDs, there have been only 400 applications for a declaration of invalidity. Of 3 4

Council Regulation 6/2002, art. 10, 2002 O.J. (L 3) 1, 7 (“Scope of protection”). Id., art. 10, ¶1.

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330 decisions, 200 invalidated the RCD and 130 upheld the RCD. So about half of one percent of designs are being challenged and a quarter of a percent are being invalidated. II. OHIM BOARD OF APPEALS CASES

In my remaining five minutes I will look at a few cases that have come before the OHIM Board of Appeals. Atria Yhtymä v. HK Ruokatalo5 concerned the registration of a pretty ordinary hamburger. We invalidated the RCD on the basis that it produced the same overall impression as the Fleury Michon Steak Haché de Jambon hamburger, which had been registered as a Community Trademark, a sort of figurative composite trademark. It is important to bear in mind that you do always have to prove lack of novelty or lack of individual character. It is no good just coming along to OHIM and saying, “That’s a plain, ordinary hamburger. It’s no different from thousands of other hamburgers.” You have to produce evidence. In this case that was very easy. They could just point to the Community Trademark Register. Fleury Michon’s earlier design had been registered as a trademark, which, of course, amounts to disclosure. A slightly more debatable case was Mars UK Ltd. v. Paragon Products, BV.6 Here we have the same result. The RCD dog chew had five prongs to it. The earlier design had four prongs to it. The Invalidity Division of OHIM said “not invalid, a different overall impression.” The Board of Appeal reversed that and said these two things produce the same overall impression. I think it is debatable. It could go either way, as, of course, is true in so many of these cases. Daka Research v. Ampel 247 is a fascinating case. The RCD underwater motive device is remarkably similar to the earlier design, except the handle is a little bit different. I used to think these things only existed in James Bond movies, by the way. To my absolute delight, I came across one on sale at London airport a couple of weeks ago. They cost about $500. This case is a classic example of self-destruction of novelty, because it is just an updating of the design holder’s product. They made the earlier design themselves. They updated it and then tried to get protection running again. Obviously, if we allowed that, protection could go forever. People just make minor alterations and claim that they had designed a new product. We invalidated that design on the ground that there were no substantial differences. Basically, there were some changes in the handle. We decided that was not enough; you have to look at the overall impression. PepsiCo v. Grupo Promer Mon-Graphic8 is the first OHIM Board of Appeal case that has gone to the Court of First Instance.9 It is an interesting case. I am not going to say a lot about it. It is rather complex. The products in question are promotional items for games that are given away to children with potato snacks or bubblegum. They are little plastic or metal disks, and they have pictures of Mickey Mouse and that sort of thing on them. All these decisions, by the way, are available on the OHIM Web site, http://oami.europa. eu. The sad thing is that not all of them are in English. The ones I am commentating on are in English, so you can look them up and read them. A lot of decisions, unfortunately, are in German and Italian, for the obvious reason that so many design registrations are coming from those countries. Case R-1214/2006-3, Atria Yhtymä v. HK Ruokatalo, OHIM Board of Appeal, Nov. 9, 2007. Case R-1391/2006-3, Mars UK Ltd. v. Paragon Prods., BV, OHIM Board of Appeal, Jan. 25, 2008. 7 Case R-196/2006-3, Daka Research v. Ampel 24, OHIM Board of Appeal, Nov. 22, 2006. 8 Case R-1001/2005-3, PepsiCo Inc. v. Grupo Promer Mon-Graphic SA, OHIM Board of Appeal, Oct. 27, 2006. 9 Case T-9/07, Grupo Promer Mon-Graphic SA v. OHIM—PepsiCo (Designs), 2007 O.J. (C 56) 34. 5 6

468 CHAPTER VI: TRADEMARK LAW III. PROCTER & GAMBLE v. RECKITT BENCKISER UK LTD.

In my remaining two minutes, I will talk about a judgment from the United Kingdom which I find a little bit alarming, Procter & Gamble v. Reckitt Benckiser UK Ltd.10 I have been going around telling people that they shouldn’t waste their money registering three-dimensional trademarks; they should register a Community design instead, because it is cheap, it is easy to obtain, and you get sufficient protection — in particular, against look-alike products, for example. This judgment may cause me to review my position on that. The RCD was Procter & Gamble’s product, FEBREZE Air Freshener. Just after that was launched — surprise, surprise — Reckitt Benckiser came along and launched its AIR WICK product. Procter & Gamble sued for infringement. In the High Court, Mr. Justice Lewison said these designs make the same overall impression on the informed user and declared that the Reckitt Benckiser product was an infringing product.11 That judgment was reversed by the Court of Appeal in a judgment given last October. The court decided that there are sufficient differences between those two air fresheners that they do not make the same overall impression on the informed user. Personally, I find that a little bit unfortunate. IV. CONCLUSION

I think, nonetheless, that the Registered Community Design system is an extremely attractive system. It is cheap — you get twenty-five years of protection for a mere 890 euros in the whole of the European Union. I think it is a system that is well worth using. I do invite you to consider it and recommend it to your clients, insofar as you are attorneys. Thank you very much. I have forty-two seconds left, and I’ll surprise everybody by finishing before that awful sound. Thank you. PROF. LEAFFER: Thank you very much, David. As Hugh says, you can never make it too short, but not a second too long. We have a few minutes for discussion. First, I will open it up to the panel. Does anybody have a comment or question? PROF. MANIATIS: I think perhaps the most controversial point is whether Germany is known for designs. I think there is a broad issue here. It appears that you have rights that could have a very wide scope of protection. You can get them without any real examination. So there is an issue that you can fill the market with too many rights, too many uncertain rights, and you could have too many conflicts. But perhaps your evidence from the invalidity cases shows that the users of the system take a much more nuanced approach. Perhaps they will make the system work effectively. Any views on that? What do you think? MR. KEELING: On what point exactly? PROF. MANIATIS: On whether the users of the system, the companies that use the design system, take a much more nuanced approach. Hence, they don’t challenge too many. MR. KEELING: Yes. That is a valid point. It did occur to me when I was looking at these figures that it is quite possible that there are a lot of invalid designs out there. In fact, I am absolutely certain that there are a lot of invalid designs on the register that are not being challenged. Procter & Gamble Co. v. Reckitt Benckiser (UK) Ltd., [2007] EWCA (Civ) 936 (Oct. 10, 2007). Procter & Gamble Co. v. Reckitt Benckiser (UK) Ltd., [2006] EWHC 3154 (Ch) (Lewison, J.), available at http://oami.europa.eu/pdf/design/cdcourts/Air_wirck.pdf 10 11

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There are many possible explanations. One explanation is that a lot of these things are just sitting there, not actually being used very much, not being invoked, in infringement proceedings in which case there is nothing for anyone to worry about really. Somebody is wasting a bit of money registering them, but nothing beyond that. The alternative explanation is that these invalid designs are in fact doing a great deal of harm. It is quite possible that threatening letters are being sent out, and people are capitulating and changing their products, taking their products off the market. I really do not know. It is impossible from our position to know that. As regards Germany, there is an interesting point that I think is worth mentioning. I think the Germans have cottoned on to the fact that there is no requirement of aesthetic merit in this system. There is no requirement of eye appeal or anything like that. To qualify for protection the design just has to look different from everything that has gone before. This means that it is a system that can be used for very banal, purely industrial products, very ordinary household items, not just limited to things that we think of in terms of design. I think that explains why we have had so many applications in Germany, and it is another reason why I think there should be more applications from the United States. PROF. LEAFFER: David Llewelyn, I know that you have something to say. PROF. LLEWELYN: As a fellow Brit, I am never quite sure how much of what David says is ironic or sarcastic. So when he says one of the attractions of the system is non-examination — I mean he is a brilliant salesman for OHIM, and I am sure he gets paid more if he gets more registrations of these designs. But the problem is that in the real world, as opposed to the world of Brussels and Alicante, these things really are becoming obstacles to free and fair competition. There are spurious claims made all the time. With my practicing lawyer hat on, every week you will get a letter from somebody making spurious claims. I will come on to trademarks a bit later and how outrageous it is becoming in that area. But design is yet another field for lawyers to throw around claims, which in practice the recipient finds very difficult to refute because the legislation is so unclear. And so it is far simpler for the small and medium-sized business to change the design and the unwarranted claims will go away. Is that a good thing for “Europe, Inc.,” or actually should we be thinking more of this system holistically, rather than merely “the more registrations we can get, the better the system is?” It is not a surprise that the English Court of Appeal case David has referred to was between two giants, Procter & Gamble and Reckitt Benckiser. Smaller entities could not afford the legal costs. PROF. LEAFFER: David, do you have a response to that? MR. KEELING: Yes, very briefly. That is very interesting. In my capacity as a well-known sympathizer with the victims of outrageous infringement actions, I have to say that I understand and agree with a lot of what David Llewelyn has said. In my capacity as the official OHIM salesman for the Registered Community Design, I will simply point out that you do need to find out about this system, you do need to understand the attractions, and you do need to consider the possibility of registering your own designs before somebody else gets in there and registers something that looks unpleasantly similar to the things that you are going to be making. So it cuts both ways. PROF. LEAFFER: Anybody on the panel have a point to make here? MR. ROBINSON: I was just going to ask a question, if I may. This is actually directed towards whether or not the Commission has done any evaluation on the design. There has been discussion at this conference for years about whether or not there was a need for a design at the Community level. I am wondering whether or not the time has already arrived, no doubt, to do the two-year or four-year review that the Commission generally does on this.

470 CHAPTER VI: TRADEMARK LAW MR. TEMMINK: As I will explain later, we are already doing an overall evaluation of the trademark systems in Europe. The Community Trademark Regulation became operational in 1996. As we just heard, the design system has only existed for five years. We have not yet undertaken an overall evaluation of the system, but I do not think that we will do so for the next two years or so. We think that if you have a new piece of legislation that introduces a new right, we should first give some time to develop the practice. Of course, we are aware of the fact that many consider that it is too easy to get a Registered Community Design, that it is too cheap, and that there is no examination. That is not news for us. But unless we have proof that the situation is alarming, we will not do anything from today to tomorrow. Of course, there may be examples out there of threatening letters, Community design “thickets,” but they have not reached the Commission, I must say. We hear it at conferences, but we do not have overall proof of alarming situations. Until then, I do not think we will act. I don’t know what the other panelists think about this approach, but we focus now on the trademark system for the time being. Then afterwards, obviously, let there be no mistake, we will evaluate the Community design system. PROF. LEAFFER: We have a little time here to ask the audience if anyone has a question or comment on the matter. Yes, Mark? QUESTION [Mark Davison, Monash University, Clayton, Australia]: I am just intrigued by this proposition of reviewing rights after they have been created. With the Database Directive,12 for example, the interim report suggested that the Database Directive wasn’t such a great idea, but it also pointed out that there’s now nothing that you can do about it.13 Similarly, if you create these design rights, which has already happened — let’s assume the point that David Llewelyn just made is correct — now what can you do about it, because you have created these rights, people have engaged in transaction costs. Undoing them is a very difficult thing. I am just wondering what is the process for deciding or evaluating the need for a right in the first place, rather than the process for evaluating whether the right was a good idea after it has been created, when it’s really very difficult to undo it. PROF. LEAFFER: Would someone on the panel like to take that? A very quick response. We just have a few seconds on that, very succinct. I think the question itself is quite significant and brings up the issue. Anybody? If not, we have to head on. I’d like to call to the podium William Robinson from Freshfields. He is going to speak on “The Court of Justice and Trademarks.”

The Court of Justice and Trademarks William Robinson* What I plan to do is to try to give a bit of an overview of the key cases, as far as I see them, from 2007 and try to pick up some themes that appear to me to be coming out of those cases. As I mentioned yesterday in the Plenary Session [see Chapter VII.A.2, infra this volume], there are about 150 cases on trademarks that were decided in 2007. Whereas when I started Council Directive 96/9, Database Directive, 1996 O.J. (L 77) 20 (EC). European Commission, DG Internal Market and Services Working Paper, First evaluation of Directive 96/9/EC on the legal protection of databases (Dec. 12, 2005), available at http://ec.europa.eu/internal_market/copyright/docs/ databases/ evaluation_report_en.pdf. * Freshfields Bruckhaus Deringer, London. 12 13

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doing this about nine years ago at this conference I could actually run through every single case, there is (now) a significant degree of selectivity going on. I am going to look at five different areas. After giving a little bit of statistics just to show you how the judicial architecture is working, I will discuss four cases, all of which are at the European Court of Justice (ECJ), and then look at a couple of areas where the Community trademark case law has been tweaked by the ECJ in respect of the operation of the Regulation. I. 2007 TRADEMARK CASE STATISTICS

First, some trademark case statistics for 2007: There were 88,250 applications to OHIM for Community trademarks, 68,078 registrations, and 1,952 appeals filed to the Boards of Appeal. The Court of First Instance (CFI) decided 143 cases. Twenty-two cases were decided at ECJ. Now, of course, this is not a straight continuum, this is a snapshot, but I think it gives you some idea of the number of cases being decided and, in particular, how few cases are actually getting all the way through the system. Again, here are just a few statistics to break down the types of marks that are going through the judicial bodies. The majority of cases are on word marks, which is unsurprising: sixty-five at the CFI and seven at the ECJ. What is surprising is the numbers for figurative marks: fiftysix cases have gone to the CFI and fourteen cases have gone to the ECJ. It’s in that area that there has been a tweak in 2007 in the case law. That is, regarding 3D shape marks, there have been nineteen cases to the CFI and one to the ECJ. II. BOEHRINGER INGELHEIM II

The first case that I want to look at is Boehringer Ingelheim II.14 It goes back to the great issue of repackaging and reboxing of pharmaceutical products — a never-ending debate, it seems, between the national courts and the ECJ. This is the second reference that went to the ECJ. I am sure most of you are familiar with this, and so I will be quick on the background. Essentially, the case turns on what is known as the “Bristol-Myers Squibb (BMS) conditions” as to whether or not it is legitimate to repackage, in this case, a pharmaceutical product, and whether or not the trademark owner can object to that reboxing or repackaging.15 The five BMS conditions are: (1) necessary in order to market the product; (2) cannot affect the original condition of the product; (3) clearly state name of manufacturer and importer; (4) presentation not liable to damage the reputation of the trademark; (5) importer gives notice and (on demand) a specimen to the trademark owner before sale. There were two references in Boehringer. Mr. Justice Laddie made a reference a few years ago.16 It went back to the national court. Following this reference, Mr. Justice Laddie found that both de-branding and co-branding infringed the claimant’s trademark rights. 14 Case C-348/04, Boehringer Ingelheim KG v. Swingward Ltd., 2007 E.C.R. I-3391 [hereinafter Boehringer Ingelheim II] (questions referred to the ECJ by the Court of Appeal (England and Wales), seeking further guidance on the effects of the judgment in Case C-143/00 (Feb. 28, 2000)). 15 Joined Cases C-427/93, 429/93 & 4336/93, Bristol-Myers Squibb v. Paranova AS, [1997] 1 C.M.L.R. 1151. 16 Glaxo Group Ltd. v. Dowelhurst Ltd.; Boehringer Ingelheim KG v. Dowelhurst Ltd.; Boehringer Ingelheim KG v Swingward Ltd.; Eli Lilly & Co v. Dowelhurst Ltd.; Glaxo Group Ltd. v. Swingward Ltd.; SmithKline Beecham Plc v. Dowelhurst Ltd., [2000] 2 CMLR 571, [2000] ETMR 415, [2000] FSR 529. Following his Feb. 28, 2000 judgment in the Dowelhurst cases, Mr. Justice Laddie referred a number of questions to the ECJ in relation to the “necessity” and “specific subject matter” tests. Case C-143/00, Boehringer Ingelheim v. Swingward Ltd. & Dowelhurst Ltd., 2002 E.C.R. I-3759 [Boehringer Ingelheim I] (holding that a parallel importer must fulfill all the BMS conditions even if the repackaging causes no harm to the specific subject matter of a trade mark; and that repackaging is necessary where effective access to the market is hindered as a result of strong resistance from a significant proportion of consumers to relabeled products). ...

472 CHAPTER VI: TRADEMARK LAW Both parties appealed to the Court of Appeal, which raised a series of questions regarding reboxing; whether “over-stickering” had to follow the same conditions; and thirdly, what on earth did the Court of Justice mean when it said that the importer had to give notice to the trademark owner? What happens if you don’t give notice? What happens if you do give notice and the trademark owner actually objects? As I mentioned, here are the three areas of questions that were referred to the ECJ — reboxing, over-stickering, and notice — getting into some of the difficult issues of burden of proof. Who is bearing the burden of proof in respect of these cases? In its April 2007 judgment, the ECJ and the Advocate General diverged in a number of places in this judgment: • The burden of proof in reboxing falls now squarely on the parallel importer, who has to prove that the conditions are satisfied, subject to a slight twist in respect of the second and fourth BMS conditions. The second condition is that reboxing cannot affect the original condition of the product. The fourth condition is that the presentation of the product in reboxed form should not be liable to damage the reputation. In those instances, there is a prima facie obligation on the parallel importer to put forward reasonable evidence to create a reasonable presumption that it has been satisfied, and then the burden reverses onto the trademark owner. • The one point I would flag here in respect of the judgment is that the ECJ said that both de-branding and co-branding are capable, in principle, of damaging the reputation of the trademark. That becomes important in the case going back to the national court. • In respect of over-stickering, the same conditions are now applicable. • In respect of notice, essentially it goes back to the national court as to what the appropriate remedy is if notice is either not given or is given insufficiently. This again is an indication of the ECJ pushing this back to the national court, but giving a little bit of guidance and saying that a financial remedy on the same basis as if the goods had been spurious, as opposed to being repackaged, would not itself be disproportionate. In other words, the playing field is wide open for national courts to take different views as to what the appropriate remedy is as a result of failure to give notice. The reason I think this case is particularly interesting is that it raises yet again the difficult relationship between national courts and the ECJ. As you see from the judgment, the ECJ gave broad guidance and referred a lot of the issues back to the national court. It came back to the national court, and Lord Justice Jacob, who takes a very particular view on some of these issues, decided that by referring the case with discretion to the national court on the law and, of course, the national court’s ability, itself — and only the national court — to determine the facts, he could essentially completely avoid part of this decision.17 In its judgment the ECJ held that: (1) all the BMS conditions apply to overstickering; (2) the requirement of necessity only applies to the fact of repackaging, not the manner of repackaging; (3) the requirement that the repackaging should not be damaging is not limited to cases where the repackaging is defective, of poor quality or untidy; (4) whether de-branding, co-branding or failure to identify the owner of the trade mark are damaging is a question of fact for the national courts; (5) the onus of proving that the repackaging complies with the BMS conditions lies with the parallel importer (who must supply a sample if requested) although the burden of proof can be reversed by providing evidence that “leads to the reasonable presumption that the condition has been fulfilled”; (6) it follows from the failure by the parallel trader to give notice of the repackaged product that the trade mark is infringed on any subsequent importation of the product; (7) it is for the national courts to address the sanctions for failure to give notice but they must not only be proportionate but also sufficiently effective and deterrent to ensure that Directive 89/104 is fully effective. Following the ECJ judgment, the cases went back before Mr. Justice Laddie, who gave his second judgment on Feb. 6, 2003. [2003] EWHC 110 (Ch) (Laddie J.). 17 With its order of June 17, 2004, the Court of Appeal referred questions to the ECJ concerning the following areas of continued uncertainty: (1) where the burden of proof should lie in relation to the BMS conditions; (2) whether the necessity test applies merely to the fact of repackaging or also to the manner of repackaging; (3) whether damage to the...

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So Lord Justice Jacob found that total rebranding does not fall within Article 5, the Trademark Directive, at all, on the principle that there is no use, and therefore there is no infringement. He got to that conclusion through a series of determinations of fact. Again, this case is somewhat similar to Arsenal v. Reed18 a few years ago, where the divisions between what is fact, what is law, and what is discretion to the national judge on the law, are all incredibly sensitive issues. This case, I think, is a good example of what is discussed at this conference pretty well every year, which is the difficult relationship between the national courts and the ECJ and how difficult it is for the ECJ, on the one hand, to give meaningful guidance, without actually getting into the specifics of the case, which would mean that it would be automatically overburdened. III. CÉLINE SARL v. CÉLINE SA

The next case is Céline SARL v. Céline SA, a Grand Chamber case of the ECJ.19 This case concerned whether or not registering a company name on the company register could be a trademark infringement where another company owns a trademark — in this case, in respect of clothes and shoes. Céline SA has an existing trademark and Céline SARL decided to register “Céline” as its company name. Céline SA sued Céline SARL for trademark infringement and unfair competition through use of the trademark and company name. There are two relevant provisions of the Trademark Directive: Article 5(1), “registered trademark proprietor may restrain the use of identical sign for similar goods or services”; and Article 6(1), which provides essentially an “own-name defense” where “in accordance with honest practices in industrial or commercial matters.” What does that mean? Advocate General Sharpston adopted a slightly curious approach in respect of the Article 6(1) own-name defense: there had to be “reasonable diligence” to investigate an existing trademark before you actually register your company name; and “honest practices” meant that there was “a duty to act fairly in relation to the legitimate interests of the trademark owner.” Advocate General Sharpston suggested that you should actually go back and ask the trademark owner what they think of this. Now let’s have a quick guess what the trademark owner is going to think of this. Advocate General Sharpston said, “Well, then you go back to 5(1) and you look at it under 5(1).” That approach, to my mind, wasn’t going to work, because it simply undermines Article 6 of all of its purpose. In its September 2007 judgment, the ECJ took a slightly different approach and I think came up with a good approach: there can be use as a trademark when you are registering it as a company name “where that use is limited to identifying a company”; it cannot be “use in relation to goods or services.” But there is such “use” if (1) that company name to goods, or (2) where a link is established between the company name and the goods. What the ECJ did — again, coming back to the relationship between the national court and the ECJ — is it reiterated some conditions that were previously set out in Anheuser-Busch20 as to the type of criteria that reputation of a trade mark encompasses anything, not just defective, poor quality or untidy repackaging or relabeling; (4) whether the BMS conditions apply to a product which has simply been over-stickered; (5) whether de-branding or co-branding are to be regarded as damaging; (6) whether failure by the parallel trader to give notice to the trade mark owner per se means that all products subsequently imported are infringing and if so what relief should be available. 18 See Arsenal Football League plc v. Matthew Reed, [2001] R.P.C. 922 (Laddie, J.) (finding no infringement); Case C-206/01, Arsenal Football Club PLC v. Reed, 2002 E.C.R. I-10273 (suggesting that only use that jeopardizes the essential function of a trade mark is an infringing use); Arsenal Football League plc v. Reed, [2003] E.W.C.A. Civ. 696 (May 21, 2003); [2003] E.T.M.R. 73 (C.A.) (on remand from ECJ) (reversing Laddie, J., and finding infringement), available at http://www.hmcourts-service.gov.uk/judgmentsfiles/j1751/arsenal_v_reed.htm. 19 Case C-17/06, Céline SARL v. Céline SA, 2007 E.C.R. I-7041 (Grand Chamber). 20 Case C-245/02, Anheuser-Busch Inc. v. Budĕjovický Budvar, 2004 E.C.R. I-10989.

474 CHAPTER VI: TRADEMARK LAW need to be taken into account by the national court in determining whether or not the defendant has acted fairly in relation to the legitimate interests of the trademark owner. Again, it gave this general guidance and pushed it back to the national court to decide. I think that must be a sensible approach in this area. IV. O2 BUBBLES

The next case, O2 Bubbles,21 is only at the stage of an Advocate General’s opinion,22 but I think it is interesting in respect of the relationship between the Trademark Directive and other Community directives. I mentioned yesterday in the plenary session the case of Promusicae,23 in which the relationship between trademarks and data protection was being considered by the ECJ. The O2 Bubbles case is an example where the ECJ is being asked to consider the relationship, on the one hand, between the Trademark Directive and, on the other hand, comparative advertising. Briefly, the facts of the case are that O2, a U.K. mobile phone operator, was the proprietor of U.K. and Community trademarks for the phrase “O2” and two pictorial marks depicting bubbles. Hutchinson 3G Limited ran a series of comparative advertisements in 2004 claiming its prepay service was cheaper than O2’s that featured the phrase “O2” and moving bubbles imagery. There was no dispute there. The provisions at issue are Article 5(1) of the Trademark Directive and Article 3(a) of the Comparative Advertising Directive.24 Article 3(a) set out four criteria that relate to trademark use: • It does not create confusion in the marketplace between the advertiser and a competitor or between the advertiser’s trade marks, trade names, other distinguishing marks, goods or services and those of a competitor; • It does not discredit or denigrate the trade marks, trade names, other distinguishing marks, goods, services, activities, or circumstances of a competitor; • It does not take unfair advantage of the reputation of a trade mark, trade name or other distinguishing marks of a competitor or of the designation of origin of competing products; and • It does not present goods or services as imitations or replicas of goods or services bearing a protected trade mark or trade name. Essentially, the opinion of Advocate General Mengozzi is that Article 3(a) of the Comparative Advertising Directive completely governs this field and there is no role at all for Article 5(1). That, of course, is a very different approach to the type of balancing act that was being done in the Promusicae case, excepting that it is a very different situation. But again, there is an interesting issue here about whether or not there is going to be a clear choice in favor of comparative advertising as against trademark rights.

21 Case C-533/06, O2 Holdings Ltd. & O2 (UK) Ltd. v. Hutchison 3G UK Ltd., [2006] EWHC 534 (Ch) (Jan. 31, 2008) (reference for a preliminary ruling under Article 234/EC from the Court of Appeal, Dec. 14, 2006 (England and Wales) (Civil Division)). 22 Subsequent to the Conference, the judgment of ECJ (First Chamber) was rendered on June 12, 2008, available at http:// eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62006J0533:EN:HTML. 23 Case C-275/06, Productores de Música de España (Promusicae) v. Telefónica de España SAU, 2008 ECJ EURLex LEXIS 625 (ECJ Jan. 29, 2008) (Judgment of the Court, Grand Chamber), available at http://eur-lex.europa.eu/ LexUri Serv/LexUriServ.do?uri=CELEX: 62006J0275:EN:HTML (reference for a preliminary ruling under Art. 234/ EC by the Juzgado de lo Mercantil No 5 de Madrid (Spain), June 13, 2006). 24 Council Directive 97/55, Amending Directive 84/450/EEC Concerning Misleading Advertising To Include Comparative Advertising, 1989 O.J. (L 40) 1.

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V. KAUL

Yesterday I mentioned the Kaul case.25 It is a very, very complex case of procedure. The judicial architecture is complex: examiner, Board of Appeal, Court of First Instance, ECJ. In 1996 an application was filed by Atlantic Richfield for the ARCOL trademark at OHIM. Kaul’s opposition on the basis of its CAPOL trademark was rejected by the examiner as no likelihood of confusion under Article 8(1)(b) of the Trademark Directive. Kaul appealed to the OHIM Board of Appeal, which ruled that further evidence was submitted out of time. Kaul appealed to the CFI, which annulled the Board’s decision, ruling that the evidence was filed in time. OHIM has appealed to the ECJ on a point of law. The theory is that you have a de novo review at the Board of Appeal, you then have a judicial review to the Court of First Instance, and then an appeal on a point of law to the ECJ. That is not quite how it has been working in practice. In practice, the CFI has taken a very liberal approach and has essentially retried the cases. Therefore, when a question came before the ECJ regarding whether or not the Board of Appeal can consider new evidence that is put before it and whether that evidence was in time, to my mind, the ECJ has taken the opportunity to give a steer to both the CFI and the Board of Appeal that is contrary to the rather strict approach it took in Baby-Dry, all the way back with the first case.26 The court is taking the approach that: (1) the Boards of Appeal should carry out a new, full merits examination, and may consider facts or evidence produced for the first time at appeal; (2) they have discretion under Article 74(2) to extend time for filing facts or evidence where the material submitted is likely to be relevant to the outcome of the opposition and the stage of proceedings and circumstances did not argue against such matters being taken into account; and (3) facts not submitted to the Opposition Division of the Board of Appeal could not be raised before the CFI. So the court is saying that there really should be a proper judicial review, rather than closer to a de novo hearing. Again, when you read the judgment, it doesn’t say that, but that, to me, is the implication of what the case is doing. VI. ECJ TWEAKING OF CASE LAW

I am going to wrap up with two examples of some the other cases where there have been tweaks to the case law. The first is in respect of 3D shape marks, where the ECJ is making it increasingly difficult to register 3D marks.27 The second is in respect of figurative marks, where there has been a slight tweak by the ECJ to say that, “When we said you had to do a global examination, we meant you had to do a global examination,” because the CFI had been sliding gently down the track of doing a somewhat less-than-global assessment of the cases.28 That is my attempt to try to pull out some of the themes of the case law for the last year. Thank you very much. 25 Case C-29/05 P, Kaul GmbH v. OHIM (Grand Chamber), available at http://oami.europa.eu/en/mark/aspects/ ecjcases.htm. 26 Case T-163/98, Procter & Gamble v. OHIM (Baby-Dry), 1999 E.C.R. II-2383. 27 See, e.g., Case T-460/05, Bang & Olufsen v. OHIM, 2007 ECJ CELEX LEXIS 650 (CFI, Third Chamber, Oct. 10, 2007) (3D shape of a loudspeaker), available at http://oami.europa.eu/EN/mark/aspects/pdf/JJ050460.pdf; Case C-238/06 P, Develey Holding GmbH & Co. Beteiligungs KG v. OHIM, 2007 E.C.R. I-9375 (shape of a plastic bottle); Case T-358/04, Georg Neuman GmbH v. OHIM, 2007 ECJ CELEX LEXIS 534 (CFI, First Chamber, Sept. 12, 2007) (shape of microphone head grille), available at http://oami.europa.eu/EN/mark/aspects/pdf/JT040358.pdf. 28 See, e.g., Case C-193/06 P, Société des Produits Nestlé SA v. OHIM, 2007 E.C.R. I-114, 2007 O.J. (C 269) 27; Case C-334/05 P, OHIM v. Shaker di L. Laudato & C. Sas., 2007 E.C.R. I-4529.

476 CHAPTER VI: TRADEMARK LAW PROF. LEAFFER: Let’s again open it up to the panel, and then we will turn to our audience. Comments, questions? PROF. MANIATIS: I agree that the Boehringer29 case shows that sometimes you have very stubborn national courts that hope that by keeping on asking the same questions in greater and greater detail at the end they will get the answers that they are looking for. It is clear that the ECJ cannot decide their cases, and can only give broad interpretative principles. I think if you look at Boehringer together with Kaul, it is clear that the ECJ is taking a step back. It wants to disentangle itself from considering facts. They should take a more strategic role, if you like, something similar to what the U.S. Supreme Court does. If you look at the statistics that William gave us, last year the ECJ had to decide twenty-two trademark cases. The Supreme Court has not looked at twenty-two cases in its entire life. On comparative advertising, I think the ECJ has consistently used the Comparative Advertising Directive to narrow the scope of trademark protection; and, on the other hand, used the Trademark Directive in order to expand the scope of the Comparative Advertising Directive and facilitate comparative advertising. On the two cases on shapes at the end, I think the Bang & Olufsen case30 perhaps shows why the Supreme Court was right in Wal-Mart.31 But really this is not a trademark. You should not protect it as a trademark unless there is evidence of distinctiveness acquired through use. Perhaps we should look again at Philips, where the ECJ appears to tell us that we should look for acquired distinctiveness when looking at product shapes.32 PROF. LEAFFER: Thank you, Spyros. David Llewelyn, a comment, question? PROF. LLEWELYN: How do you comment about this tidal wave of litigation? I think it is useful to look at it from different perspectives. Let me put on five different hats here. First hat: practicing lawyer. From this perspective it’s great, because there is no clarity on any issue after the ECJ has answered questions posed to it. Every piece of litigation has at least one plaintiff and one defendant. Every single question you are asked, you cannot say definitively what the answer is. So for practicing lawyers, it’s a great year for us. Second hat: writer of textbooks. It’s great. It means publishers say “We want a new edition, quicker, quicker.” But these days I think to myself that I know more and more about less and less. (That puts me in mind of Jim Slater’s definition of an expert: somebody who knows more and more about less and less until eventually they know everything about nothing.) So that’s from the point of view of a writer of textbooks. As an academic: Again it’s great. But I find these days that students are coming to me and saying, “But is it really that complicated? Isn’t this just about trademarks?” The answer is no, it is not really about trademarks anymore; it is about the whole area of unfair competition. So as a teacher, it is great. I keep getting asked by publishers to review proposals from authors about new areas, on trademark use, on dilution. So it’s great for academics. The publishers do not pay me for telling them whether they should publish these books, they just give me a copy of the book, so it’s self-perpetuating. I happen to also own some small businesses, however. Those businesses own trademarks. It is not good from the perspective of the owner of a small business because there is such dross going on the register, both in Alicante and in the United Kingdom. Let me give you two examples. 29 Case C-348/04, Boehringer Ingelheim KG v. Swingward Ltd., 2007 E.C.R. I-3391 [hereinafter Boehringer Ingelheim II]. 30 Case T-460/05, Bang & Olufsen. 31 Wal-Mart Stores Inc. v. Samara Bros. Inc., 529 U.S. 205 (2000). 32 Case C-299/99, Koninklijke Philips Elecs. NV v. Remington Consumer Prods. Ltd., 2002 E.C.R. I-5475.

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FAMILY FEAST is a registered trademark in the United Kingdom belonging to Kentucky Fried Chicken (KFC). It sent a letter before action to a pub in Yorkshire that had on a blackboard something on the lines of “Come this Sunday and enjoy your family feast.” So this little pub received this letter before action from KFC’s lawyers. What do they do? Do they change? Do they pay an expensive lawyer to advise them on this very complicated area that they have a defense? Do they rely on the entreaties of OHIM — “Oh, it doesn’t matter. You can challenge it. You’ve got a defense”? All that forgets, conveniently, that in order to find that out, you’ve got to pay money to a lawyer. No. They decide to go to the BBC and it’s all over the press, it’s on television, it’s on the radio. So I go on the radio and I say, “This is a mark that should not be on the register. It is a ‘Friday afternoon’ registration. The trouble is these days Friday afternoon is becoming every day of the week.” I get an outraged letter from the head of the Trademarks Registry saying: “How can you make such appalling, outrageous allegations? We comply with all our targets. Over the last three years, we have complied with our government target of getting at least 98.5 percent correct decisions.” By the way, I am not breaking any confidences by mentioning this letter because he copied it to the Law Society, the Chartered Institute of Patent Attorneys, the Institute of Trademark Attorneys, and various others. So I replied, because I had to, to his very serious charges, noting that these days I don’t know whether I’ve made a correct decision on anything in trademark law, so how he can say that he makes more than 98.5 percent correct decisions, I just don’t know. There is a serious point here. It is in a way the same point I made to David Keeling on registered designs: We are in a position where there are all these registered rights. And yes, there are the defenses. Yes, you can apply for the mark to be removed from the Register. But if you are the recipient of a letter from KFC, what do you do? You change; or in that case you go to the BBC. Another case: TIFFIN is registered for prepared meals. My client received a letter before action saying: “You are marketing Tiffin Indian meals in Tiffin containers.” To allow the registration of “Tiffin” (which people in India have been eating in the afternoon since the days of the Raj) is like allowing registration of “lunch” for prepared meals. The proprietor made outrageous allegations — dilution, all sorts of other allegations. Fortunately, my client was not prepared to be bullied and they were prepared to pay me to write a serious letter in response. And nothing further happened. But it is that type of thing that in the real world is out there to an increasing extent. I think the ECJ has not helped. I don’t think that it is the ECJ’s fault that they don’t help, because “rubbish in, rubbish out.” The legislation is very poorly drafted. It is now twenty years since the Directive was passed, in December of 1988. The fact that we, and Advocate General Mengozzi (in the O2 reference),33 are still saying, “This is actually a bit of a mess this area really, isn’t it? We’ve got Arsenal,34 we’ve got Opel35 — what on earth do those mean? We now have O2.” MR. ROBINSON: Dyson.36 PROF. LLEWELYN: And Dyson. So, with all due respect to the Commission and their legislative activities, it is a mess. It is a mess which, with my hat on as a member of the great British public, the European public, I have to say has gone too far in the direction of overreaching. 33 Opinion of Advocate General Mengozzi, Case C-533/06, O2 Holdings & O2 (UK), Jan. 31, 2008, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62006C0533:EN:HTML. 34 Case C-206/01, Arsenal Football Club PLC v. Reed, 2002 E.C.R. I-10273; see also discussion of the Arsenal case, supra note 16. 35 Case C-48/05, Adam Opel AG v. Autec, 2007 E.C.R. I-1017. 36 Case C-321/03, Dyson Ltd. v. Registrar of Trade Marks, 2007 E.C.R. I-687.

478 CHAPTER VI: TRADEMARK LAW As Lord Justice Jacobs said in the Intelmark case, “Trademark proprietors risk overreaching themselves.”37 I think that that overreaching is becoming something which we as consumers ought to be worried about. PROF. LEAFFER: Thank you, David. This is a wonderful polemic. You have given us a lot of food for thought that I think we are going to have to eat just a little later, because we are a little off-schedule. I would like to call to the podium Harrie Temmink, Industrial Property Unit, DG Internal Market and Services, European Commission in Brussels. He is going to talk about are legislative or other changes needed in trademarks or designs. So we might have somewhat of a heated discussion for a few minutes afterwards.

Are Legislative or Other Changes Needed in Trademarks or Designs? Harrie Temmink* Thank you very much. I see that I have almost fifteen minutes, but I don’t know whether I will need fifteen minutes. I would very much like to also give the floor to the audience, and perhaps even to David to comment on the need for legislative changes. Before we come to the legislation that you are referring to, let me start with the Trademark Directive38 and the Community Trademark Regulations.39 I. FEES

First of all, I would like to spend two minutes on the fees. One of the immediate legislative changes that the Commission is going to propose is a substantial reduction of the OHIM fees. The reason for that reduction is fairly simple to understand. We have an office in Alicante that is making extraordinary profits. At this very moment, there is an accumulated surplus on the bank in Alicante of almost 300 million euros, which is about $450 million. Why is there so much money on the bank in Alicante? First of all, because there is an increase in applications and registrations of, in particular, Community trademarks. Community designs only account for about 8 percent of the whole budget of the OHIM. There is more efficient management now than there was, let’s say, ten years ago, five years ago. There has been an introduction of IT tools, electronic filing, etc. Actually, the whole system becomes more efficient. All this has led to an accumulated surplus of about 300 million euros. The Commission now is going to propose a substantial reduction of the fees — I would say, about 40 percent — by the summer of this year, which means, in practice, that the price for a Community trademark registration, an ordinary application and registration, will fall from 1,600 euros nowadays to about 1,000 euros in the future — that is to say, if the Member States will agree with the proposal of the Commission. There are many Member States who are not so happy with the substantial reduction of the fees, because they consider that a Community 37 Intel Corp. Inc. v. CPM United Kingdom Ltd., [2007] EWCA (Civ) 431, ¶ 37 (Jacob, J.) (“Trade mark law is there to protect a proper system of competition, not to provide trade mark owners with overreaching rights which may obstruct trade.”), available at http://www.bailii.org/ew/cases/EWCA/Civ/2007/431.html. * Industrial Property Unit, DG Internal Market and Services, European Commission, Brussels. 38 Council Directive 89/104, Directive to Approximate the Laws of the Member States in Relation to Trademarks, 1989 O.J. (L 40) 1 (EEC) [hereinafter 1989 Community Trademark Directive], available at http://eur-lex.europa.eu/ LexUriServ/ site/en/consleg/1989/L/01989L0104-19911223-en.pdf. 39 Council Regulation 40/94, 1994 O.J. (L 11) 1.

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trademark that is too cheap will threaten the existence of the national trademark systems, which include, of course, the existence of national trademark offices. This proposal that the Commission is going to present sometime in the summer will be accompanied by an impact assessment in which we will explain that this threat is perhaps not as big as it seems. If you apply for a national trademark in the European Union, you will pay up to 500 euros. That’s the most expensive country — Hungary, I think it is — 500 to 550. So even if we were to reduce the fees to 1,000 euros, there is still a substantial difference between the two figures. Okay, that as an introduction. Now I have eleven minutes left to update you about the evaluation exercise that we are currently undertaking. II. COMMUNITY TRADEMARK DIRECTIVE AND REGULATION

As was said before, the Directive was adopted at the end of 1988, almost twenty years ago. The Regulation has been operational since 1996. That’s about ten years ago. In the meantime, there has never been an exhaustive and comprehensive evaluation of the trademark systems. I’m not referring to bits and pieces here and there. Of course, the Trademark Regulation was amended in 2005, but that was done, actually, without an overall evaluation of the trademark systems. This is an exercise that the Commission is launching right now. Let me explain a little bit more about the scope of that evaluation. This is not only about the way that OHIM is functioning. In general, OHIM is functioning very well, as far as the Commission is concerned. This is reflected, for example, in the User Satisfaction Survey that OHIM is carrying out on a permanent basis, which is already a fairly unique business that should be a best-practices model for other IP offices in the world. These surveys show that overall — and I’m not referring to some exceptions — the users of the system, both the proprietors and the representatives of the proprietors, the agents, are satisfied with the service that OHIM is providing. So this evaluation is not only about OHIM. It is also about the way that the trademark system functions in practice — and that is exactly what we were addressing before — what goes well and what goes wrong. What should be at the core of the evaluation, with a view of amending the existing legislation? It is a not an exercise just for the sake of evaluation. It is much more. We really intend, after the evaluation, to the need for amendments to the existing acquis, the existing legislation. The way that we are organizing this is perhaps also different than what most of you would expect from the Commission. In the past, it has been fairly usual that the Commission said, “We are going to study,” and then you launch a procurement procedure, a tender, with some terms of reference, and then one consultancy gets the contract. You pay the consultancy 500,000 euros, and they will make you a study. You will receive the study and you will say, “Thank you very much,” and it goes into the cupboard and will never get out again. That is not what we want. Of course, we will launch a study, complete with terms of reference and what have you. But that is only one part of the evaluation. Our true aim is to reach the users of the system and find out what they think about the trademark system in practice. That means that we are going to have bilateral meetings with user organizations, both the proprietors’ organizations and the organizations of agencies — and the organizations of lawyers. So hereby David is actually invited to come to the Commission and explain what he thinks is wrong — not only what is wrong, but also how we should improve the system. So far I have heard a lot of things about what is not good, but I have not heard so far — but maybe this is not the setting for that — what should be changed and how we should change that. It is not enough to have only one or two examples of things that go bad.

480 CHAPTER VI: TRADEMARK LAW That is also a novelty as far as the Commission is concerned. We in the Commission cannot make any new amendment of legislation or a proposal for new legislation without a sound impact assessment. That’s a very nasty issue, the impact assessment, because as operational services, actually, we depend on an independent impact assessment board that will really scrutinize and see whether we have been honest in our proposals or not. Such an impact assessment can only be based on sound evidence — sound evidence. That evidence should then come, of course, from contacts with our stakeholders and it should come from the study. As far as the stakeholders are concerned, for example, in the second half of this year, we are going to launch a survey for which we use an existing tool, which is called the European Business Test Panel, which is a simple database, so to speak, with 3,500 European enterprises, most of them SMEs, that are located all over Europe. We will pose them some questions: What do you think about the trademark system in Europe? Then perhaps one person says, “It’s appalling, because there are too many rights out there,” or whatever. But that is the way that we want to start the dialogue with our stakeholders, not only with big businesses, but in particular, I would say, with SMEs, because I think that in quantitative terms the most important users of trademark systems in Europe are the SMEs. So we want to reach out our hands to them and find out what they think should change. This is the envisaged approach. IV. STUDY AND EVALUATION PROPOSAL

Now let’s see what really should be a subject of study. I won’t go too much into detail. Perhaps that is more for the audience, actually, to come up with. • E-business is an interesting topic. It has not been mentioned yet. What are the existing limitations for e-business? I’m absolutely convinced that in the future any application should be done by the Internet, by electronic means. • The fee arrangements. Of course, we will have in the short term a substantial reduction. But what about the existing fee system? There are many fees that perhaps could be abolished. Or is the price of a trademark getting too low, perhaps? I personally don’t think so. It is not about the price for a trademark; it is more about the quality of the trademark in practice. But perhaps others have different views on that. • Enhanced cooperation, which is more a matter of governance, cooperation between the OHIM and national offices. As I said, there is a big bag of money out there in Alicante. If we have a reduction of fees, what will happen in the future is that this surplus will not accumulate more; there will not be more surplus. But what are we going to do with the existing surplus? That sounds like a very luxurious position, but there is a lot of politics involved here, I can assure you. Sometimes it’s easier not to have money than to have money, even if it sounds a bit strange. We have to find ways, actually, to spend that money. One option would be to give it to the Community budget. But, of course, the trademark owners would not be happy with that, because they would say, “It’s our money. We paid for it in the past.” Another option would be to create a financial instrument and, for instance, finance projects in the fight against counterfeiting. Perhaps we could help the national offices in modernizing themselves in the way that OHIM has done, by providing them with more electronic tools, by having better access to existing databases, which is, as far as I’m concerned, very important. Everyone should know where trademarks are registered and what trademarks are registered. OHIM is actively working in this field and is doing a good job, together with Member States, to have a sort of pan-European

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database of trademarks — Community and national trademarks, of course — so that it would be easier for anyone to find out whether a trademark has already been registered. I see that I have one minute, thirty-two seconds. Of course, I could easily continue, but I think it’s better now to give the audience some time to comment on what I have just said. Thank you very much for your attention. PROF. LEAFFER: Thank you, Harrie. That’s very gracious of you. And also thank you for the invitation — it’s not just to David? MR. TEMMINK: It’s not just to David, no. PROF. LEAFFER: I just wanted to make that clear. We’re all invited. Okay. MR. TEMMINK: Academics in general. PROF. LEAFFER: Absolutely. We might just take you up on that. We turn to commentary here. William, did you have something to say concerning this? MR. ROBINSON: I just wanted to add a sixth perspective to David’s five, which is the perspective from the ECJ as to how it has had to deal with the legislation over the last few years. David Keeling yesterday mentioned some of the early cases. For me those were very much the Phase I cases, where the ECJ was trying to work out the problems with the legislation. For example, why didn’t they talk about exhaustion in international or national terms — thank you — in a hospital pass from the legislature to the ECJ? Secondly, why did you say the likelihood of confusion includes the likelihood of association? Well of course, we all know why, because it was a political fix between the Benelux countries and others. But again, that was another hospital pass for the ECJ. So the first few years of cases were spent trying to sort out some of the inherent problems within the legislation itself. To my mind, we are now in Phase II, where the ECJ is retreating somewhat and leaving it to the Member States. The flip side of that is, of course, you still have some somewhat stubborn judges in the Member States who are then using their various devices to take trademark law within the framework of the Directive in particular directions. But that is something that the ECJ is essentially acknowledging and accepting and saying, “Well, we need to give more hands-off guidance and let you get on with applying the law in your national context.” Yes, you will have different approaches in different Member States, but that is the tradeoff in, to my mind, this second phase of the ECJ case law. Part of the consequences of that is that you can end up with situations of uncertainty, such as that that David has outlined. But the flip side is that you go back to the ECJ deciding every single case, which just can’t be right. PROF. LEAFFER: Thank you, William. I believe some of our panelists have comments. PROF. MANIATIS: I am giving a seminar next week in Alicante. I am asking for a much higher fee now that there is so much money. It is ridiculous. They are paying us rubbish. There is a point I want to make about efficient management and the quality of the trademarks. I think that more money needs to be spent to allow examiners to examine properly applications. Efficient management does not mean that you look at an application and you decide in five minutes that this is registerable or not. I think that there is a niche there that needs to be explored further. MR. KEELING: I am glad to hear that, Spyros. Harrie invited David Llewelyn to Brussels to explain what is wrong with trademark law. I would be very glad if you would invite me to Brussels to tell you one or two things about management.

482 CHAPTER VI: TRADEMARK LAW I should point out that I am now removing my hat as the official OHIM salesman for the Registered Community Design and I am donning my hat as a very independent member of an OHIM Board of Appeal. You say OHIM management is more efficient than it used to be. Well, you have probably been talking to the President of OHIM. If he went to Brussels and told you that the management was less efficient than it used to be, I would be a bit surprised. You really need to talk to a few more people. There are different views about what efficient management is and different views about what modern management should be. It is true that we have far more trademark applications now than we had in the early years and we actually have fewer staff than we had then. Now, if you think that is proof of more efficient management, fair enough. These are facts. But there is an alternative point of view, and it is basically the one that Spyros has been saying, namely focus on the quality of examination. I see things from a slightly different perspective than the perspective of the President of OHIM. I am seeing things as a member of the Board of Appeal and I am seeing the work that has been done by the examiners and the people the Opposition Divisions. I have a great deal of respect for the individuals involved. I see myself to some extent as the defender of them. I think, on the whole, they do try to do a very good job. The problem is that they just do not have enough time. And, there is this dreadful word “targets” that I heard mentioned early on, which provoked some derisive laughter. This is the root of the problem. The examiners are under intense pressure to produce more in less time. The result is a fall in quality. And, above all, what I am seeing is a lack of consistency in the examination procedure. I see, frankly, evidence of arbitrariness when it comes to, for example, registration of threedimensional trademarks — I did a talk on this a few months ago, and so I went into things in some depth. As a member of the Board of Appeal, of course, I only see the ones that get refused, and I might have the impression the Office is doing a good job. But I decided to look at the three dimensional trademarks that had been accepted. Of course, those decisions are never contested, so I don’t have to deal with them on appeal. I was amazed at the total arbitrariness. There is also a lot of arbitrariness when it comes to assessing likelihood of confusion. You can toss a coin, frankly. You don’t know. As David Llewelyn pointed out, you don’t know what a correct decision is nowadays. That is not entirely the fault of OHIM. It is very much the fault of the Court of First Instance and the European Court of Justice, which basically have made a mess of trademark law. But the Office itself must do more to harmonize its practice, to be more consistent, and to provide a better-quality examination. That, in my opinion, is at least as important as reducing the fees. MR. TEMMINK: Obviously, I am speaking to the President of OHIM, but also to, for example, members of the Boards of Appeal. My preferred counterparts here are simply the users of the system. Obviously, we hear these concerns all over the place. What I did was explain why there is such a surplus. Of course, if I say efficient management, it is simply that the cost/benefit situation has improved, to put it in economic terms. PROF. LEAFFER: Harrie, you got the last word. Our time is up. MR. TEMMINK: I think I have made my point. PROF. LEAFFER: You certainly have. Thank you so much. A wonderful panel.

CHAPTER VI

Trademark Law Part B: The Right of Publicity Developments in the United States and Europe European Commission’s Agenda, European Court of Justice, Court of First Instance, and OHIM Moderator JOHN MICHAEL RICHARDSON

Arbitrator and Mediator (New York) Speakers PROF. GILLIAN BLACK

JONATHAN FABER

University of Edinburgh

President & CEO, Luminary Group (Shelbyville)

PROF. MARSHALL LEAFFER

Indiana University School of Law (Bloomington, IN) Panelist PROF. LIONEL BENTLY

Cambridge University

MR. RICHARDSON: Good morning, ladies and gentlemen. The subject of this session is “The Right of Publicity:1 Developments in the United States and Europe.” We have three speakers: Jonathan Faber from Luminary Group in Indianapolis; Professor Marshall Leaffer from the Indiana University School of Law; and Professor Gillian Black from 1 The term “right of publicity” was coined by Judge Jerome Frank in Haelan Laboratories, Inc. v. Topps Chewing Gum, Inc., 202 F.2d 866 (2d Cir. 1953). See generally J. Thomas McCarthy, The Rights of Publicity and Privacy 1:3, 1:4 (2nd ed. rev. Mar. 2002); Diane Leenheer Zimmerman, “Who Put the Right in the Right of Publicity?”, 9 DePaulLCA J. Art & Ent. L. 35, 36–37 (1998).

484 CHAPTER VI: TRADEMARK LAW the University of Edinburgh. Lionel Bently is our commentator. There will be ten minutes for each speaker and then fifteen minutes at the end for Lionel and discussion with the audience and panelists. We will be looking at human rights, individual identity and personality, privacy, property, contracts, statutory IP rights, argument as to preemption of the field, the domicile, the length of the life (and, increasingly, the length of the death) of celebrities, with the legislators most recently giving dead people postmortem legislation. There is no time in eternity, but dead celebrities probably enjoy best their first seventy years or so, under the laws of some states in the United States.2 Along the way, there has always been great pleasure in reading the dissents of Judge Kozinski in the Ninth Circuit,3 and I suspect we will have some more of those. I will ask Jonathan to start.

The Evolution Continues: Recent Right of Publicity Legislation and Litigation Jonathan Faber* I. BASIC RIGHT OF PUBLICITY PRINCIPLES

The right of publicity can be defined as the right to control the commercial use of one’s identity. The key concepts of this definition are: (1) control (policy justification underlying doctrine); (2) commercial use (exemptions? limitations?); (3) identity (what is the reach of identity?). The right of publicity is a distinct member of the intellectual property family, with its own policy rationales, sources of authority, and fascinating collection of case law. The basic right of publicity principles: • While related to the right of privacy, the right of publicity is generally regarded as a property right, not a privacy right, and certainly by the year 2008 we can agree that those are distinct interests. • Every individual possesses the right of publicity. • Because it is a property right, it survives death. It is freely transferable and divisible during life or after death. • Most U.S. jurisdictions recognize a postmortem right of publicity. Nineteen states have enacted right-of-publicity statutes, and the majority position is that it would be recognized by common law in most other jurisdictions in the United States.4 2 Lea Goldman & David M. Ewalt (eds.), “Top-Earning Dead Celebrities”, Forbes, Oct. 29, 2007, available at http://www. forbes.com/2007/10/29/dead-celebrity-earning-biz-media-deadcelebs07_cz_lg_1029celeb_land.html; see also infra note 4. See generally Peter L. Felcher & Edward L. Rubin; “The Descendibility of the Right of Publicity: Is There Commercial Life after Death?”, 89 Yale L.J. 1125 (1980). 3 See, e.g., Wendt v. Host Int’l, Inc., 125 F.3d 806 (9th Cir. 1997), reh’g denied, 197 F.3d 1284 (1999) (Kozinski, J., dissenting, arguing that copyright holder’s right to exploit the characters played by plaintiff actors should preempt their state publicity rights); White v. Samsung Elecs. Am., Inc., 971 F.2d 1395 (1992) (Kozinski, J., dissenting) (holding that California common law protects plaintiff’s “identity” when the state’s courts had not interpreted it as broadly). * President and CEO, Luminary Group, Shelbyville. 4 State right of publicity statutes: Cal. Civ. Code § 3344 (prohibits unauthorized commercial use of name, voice, signature, photograph, or likeness of living persons); Cal. Civ. Code § 3344.1, The Astaire Celebrity Image Protection Act (provides for a right that continues for seventy years after the death of the personality); Fla. Stat. § 540.08 (prohibits unauthorized publication or use for commercial or advertising purposes of the name or likeness of any person; right continues for forty years after death); Ill. Rev. Stat. Ch. 765 §§ 1075/1 et seq. (each individual is recognized as having...

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The standard for infringement of right of publicity is identifiability (as opposed to falsity or likelihood of confusion in a trademark context). The reach of identity: The “trifecta” of name, image, and likeness, but also gestures, mannerisms, statistics, nicknames, band names, phone numbers, pen names, jersey numbers, character roles, birth names, musical styling, and distinctive appearances. Some of these are articulated in statutes, others via case law. We end up with a fascinating, and often inconsistent, line of cases coming from the different jurisdictions that are deciding cases that come before any given court. You have states like Indiana, for instance, that recognize the postmortem right of publicity for 100 years.5 Then you have, by contrast, Tennessee’s “Elvis law,” which recognizes the rights basically in perpetuity, as long as there is no interruption in commercial use.6 II. RECENT ACTIVITY SHAPING THE EVOLUTION OF RIGHT OF PUBLICITY

We have seen in recent times a fair amount of development both on the litigation front and in the legislation. a right in controlling whether and how to use their identity for commercial purposes; right continues for fifty years after death); Ind. Code § 32-36 (prohibits unauthorized “commercial use” of a personality’s name, voice, signature, photograph, image, likeness, distinctive appearance, gestures or mannerisms, with several exceptions listed, e.g., literary works, musical compositions, fine art; right continues for 100 years after death); Ky. Rev. Stat. § 391.170 (prohibits unauthorized commercial use of the name or likeness of a “person who is a public figure”; right continues for fifty years after death); Mass. Gen. Laws Ann. Ch. 214, § 3A (prohibits unauthorized use of name, portrait, or picture of a person for advertising or trade purposes; no rights after death); Neb. Rev. Stat. § 20-2002 (prohibits exploitation of a natural person’s name, picture, portrait, or personality for advertising or commercial purposes, as an invasion of privacy; no rights after death); Nev. Rev. Stat. §§ 597.770–810 (prohibits unauthorized commercial use of any person’s name, voice, signature, photograph, or likeness during life; continues for fifty years after death); N.Y. Civ. Rights Law §§ 50, 51 (prohibits unauthorized use for advertising or trade purposes of the name, portrait, or picture of any living person; no rights after death); Ohio Rev. Code Ann. §§ 2471.01 et seq. (prohibits the unauthorized use of “any aspect of an individual’s persona” for commercial purposes during life and sixty years after death); Okla. Stat. tit. 12, §§ 1448, 1449 (prohibits unauthorized use of another’s name, voice, signature, photograph, or likeness, in any manner, on or in products, merchandise, or goods for the purposes of advertising or selling; continues for 100 years after death); Pa. Cons. Stat. tit. 42, § 8316 (prohibits unauthorized use of name or likeness); R.I. Gen. Laws §§ 9-1-28 to 9-1-28.1(a)(2) (prohibits unauthorized use of any person’s name, portrait, or picture for advertising or trade purposes; no rights after death); Tenn. Code Ann. §§ 47-25-1102, -1103, -1104, -1105, -1106, -1107 (prohibits unauthorized use of an individual’s name, photograph, or likeness in any medium for the purposes of advertising, fund raising, or solicitation of donations or purchases; continues for ten years after death); Tex. Prop. Code Ann. §26.001 et seq. (prohibits the unauthorized use of a deceased individual’s name, voice, signature, photograph, or likeness in any manner, including commercial and advertising uses; continues for fifty years after death; strangely, the law is written to specifically address a deceased individual’s rights but does not apply to living individuals); Utah Code Ann. §§ 45-3-1 et seq. (prohibits unauthorized commercial use of an individual’s personal identity in a way that expresses or implies approval or endorsement of a product or subject matter; no rights after death; § 769-407 (misdemeanor)); Va. Code § 8.01–40 (prohibits unauthorized use of a persons name, portrait, or picture for advertising or trade purposes; continues for twenty years after death; § 18, 2-216.1 (misdemeanor)); Wash. Rev. Code §§ 63.60.010 et seq. (recognizes that every individual or personality has a property right in the use of their name, voice, signature, photograph, or likeness; law distinguishes between an Individual (natural person) and a Personality (any individual whose “publicity” has commercial value); rights of an Individual continue after death for ten years; rights of a Personality continue for seventy-five years after death); Wis. Stat. § 895.50(2)(b) (prohibits unauthorized use for advertising or trade purposes of the name, portrait, or picture of any living person; no rights after death). Eleven states recognize the right to publicity in common law only: Alabama, Arizona, Connecticut, Georgia, Hawaii, Maine, Michigan, Minnesota, Missouri, New Jersey, Oregon. Links to right-of-publicity statutes in every state are available at http://www.ncsl.org/programs/ lis/privacy/publicity04.htm. 5 Ind. Code § 32-36, supra note 4. 6 Tenn. Code Ann. § 47-25-1102–107 (“Elvis law”), supra note 4; see Tennessee ex rel. Elvis Presley Int’l Mem’l Found. v. Crowell, 733 S.W.2d 89, 97, 99 (Tenn. Ct. App. 1987) (holding that Tennessee common law recognizes a postmortem right of publicity, overruling a 1980 Sixth Circuit Court of Appeals decision).

486 CHAPTER VI: TRADEMARK LAW A. Legislative Developments With respect to legislation, it has been evolving very rapidly. The company that I was the president of for quite a number of years, CMG Worldwide, was at ground zero essentially, filing a Marilyn Monroe lawsuit in Indiana, which quickly was removed to California and New York.7 The idea was that by filing the claim in Indiana, there would be the ability to avail the Marilyn Monroe estate of the protections of the Indiana statute.8 But by the time the cases were removed to both California and New York, a lot of other conflicting principles came into play.9 To be honest with you, the Marilyn Monroe estate has not fared very well.10 Even as recently as two weeks ago, the United States District Court for the Central District of California basically said that the estate would be judicially estopped from claiming California as her domicile, because her will was probated in New York and, therefore, the presumption was that New York was her domicile.11 In 1962, when Marilyn Monroe passed away, there was no right of publicity that would pass into her estate. In the wake of these decisions saying that Marilyn Monroe has no right of publicity, there has been an effort to amend the legislation. Obviously, if Marilyn’s domicile could be found to be in California, that is going to be a more favorable result with respect to postmortem right-of-publicity recognition. The March 17 ruling was to the effect that the estate would be judicially estopped from claiming California. I do not think that is necessarily a foregone conclusion. There are some good arguments that California was where she intended to have her domicile. As we all know, as lawyers, essentially it comes down to where you intend to have your permanent home. A lot of celebrities live in multiple locations, which confuses the issue somewhat. But it also gives the lawyers something to argue over. 1. New York In New York this spring, the legislature will be looking at a provision to allow for seventyyear postmortem recognition of these rights and to make that retroactive.12 In summary, the proposed legislation would provide: 7 See CMG Worldwide, Inc. v. Shaw Family Archives, No. 05 Civ. 0423, 2005 U.S. Dist. LEXIS 42493 (S.D. Ind. Mar. 25, 2006) (transferring Indiana action to S.D.N.Y.); Shaw Family Archives Ltd. v. CMG Worldwide, Inc., No. 05 Civ. 3939, 2006 U.S. Dist. LEXIS 96162 (S.D.N.Y. July 6, 2006) (memorandum order staying decision); Milton Greene Archives, Inc. v. CMG Worldwide, Inc., No. 05-CV-2200, 2008 WL 655604 (C.D. Cal. May 14, 2007). 8 See Ind. Code 32-36-1-16 to 18, supra note 4; Cal. Civ. Code 3344.1(b)–(d), supra note 4. 9 At the time of Monroe’s death in 1962, postmortem rights of publicity were not recognized in New York, California, or Indiana. California did not recognize postmortem publicity rights until 1984; New York does not recognize postmortem publicity rights at all; and Indiana did not recognize postmortem publicity rights until 1994. 10 Shaw Family Archives Ltd. v. CMG Worldwide, Inc., 486 F. Supp. 2d 309 (S.D.N.Y. 2007) (holding that the California right-of-publicity statute enacted in 1985, did not allow the right of publicity to be transferred by the will of the celebrity who died prior to the enactment of the statute); see also Milton Greene Archives, Inc. v. CMG Worldwide, Inc., No. 05-CV-2200, 2008 WL 655604 (C.D. Cal. May 14, 2007). 11 Milton H. Greene Archives, Inc. v. CMG Worldwide, Inc., No. 05-CV-2200, 2008 WL 1922980 (C.D. Cal. Mar. 17, 2008) (the United States District Court for the Central District of California granted a motion for reconsideration concerning its earlier January 7, 2008 order, which had found that plaintiffs were not estopped from claiming that Marilyn Monroe died a California domiciliary and that California’s posthumous right of publicity could be applicable), opinion amended and superceded, 568 F. Supp. 2d 1152 (2008) (holding that plaintiffs were judicially estopped from asserting that Monroe was domiciled in California, and California’s posthumous right of publicity was not applicable). 12 The proposed Bill A088366, which, if enacted, would take effect immediately, would make it unlawful to use, for purposes of advertising or trade, the “portrait, name, voice, signature or picture” of any person who died on or after January 1, 1938 without the written permission of that person’s heirs or estate. It would retroactively grant these publicity rights “to the deceased person before such person’s death” and the rights would last in perpetuity. A summary of A088366 and further information available at http://assembly.state.ny.us/leg/?bn=A08836.

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• Seventy years postmortem recognition from January 1, 2008. • Specific recognition of First Amendment concerns. • Exemptions for a play, book, magazine, newspaper, musical composition, motion picture, radio or television program, other audio-visual work, single and original work of art, work of political or newsworthy value, or an advertisement or commercial announcement for any of these works. • First-sale exemption. • Other specifically articulated exceptions and exemptions. This legislation is reportedly “blessed” by the Motion Picture Association of America (MPAA), a vocal source of opposition to similar efforts in the past. I do not know what effect this would have on the Marilyn Monroe litigation, since the litigation came first, but if this new law is passed, it would certainly be helpful for anyone sympathetic to that side. 2. California In California, SB 771, which was signed into law by Governor Arnold Schwarzenegger in 2007, clarifies that a deceased personality’s right of publicity is freely descendible by means of testamentary instructions executed before or after January 1, 1985. I think this is more of a clarification than new law.13 The law explicitly states that the rights recognized are retroactive, including for those personalities who died before January 1, 1985, the effective date of California’s postmortem right-of-publicity statute (formerly S. 990, now S. 3344.1). The law recognizes a postmortem term of protection for seventy years from date of death. Prior to SB 771, the law was interpreted as not permitting publicity rights to pass to beneficiaries if the celebrity died before 1985.14 The new law is intended to abrogate the summary judgment orders entered in the federal case involving Marilyn Monroe. A comment in the Milton Greene case suggests that state legislatures could reverse the result legislatively: “The court reaches this conclusion with some reluctance… . [N]othing in this order prevents legislatures from enacting right of publicity statutes so as to vest the right of publicity directly in the residuary beneficiaries of deceased personalities’ estates or their successors-in-interest.”15 3. Arizona Arizona passed a right of publicity statute in 2007, by Senate Bill 1014.16 Interestingly enough, it only provides a statutory right of publicity for military personnel. Presumably, this was 13 SB 771, ch. 439, Act to Amend Section 3344.1 of the Civil Code, Relating to Deceased Personalities, available at http://info.sen.ca.gov/pub/07-08/bill/sen/sb_0751-0800/sb_771_cfa_20070711_171049_asm_floor.html. 14 Cal. Civ. Code § 3344.1, The Astaire Celebrity Image Protection Act, extended the personality rights for a celebrity to seventy years after death. Previously, the California Supreme Court held that Bela Lugosi’s personality rights could not pass to his heirs. Lugosi v. Universal Pictures, 603 P.2d 425 (Cal. 1979). In this decision, preceding (and precipitating) the Legislature’s enactment of Section 990, the California Supreme Court held that rights of publicity were not descendible in California. Bela Lugosi’s heirs, sued to enjoin and recover profits from Universal Pictures for licensing Lugosi’s name and image on merchandise reprising Lugosi’s title role in the 1930 film, “Dracula.” The California Supreme Court faced the question whether Bela Lugosi’s film contracts with Universal included a grant of merchandising rights in his portrayal of Count Dracula, and the descendibility of any such rights. Adopting the opinion of Justice Roth for the Court of Appeal, Second Appellate District, the court held that the right to exploit one’s name and likeness is personal to the artist and must be exercised, if at all, by him during his lifetime. Lugosi, 603 P.2d at 431. 15 Milton Greene Archives, No. 05-CV-2200, 2008 WL 655604, at *36. 16 Ariz. Rev. Stat. §§ 13-3726 & 12-761 (right of publicity; unauthorized use of the name, portrait or picture of a soldier), available at http://www.azleg.gov/FormatDocument.asp?inDoc=/legtext/48leg/1R/laws/0227.htm; see also Frazier v. Boomsma, 84 U.S.P.Q.2d (BNA) 1779 (D. Ariz. 2007) (antiwar messages on T-shirts).

488 CHAPTER VI: TRADEMARK LAW born out of the tragedy surrounding the death of Pat Tillman, who put his NFL career with the Arizona Cardinals on hold to join the U.S. Army. He was killed by “friendly fire” in Afghanistan. The statute has no express expiration. The enumerated people who can enforce the postmortem right include the soldier’s legally designated representative, spouse, parents, children, or grand-children. Thus, it cuts off with grandchildren. The statute includes all of the usual exemptions and exceptions, plus one for use of an image in which the soldier is not facially identifiable, and one for use in relation to a monument or memorial. “Soldier” is defined as any active duty member or former member or the armed forces of the United States, including any member who was killed in the line of duty. 4. Indiana In March 2006 an effort was made to amend Indiana’s Right of Publicity Act (I.C. 32-361-(1-20)). House Bill 1353 was introduced by an attorney defending a claim brought by the heirs of the infamous bank robber from the 1930s, John Dillinger.17 The idea was that maybe Indiana’s law shouldn’t give a valuable property right to someone who is famous for the wrong reasons. The proposed language was to function in a similar capacity as “Son of Sam” statutes (preventing financial benefit as a result of crimes committed).18 Indiana already has a Son of Sam statute.19 The proposed language read: “A person’s heirs, assigns, or estate may not claim a property interest in the right of publicity of a person if the publicity is related in whole or in part to the person’s involvement in a state or federal criminal offense.” This actually would strip personalities of their right of publicity based on mere “involvement” in a criminal offense, including civil rights leaders like Martin Luther King Jr. and Rosa Parks, who refused to give up her seat on a bus; and athletes like Brett Favre and Pete Rose, who bet on the outcome of baseball games. I think you quickly can see that this low-threshold standard would be very difficult to apply. Faber stopped the amendment from passing on the day it was to be voted into law. Prior to stopping it, Faber argued that the standard for stripping a person of his or her right of publicity under the Indiana law must be based on actual conviction of a violent criminal offense. 5. Connecticut Connecticut is considering right-of-publicity legislation.20 Actors Paul Newman, Christopher Plummer, and Charles Grodin, Connecticut residents, have lobbied the Legislature for a statutory right of publicity. They expressed concern that technology has made it possible to access their films, images, and voices, and to use that material to produce another product 17 See Phillips v. Scalf, 778 N.E.2d 480 (Ind. Ct. App. 2003) (holding the operators of Dillinger’s restaurant violated the right of publicity of Jeffrey G. Scalf, the grandnephew of John Dillinger in using without authorization Dillinger’s name, image, and likeness). 18 See federal “Son of Sam” statute, Order of Special Forfeiture, 18 U.S.C. § 3681 (Lexis 2000), available at http://law. onecle.com/uscode/18/3681.html. States that have active Son of Sam statutes include: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Montana, Mississippi, Montana, Nebraska, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Virginia, Washington, West Virginia, Wisconsin, Wyoming. 19 Ind. Code Ann. §§ 5-2 to 6.3-3 (1982), supra note 4. 20 An Act Concerning the Right to Privacy and Artistic Integrity, Senate and House of Representatives in General Assembly convened. See Posting by William Patry to http://williampatry.blogspot.com/2006/03/paul-newman-andfair-use.html (Mar. 30, 2006 9:43AM) (noting that the proposed legislation in 2006 was shelved).

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which they know nothing about. “We are suddenly cloned into something we’re not,” Plummer said. “We are robbed of our individuality, and our life’s work is tarnished.”21 In summary, the proposed right of publicity legislation includes: • Statement of purpose: to protect from infringement by others an individual’s right in the use of his or her name, voice, distinctive mannerisms and gestures, signature, photograph or likeness and to protect the artistic integrity of an individual’s performance. • A deceased individual shall include, without limitation, anyone who has died within ten years prior to January 1, 2008. • The current version does not contain a postmortem duration. Prior versions provided seventy years. This may be an oversight. • The current version reaches back ten years from date of enactment, but this provision at the end of Section 3(a) likely belongs in Section 1. • Section 6(6) states that a use is exempted for a “literary work, theatrical work, musical composition, film, radio, online or television program, or magazine article when the use does not accurately or falsely represent that the individual has performed, created or endorsed the work or a part thereof.” • Section 6(8)(B) states that a use is exempted for “promotional material or an advertisement for a news reporting or entertainment medium for work that is exempt pursuant to his section and that … (B) does not convey or reasonably suggest that the individual endorses the news reporting or entertainment medium unless it is established that the owners of employees had knowledge of the unauthorized use of the individual’s name, voice, signature, photograph or likeness, as prohibited therein.” Query: Is “medium” confusing if the intention is to address an ad for an entertainment work that does not suggest that the person endorses the “work,” not the “medium?” Is “suggest” or “endorses” problematic? Is it an attempt to remove the exemption for ads if the ad suggests that the person in the performance “endorses” the performance? • Section 6(9) states that a use is exempted for “the use of an individual’s name to truthfully identify the individual as the author of a written work or the performer of a recorded performance under circumstances in which the written work or recorded performance is otherwise rightfully reproduced, exhibited or broadcast.” Query: Does this require that the work or performance is “rightfully reproduced?” If so, what does “rightfully” mean? B. Litigation On the litigation front, there is all kinds of activity. 1. Diana, Princess of Wales A lot of it is born out of the Diana, Princess of Wales Memorial Fund v. Franklin Mint Co. case, which turned on the issue of domicile; that is, whether U.K. law applied to a U.S. case involving infringement occurring in the United States.22 We see that issue coming up again with respect to Marilyn Monroe, as I mentioned earlier. 21 Susan Haigh, Actors Back Bill that Protects their Likenesses, Boston.com News, Mar. 24, 2006, http:// www.boston.com/news/local/connecticut/articles/2006/03/24/movie_stars_backing_bill_that_protects_their_ liknesses/. 22 120 F. Supp. 2d 880 (C.D. Cal. 2000); Cairns v. Franklin Mint Co., 292 F.3d 1139 (9th Cir. 2002) (affirming three lower court decisions dismissing the lawsuit filed against The Franklin Mint by the Diana, Princess of Wales Memorial Fund and Princess Diana’s Estate, which had unsuccessfully challenged the Mint’s right to market Princess Diana collectibles).

490 CHAPTER VI: TRADEMARK LAW Under California’s old Section 990, the court was obligated to follow California’s choiceof-law provision (Section 946). Because the Princess was a domiciliary of England, the court found that the plaintiff did not have any publicity rights to assert in the first place. The Memorial Fund appealed three holdings: (1) reinstatement of postmortem right of publicity based on Amended 3344.1; (2) summary judgment against Lanham Act/false endorsement claim; (3) attorney’s fees. Question: How significant is it that Diana never objected to Franklin Mint’s products during her lifetime? The Fund argued that the new language in 3344.1(n) was a choice-of-law provision in itself. This was rejected based on language and the legislative history. The court held that the default rule for property choice of law is Section 946: since it is the default, 3344.1 does not have to reference Section 946 explicitly for Section 946 to apply. 2. Jimi Hendrix In the Experience Hendrix, LLC and Authentic Hendrix, LLC v. The James Marshall Hendrix Foundation case in the State of Washington, two sides of the Jimi Hendrix family were fighting against each other.23 Ruling on the Motion for Summary Judgment on April 15, 2005, the court ruled that New York law would apply due to Hendrix being domiciled in New York, therefore following the line established in the Franklin Mint/Diana, Princess of Wales case. I almost wish I could go to them and say, “Listen, don’t work this out in a court of law, because you are basically cannibalizing each other’s rights.” I do not think that the end result good for either the plaintiff or the defendant in this particular case. There has also been an effort to revise the Washington statute with respect to retroactivity as well. Companies like Getty and Corbus were behind the effort to change Washington’s position. 3. O.J. Simpson We have also seen some very fascinating developments with right of publicity concerning O.J. Simpson. There was an effort to have O.J. Simpson’s publicity rights to his own likeness, name, and persona assigned to Fred Goldman to satisfy the approximately $33.5 million judgment in the civil wrongful death judgment that the Goldman family won. With interest, it is substantially more. It certainly was a novel concept. In fact, I was asked to consult on that matter. I had my reservations about it. After ruling tentatively in favor of O.J. Simpson, Santa Monica Superior Court Judge Linda Lefkowitz later issued a final ruling rejecting Goldman’s request. She decided that even though publicity rights and privacy rights are distinct, there was concern that granting the motion would violate Simpson’s right to privacy and take the right of publicity into dangerous ground. To have decided otherwise would have been tantamount to forcing his fifty-nine-year-old client into “involuntary servitude” to the Goldmans, according to Simpson’s attorney. By granting Goldman’s motion, the court would be giving him the theoretical right to change Simpson’s name and “disparage his image on billboards across the country.” Simpson’s court papers stated, “This is absurd.” 23 Experience Hendrix LLC v. James Marshall Hendrix Found., No. C03-3462Z, 2005 U.S. Dist. LEXIS 27533 (W.D. Wash. Nov. 4, 2005) (finding that father Al Hendrix had no right of publicity to assign to the plaintiffs/appellants because no posthumous right of publicity existed in New York at the time of Mr. Hendrix’s death), aff’d, 240 F. App’x 739 (9th Cir. 2007).

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Around the same time that case was ongoing, O.J. Simpson announced plans for a TV interview and a book in which he discusses how he would have committed the slayings of his ex-wife and her friend “if I did it.” The two-part television interview, titled “O.J. Simpson: If I Did It, Here’s How It Happened,” aired on Fox TV. The interview, conducted with book publisher Judith Regan, aired days before Simpson’s new book, If I Did It, was scheduled to go on sale. The book “hypothetically describes how the murders would have been committed,” the network said. The book is published by ReganBooks, an imprint of HarperCollins Publishers, run by Regan. HarperCollins and Fox are units of News Corporation. In August 2007 the Goldman family made a deal to publish this book under the new title If I Did It: Confessions of the Killer. The original manuscript was left intact in its entirety, but with commentary inserted throughout. The book was released on September 13, 2007. Rights for the book were transferred to the Goldman family, who will receive 90 percent of the profits as part of their settlement. The family’s lawyers announced intentions to pursue new publishing, film, or TV deals in order to receive the $33.5 million awarded to them in the civil case. Fred Goldman sued Simpson’s shell company, Lorraine Brooks Associates, for the publishing rights after it filed for bankruptcy. 4. Major League Baseball In CBC Distribution and Marketing, Inc. v. Major League Baseball Advanced Media, LP and Major League Baseball Players’ Association,24 the issue was whether CBC’s use of player names and statistics in fantasy games violated the players’ rights of publicity. Major League Baseball Advanced Media (MLBAM) argued that it owned exclusive rights to license player names for use in fantasy contests by virtue of an agreement made with the Major League Baseball Players’ Association (MLBPA) in January 2005. CBC argued that player names and statistics were public domain and could be used by anyone, much as box scores are printed for free in newspapers and on Web sites every day. The court held that “the undisputed facts establish that the players do not have a right of publicity in their names and playing records as used in CBC’s fantasy games and that CBC has not violated the players’ claimed right of publicity. The court finds further that the undisputed facts establish the names and playing records of Major League baseball players as used in CBC’s fantasy games are not copyrightable and, therefore, federal copyright law does not preempt the players’ claimed right of publicity.”25 Judge Medler granted CBC’s motion for summary judgment and denied motions for summary judgment filed by MLBAM and the MLBPA. The judge also dismissed all counterclaims filed by MLBAM and the MLBPA. MLBAM and MLBPA filed a petition for a writ of certiorari to the U.S. Supreme Court, seeking to overturn the appeals court decision. MR. RICHARDSON: Professor Marshall Leaffer is next.

I just should add that it would be interesting if New York follows the lead of other states, because outside the University Club there is a hotdog stand with pictures of Winston Churchill and Joseph Stalin with various recommendations for eating.

24 25

443 F. Supp. 2d 1077 (E.D. Mo. 2006), aff’d, 505 F.3d 818 (8th Cir. 2007), cert. denied, 128 S. Ct. 2872 (2008) Id. at 15.

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Copyright Preemption and the Right of Publicity Prof. Marshall Leaffer* I. INTRODUCTION

Jonathan Faber has given you a comprehensive overview of the right of publicity, a rapidly changing, complex body of law, and the most recent of our intellectual property rights. The subject is complex because the right of publicity is recognized in various ways in the majority of the fifty states — sometimes statutorily, sometimes in common law, and sometimes both.26 When the state law covers the same ground as federal copyright law, the chance that the state law will conflict with the policies of federal law is omnipresent.27 When this occurs, federal copyright law should preempt — render null — the state right of publicity claim. My contention is that the right often interferes with federal copyright law, and that, when this occurs, the courts should favor preemption, and the state right of publicity should give way to federal copyright.28 You can imagine that one of Jonathan’s celebrity client’s images is placed in a photograph. The photographer, let’s say, owns the copyright and wants to sell the photograph. The celebrity says, “You can’t do that. Even though you enjoy copyright in the photograph. I will assert my right of publicity because you are commercially exploiting my persona and identity.”29 Such claims play havoc not just with copyright law but with commercial expectations of the parties. So how do we reconcile the tension so created in applying federal preemption under the Copyright Law? Copyright must preempt the right-of-publicity law in those instances when the right of publicity substantially interferes with the rights of copyright. And federal copyright should dominate in close cases. The right of publicity overlaps the rights conferred by copyright for obvious reasons. In most instances, an individual’s identity is fixed in graphic pictorial or sculptural work, his * Indiana University School of Law, Bloomington, IN. 26 See supra note 4. 27 Several major legal organizations and associations, including the International Trademark Association (INTA) and the American Bar Association (ABA), and leading commentators, including Professor Thomas McCarthy, have urged the adoption of a federal right of publicity statute. The push for a federal right of publicity goes back to at least 1994, when the Board of Directors of INTA undertook to examine whether the Lanham Act should be amended to address the right of publicity. On March 3, 1998, the Right of Publicity Subcommittee of the Issues and Policy Committee of INTA requested that INTA’s Board of Directors adopt a resolution calling for the introduction of legislation in the U.S. Congress to create a federal right of publicity that would preempt all state and common law. The proposed statute would have been descendible and transferable for a fixed term after death, and would have exempted from liability uses that constituted fair use, that were protected under the First Amendment or that were otherwise uses in connection with news, biography, history, fiction, commentary and parody. The ABA has led the way in drafting proposed legislation in the form of a series of proposed amendments to the Lanham Act. ABA Section of Intellectual Property Law, Committee on Federal Trademark Legislation, Proposed Federal Right of Publicity Act, § 3, 2001–2002 Annual Report, available at http://www.abanet.org/intelprop/annualreport04/con tent/01-02/ COMMITTEE%20NO%20201.pdf. 28 See, e.g., Wendt v. Host Int’l, Inc., 197 F.3d 1284, 1286 (9th Cir. 1999) (denial of motion for rehearing) (Kozinski, J., dissenting) (arguing that copyright holder’s right to exploit the characters played by plaintiff actors should preempt their state publicity rights); Baltimore Orioles, Inc. v. Major League Baseball Players Ass’n, 805 F.2d 663, 676–79 (7th Cir. 1986) (holding that baseball club’s copyright in game telecast preempted players’ right of publicity in their athletic performances). Cf. Midler v. Ford Motor Co., 849 F.2d 460, 462 (9th Cir. 1988) (holding that federal copyright protection for sound recordings did not preempt plaintiff’s state publicity right to prevent unauthorized use of soundalike singer); see also Schuyler M. Moore, “Putting the Brakes on the Right of Publicity”, 9 UCLA Ent. L. Rev. 45, 55–56 (2001) (arguing copyright should not preempt publicity rights because they protect different interests). 29 See Comedy III Prods., Inc. v. Gary Saderup, Inc., 106 Cal. Rptr. 2d 126 (2001).

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voice in a music work or sound recording, or his persona in an audiovisual work or motion picture, all of which fall within the subject matter of copyright. Moreover, the rights conferred by state publicity rights resemble those conferred by federal copyright law. The tension created by state publicity rights presents the thorniest questions in three recurring patterns, which I plan to explore in the following discussion: • You find it when photographs of celebrities, as I mentioned, are embodied in copyrighted works.30 • You find it in imitations of distinctive singing styles, such as imitations of Bette Midler31 or Tom Waits.32 • You find it in performances embodied in dramatic work involving fictional characters.33 In these instances, the photographed celebrity, the singer, and the performer attempt to trump the rights of the copyright owner by asserting state right of publicity. As in most instances involving federal preemption, there are no easy answers to how to strike the balance between state law and federal copyright. In the short time that I have, I will to present a couple of guidelines, illustrated by three cases that pose recurring difficulties when federal copyright should preempt the right of publicity. I believe that these three cases got it right. Unfortunately, a number of other cases have gotten it wrong. Ideally, I would like to discuss those as well but we simply don’t have time for that. II. OVERVIEW OF STATUTORY AND CONSTITUTIONAL PREEMPTION

In the United States our method of reconciling state law that interferes with copyright law has been codified in Section 301 of Copyright Act.34 To preempt state law the statute provides three criteria: (1) It must be fixed in a tangible medium of expression. (2) It must come within the subject of copyright under Sections 102 and 103. (3) Right granted by the state law must be equivalent to one of the exclusive rights conferred by the Act under Section 106.35 30 See Haelan Labs., Inc. v. Topps Chewing Gum, Inc., 202 F.2d 866, 868 (2d Cir. 1953); Toney v. L’Oreal USA, Inc., 406 F.3d 905 (7th Cir. 2005) (holding that Illinois’ right of publicity statute was not preempted by the Copyright Act). See generally McCarthy, supra note 1, § 5:41. 31 Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir. 1988) (holding that federal copyright protection for sound recordings did not preempt plaintiff’s state publicity right to prevent unauthorized use of sound-alike singer). 32 Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir. 1992). 33 See generally McCarthy, supra note 1, § 4:45. A prerequisite for a claim of right of publicity is that the person’s name or likeness was actually used. See Stanford v. Caesars Entm’t, Inc., 430 F. Supp. 2d (W.D. Tenn. 2006); DeClemente v. Columbia Pictures Indus. Inc., 860 F. Supp. 30, 52–53 (E.D.N.Y. 1994) (rejecting claim of right of publicity where no reasonable jury could find that the plaintiff’s public personality as the “Karate Kid” was so notorious that the public identified plaintiff exclusively with this persona). In Pesina v. Midway Mfg. Co., 948 F. Supp. 40 (N.D. Ill. 1996), the plaintiff asserted that his likeness was used without permission in a home version of a video game; court rejected the right of publicity claim on the ground that plaintiff’s likeness had been extensively altered prior to being incorporated into the game and was thus not recognizable; further, the court rejected plaintiff’s claim that his right of publicity was invaded by defendant’s use of a character that was allegedly based on the plaintiff. The court noted that to prevail, the plaintiff would have had to show that his identity was inextricably intertwined in the public mind with the cartoon character, a showing that was not made. Id. 34 17 U.S.C. § 301 Preemption with respect to other laws: (a) On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by [17 U.S.C. § 106] in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by [17 U.S.C. § §102 and 103], whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State. 35 See, e.g., Downing v. Abercrombie & Fitch, 265 F.3d 994, 1003–04 (9th Cir. 2001).

494 CHAPTER VI: TRADEMARK LAW If these three criteria are met, the state law is preempted, and the state law is rendered unenforceable. Section 301 was a centerpiece of the 1976 Act. Its overriding purpose was to establish uniformity and certainty to federal copyright law. Since passage of the 1976 Act, the courts have decided dozens of preemption cases applying the standards set forth in Section 301.36 This body of preemption case law has fallen far short in supporting the values of certainty and uniformity that Congress envisioned in passing Section 301. The legislative history stated that “The declaration of this principle in section 301 is intended to be stated in the clearest and most unequivocal language possible, so as to foreclose any conceivable misinterpretation … and to avoid the development of any vague borderline between State and Federal protection.”37 Unfortunately, an uncomfortable number of these cases are essentially unintelligible, undermining the laudable intentions of the Congress to produce clarity and certainty in the law. Before Congress passed the 1976 Act, the courts applied preemption under the Constitution. Constitutional preemption is based on the Supremacy Clause.38 Under the Constitution, if the state law interferes substantially with the federal law, the state law again is preempted and unenforceable. It was largely to render bright-line substance to the “vague” contours of constitutional preemption that Congress passed Section 301. I will now turn to three recent cases that illustrate the recurring problem areas concerning the preemption of publicity rights. In each instance, as I have mentioned, the court resolved the preemption issue correctly. III. FOCUS ON SEVERAL RECENT CASES

A. Non-Preemption: Identity in Photo The first case I would like to discuss — one that arrived at the proper result — is Toney v. L’Oréal USA, Inc.,39 a case regarding whether a claim under the Illinois right of publicity statute40 is preempted by federal copyright law. June Toney was a model appearing in ads for personal-care products. The contract was limited in duration as to when the defendant could use her image in ads. Toney sued L’Oréal for using her photograph in ads for hair-care products after the expiration of the contract. The district court held that publicity rights here were preempted in favor of the photographer’s copyright ownership of his work.41 In so doing, the district court mechanically applied the criteria set forth in Section 301. The court reasoned that the subject matter (artistic work) of 36 Several courts have held that a state law right of publicity claim is not preempted by copyright law — Fifth Circuit: Brown v. Ames, 201 F.3d 654, 661 (5th Cir. 2000) (subject of tort of misappropriation for a name or likeness in person’s “persona,” which does not fall within the subject matter of copyright); Ninth Circuit: Downing, 265 F.3d at 994, 1003; Perfect 10, Inc. v. Cybernet Ventures, Inc., 167 F. Supp. 2d 1114, 1125 n.13 (C.D. Cal. 2001); state courts: KNB Enters. v. Matthews, 78 Cal. App.4th 362 (Ct. App. 2000) (right of publicity claim based on unauthorized display of photograph not preempted by copyright law because a human likeness is not copyrightable) — but there is authority to the contrary. See, e.g., Baltimore Orioles v. Major League Baseball Players’ Ass’n, 805 F.2d 663 (7th Cir. 1986) (“Because the right of publicity does not require a qualitatively different additional element [from a copyright claim], it is equivalent to a copyright and is preempted to the extent that it is claimed in a tangible work within the subject matter of copyright.”). 37 Historical and Revision Notes, H.R. Rep. No. 94-1476, Office of the Law Revision Counsel, U.S. House of Representatives, at 130 (Jan. 3, 2007), available at http://law2.house.gov/uscode-cgi/fastweb.exe?getdoc+uscview+t 17t20+36+0++() %20% 20AND%252. 38 U.S. Const. art. VI, cl. 2. 39 406 F.3d 905 (7th Cir. 2004), reh’g en banc denied (June 21, 2005). 40 Ill. Comp. Stat. 1075/1–60 (2003), supra note 4 (IRPA). 41 Toney v. L’Oreal USA, Inc., 64 U.S.P.Q.2d (BNA) 1857 (N.D. Ill. 2002).

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the person’s likeness was within that scope of copyright, and that the rights (reproduction) conferred by the state publicity law were equivalent. The Seventh Circuit reversed, rejecting the preemption argument.42 Here the court declared that the publicity claim was based on this individual’s likeness in photographic form and that the subject matter of the right-of-publicity claim is not really the photograph of the person. The right of publicity in this circumstance covers this person’s identity as a human being, and defendant was using Ms. Toney’s face to sell a commercial product. I think the court came to the right result because the action should not have been preempted. In this instance, one can distinguish publicity rights from those conferred by copyright. Toney illustrates that, in these close cases, whether the right of publicity should be preempted is an issue to be evaluated in context. Where the defendant seeks to exploit the plaintiff’s persona to enhance the salability of a commercial product, such as in the Toney case, the claim should not be preempted. On the other hand, applying the contextual application of the right of publicity, I would argue that the photographer who took Ms. Toney’s picture could sell the photograph as a work of art, but not sell commercial products that capitalized on Ms. Toney’s identity. B. Preemption of Dramatic Performances The second case I would like to explore is Stanford v. Caesars Entertainment, Inc.43 Caesars, a casino operator, embarked on an advertising campaign that featured the character “Loose Slot Louie” to promote its casinos. Crisper Stanford agreed to play “Louie” in commercials and executed a “model release” contract granting the right to use his image and likeness in creating and displaying the Louie character. Stanford asserted state publicity rights, arguing that the use of the Louie character violated his publicity rights.44 In effect, Stanford argued that he became “Louie” and that the use of image and likeness in the display exploited his identity and violated his publicity rights. The court held that Stanford’s action for right of publicity was preempted. Once the plaintiff willingly dressed up in a “Loose Slot Louie” costume and knowingly appeared as a character in the advertisement, his performance became a dramatic work under the Copyright Act and was fixed in a tangible medium of expression. If the right of publicity were sustained, it would trump copyright law and usurp the rights of the copyright owner. C. Imitations of Singing Style and Voice The third case I wish to discuss is Laws v. Sony Music Entertainment, Inc.45 The plaintiff, Debra Laws, entered into a recording agreement with Elektra Records to produce a master recording of her vocal performance. Laws recorded the song “Very Special” in 1981, pursuant to this agreement with Elektra. Elektra copyrighted it. In 2002 Electra licensed Sony Music Entertainment to use a sample of Laws’s “Very Special” in the song “All I Have,” which was performed by two recording artists who use the names Jennifer Lopez and L.L. Cool J. And Sony sold CDs titled “This Is Me ... Then,” which included the song “All I Have.” It included about ten seconds from Laws’s “Very Special.” 42 Toney v. L’Oreal USA, Inc., 406 F.3d 905 (7th Cir. 2005) (holding that Illinois’ right of publicity statute was not preempted by the Copyright Act but noting that states may not create “copyright-like” protections that conflict with federal copyright law). 43 430 F. Supp. 2d 749 (W.D. Tenn. 2006). 44 Tenn. Code Ann. § 47-25-1105, supra note 4 (“Elvis law”). 45 448 F. 3d 1134 (9th Cir. 2006).

496 CHAPTER VI: TRADEMARK LAW Laws brought an action in state court in California under the right-of-publicity statute.46 Sony removed the case to federal district court, which granted summary judgment on preemption.47 The Ninth Circuit determined that Law’s right of publicity was preempted by federal copyright. Did the right of publicity claim fall within the subject matter of copyright? The court distinguished other voice-imitation cases — the Midler case,48 the Waits case49 — declaring that Sony did not imitate plaintiff’s voice, but was instead using a portion of the copyrighted performance itself. IV. SUMMARIZING PRINCIPLES: PREEMPTION

In sum, as these three cases illustrate, statutory preemption under Section 301 starts the analysis, but ultimately provides insufficient guidance. Supremacy Clause analysis is necessary in close cases. State law must be preempted if it conflicts with the purpose of federal copyright law. Essentially, the question boils down to a simple proposition: Does the publicity claim unduly interfere with the rights of the copyright owner in undermining the incentives that we give to the copyright owner to create and exploit a work of authorship? In Stanford, the court held that actors have no separable rights of publicity. If the actor’s right of publicity were to be enforced, its application would unduly interfere with the normal exploitation of the copyrighted work, undermining the rights conferred by federal copyright and frustrating commercial expectations. Similarly, in Laws, the court held that performers should have no further rights in their sound recordings once their performances are fixed with their consent and the rights are either assigned to a record company or created as a work made for hire.50 Again, copyright law should not be sabotaged by the right of publicity.51 V. CONCLUSION

Let me conclude by repeating my basic proposition — a proposition that some publicity maximalists might find offensive: in close cases, where publicity rights conflict with copyright, the right of publicity should give way. Otherwise, state right of publicity will unduly undermine the policies of federal copyright and frustrate commercial expectations. MR. RICHARDSON: Thank you, Marshall. Now we are going to switch to Europe, specifically the United Kingdom. My only comment is that, based upon the proposals to tax foreigners in the United Kingdom and the chaos that Cal. Civ. Code § 3344, supra note 4. Laws v. Sony Music Entm’t, Inc., 294 F. Supp. 2d 1160 (C.D. Cal. 2003), aff’d, 448 F.3d 1134 (9th Cir. 2006). 48 Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir. 1988). 49 Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir. 1992). 50 For other cases addressing the right of publicity, see Prima v. Darden Restaurants, Inc., 78 F. Supp. 2d (D.N.J. 2000); Landham v. Lewis Galoob Toys, Inc., 227 F.3d 619 (6th Cir. 2000); Brown v. Ames, 201 F.3d 654 (5th Cir. 2000); Wendt v. Host Int’l, Inc., 125 F.3d 806 (9th Cir. 1999), en banc rehearing denied, 197 F.3d 1284 (9th Cir. 1999) (Kozinski, J., dissenting from denial); White v. Samsung Elecs. Am., Inc., 971 F.2d 1395 (1992), en banc rehearing denied, 989 F.2d 1512 (9th Cir. 1993) (Kozinski, J. dissenting from denial); Fleet v. CBS, Inc., 58 Cal. Rptr. 2d 645 (1996); Baltimore Orioles, Inc. v. Major League Baseball Players’ Ass’n, 805 F.2d 663 (7th Cir. 1986). 51 For articles and treatises that discuss these issues, see Joseph P. Bauer, “Addressing the Incoherency of the Preemption Provision of the 1976 Act”, 10 Vand. J. Ent. & Tech. L. 1 (2007); Jennifer E. Rothman, “Copyright Preemption and the Right of Publicity”, 36 U.C. Davis L. Rev. 199 (2002); McCarthy, supra note 1, §§ 11.44–11.55; Nimmer on Copyright § 1.01[B][1][c]; Melville B. Nimmer, “The Right of Publicity”, 19 Law & Contemp. Probs. 203 (1954); Paul Goldstein, Copyright § 17.22 (2007); Marshall Leaffer, Understanding Copyright Law 523–49 (2005). 46 47

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apparently is still occurring at New Terminal 5, there won’t be any celebrities left in the United Kingdom. Now I invite Gillian Black to speak.

Recent Developments in Publicity Rights in The UK: Where Now for Celebrities? Gillian Black* I. INTRODUCTION: PUBLICITY RIGHTS IN THE UNITED KINGDOM — SITUATED BETWEEN THE UNITED STATES AND CONTINENTAL EUROPE?

One of the curious things about publicity rights in the Western world is the marked divergence of the legal response to publicity practice in different states when compared with the evident similarity of the publicity practice itself. Michael Douglas and Catherine Zeta Jones are an excellent example of this: a trans-Atlantic union of two stars who are both well-known in the States and in Europe, and who generate considerable column inches, yet the legal response to their celebrity and its commercial value changes with almost every border they cross. In order to understand the legal response to publicity and celebrity in the United Kingdom, it is necessary to understand its legal location between the United States and Continental Europe. Is the United Kingdom being pulled westwards towards America by the gravitational lure of celebrities and a common celebrity culture, or is it heading east towards ever-closer links in the European Community? The U.S. response to publicity evolved over a century, with high points in that development being “the right to privacy” in 1890,52 Haelan Laboratories v. Topps Chewing Gum in 1953,53 and Zacchini v. Scripps-Howard Broadcasting Co. in 1977.54 The United States now affords legal protection for publicity rights by way of a common-law publicity right in the nature of a property right (Haelan and Zacchini), and an appropriation of privacy tort (Prosser and the Restatement (Second) Torts), supplemented with an unfair competition action (Restatement (Third) Unfair Competition). These offer comprehensive protection for the commercial value of popularity or celebrity status and, equally importantly, for the celebrity’s licensees and associated merchandisers. The Continental European response has been driven by the civilian tradition, stemming from Romanist principles. The concern in Europe has typically been with protecting the personality of the individual: his human rights, dignitarian interests, and autonomy. This trend is continuing with the central importance of instruments such as the European Convention on Human Rights (ECHR).55 Exploiting an individual’s personality for commercial gain is * The University of Edinburgh. 52 Samuel D. Warren & Louis D. Brandeis, “The Right to Privacy”, 4 Harv. L. Rev. 193 (1890). 53 202 F.2d 866 (2d Cir. 1953). 54 433 U.S. 563 (1977). 55 Convention for the Protection of Human Rights and Fundamental Freedoms, Nov. 4 1950, 213 U.N.T.S. 221, U.K.T.S. 71. The ECHR text has been amended by Protocol No. 3 (ETS No. 45) (entered into force 21 Sept. 1970); Protocol No. 5 (ETS No. 55) (entered into force 20 Dec. 1971; and Protocol No. 8 (ETS No. 118) (entered into force 1 Jan. 1990) and comprised also the text of Protocol No. 2 (ETS No. 44) which, in accordance with art. 5(3) had been an integral part of the Convention since its entry into force on 21 Sept. 1970. All provisions which had been amended or added by these Protocols are replaced by Protocol No. 11 (ETS No. 155), (entered into force 1 Nov. 1998). As from that date, Protocol No. 9 (ETS No. 140) (entered into force Oct. 1, 1994) was repealed and Protocol No. 10 (ETS No. 146) has lost its purpose. Full text available at http://conventions.coe.int/treaty/en/Treaties/Html/005.htm.

498 CHAPTER VI: TRADEMARK LAW not a concept that fits comfortably within this tradition, with the result that legal protection for the commercial harm arising through unauthorized publicity practices has been slower to develop. Where it has developed, it has typically been through the medium of personality rights, rather than as a property or quasi-property right.56 The challenge in civilian jurisdictions has, therefore, been to reconcile the patrimonial interests of the individual with the extrapatrimonial doctrine of personality. The response in the United Kingdom currently sits between these two approaches. (I refer here to the United Kingdom, but in fact I am primarily concerned with England. The Scottish jurisdiction (despite a higher-than-average quota of celebrities!) has so far seen no publicity rights litigation at all. How the Scots courts would respond to such claims remains a moot point, and one that I am exploring in other research.) For now, however, I wish to concentrate on the U.K. response, as typified by the decisions of the English courts and the (in)action of the U.K. legislature. By the year 2000, over a century after the movement started (via privacy) in the United States, the English courts had not allowed any common law claim by an individual for unauthorized use of their image or indicia in merchandising, endorsement, or other publicity activities. A deep-seated skepticism about the very practice of publicity resulted in a slow and diffident response from the English courts — and no response at all from the legislature. There have been two significant developments since then, which I will address below, the cases of Irvine v. Talksport57 and Douglas v. Hello!.58 In brief, the protection for publicity rights in the United Kingdom can be seen to derive from two torts: passing off and breach of confidence. These two torts reflect different elements of the commercial and personal practice of exploiting image and identity, with the result that the United Kingdom is situated, not entirely comfortably, between the two trends identified above: the commercially-focused U.S. response and the dignitarian concerns of the European response. Although this is a simplification of the position in all jurisdictions, it is possible to derive a greater understanding of all three from a closer analysis of the conceptual approaches in these three jurisprudential traditions. II. THE “PUBLICITY AS PROPERTY” APPROACH IN THE UNITED STATES

Although this paper intends to address the position of the United Kingdom in the publicity rights debate, it is useful to start with a brief summary of one approach to publicity in the United States. (A second approach, the privacy appropriation tort, will be considered below.) This review of the common law “publicity as property” approach in the United States allows a clearer understanding of the U.K. position and its location in relation to alternative approaches. However, this review will be kept short, allowing greater detail to be provided on the U.K. and European approaches. In a 1989 lecture, reflecting on the commercial role of identity, J. Thomas McCarthy claimed that the right of publicity grew out of the laws of privacy, trade marks, and copyright, but it could now be said that it has “matured and taken on its own distinctive identity as an altogether separate legal category.”59 That category is located within property rights. As a “commercial and business right,”60 the right of publicity is a kind of intellectual property right 56 See, e.g., Johann Neethling, “Personality Rights”, in Elgar Encyclopedia of Comparative Law (Jan M. Smits ed., 2006); Huw Beverley-Smith et al., Privacy, Property and Personality (2005). 57 Edmund Irvine Tidswell Ltd. v. Talksport Ltd., [2002] EWHC 367 (Ch); on appeal, Irvine & Ors v. Talksport Ltd. [2003] EWCA (Civ) 423. 58 Reported in the High Court, [2003] EWHC (Ch) 786; on appeal to the Court of Appeal, [2005] EWCA (Civ) 595, and on appeal to the House of Lords, [2007] UKHL 21. 59 J. Thomas McCarthy, “Public Personas and Private Property: The Commercialization of Human Identity”, 79 Trademark Rep. 681, 685 (1989); see also McCarthy, supra note 1. 60 Id. at 687

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and, in McCarthy’s view, a property right.61 In part, this maturation can be traced to two key legal events in the 1950s: the case of Haelan Laboratories v. Topps62 in 1953 and the seminal article by Melville Nimmer, “The Right of Publicity,”63 published a year later. Nimmer recognized that “although the well known personality does not wish to hide his light under a bushel of privacy, neither does he wish to have his name, photograph, and likeness reproduced and publicized without his consent or without remuneration to him.”64 Where the only legal rights available to the well-known personality look to protection of privacy, he is unlikely to achieve the remuneration or compensation he seeks. Nimmer examines privacy, unfair competition, and contract, and concludes that these are inadequate.65 Instead, he argues that the right of publicity “must be largely determined by two considerations: first, the economic reality of pecuniary values inherent in publicity and, second, the inadequacy of traditional legal theories in protecting such publicity values.”66 In order to recognize this value and provide appropriate legal protection, Nimmer concludes that “[t]he right of publicity must be recognized as a property (not a personal) right.”67 In reaching this conclusion, Nimmer referred to the judgment of the “highly respected Second Circuit”68 the year before, in Haelan Labs v. Topps.69 The influence of this case has been, and is still, strongly felt, with the words of Circuit Judge Frank echoing through much academic work in this area: We think that, in addition to and independent of the right of privacy (which in New York derives from statute), a man has a right in the publicity value of his photograph . … Whether it be labelled a “property” right is immaterial; for here, as often elsewhere, the tag “property” simply symbolizes the fact that courts enforce a claim which has a pecuniary worth.70

By 1990, George Armstrong was prepared to advance the claim that persona was not only treated as a property right, but that it had been fully reified and was the subject of property rights: “[c]elebrity persona has become a heritable, alienable ‘thing’ from which the owner may arbitrarily exclude others. In other words, it has become property.”71 Similarly, Jan Klink refers to popularity and image as “valuable assets.”72 This approach to publicity as property is perhaps the most all-encompassing approach to publicity rights.73 Rather than attempting to pin down the notion of publicity or exploitation in much detail, authors in this category focus on the commercial value of identity. Thus, David Westfall and David Landau define publicity rights in straightforward terms as “the right of an individual to control the commercial use of her identity.”74 Oliver Goodenough endorses McCarthy’s definition, and frames his own definition in terms of it: 61

Id. Haelan Labs. v. Topps Chewing Gum, 202 F.2d 866 (Fed. Cir. 1953). 63 Melville B. Nimmer, “The Right of Publicity”, 19 Law & Contemp. Probs. 203 (1954). 64 Id. at 204. 65 Id. at 204, 210, and 214. 66 Id. at 215. 67 Id. at 216. 68 Id. at 222. 69 202 F.2d 866 (1953). 70 Id. at 868 (per Frank, C.J.). 71 George M. Armstrong Jr., “The Reification of Celebrity: Persona as Property”, 51 La. L. Rev. 443, 444 (1991). Other authors who have discussed the reification of the image include Jan Klink, who states that the United States now “prevents and compensates unauthorised use of another’s property in popularity.” Jan Klink, “50 Years of Publicity in the United States and the Never-ending Hassle in Europe”, Intell. Prop. Q. 363, 383 (2003); Brad Sherman & Felicity Kaganas, “Case Comment: The Protection of Personality and Image: An Opportunity Lost”, Eur. Intell. Prop. L. Rev. 340 (1991). 72 Klink, supra note 71, at 363 73 The breadth of its scope is explicitly recognized by Klink. Id. at 383 74 David Westfall & David Landau, “Publicity Rights as Property Rights”, 23 Cardozo Arts & Ent. L.J. 71, 72–73 (2005–2006). 62

500 CHAPTER VI: TRADEMARK LAW McCarthy says of the right of publicity that: “All it really does is recognize the potential commercial value of every person’s identity,” to which I add “and assigns that value to the person in question.”75

It is possible to extract the three key elements in this area of the literature which are the unifying factors. These are (1) the centrality of commercial use; (2) the treatment of the commercial value in identity as a property right; and (3) a tendency to define the “asset” being exploited in wide terms, typically “identity,” rather than narrower notions of name or image. III. THE EUROPEAN PERSONALITY RIGHTS APPROACH TO PUBLICITY

The personality rights approach is most closely associated with civilian jurisdictions, such as France and Germany, which recognize a dignitarian right to “personality” as a species of legal right intimately connected with the human being. Personality rights “recognise a person as a physical and spiritual-moral being and guarantee his enjoyment of his own sense of existence.”76 Thus, personality rights in this context are quasi-human rights, and the “convenient portmanteau term”77 is used to refer to, amongst others, “the rights to life, physical integrity, bodily freedom, reputation, dignity, privacy, identity (including name and image) and feelings.”78 Eric Reiter echoes this in considering the current role of personality rights, and observes that the “various attributes of personality that the modern world has erected on this premodern foundation … [include] privacy, image, voice, bodily integrity, name and reputation.”79 The importance of these personality rights in civilian jurisdictions should not be underestimated: German law, for example, places the right to dignity at the very heart of its constitutionally protected personality rights.80 This civilian approach to personality rights has been delineated on a pan-jurisdictional basis by Johann Neethling.81 Although most civilian jurisdictions are consistent in their treatment of publicity within the framework of personality rights, the approach of different jurisdictions within this particular class is not consistent. One possible reason for this is the tension that results from protecting an inherently commercial, economic interest within a dignitarian framework of extra-patrimonial interests. Reiter, a Canadian academic writing in the civilian province of Quebec, notes that “while the attributes of human personality, like name, reputation, image, voice, and privacy, have traditionally been seen as extrapatrimonial rights without monetary value, today these rights are being increasingly patrimonialized and brought into commerce.”82 Consequently, the courts and commentators have had to reconcile two opposing interests, with the result that a “patrimonialized extra-patrimonial right” emerges.83 Accommodating this divergence between dignitarian rights and commercial interests has produced various responses in civilian jurisdictions. As Elizabeth Logeais observes, in the context of the debate in France, the general analysis is to consider that the right to the image 75 Oliver R. Goodenough, “Re-theorising Privacy and Publicity”, 1997 Intell. Prop. Q. 37 (1997) (footnotes omitted). 76 Neethling, supra note 56, at 530. 77 Elspeth Reid, “Protection for Rights of Personality in Scots Law: A Comparative Evaluation”, 11.4 Elec. J. Comp. L. ¶ 1.1 (2007). 78 Neethling, supra note 56, at 530 79 Eric Reiter, “Personality and Patrimony: Comparative Perspectives on the Right to One’s Image”, 76 Tulane L. Rev. 673, at 680 (2001–2002) (emphasis added). 80 Neethling, supra note 56, at 563 (“German doctrine thereby accords all human rights the same status (apart from human dignity, which is regarded as the most fundamental value)” and this is protected by the German Constitution of 1949). 81 Neethling provides an excellent summary of these rights in his chapter on “Personality Rights.” Id. 82 Reiter, supra note 79. 83 Id. at 673

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is a “Janus” right displaying a negative extra-patrimonial aspect that is in fact absorbed by personality rights (mainly the rights to privacy and dignity) and a “positive” patrimonial aspect, the right to capitalize on the use of one’s image.84 This is commonly regarded as a dualistic model,85 since it requires two different rights, one (positive) patrimonial and one (negative) extra-patrimonial, to protect the interests in exploitation and protection of publicity. The distinction made in French law is between the right to one’s image, which is an “inherent part of the person,” and the right over one’s image, which is “a commodity to be exploited.”86 The alternative monistic approach is favored, for example, in Germany.87 Here, one right, such as the general personality right, protects both the economic and dignitarian interests in publicity.88 Jan Klink criticizes this approach, arguing that “human rights based concepts … are not well suited to protect comprehensively the value of popularity. … Human rights, by doctrine, can — and in fact should — not be transferred, waived or inherited.”89 Where commentators, such as Klink, favor the broad publicity as property approach outlined above, with its emphasis on the commercial value of popularity, the seeming inability of personality rights doctrine to realize this value through transfer, waiver or inheritance publicity rights is indeed viewed as a hindrance. One American writer who, despite her roots in a common-law jurisdiction closely associated with the “publicity as property” concept, has tried to advance quasi-personality rights in the right of publicity is Roberta Rosenthal Kwall. In a very interesting article, she argues that American doctrine fails to respond to the dignitarian elements of publicity and publicity rights, and that a moral rights equivalent is required. She argues that the traditional U.S. approach has an implicit concern with the need to protect the “damage to the human spirit,”90 which moral rights would protect explicitly: “a careful look at right of publicity litigation reveals that many decisions actually are more concerned with redressing rights of integrity over the images of the celebrity.”91 The importance of her conclusion is that it straddles one of the inherent distinctions between the civilian rights of personality approach and the broad publicity/property approach described above: Although the commercial/non-commercial distinction is critical under the right-of-publicity doctrine, which applies only to commercial usages, this limitation is not relevant to moral-rights doctrine.92

It is possible to identify common themes that arise from the treatment of publicity rights as a class of personality rights. The first of these is the emphasis on dignitarian and quasimoral rights. Accordingly, the role of concepts such as privacy and human dignity become central to any legal protection for the individual. The second theme is one consequence of this dignitarian stance: the obstacles involved in providing commercially focused remedies. As Huw Beverley-Smith et al. observed, “non-economic interests often cannot be completely compensated by a specific money payment and a plaintiff may remain unsatisfied after an award of damages.”93 Where, on the other hand, the legal system focuses predominantly on the non-economic interests infringed, then the commercial importance of the infringement may be marginalized. To take an illustration from German law, claims for damages in the field Elizabeth Logeais, “The French Right to One’s Image: A Legal Lure?”, 5 Ent. L. Rev. 163, 165 (1994). See, e.g., Beverley-Smith et al., supra note 56, at 11; Neethling, supra note 56, at 543. 86 Both quotations from Reiter, supra note 79, at 684–85. 87 Neethling, supra note 56, at 543 88 Beverley-Smith et al., supra note 56, ch. 3; Klink, supra note 71, at 380 89 Klink, supra note 71, at 381 90 Roberta Rosenthal Kwall, “Preserving Personality and Reputational Interests of Constructed Personas Through Moral Rights: A Blueprint for the Twenty-first Century”, U. Ill. L. Rev. 151, 152 (2001). 91 Id. at 158. 92 Id. at 159. 93 Beverley-Smith et al, supra note 56, at 2–3. 84 85

502 CHAPTER VI: TRADEMARK LAW of personality rights require either evidence of a loss, which can be difficult to show, or the calculation of a hypothetical reasonable license fee.94 Yet this measure will not be available where it can be shown that the claimant would never have been prepared to license the use complained of, as in the case of “the professor of ecclesiastical law, who had been alleged to propagate the ginseng root as a sexual stimulant, [and who] could not recover substantial damages but only a solatium”95 because the court held he would never have been prepared to license his image for this use. The end result is the risk that “the courts deny adequate compensation in the most serious cases of personality right infringement.”96 IV. THE U.K. RESPONSE AND THE APPROPRIATION OF PERSONALITY ANALYSIS

A. The U.K. Response: Recent Case Law The U.K. response to publicity practice has so far been ad hoc and somewhat opportunistic. With no formal legal provision in place, claimants have sought to shoehorn their commercial grievances into the nearest appropriate legal doctrine, with the result that two different torts — intended to serve different purposes — have been pressed into service: passing off and breach of confidence. The high-water marks for both these torts (or nadir, depending on one’s perspective) have been the post-2000 cases of Irvine v. Talksport97 and Douglas v. Hello!.98 In addition to the use of these two common law torts, there have been attempts to use registered trademark protection to secure the celebrity name, usually to little avail.99 Irvine v. Talksport featured an action by Eddie Irvine, who was at that time one of the top F1 drivers in the world. A photograph of him in his racing overalls at an F1 racing circuit was doctored to show him holding a radio branded with the defendant’s radio station logo, and this picture was then used in a brochure, issued to approximately 1,000 potential clients. Irvine had not given his consent to either the doctoring of the original photograph or its subsequent use to promote Talksport’s radio station. He sued Talksport for this unauthorized use, citing passing off, and was successful. On appeal,100 the award of damages was increased from £2,000101 to £25,000.102 Although perhaps not an outstandingly high award for the use of his image in an advertising campaign, the fact that the High Court and Court of Appeal both recognized his claim under passing off was an important step forward for English law. In particular, it signaled a potential reversal of an earlier case, Lyngstad v. Anabas,103 from 1977. Here, members of the pop group ABBA sued under passing off for unauthorized use of their images on pillowcases. This action also alleged passing off, but their claim was rejected in the English courts because ABBA had no substantial licensing activities in the United Kingdom at that time, nor were they in the business of manufacturing pillowcases. 94 This reasonable license fee is the hypothetical sum that the plaintiff and defendant would have agreed upon for the defendant’s otherwise unauthorized use. 95 Beverley-Smith et al, supra note 56, at 143. 96 Id. 97 Edmund Irvine Tidswell Ltd. v. Talksport Ltd., [2002] EWHC 367 (Ch), on appeal, Irvine & Ors v. Talksport Ltd., [2003] EWCA (Civ) 423. 98 Reported in the High Court, [2003] EWHC (Ch) 786, on appeal to the Court of Appeal, [2005] EWCA (Civ) 595, on appeal to the House of Lords, [2007] UKHL 21. 99 See, e.g., Elvis Presley Trade Marks, [1999] R.P.C. 567, and Jane Austen Trade Mark, [2000] R.P.C. 879. For a more detailed review of the use of trade marks to protect celebrity names, see Gillian Davies, “The Cult of Celebrity and Trade Marks:The Next Installment”, 1:2 SCRIPT-ed 230 (2005), available at http://www.law.ed.ac.uk/ahrc/scripted/docs/agents. asp. 100 [2003] EWCA (Civ) 423. 101 Approximately $4,050 at current exchange rates. 102 Approximately $50,700 at current exchange rates. 103 Lyngstad & Others v. Anabas Prods. Ltd. & Another, [1977] F.S.R. 62

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Passing off has therefore been successfully argued for the claimant in cases of false endorsement, as in Irvine, but current precedent would suggest that passing off is not able to provide a cause of action for unauthorized merchandising. To what extent future courts faced with a merchandising case would follow Irvine in preference to Lyngstad remains unclear, but the judicial and commercial worlds have both developed considerably since 1977 and the question remains open. The second key development in English law is the case of Douglas v. Hello!. The facts of this case arise out of the wedding of Michael Douglas and Catherine Zeta Jones at the Plaza Hotel in New York in November 2000. Prior to their big day, they entered into a contract with OK! Magazine, giving OK! the exclusive right to publish their wedding photographs over a nine-month period. The agreed fee for this was £1 million,104 which was the standard fee for most celebrity weddings in the United Kingdom at this time.105 Hello! Magazine had also been interested in gaining these exclusive rights and had offered the same fee, but the future Mr. and Mrs. Douglas had opted to go with OK!. Despite tight security at the wedding, a paparazzo photographer managed to gain entrance to the Plaza Hotel and take fifteen shots of the wedding, including the bride and groom, and the cake. Within hours, six of these images had been sold to Hello! for £125,000.106 An attempt by the newlyweds to prevent publication failed,107 and both OK! and Hello! went to print containing authorized and unauthorized photos, respectively. Relying heavily on the Human Rights Act 1998, which implemented the European Convention on Human Rights into English law, the Douglases’ action against Hello! for breach of confidence and an invasion of privacy was successful. This combination of breach of confidence and Article 8 ECHR privacy rights effectively creates a “new” tort, as first articulated by the House of Lords in Campbell v. MGN: “This cause of action has now firmly shaken off the limited constraint of the need for an initial confidential relationship. … The essence of the tort is better encapsulated now as misuse of private information.”108 Framing their claim in terms of this action, the Douglases were awarded damages to compensate for the invasion of their privacy through the unauthorized publication of these photographs in the amount of £14,600.109 OK! also brought an action against Hello!. This was a considerably more contentious action and was only finally decided in 2007, when the House of Lords handed down its opinion in May 2007. It is on this decision that I wish to focus in this paper, as being one of the most important developments in publicity rights in the United Kingdom in recent years. Before I do so, however, I wish to draw a few general conclusions about the legal approach in English law, and set it in a wider analytical context of the U.S. and civilian European approaches discussed above. B. The Appropriation of Personality Analysis The use of the torts of passing off and breach of confidence in publicity relies on the notion of appropriation, and reflects a tradition of academic analysis that borrows heavily from the U.S. Restatement (Second) of Torts and the privacy appropriation tort. Arguably the most influential Approximately $2,027,000 at current exchange rates. David and Victoria Beckham sold to OK! in 1999 for £1 million; Jordan and Peter Andre sold to OK! in 2005 for £2 million; Ashley Cole and Cheryl Tweedy sold to OK! in 2006 for £1 million. Since official details are not published, definitive authority is hard to produce: all details from BBC online or Wikipedia, Nov. 8, 2006. 106 Approximately $253,000 at current exchange rates. 107 [2000] EWCA (Civ) 353. 108 Campbell v. MGN, [2004] UKHL 22, ¶ 14, per Lord Nicholls (emphasis added). See also Lord Nicholls at ¶ 17 (“The time has come to recognise that the values enshrined in articles 8 and 10 are now part of the cause of action for breach of confidence.”). 109 Approximately $30,000 at current exchange rates. 104 105

504 CHAPTER VI: TRADEMARK LAW and popular approach taken by English academics is the “appropriation of personality” classification. At the outset, it needs to be appreciated that “personality” in this context means the identifying elements of an individual, typically their name, likeness and voice. It is akin to the colloquial notion of someone’s personality being their character. This use of “personality” can be contrasted with the very different technical meaning accorded to “personality rights” in the (essentially civilian) personality rights canon discussed above. Perhaps the starting point for this approach can be traced to the influence of William Prosser’s seminal 1960 article “Privacy,” wherein he sought to synthesize a series of American judicial decisions originating from Warren and Brandeis’ 1890 article “The Right to Privacy.”110 While Warren and Brandeis’ article was most certainly interested in the “right to be let alone,” case law and publicity practice evolved in the seventy years between the two articles such that Prosser could no longer ignore the commercial practice in “selling” privacy. Accordingly, when he formulated his tort of privacy, the four limbs he identified covered a range of invasions, concluding with the fourth: “Appropriation, for the defendant’s advantage, of the plaintiff’s name or likeness.”111 This four-part tort protecting privacy was incorporated into the Restatement (Second) of Torts, where it became the second limb: “The right of privacy is invaded by … (b) the appropriation of the other’s name or likeness as stated in para 652C.”112 It is this limb, originating from Prosser’s work, which I take as the starting point for this category of “publicity” thinking in the United Kingdom. A clear lineage of writers in this canon can be traced from Prosser onwards, through David Vaver’s analysis of the incorporation of this tort in privacy statutes in three Canadian provinces,113 to Frazer’s important contribution to English legal literature in 1983 and Beverley-Smith’s essential monograph from 2002, The Commercial Appropriation of Personality. Quotations from Frazer and Beverley-Smith illustrate their shared approach, and echo Prosser’s earlier formulation. For example, Frazer wishes to “examine the extent to which the law has developed, or ought to develop, to take account of one particular form of commercial practice — the use, without consent, of the name, likeness or voice of another.”114 Beverley-Smith chooses to open his analysis with a succinct definition: The essence of the problem of appropriation of personality may be put very simply: if one person (A) uses in advertising or merchandising the name, voice or likeness of another person (B) without his or her consent, to what extent will B have a remedy to prevent such an unauthorized exploitation?115 These definitions are repeated and rephrased in countless articles discussing and analyzing publicity rights or the commercial appropriation, or misappropriation,116 of personality.117 The three features that are common to this approach are: (1) the notion of appropriation — an interesting choice of term, given that the subject of the “appropriation,” the personality, is not universally recognized as an item of property; (2) a recognition that tort law is the most appropriate, or at least the most practicable, home for such actions, rather than either property Warren & Brandeis, supra note 52. William L. Prosser, “Privacy”, 48 Cal. L. Rev. 383, at 389 (1960). 112 Restatement (Second) of the Law of Torts, ¶ 652A. 113 David Vaver, Copyright Law (2000). 114 Tim Frazer, “Appropriation of Personality — A New Tort?”, 99 Law Q. Rev. 281 (1983). 115 Huw Beverley-Smith, The Commercial Appropriation of Personality 3 (2002). 116 As, for example, used by Hull, “The Merchandising of Real and Fictional Characters: An Analysis of Some Recent Developments”, Ent. L. Rev. 124, 132 (1991). 117 See, e.g., Stowe Boyd & R. Jay, “Image Rights and the Effect of the Data Protection Act 1998”, Ent. L. Rev. 159 (2004); Beverley-Smith et al., supra note 43; S. Bains, “Personality Rights: Should the UK Grant Celebrities a Proprietary Right in their Personality? Parts 1, 2 and 3”, Ent. L. Rev. 16, 205 & 237 (2007); Hazel Carty, “Advertising, Publicity Rights and English Law”, Intell. Prop. Q. 209 (2004); Hull, supra note 116; Gary Scanlan & Andrew McGee, “Phantom Intellectual Property Rights”, Intell. Prop. Q. 264 (2000). 110 111

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or human rights doctrines; and (3) a focus on unauthorized use, which is implicit in the concept of appropriation. In addition, there is frequently an assumption that the appropriation will be for commercial uses, most commonly advertising. The emphasis on appropriation arguably leads to a problem with this analysis of publicity rights. If the wrong done is appropriation, there is an implication that this can only be done by someone else: it is a taking away from, rather than a use or exploitation of identity. Thus a definition which centers round the “appropriation” of personality implicitly excludes an individual’s own exploitation of personality from its scope. Related to this is the focus on use of personality “without consent,” that is to say “misappropriation.” This seems to envisage unauthorized use of the individual’s personality by other parties in all cases. Does this mean that there is no right for the individual to exploit his own publicity value? And what of the rights of authorized users, typically via a license, as illustrated by, for example, the second plaintiff (who was authorized to exploit the cartoons, and who suffered commercially from the unauthorized exploitation by the defendant) in the case of Mirage Studios?118 To what extent can any publicity right be transmitted to, or be sued upon by, parties other than the individual? Again, this aspect is often excluded from the “appropriation of personality” category. Despite these questions, the (mis)appropriation of personality category offers the most comprehensive review of publicity rights in English (and therefore, potentially, Scots) law. What the leading English cases (Irvine and Douglas) have in common is their emphasis on unauthorized use. Both actions focused on the “misappropriation” of image, and the consequences of this for the claimants. In the Douglases’ case, the breach-of-confidence action focused the claims on personal/ dignitarian concerns arising out of the invasion of their privacy through the unauthorized publication of their wedding photographs. Where this action is used, English law sits more closely with the European tradition of respect for humanity and dignity. In contrast, Irvine’s action against Talksport was situated within the tort of passing off and focused on commercial concerns arising from use of his image in the course of trade. This action produces a result that is closer to the American remedy found in unfair competition and the common law publicity right. C. Recent Developments in the United Kingdom: Douglas v. Hello! in the House of Lords Having set the scene and placed the English legal response between those of the U.S. and European civilian traditions, I now wish to consider the impact of the most important recent legal development in English law — and the resultant confusion generated by — the opinion of the House of Lords in Douglas v. Hello!.119 1. The Facts The first point to emphasize is that this appeal did not involve the Douglases. They were successful in their action against Hello! in both the High Court and the Court of Appeal, and Hello! chose not to appeal against the decision of the Court of Appeal. However the second claimant in the action was OK! Magazine. Its action against Hello! had been upheld by Lindsay J. in the High Court in 2003, for which he awarded them £1,033,156120 in damages. However, it was then unanimously rejected by the Court of Appeal in 2005. OK! therefore chose to appeal that adverse decision to the House of Lords, to seek to recover for the economic damage caused by Hello!’s actions. Effectively, the question for the House of Lords was “what rights 118 Mirage Studios & Others v. Counter-Feat Clothing Co. Ltd. & Another, [1991] F.S.R. 145. For an analysis of this in the United States, see Haelan Labs. v. Topps Chewing Gum, 202 F.2d 866 (1953). 119 [2007] UKHL 21.

506 CHAPTER VI: TRADEMARK LAW does an exclusive licensee have against third parties whose unauthorized actions interfere with that exclusive license?” This question was, of course, the very one at issue in the American case of Haelan Labs v. Topps Chewing Gum. In neither case was the celebrity licensor a party to the immediate action. The Douglases’ action was, as mentioned, founded on the tort of breach of confidence when considered in light of article 8 ECHR privacy rights. However, the success of this claim did not affect OK!, since they had suffered a separate loss arising from the damage caused to their commercial interests from this wrongful publication. In order to succeed, OK!’s claim had to stand alone and overcome three cumulative hurdles: (1) In the first place, OK! had to show that the Douglases’ wedding photographs constituted confidential information amounting to a commercial trade secret; (2) If they succeeded in this, OK! also had to demonstrate that they, as exclusive licensee, were entitled to enforce their interest in the Douglases’ commercially confidential information; (3) The third challenge facing OK! was to show that publication of different photographs, which were unauthorized, infringed this commercial confidentiality.121 OK! was successful in this claim by the narrowest of margins. Of the five Law Lords, three found in OK!’s favor, and two found for Hello!. I shall consider the opinions of the majority first. 2. The Majority Judgment Lord Hoffmann gave the leading judgment. It is largely a commercial decision, with little legal analysis, which poses potential problems for its future application. He considered the nature of the information over which confidentiality was claimed, and agreed with Lindsay J in the High Court that it was the wedding photographs that constituted the information in question, rather than information about the wedding in general. He then proceeded to address the first hurdle facing OK!: did these wedding photographs amount to confidential information? Lord Hoffmann concluded that the wedding photos were confidential information not because of their inherent nature but because the Douglases had control over them: The fact that the information happens to have been about the personal life of the Douglases is irrelevant. It could have been about anything that a newspaper was willing to pay for. What matters is that the Douglases, by the way they arranged their wedding, were in a position to impose an obligation of confidence. They were in control of the information.122

Other commentators have pointed out that this does not take into account what has traditionally been the first test for confidential information: whether the information has the necessary quality of confidence.123 Instead, Lord Hoffmann concluded that the combination of control and inaccessibility created this necessary quality of confidence. The second issue to be addressed was whether OK! had any legally enforceable interest in this inaccessible and confidential information, by reason of their contract with the Douglases. Again, Lord Hoffmann took a very commercial approach to this: “The point of which one Approximately $ 2,065,000 at current exchange rates. OK! also advanced a claim based on the economic torts, but this claim was unsuccessful and will not be considered in this paper. 122 Douglas, [2007] UKHL 21, ¶ 118. 123 The three-part test for commercial confidence requires that the information has the necessary quality of confidence; that it has been imparted in circumstances importing an obligation of confidence; and that the unauthorized use is detrimental to the party who communicated it. See Coco v. A. N. Clark Eng’rs, [1969] R.P.C. 41; see also Christina Michalos, “Douglas v. Hello: The Final Frontier”, 2007 Ent. L. Rev. 241. 120 121

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should never lose sight is that OK! had paid £1m for the benefit of the obligation of confidence imposed upon all those present at the wedding in respect of any photographs of the wedding. That was quite clear. Unless there is some conceptual or policy reason why they should not have the benefit of that obligation, I cannot see why they were not entitled to enforce it. And in my opinion there are no such reasons. Provided that one keeps one’s eye firmly on the money and why it was paid, the case is, as Lindsay J. held, quite straightforward.”124 Effectively, the law will follow the money: OK! paid £1 million for exclusive rights, so the law will enforce those exclusive rights. Questions of privity of contract, and the knowledge, actual or imputed, of Hello! as an outside party to the licensing deal were not addressed. Baroness Hale also found for OK!. She chose to adopt Lord Hoffmann’s reasoning, explicitly stating that, if anything in her written opinion conflicted with Lord Hoffmann’s, then his was to be preferred to hers. She acknowledged that the photographs “were undoubtedly a secret unless and until OK! chose to publish the images authorized by the Douglases.”125 Unfortunately, she did not explain why this was “undoubtedly” the case, nor did she comment on the fact that the authorized images had been published by OK! — an action which would, traditionally, have destroyed the trade secret. Lord Brown gave the third concurring opinion. As with Baroness Hale, he adopted the reasoning of Lord Hoffmann, particularly regarding the significance of the commercial value of the deal: “Having paid £1m for an exclusive right it seems to me that OK! ought to be in a position to protect that right and to look to the law for redress were a third party intentionally to destroy it.”126 He went on to make an interesting argument in favor of OK!’s right. He posed the question as to what outcome could have been expected for the Douglases if their contract with OK! had stipulated that the license fee of £1 million would have to be repaid by the Douglases in the event that OK! did not get the exclusivity for which they bargained. The Douglases would then have suffered a quantifiable financial loss. In this case, Lord Brown asks, “Would not the Douglases have been entitled to claim that loss against Hello on the ground of breach of confidence? Why then not OK! too?”127 This is an interesting approach, not least because it relies on the Douglases’ claim to help justify recovery for OK!. By throwing the justifications for such a claim back onto the Douglases’ original claim, which was built on (slightly) more solid jurisprudential foundations than that of OK!, Lord Brown effectively created a stronger justification for OK!’s claim. Further, since the Douglases’ right is less controversial than OK!’s, parties in the position of the Douglases and OK! would be well advised to strengthen their chances of a successful action in the event of damaging action, by inserting a contractual stipulation which would pass more of the financial loss to the party in the position of the Douglases. However, this is by no means a perfect solution, not least because OK!’s loss was not the fee they had paid (£1 million), but rather the loss of the value of the exclusive publication, together with the costs incurred in rushing forward publication to meet Hello!’s intended publication date (which was valued in damages by the High Court at £1,033,156). Nonetheless, this highlights an interesting issue regarding the differing strengths of the licensor’s and licensee’s claims, and practical ways of addressing this difference. [2007] UKHL 21, ¶ 117 (emphasis in original). Id. ¶ 307 (per Baroness Hale of Richmond). 126 Id. ¶ 325 (per Lord Brown of Eaton-under-Heywood). Both Lord Hoffmann and Lord Brown were obviously influenced by the commercial elements of the deal. This is by no means unusual in developing areas, and another “celebrity case” that sought to reflect the “realities of the market place” was the false endorsement case of Irvine v. Talksport. See decision of Laddie, J., at [2002] EWHC 367 (Ch), ¶¶ 43, 38–39. Note, however, that the legal bases on which Irvine was decided were entirely different from those in Douglas v. Hello!. 127 Id. ¶ 328. 124 125

508 CHAPTER VI: TRADEMARK LAW 3. The Minority Dissent The remaining two Law Lords found for Hello!. Their dissenting opinions are very valuable, in showing the weaknesses in OK!’s case and by indirectly revealing where future problems are likely to arise. Lord Nicholls confirmed that Hello!’s action was a misuse of the Douglases’ personal information. However, he made a clear distinction between private information and confidential or secret information128 and he emphasized that OK!’s claim was based on confidentiality for a commercial secret, rather than private information. The fact that the photographs had already been held to constitute private information did not mean that they would automatically be regarded as commercially confidential information. In fact, Lord Nicholls reached his eventual conclusion by short-circuiting much of the rest of the debate. Without deciding the point, he started from the assumption that the information in question was confidential129 and then asked what was the effect of the simultaneous publication by OK! of similar (but not identical) photographs. He concluded that this simultaneous publication of similar photographs containing the same information must of necessity have destroyed any commercial confidence in those pictures. Thus Hello! had done no wrong in publishing photographs containing information already in the public domain, while OK! had in effect shot themselves in the foot by publishing their approved photographs, thereby releasing the information into the public domain. A number of problems with this interpretation can be discerned. In the first place, this analysis enabled Lord Nicholls to avoid troublesome questions as to whether or not the wedding photos were confidential. The point becomes irrelevant once the information is already in the public domain, since there can be no breach of a trade secret at this point. But following this approach means we are none the wiser as to what the outcome would have been if OK! had delayed publication by twenty-four hours or more, instead of rushing forward the publication date to meet Hello!’s unauthorized edition on the newsstands. If OK!’s publication had followed Hello!’s, would their claim against Hello! have then succeeded? Lord Nicholls does not address this (hypothetical, for him) question. A second issue is raised by the differing interpretations of Lord Nicholls and Lord Hoffmann. Lord Hoffmann disagreed with Lord Nicholls’ construction because, in his view, publication of approved photographs could not render publication of unapproved photographs acceptable.130 There may have been publication of certain authorized images by OK!, which meant that those images were in the public domain131 but “no other pictures were in the public domain and they did not enter the public domain merely because they resembled other pictures which had.”132 This interpretation is perhaps one of the most significant of the case, and the division between Lords Hoffmann and Nicholls leaves important questions still outstanding. Lord Brown addressed this question in order to justify his decision in favor of OK! and stated that: “The secret consists no less of each and every visual image of the wedding than of the wedding as a whole. Assume, for example, that OK! had chosen to publish photographs of the bride and groom in one issue, the guests in the next, and the presents later still. The confidence would, I think, continue throughout and I see no reason why at some point bootlegged photographs should suddenly become acceptable on the grounds that the look of the wedding was now in the public domain so that no confidentiality in its photographic image remained to be protected.”133 Id. ¶ 255. Id. ¶ 259. 130 Id. ¶ 121. 131 Any unauthorized reproduction of the approved images would thereafter be a breach of copyright rather than breach of confidence. 132 [2007] UKHL 21, ¶ 122 (per Lord Hoffmann). 133 Id. ¶ 329. 128 129

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Lord Walker’s dissenting opinion is by far the longest of the five judicial opinions. He expressed concern at the idea that the Douglases’ wedding photographs could be protected at the suit of OK!, and asked for a “consistent and rational development of the law of confidentiality.”134 Following traditional lines of authority, Lord Walker concluded that the photographs could only be protected where they were embarrassing, constituted a misuse of public/official powers, or disclosed something which merited protection as a commercial secret.135 The first two categories were not relevant since there was no misuse of official powers, nor was there any suggestion that the photographs were embarrassingly intimate: similar images of the same event were destined for publication in OK!, and the only upsetting element was the poor quality of the unauthorized images. Lord Walker therefore focused on the final category, being information that merits protection as a commercial secret. He gave as an example the film set of Kenneth Branagh’s “Frankenstein,” a $40 million film which he described as “high-budget” with several bignamed actors in leading roles. This, he suggested, was worthy of protection as commercially confidential information, in contrast to the wedding photographs. Yet this interpretation is open to criticism for basing protection on the very criteria he earlier rejected: the commercial value of the secret. Whereas photographic details of a film set and characters were worthy of protection at least in part because of the budget of the film, at $40 million, he was of the opinion that a celebrity wedding costing presumably a considerable fraction of this amount for a one-day event was not worthy of protection. Despite this lack of clarity, his eventual conclusion is hard to dispute: the confidentiality of information “must depend on its nature, not on its market value.”136 Lord Walker also disputed the claim that OK!’s exclusive license was destroyed by Hello!’s actions, arguing instead that it was simply made less valuable.137 4. Analysis of the Decision From a commercial standpoint, the outcome would seem to be sensible. It reflects what happens in commercial practice when magazines and newspapers are prepared to pay large sums of money to secure exclusive rights to publish information regarding people in the news, and it ensures that the commercial value of these exclusive deals, for the celebrities and for the media, is protected. Yet relying on the commercial value of a deal to determine its status as a legally protected right is undeniably troublesome, and creates considerable legal uncertainty. If the Douglases had not charged a fee at all, or had charged a lesser sum, or had donated their license fee to charity, then the commercial value of the deal might be negligible, yet the facts and subject matter would remain the same. Would the law still protect the exclusive right if not supported by a substantial commercial fee? Further, it is difficult to know how much weight to attach to the particular facts of this case. The two parties, OK! and Hello!, were very closely connected by virtue of their rivalry and the fact that both had been competing for the exclusive license deal with the Douglases. This meant that Hello! had intimate knowledge of OK!’s commercial position: the amount OK! had paid for the exclusive deal and the commercial importance of the arrangement. It is not clear how significant Hello!’s awareness was for the court, but the usual constraints of privity of contract were not extensively judicially considered, suggesting that the specific awareness of the defendant did indeed influence the court. It therefore remains uncertain what the outcome Id. ¶ 298. Id. ¶ 293. 136 Id. ¶ 299. 137 Id. ¶ 298. 134 135

510 CHAPTER VI: TRADEMARK LAW would be in any future case where the defendant published unauthorized photographs with no knowledge of the exclusive license deal in favor of another publisher. To what extent will the court impute such knowledge? V. CONCLUSION

In spite of the considerable uncertainties that remain, it is now possible to outline the legal protection in English law for the commercial use of an individual’s image and personal information. The Court of Appeal decision in Douglas v. Hello! confirms that, where individuals control information regarding themselves (whether details of their personal lives or photographic images of a particular event), then they can protect it by way of privacy. The House of Lords decision in the same case confirms that where those individuals commercially exploit that information by passing rights to this information to other parties, the licensed parties can enforce their contractually acquired rights directly against the infringer. In the words of Lord Hoffmann: “Some may view with distaste a world in which information about the events of a wedding … should be sold in the market in the same way as information about how to make a better mousetrap. But being a celebrity or publishing a celebrity magazine are lawful trades and I see no reason why they should be outlawed from such protection as the law of confidence may offer.”138 Protection for the individual will also be available where there has been unauthorized use of the individual’s name or image in advertising or endorsement, following the decision in Irvine v. Talksport. The measure of damages awarded is likely to reflect the commercial value of the deal to the individual whose name or image has been exploited. Thus the amount awarded to Irvine was the fee he would usually charge for such an endorsement deal. This case also gives rise to the possibility at least that the tort of passing off could be successfully invoked by a claimant where there has been unauthorized use of his image in merchandising, despite the rejection of this claim thirty years ago in Lyngstad v. Anabas.139 Celebrities in the United Kingdom may now rely upon a variety of legal rights to protect the commercial and dignitarian interests deriving from their publicity value. As with the American approach, the strongest protection appears to derive from the economic claim in passing off, together with recent support for the rights of the exclusive licensee under the doctrine of commercial confidence. The individual’s dignitarian interests remain protected, but the relatively low sums of compensation awarded detract from the utility of this action, at least from the individual’s perspective. I would therefore conclude that the U.K. experience is tentatively aligning itself with the strongly commercial and economic approach to publicity rights seen in America, no doubt pulled to some extent by the brisk trans-Atlantic celebrity trade. Whether this legal response continues in this reactive vein or whether these rights are put on a more solid footing by way of legislation remains to be seen. MR. RICHARDSON: Thank you, Gillian. We now turn to Professor Lionel Bently. Hopefully, you can stir everything up and get the speakers and the audience involved. PROF. BENTLY: I will try to stir things up a bit. I hope that Gillian will forgive me in five minutes’ time. Gillian describes the situation in the United States, where they have a lot of law relating to publicity rights, as “enviable.” She talks about the United Kingdom as lacking a principled 138 139

Id. ¶ 124. Lyngstad v. Anabas Prods. Ltd., [1977] F.S.R. 62.

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or coherent approach and says that the United Kingdom’s position represents “a step back in time.” In so doing, she implies that it is inevitable, and indeed desirable that the law go down the route that the different states of the United States have already gone down. It seems, she claims, that the basis for this is that the law needs to correspond to commercial practice and it seems that in some ways they ought to be endorsing Lord Hoffmann’s bizarre view that the lower court judges should “keep their eyes on the money” (as he expressed the matter in Douglas v. Hello!140). Well, in my view — and maybe it is an overly academic view — legal intervention should only take place, and the freedoms of people should only be curtailed, when there is a good justification for so doing. Traditionally, we have talked about justifications for interference in people’s liberty in terms of goals that are for the public good, utilitarian-type justifications and goals that we think are ethical. I share the views of many U.S. commentators — in particular Brooklyn Professor Michael Madow141 — that there is neither a public-interest justification nor a natural rights or ethical justification for interference with liberties by the adoption of a right of publicity. What I hear from Jonathan and Marshall is that the story in the United States is one of chaos and incoherence. Despite the various Restatements of Tort and Unfair Competition, there is considerable variation from state to state as to the basis for intervention and the duration of any rights. There is confusion as to the relation with copyright law and the preemptive impact of federal copyright legislation. This is certainly not a state of legal affairs that I envy and not anything I desire, and certainly not something for which I think there is a rational theoretical justification. I have included in the documents for the conference a paper that explores one other avenue by which the United Kingdom might be obtaining a right of publicity or a right of identity, namely through the European Convention on Human Rights’ protection of privacy, which has been interpreted quite broadly in the European Court of Human Rights’ decision in von Hannover.142 (The paper, entitled “Identity and the Law,” will be published this year by Cambridge University Press in a collection of the Darwin Lectures on “identity” edited by Elizabeth Leedham-Green, and also is included as Appendix A of this chapter.) Article 8 of that Convention states that “everyone has the right to respect for his private and family life, his home and his correspondence.” Because of the wording relating to “respect,” Article 8 does not merely compel the State to abstain from interfering with private and family life but also requires the state positively to act to protect privacy, even in the sphere of the relations of individuals between themselves. Some commentators have argued that the decision of the European Court of Human Rights in von Hannover, essentially gave a public figure a right to control use of their image. In von Hannover it was held that Princess Caroline’s Article 8 right to respect for her private life had been violated when pictures of her going about her daily activities (riding a horse, eating an ice cream) were published in gossip magazines. The language of the decision and some of the reasons the court gave as justifying protection of “private life” can be read as implying that Article 8 requires Member States to adopt a right of identity or a right of personality. For example, Huw Beverley-Smith, Ansgar Ohly, and Agnès Lucas-Schloetter, in their book, Privacy, Property and Personality: Civil Law Perspectives on Commercial Appropriation, have argued that von Hannover does seem to require recognition of a right to identity.143 They say: “Following the ECHR’s reasoning, article [2008] 1 A.C. 1, ¶ 117. See, e.g., Michael P. Madow, “Private Ownership of Public Image: Popular Culture and Publicity Rights”, 81 Cal. L. Rev. 125 (1993). 142 Application No 59320/00, (2005) 40 Eur. Ct. H.R. 1. 143 Beverley Smith et al., supra note 56, at 222–23. 140 141

512 CHAPTER VI: TRADEMARK LAW 8 of the Convention arguably imposes an obligation on the member states to protect individuals against any misappropriation of their personal indicia in advertising or merchandising.” In my view there is good reason not to read that decision in that way. Points where the court does refer to a right in one’s image can best be seen as references to the German law that the court was considering rather than to any rights that must be regarded as flowing from Article 8. The German law which conferred a right over one’s image is subject to an exception to figures of contemporary history par excellence. When the court said that this exclusion was unjustified, and that public figures have a right to a private life under Article 8, it was not saying that Article 8 required recognition of a right to one’s own image. On my reading of the decision it is not necessary for Members to recognize a right over one’s image in any circumstances where that right is not concerned with one’s “private life.” The court explains the basis for Article 8 in terms of “identity.” It stated that the scope of private life “extends to aspects relating to personal identity, such as a person’s name, or a person’s picture. Furthermore, private life, in the court’s view, includes a person’s physical and psychological integrity; the guarantee afforded by Article 8 of the Convention is primarily intended to ensure the development, without outside interference, of the personality of each individual in his relations with other human beings. There is therefore a zone of interaction of a person, with others, even in the public context, which may fall within the scope of ‘private life.’” 144 Although the court refers to “identity,” I do not think that it meant to establish anything akin to a proprietary right in identity. Indeed quite a number of earlier Article 8 cases where the language of “identity” has been deployed are cases of individuals challenging state rules limiting the adoption of particular names. When the court refers to Article 8 as protecting identity, it is gesturing towards that line of case law in which state-mandated restrictions on individual choice as to aspects of personal identity have been regarded as requiring justification. I do not think the idea of a right in one’s own “identity” is one the court has been contemplating. Moreover, I consider the notion of identity as a founding notion on which to base a proprietary right as extremely problematic. Partly, there are problems of definition of the notion of identity. In a series of contract cases, English courts have attempted to distinguish between a person’s identity and their attributes and have got themselves in a hopeless muddle. Similarly, the social sciences literature on the notion of identity only offers definitions of identity that are deeply subjective, and implausible as candidates for the definition of a property right. In the final analysis, the idea of a right in identity is not one that the law can sensibly adopt because it is one that does not have a satisfactory definition. Moreover, and more importantly, I think that the different things that are bundled into this right of identity that is now widely recognized in the United States do not share the same characteristics or function in the same way. Names do not have the same characteristics (for example in terms of uniqueness) or function in the same way as voices. Voices do not have the same characteristics (for example, in terms of recognizability) or function in the same way as faces or images. If the legal system does offer proprietary rights over different components of identity, such as image, name and voice, it should acknowledge the differences in these different aspects. Marshall Leaffer’s examples usefully illustrate some of the problems. If we recognize a proprietary right in identity that includes your voice, we would have massive overlap with performers’ rights, with copyright. We have carefully tailored performers’ rights and copyright to accord with what we regard as public interest or ethical goals. The idea of suddenly imposing some strange, vague, amorphous right of identity on top of that has the potential seriously to undermine those carefully — or maybe not so carefully — calibrated regimes and introduce further chaos into U.K. law. 144

(2005) 40 Eur. Ct. H.R. 1, ¶ 50.

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Please forgive me, Gillian, but I disagree with you quite profoundly. A right in identity, even a more narrowly formulated right in one’s own image, is in my view unnecessary (under the Convention) and undesirable. The partial protection that English law currently offers images is not unprincipled: far from it. Rather, it reflects three principles: protection of privacy, protection of traders against damaging misrepresentations through the law of passing off, and protection of confidence. Those are three principled grounds of intervention. In my view there is no good basis for protecting images, or identity, per se. MR. RICHARDSON: Does anybody in the audience want to say anything? Hugh Laddie? QUESTION [Professor Hugh Laddie, University College London]: I’m sorry, Gillian, it’s not your day. PROF. BLACK: Evidently. QUESTIONER [Prof. Laddie]: I was the judge who decided the Irvine v. Talksport case.145 I resent the suggestion that it had anything to do with a right of publicity. It had nothing to do with a right of publicity. It was a standard passing-off case. The facts as found — I might have been wrong on the facts — were that he was a famous sportsman who used his image to endorse goods. Talksport came along and used his image to endorse its services. It was a simple fraud on the public. It was a misrepresentation. It had nothing to do with a right of privacy or anything else. It was passing-off. It had nothing whatsoever to do with a right of privacy. And I agree entirely with Lionel. Why give rights in the names of dead people? It’s bad enough having copyright extending for the life of the author plus God knows how many decades. Why create another right? Why should there be a right to stop people referring to Elvis Presley? He’s dead and gone. As far as I am concerned, I pray that the Brits and the Europeans do not go down the route of creating a whole raft of new rights unsupported by any real ethical or commercial justification. Elvis Presley would not have sung another song or made another record if he had thought that there was a right of privacy in himself after he was dead. It would have made no impact on him as a performer. MR. RICHARDSON: Anyone else in the audience? QUESTION [Demetrios Moscholeas, White & Case, New York]: I just have two very brief comments to make. One is I don’t know if the panel will agree with me that the right of publicity has gone too far here in the United States and sometimes people try to use it as a back door for what they didn’t negotiate ex ante, like, let’s say, the Baltimore Orioles case.146 Now, because they have assigned their rights or it was a work for hire, they have no copyright. Now they try to use the right of publicity so, ex post, they can claim commercial rights that they should have negotiated ex ante. The second comment. Although I do agree, I have an objection to what you said about the European Convention on Human Rights. I do not think that would provide a right equivalent to the right of publicity in the United States. As you very well know, first of all, it is about the rights of an individual against the government, so it wouldn’t really work well. PROF. BENTLY: Well, the European Court of Human Rights has effectively extended the right of privacy to have horizontal effect. Von Hannover,147 for example, concerned whether German law created appropriate rights (and limitations) in the law it applied between individuals (Princess Caroline and the newspapers). Edmund Irvine Tidswell Ltd. v. Talksport Ltd., [2002] EWHC 367 (Ch) (Laddie, J.). Baltimore Orioles, Inc. v. Major League Baseball Players Ass’n, 805 F.2d 663, 668 (7th Cir. 1986). 147 Application No 59320/00, (2005) 40 E.H.R.R. 1. 145 146

514 CHAPTER VI: TRADEMARK LAW QUESTIONER [Mr. Moscholeas]: But how would it work when it comes to contracts and when we are talking about a broader right of identity or privacy? Those people in some cases do not object to someone using their image. What they object to mainly is that they cannot capitalize on that, that someone else is capitalizing. It is not really that someone intruded on their privacy; it is that someone else is exploiting that commercially. Thirdly, I really like Judge Kozinski’s comment that sometimes people just do not like being criticized and what they try to do is use the right of publicity just because they do not like the negative comments and the criticism.148 MR. RICHARDSON: Marshall, do you have anything to say about the first point, which was about trying to renegotiate things you didn’t deal with in the first place? PROF. LEAFFER: Yes. It is a very valid point. This is actually an issue that I addressed in my talk. I think that the courts that look at the contractual provisions and the conveyance of both copyright and right of publicity, in that instance this should be simply preempted by the copyright laws. That is one way of doing it. There are other limitations on the right of publicity that we didn’t get a chance to talk about. In the United States, there is also a First Amendment limitation in right of publicity.149 That is the subject of a current case that Jonathan perhaps would have liked to have talked about. 148 See Alex Kozinski, “What I Ate for Breakfast and Other Mysteries of Judicial Decision Making”, 26 Loy. L.A. Ent. L. Rev. 993 (1993). 149 See generally Jeremy T. Marr, “Constitutional Restraints on State Right of Publicity Laws”, 41 B.C. L. Rev. 863 (2003), available at http://www.bc.edu/schools/law/lawreviews/meta-elements/journals/bclawr/44_3/05_FMS.htm; Solomon, supra note 140, at 1222. The right of publicity is not absolute. Among the most notable exceptions to the cause of action are incidental use of a name or likeness, the use of a name or likeness for matters of legitimate public interest or concern, or other uses that would be protected by the First Amendment. Courts have been careful to limit the application of the state rights of publicity and to accord First Amendment protection to expressive works. Application of the First Amendment to Lanham Act claims for false endorsement is not uniform. At least three different approaches have been used by the federal courts. Tenth Circuit: Cardtoons v. Major League Baseball Players, 95 F.3d 959, 970 (10th Cir. 1996) (first Amendment factored into the traditional likelihood of confusion analysis); Eighth Circuit: Mutual of Omaha Ins. Co. v. Novak, 836 F.2d 397, 402 (8th Cir. 1987) (court looked at whether there were alternative means for an artist to convey his or her idea in determining whether First Amendment protection should apply). The Second, Fifth, Sixth and Ninth Circuits determine whether the use of the image at issue is relevant to the underlying work. If it is, the court then determines whether anything about the use explicitly misleads as to the source of the work. Under this approach, the court will find the Lanham Act applicable only where the public interest in avoiding confusion outweighs the public interest in free expression. See, e.g., Rogers v. Grimaldi, 875 F.2d 994, 1004 (2d Cir. 1989); ETW Corp. v. Jireh Publ’g, Inc., 332 F.3d 915, 926 (6th Cir. 2003). Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), provides “a right of action to persons engaged in interstate and foreign commerce, against deceptive and misleading use of words, names, symbols, or devices, or any combination thereof, which have been adopted by a … merchant to identify his goods and distinguish them from those manufactured by others.” Whereas the right of publicity protects the pecuniary right and interest in the commercial exploitation of one’s identity, (see Herman Miller, Inc. v. Palazzetti Imports and Exports, Inc., 270 F.3d 298, 325 (6th Cir. 2001); Restatement (Second) of Torts, § 652C cmt. a (1977) (the right created by the publicity prong of the right of privacy tort “is in the nature of a property right. …”), the Lanham Act was enacted primarily to protect consumers from misrepresentations or deceptions and to protect trademark owners from the misperception that they are associated with or endorse a product. Mattel Inc. v. Walking Mountain Prods., 353 F.3d 792 (9th Cir. 2003). The legislative history of the Lanham Act makes clear that there is a “sound public policy” in the protection of trademarks, which is the same as the “protection of good will, to prevent diversion of trade through misrepresentation, and the protection of the public against deception. …” S. Res. No. 1333, 79th Cong., 2d Sess. (1946), reprinted in 1946 U.S.C.C.A.N. 1277. The Lanham Act’s goal is not to protect “the person or entity that originated the ideas or communications that ‘goods’ embody or contain.” Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 32–38 (2003) (holding that the phrase “origin of goods” in Lanham Act § 43(a) does not require attribution to authors). Over the years, through amendments to the Lanham Act and court interpretations, the scope and protection of the Lanham Act has expanded to cover more general notions of unfair competition and false advertising. Yet the gist of a Lanham Act claim requires consumer perception that the plaintiff is somehow associated with, sponsors, or endorses defendant’s goods or services. See generally Barbara A. Solomon, “Can the Lanham Act Protect Tiger Woods? An Analysis of Whether the Lanham Act Is a Proper Substitute for a Federal Right of Publicity”, 94 Trademark Rep. 1202 (2004), available at http://www.frosszelnick.com/assets/20061017163214_3_PUBLISHED_PDF.pdf. ...

PART B: THE RIGHT OF PUBLICITY – DEVELOPMENTS IN THE US AND EUROPE 515 MR. RICHARDSON: Gillian, do you have any comeback? PROF. BLACK: Yes. I could perhaps try to salvage the situation somewhat, if I could make

a few comments. First, in response to Lionel’s comments, I don’t think I am endorsing Lord Hoffmann’s means of arriving at his decision. I am simply endorsing the commercial outcome of this case. I think that the confusion that results from Douglas and from the use of privacy by the Douglases and commercial confidence by Okay! to try to protect what they saw as their rights, I think this really emphasizes the lack of coherence and lack of principled development in the United Kingdom and, I think, is a good reason for why we need to develop the law to make that clear. That is why I would favor certainly some sort of sui generis statutory right to make it very clear what rights celebrities and their licensees do or do not have. I also, coming from a mixed jurisdiction in Scotland, which is half civilian and half common law, am very conscious of the tension between the proprietary approaches in the United States and the personality and dignitarian approaches in the civilian jurisdictions. My own personal view is that I would not seek a proprietary right, I would not seek a right of property, as they have in the States, but I think some clear right to exclude which has limits much closer to an IP right, for example, where there is a right but it has firm limits and defenses to it, would certainly help celebrities in the United Kingdom. Justification is the $64,000 question. It is something I have addressed in other work but haven’t had a chance to get around to today. I think it is by far the biggest challenge facing me, and something I don’t wish to get into. But I think it can be done. I’ would just like to say to Mr. Laddie that I would agree that the Irvine case had absolutely nothing to do with privacy. I think I would make a very clear distinction between privacy and publicity. Perhaps this is something we could discuss later in the break. Notwithstanding the fact that the right of publicity and the Lanham Act address different interests, plaintiffs have tried to use § 43(a) and, specifically, claims for false endorsement and unfair competition, as a substitute for a federal right of publicity claim. Claims under the Lanham Act, unlike claims for violation of the right of publicity, face barriers that include the statutory fair use defense (15 U.S.C. § 1115(b)(4)), the judicially created nominative fair use defense, lack of likelihood of confusion and lack of protectable rights. For this reason, as noted by one court, “[a] lthough publicity rights are related to laws preventing false endorsement, they offer substantially broader protection.” Cardtoons v. Major League Baseball Players, 95 F.3d 959, 967 (10th Cir. 1996), cert. denied, 531 U.S. 873 (2000); see also White v. Samsung Elecs. Am., Inc., 989 F.2d 1512, 1515 (9th Cir. 1993) (the right of publicity “is not aimed at or limited to false endorsements … ; that’s what the Lanham Act is for” (Kozinski, J., dissenting)). Some celebrities have been able to successfully use the Lanham Act to redress right of publicity claims. See, e.g., Jackson v. MPI Home Video, 694 F. Supp. 483 (N.D. Ill. 1988) (Jesse Jackson obtained relief against a company that sold a video tape of his address to the 1988 Democratic National Convention in packaging that bore his name and likeness on the grounds that the public might believe that the tapes were approved or produced by him); Allen v. Nat’l Video, Inc., 610 F. Supp. 612 (S.D.N.Y. 1985) (Woody Allen stopped the use of look-alikes in ads for a video club.); Rostropovich v. Koch Int’l Corp., 34 U.S.P.Q.2d 1609 (S.D.N.Y. 1995), reh’g denied, 36 U.S.P.Q.2d (S.D.N.Y 1985) (cellist Mstislav Rostropovich defeated a motion for summary judgment to dismiss his claim that the use of his likeness on CDs featuring his early performances would cause consumers to believe he had endorsed the CDs). Whether protection will be granted is uncertain, however, and many celebrities have not been on the winning side. See, e.g., ETW Corp. v. Jireh Publ’g, Inc., 332 F.3d 915 (6th Cir. 2003) (Tiger Woods unable to use the Lanham Act to stop distribution of limited edition prints featuring his image); Seale v. Gramercy Pictures, 964 F. Supp. 918 (E.D. Pa. 1997), aff’d, 156 F.3d 1225 (3d Cir. 1998) (Bobby Seale was unable to prevent the use of his likeness in a brochure accompanying a CD soundtrack to the film “Panther”); Pirone v. MacMillan, Inc., 894 F.2d 579 (2d Cir. 1998) (Babe Ruth’s daughters were unable to prevent depictions of the Babe in a baseball calendar); Cairns v. Franklin Mint Co., 292 F.3d 1139 (9th Cir. 2002) (heirs of Diana Princess of Wales were unable to prevent the use of her likeness on plates and other commercial products). However, to pursue claims under the Lanham Act, fame is needed. See, e.g., Albert v. Apex Fitness Inc., 44 U.S.P.Q.2d 1855 (S.D.N.Y. 1997) (non-celebrity model could not recover under Lanham Act when photograph of model was used in advertisement without permission); Pesina v. Midway Mfg. Co., 948 F. Supp. 40 (N.D. Ill. 1996) (to succeed on a false endorsement claim, plaintiff must be a “celebrity” or have public recognition); Newton v. Thomason, 22 F.3d 1455 (9th Cir. 1994) (recognized but not widely-known countrywestern singer had no claim under the Lanham Act against producers of television series “Evening Shade,” which had a character with singer’s name).

516 CHAPTER VI: TRADEMARK LAW I shall stop there. Thank you. MR. RICHARDSON: Jonathan, do you have anything that you want to add? MR. FABER: In general, obviously the right of publicity is a concept that provokes a fair amount of criticism and debate. But what I would submit is that I do not think it is fair to characterize the right-of-publicity legislation and case law that we have in this country as sheer chaos. I think that there is a discernible baseline of standards. Sure there are outliers and some unusual situations, but I do not think we would be able to have an intellectual property conference at Fordham Law School if there wasn’t a fair amount of controversy in patents, trademarks, and right of publicity. I think the right of publicity, without question — I may be the only one in the room that feels this way — protects something that is very different from trademark and copyright. It absolutely has to be balanced with these other laws. But it is worth noting that the statutes that are in place have very sensible exemptions for things like plays and books and documentaries and certain First Amendment types of protections. The concern that I tend to hear is that it just is not worth doing. I think it is worth remembering that what we are really getting at here is commercial speech. I don’t really have any problem with Vanna White having a right to be paid by Samsung when Samsung has an infinite number of ways to execute their advertising and they choose to do it in a way that the audience that comes to the advertisement already has a formulation as to who Vanna White is. The ad really does not work without that familiarity. I do not see why Samsung should have a right to do that without Vanna White. That may be one of the cases that are closer to the line.150 There are quite a number of cases out there. Let’s not forget that in both Midler151 and Waits152 the advertisers went to Midler and Waits and said, “Can we use your voice?” and they said, “No, we do not engage in commercial hucksterism.” The song that was used by Frito Lay was a song by Waits which was critical of commercialism, so the irony runs pretty deep. I think I will stop there. Hopefully, I have made some good counterpoints. MR. RICHARDSON: I think we have run our course and we are into the break, unless there is anybody from the audience who has a question. QUESTION: I really enjoyed the discussion. My question is basically: Does anyone think that the right of publicity idea could be philosophically aligned closer to moral rights, to the extent that with moral rights all the dignitary interests are there, so you have some sort of justification to start with? To the extent that celebrities spend all their time and energy and effort in crafting their persona and the like, you could start drawing analogies between works and the moral rights that authors have in those works, and celebrity images, to the extent that some time and effort may be spent in crafting that image. MR. RICHARDSON: Lionel, why don’t you try to answer that to start? PROF. BENTLY: We didn’t talk about French case law. You see the French development of the personality right has two streams analogous to those of copyright: an economic dimension and a moral rights dimension, a sort of bifurcation that is exactly the same.153 So yes. 150 White v. Samsung Elecs. Am., Inc., 971 F.2d 1395 (1992) (“In cases involving confusion over endorsement by a celebrity plaintiff, ‘mark’ means the celebrity’s persona”), petition for rehearing en banc denied, 989 F.2d 1512 (9th Cir. 1993) (Kozinski, J., dissenting), cert. denied, 508 U.S. 951 (1993). 151 Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir. 1988). 152 Waits v. Frito Lay, Inc., 978 F.2d 1093 (9th Cir. 1992) (“A false endorsement claim based on the unauthorized use of a celebrity’s identity is a type of false association claim, for it alleges the misuse of a trademark, i.e., a symbol or device such as a visual likeness, vocal imitation, or other uniquely distinguishing characteristic, which is likely to confuse consumers as to the plaintiff’s sponsorship or approval of the product.”). 153 Personality rights are strongly protected in France through the protection of private life in art. 9 of the French Civil Code, which has been used to prevent unauthorized reproduction of images by ordinary and famous...

PART B: THE RIGHT OF PUBLICITY – DEVELOPMENTS IN THE US AND EUROPE 517 MR. RICHARDSON: Gillian, you can have the last word. PROF. BLACK: In response to that question? MR. RICHARDSON: Or as you wish. PROF. BLACK: There is a very interesting paper by an American academic, Professor

Roberta Kwall, who looks specifically at using moral rights to protect publicity.154 I think that’s definitely one of the attractions of the civilian approach, as Lionel has mentioned, that it does look at both the moral and the economic interests. MR. RICHARDSON: I thank the speakers, the panelists, and the audience.

APPENDIX A Identity and the Law Lionel Bently* Although issues of “identity” have frequently been the subject of legal regulation and legal decision making in legal areas as disparate as child law, contract law, and criminal sentencing, the concept of “identity” has not hitherto occupied a central place in English law. In contrast, in the United States, in particular, the idea that a person has property over their identity, including their image, name, or voice, is one that is gaining increasing acceptance. Under these laws (which operate primarily at state level and vary in detail from state to state) a person may be able to object if their name is used on a product, or as a domain name, or their face on a poster, t-shirts, mugs, video games, or memorabilia, or their voice in a television advertisement. Thus it has been held that a famous baseball player can prevent use of his image on baseball cards,155 a famous athlete could prevent use of his nickname “Crazylegs” on shaving gel,156 and individuals alike. It would thus appear that personality rights in France are based on dignitary, rather than commercial, concerns although the exercise of the rights can have commercial implications. A database of French cases is available at http://www.law.ed.ac.uk/ hrc/personality/france.asp. On the side of privacy are cases such as Philippe, where photographers and reporters had entered a hospital room to take photographs of an ill child. Individuals are not just protected within enclosed spaces, but also against the intrusive nature of long-lens photography, such as that employed in the Bardot and Schneider cases. Commercial aspects of personality are also protected. The French doctrine “finalité” places restrictions on what the press is able to publish in respect of images of individuals. The courts look to what has been authorized by an individual and limits the extent of publication to such authorization. Catherine Deneuve could thus prevent magazine from printing photographs of her that it had bought from another, where that other magazine had produced and published them with her consent. Recent cases also construe this “goal of publication” element narrowly. The Cour de Cassation prevented a magazine from publishing photographs of items of merchandise that portrayed the image of Johnny Halliday and which Johnny Halliday had authorized for sale. The scope of a publicity campaign has also to be known to an individual and that individual must consent to the extent to which an image will be used in such a campaign, B/SA C. While publicly known facts and images of public figures are not generally protected, use of someone’s image or personal history has been held actionable under French law. The most famous case in recent history is perhaps the publication of the book, Le Grand Secret, about François Mitterrand, in which Mitterrand’s doctor published a book that not only revealed private facts about Mr. Mitterrand’s life, but also revealed medical confidences protected by patient-doctor privilege. 154 Kwall, supra note 90. * For helpful conversations, my thanks go to Robert Burrell, Bill Cornish, Jennifer Davis, Joanna Kostylo, Kathy Liddell, and Clair Milligan; for research assistance to Doug MacMahon. 155 Haelen Labs., Inc. v. Topps Chewing Gum, Inc., 202 F.2d 866 (1953); see also Newcombe v. Adolf Coors Co., 157 F.3d 686 (9th Cir. 1998) (picture of pitcher on calendar). 156 Hirsch v. S.C. Johnson & Son, Inc., 280 N.W.2d 129 (Wis. 1979) (appeal allowed from dismissing action by...

518 CHAPTER VI: TRADEMARK LAW a famous singer could prevent advertisers using vocal imitations in association with the sale of snackfood.157 Some commentators are suggesting that the European Convention on Human Rights now requires the United Kingdom to take a similar position. In this essay I want to argue that the United Kingdom is not obliged, as yet, to adopt such a law, and would be well advised to think twice before doing so. Whereas other critics of identity rights have questioned the underlying justification for creation of such rights, I want to highlight some other potential problems with the idea of property in identity. I will suggest that “identity” is a particularly problematic concept around which to build legal structures. The first reason is because it eludes definition, or, to the extent to which it can be defined, raises problems of subjectivity. The second is because, even as regard the core aspects of identity that have been subject of legal protection — name, image, and voice — the nature of these attributes is contested and may, therefore, warrant different legal treatment. In particular, echoing Rosemary Coombe, I want to highlight the possibility that property in identity may well conflict with the legitimate freedoms of others to develop their identities. I. COMPARATIVE LEGAL DEVELOPMENT OF PROPERTY IN IDENTITY

A. The United States The U.S. protection of a person’s identity has its origins in the development of a right of privacy. 158 The story of the development of this right begins with “that most influential law review article of all,”159 written by Samuel D. Warren and Louis Dembitz Brandeis in the 1890 Harvard Law Review.160 In this article, the authors sought to discover whether the common law offered any remedy to protect the privacy of an individual, “the desirability — indeed the necessity — of some such protection, there can, it is believed, be no doubt.”161 They argued there was such a remedy, not based, perhaps as one might have expected, through extension of the law of defamation’s protection of “reputation,”162 but rather through case-law that had protected authors and artists against unauthorized publication of their works. Using the classic methodology of searching for an “underlying principle” or “golden thread” to explain famous 1940s and 1950s footballer and basketball player Elroy Hirsch, nicknamed “Crazylegs,” who objected to Johnson’s use of name on shaving gel for women); see also John Doe, a.k.a. Tony Twist v. TCI Cablevision, 110 S.W.3d 363 (Mo. 2003) (notoriously violent ice hockey player, Tony Twist, could succeed in action objecting to use of name “Tony Twist” as that of evil mafia don in comic book Spawn, even though there was no physical resemblance). McFarland v. Miller, 14 F.3d 912, 914 (3d Cir. 1994) (actor who played “Spanky McFarland” could bring action against restaurant using the name). 157 Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir. 1988); Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir. 1992). Cf. Booth v. Colgate-Palmolive Co., 362 F. Supp. 343, 347 (S.D.N.Y. 1973) (right of publicity under New York law confined to name or likeness so did not cover sound-alike voice). 158 Distinct from the right of publicity, protected by state common or statutory law, a broader right of privacy has been inferred in the Constitution. Although not explicity stated in the text of the Constitution, “a right to be left alone” has developed into a liberty of personal autonomy protected by the Fourteenth Amendment. The Fourteenth Amendment makes this prohibition applicable to the States as well. See Palko v. Connecticut, 302 U.S. 319, 326–27 (1937).The First, Fourth, and Fifth Amendments also provide some protection of privacy, although in all cases the right is narrowly defined. The constitutional right of privacy has developed alongside a statutory right of privacy which limits access to personal information. 159 Harry Kalven Jr., “Privacy in Tort Law — Were Warren and Brandeis Wrong?”, 31 Law & Contemp. Probs. 326, 327; Hirsch, 280 N.W.2d at 133 (Heffernan, J.). 160 Samuel D. Warren & Louis D. Brandeis, “The Right of Privacy”, 4 Harv. L. Rev. 193–220 (1890). William L. Prosser, “Privacy”, Cal. L. Rev. 383 (1960) (“It has come to be regarded as the outstanding example of the influence of legal periodicals upon American law.”). 161 Warren & Brandeis, supra note 160, at 196. 162 Id. at 197–98.

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existing cases, the authors “discovered” that the common law sought to protect “the right to one’s personality.”163 The relevant case law — as matters turned out, bizarrely, much English jurisprudence — was that recognizing an author’s right to decide on the publication of their unpublished manuscripts, artistic works.164 For Warren and Brandeis these cases were not properly explained as cases of “property” in the products of one’s labor, but were better seen as “instances and applications of a general right to privacy.”165 The cases protected private “thoughts, emotions, and sensations” and the authors argued “these should receive the same protection, whether expressed in writing, in conduct, in conversation, in attitudes or in facial expression.”166 After some hesitation,167 the Warren and Brandeis analysis was accepted in a case of use of an individual’s image, without consent, in an advertisement. In Pavesich v. New England Life Insurance Co.168 the plaintiff was an artist who discovered his photograph (which, it seems, had been taken with consent) was being used by the defendant in an advertisement for its insurance services. The advert depicted the plaintiff along side a sickly looking man, and suggested that the plaintiff’s comparative good health was attributable to the fact that he had insurance with the defendant, whereas the sickly-looking man did not. The plaintiff’s action was for trespass on the plaintiff’s right of privacy, caused by breach of confidence and trust reposed in the photographer. At first instance the claim was rejected, but on appeal the Supreme Court of Georgia allowed the appeal. Cobb J., for the court, acknowledged that the court had to determine whether an individual had a right of privacy which the courts would protect against invasion. Despite the fact that neither previous case-law nor commentary suggested there was such a right, the court found that this did not suggest there was not such a right. The court based its reasoning in “natural law,” arguing that the right of privacy “has its foundation in the instincts of nature. It is recognized intuitively, consciousness being the witness that can be called to establish its existence.”169 Just as a person had liberty to decide whether to expose their bodies to the public gaze (or to stay in seclusion), so they should have the power to decide whether their image was placed before the public eye.170 For Cobb J, this right of privacy could be waived, but such waiver could be “for one person, and still asserted for another; it may be waived in behalf of one class, and retained as against another class; and it may be waived at to 163 See James Q. Whitman, “The Two Western Cultures of Privacy: Dignity versus Liberty”, 113 Yale L.J. 1151, 1202 (2004), for the argument that the “Warren and Brandeis tort” is best thought of not as “a great American innovation” but as “an unsuccessful continental transplant.” Whitman claims that the American conception of “privacy” concerns freedom in the home, particularly from interference by the state, whereas “continental” conceptions are grounded in notions of dignity and honor originally afforded only to an elite but in modern times generalized to the whole population. For Whitman, the Warren and Brandeis tort was grounded in this latter conception, specifically drawing on French and German law and scholarship. 164 Prince Albert v. Strange, (1849) 2 DeG. & Sm. 652; Nicols v. Pitman, (1884) 26 Ch D 374; Lee v. Simpson, 3 C.B. 871, 136 Eng. Rep. 349 (1847) (pantomime can be copyrighted); Turner v. Robinson, (1860) 10 Ir. Ch. 121. The authors also relied on implied contract and trade secret cases, Warren & Brandeis, supra note 160, at 210–14. 165 Warren & Brandeis, supra note 160, at 198. 166 Id. at 206. 167 For the immediate case-law, see Prosser, supra note 160, at 384–85. Most important amongst these was a decision of the New York Court of Appeal, Roberson v. Rochester Folding Box Co., 64 N.E. 442 (N.Y. 1902), where a complaint concerning the use of a young woman’s image in an advertisement for flour, with the caption “The Flour of the Family,” was rejected. Significantly, this prompted the New York legislature to introduce statutory protection to prevent the use of the name, portrait, or picture of any person for “advertising purposes or for the purposes of trade” without consent. 168 50 S.E. 68 (Ga. 1905). 169 Id. at 69; see also id. at 71 (“[T]he right of privacy … is a right derived from natural law, recognized by the principles of municipal law, and guaranteed to persons in this state both by the Constitution of the United States and of the state of Georgia, in those provisions which declare that no person shall be deprived of liberty except by due process of law.”). 170 Id. at 70.

520 CHAPTER VI: TRADEMARK LAW one individual, and retained as against all other persons.”171 Moreover, the right would, where appropriate, give way to competing interests in free speech.172 However, in the case in hand there was little difficulty in reconciling the two, often competing, interests of privacy and free speech. The “form and features of the plaintiff are his own” and the defendants had “no more authority to display them in public for the purpose of advertising the business in which they were engaged than they would have had to compel the plaintiff to place himself upon exhibition for this purpose.”173 Such use in advertising involved “not the slightest semblance of an expression of an idea, a thought or an opinion.”174 The right of privacy, described as an extension of liberty of movement and self-determination, was thus violated. Pavesich recognized that privacy interests could be affected by unwanted exposure of one’s image in association with advertising. However, Pavesich concerned an image of an unknown person, where the wrong was perceived in non-pecuniary terms: the publication was “peculiarly offensive to him” and “tends to bring plaintiff into ridicule before the world.”175 Although the court spoke in terms of “liberty,” and thus might have foreshadowed a general right to control all uses of one’s image, subsequent courts declined to protect well-known personalities where claims of injury to solitude or feelings were implausible. In O’Brien v. Pabst Sales Co.,176 for example, the plaintiff football player, Davey O’Brien, who had allowed Texas Christian University to take photographs for publicity purposes, was held not entitled to prevent the use of his photograph in a football strip on a calendar, the Pabst Blue Ribbon Football Calendar 1939. The Court of Appeal for the Fifth Circuit held that a person who had courted celebrity could not complain of intrusion into his privacy when he received the very publicity the court said he had “been constantly seeking and receiving.” In Haelen Laboratories, Inc. v. Topps Chewing Gum, Inc.177 the U.S. Court of Appeal for the Second Circuit extended the logic of Pavesich into a right to control not privacy but “publicity.” In Haelen, the facts of which “were not too clearly found,”178 the plaintiff claimed the exclusive right to use photographs of famous baseball players in connection with the sale of its chewing gum, basing its claim on contracts entered with the players. The defendant, a rival chewing-gum manufacturer, used the same players’ images on its cards. The plaintiff objected on the basis of both inducing breach of contract (a recognized tort) and the exclusive rights in the images. The defendant argued that the baseball players had only non-assignable rights of privacy, which they could waive vis-à-vis the plaintiff (or the defendant) so that its use of the images was non-infringing, but could not assign the right to the plaintiff. Judge Jerome Frank, held that “in addition to and independent of the right of privacy (which in New York derives from statute), a man has a right in the publicity value of his own photograph, i.e., the right to grant the exclusive privilege of publishing his picture,” which was assignable.179 These rights Id. at 72. Id. at 73–74 (“The right of privacy is unquestionably limited by the right to speak and print.”). 173 Id. at 79. 174 Id. at 80. 175 Id. at 68; Jonathan Kahn, “Controlling Identity: Plessy, Privacy and Racial Defamation”, 54 DePaul L. Rev. 755, 767 (2005) (emphasizing that Pavesich involved “a dignitary harm — and infringement of a personal interest — not a property right.”) 176 124 F.2d 167 (5th Cir. 1941); Pallas v. Crowley-Milner & Co., 54 N.W.2d 595 (Mich. 1952). See Melville B. Nimmer, The Right of Publicity, 19 Law & Contemp. Probs. 203, 204–09 (1954) (explaining limitations of “privacy”based conception of right over name and likeness). 177 202 F.2d 866 (1953). For background to the case, see J. Gordon Hylton, “Baseball Cards and the Birth of the Right of Publicity: The Curious Case of Haelan Laboratories v. Topps Chewing Gum”, 12 Marq. Sports L.J. 273 (2001). 178 202 F.2d at 867 (1953). 179 Id. at 868 (distinguishing Pekas Co. Inc. v. Leslie, 52 N.Y.L.J. 1864 (1915), on the basis that the judge’s attention was directed purely at the New York statute protecting privacy). 171 172

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of “publicity” were particularly relevant to the “many prominent persons” who objected to use of their images not because of “bruised feelings” from exposure of their likenesses but because they “no longer received money for authorizing advertisements, popularizing their countenances.” Haelen inaugurated a second wave of cases (and statutes) in which famous plaintiffs were permitted to claim for misuse of their names or likenesses, particularly by their use, without authorization, in advertising.180 While Pavesich had recognized such actions might involve invasions into the privacy of relatively unknown individuals, Haelen recognized that public figures had similar rights. But while the two actions bore a superficial similarity, the exact relationship between them was to become a matter for debate. Dean William L. Prosser181 sought to incorporate the publicity right within the rubric of privacy.182 Prosser asserted that “privacy” comprised not a single cause of action, but instead “a complex of four” distinguishable strands. These “four distinct kinds of invasion of four different interests” were intrusions upon another’s seclusion or solitude, public disclosure of embarrassing private facts, placing another in a false light and appropriation for the defendant’s advantage of the plaintiff’s name or likeness. Prosser argued that as regard the fourth tort “[t]he interest protected is not so much a mental as a proprietary one, in the exclusive use of the plaintiff’s name and likeness as an aspect of his identity.” In contrast, Edward Bloustein183 claimed that the publicity right lay outside the concept of privacy. Privacy, he said, protects “the individual’s independence, dignity and integrity; it defines man’s essence as a unique and self-determining being,” and argued that Prosser’s division into parts neglect this significant unifying characteristic. Bloustein denied that protection of one’s name or image can be reduced to a proprietary interest, emphasizing that cases such as Pavesich concern preservation of “individual dignity.” For Bloustein, the “[u]se of a photograph for trade purposes turns a man into a commodity and makes him serve the economic needs and interests of others … .” He denies that there is a “right of publicity” and prefers to see commercial dealings as situation where a person abandons his or her privacy right. Although Prosser’s categorization of “four torts of privacy” has received widespread judicial acceptance,184 the question of the relation between protection of “identity” through rights of privacy and publicity has continued to engage scholars and law-makers.185 Perhaps the most important development has been the Restatements produced by the American Law Institute. Here the rules on commercial appropriation of identity are summarized in two Restatements, both under rubrics of “privacy” and “unfair competition.”186 The Restatement (Second) of Torts includes a rule imposing liability for an invasion of privacy against “one who appropriates to his own use or benefit the name or likeness of another.”187 180 According to the National Conference of State Legislatures, there are nineteen states with statutory publicity laws and eleven that recognize a right at common law only. In California actions arise under Civil Code § 3344 and the common law. Section 3344(a) provides that “any person who knowingly uses another’s name, voice, signature, photograph or likeness, in any manner … for purposes of advertising or selling, … without such person’s prior consent … shall be liable for any damages sustained by the person or persons injured as a result thereof.” In New York the action is based on §§ 50 and 512 of the Civil Rights Law. 181 Dean of University of California School of Law, Berkeley. 182 Prosser, supra note 160, at 388. 183 Edward J. Bloustein, “Privacy as an Aspect of Human Dignity: An Answer to Dean Prosser”, 39 N.Y.U. L. Rev. 962 (1964); id. at 971. 184 J. Thomas McCarthy, “Public Personas and Private Property: The Commercialization of Human Identity”, 79 Trademark Rep. 681, 685–86 (1989). White v. Samsung Elecs. Am., Inc., 971 F.2d 1395 (9th Cir 1992) (“one of the earliest and most enduring articulations of the common law right of publicity cause of action”). 185 Jonathan Kahn, “Privacy as a Legal Principle of Identity Maintenance”, 33 Seton Hall L. Rev. 371 (2003). 186 Restatement (Second) of Torts § 652 (1977); Restatement (Third) of Unfair Competition (1995). 187 Restatement (Second) of Torts § 652 (1977). The commentary, written by Prosser, states that “the interest protected by the rule stated in this Section is the interest of the individual in the exclusive use of his own identity, in so...

522 CHAPTER VI: TRADEMARK LAW The Restatement (Third) of Unfair Competition states that: “One who appropriates the commercial value of a person’s identity by using without consent the person’s name, likeness, or other indicia of identity for the purposes of trade is subject to liability for the relief appropriate under the rules states in sections 48 and 49.”188 The Restatement explains that this parallels the provisions of the Restatement (Second) of Torts on privacy, which relate to the protection of personal interests that are affected by the appropriation of another person’s identity. Thus “similar substantive rules govern the determination of liability” in privacy and unfair competition, the difference relating primarily to the nature of the harm suffered.189 The identity right is, of course, limited by various doctrines: incidental uses are not covered,190 nor are non-commercial uses, and artistic uses may benefit from exemption under the First Amendment B. The U.K. Protection of Identity As I mentioned at the outset, English law does not have a corresponding action for “comercialization of identity.” The English common law declined (until recently) to recognize a right of privacy and has not come close to accepting the idea of a right of publicity. Baroness Hale explained in 2004 that “[u]nlike in France and Quebec, in this country we do not recognize a right to one’s own image,”191 and, as recently as May 2007, other members of the House of Lords reiterated the point. While recognizing that “the position is different in other jurisdictions” in Douglas v. Hello!, Lord Walker stated that “under English law it is not possible for a celebrity to claim a monopoly in his or her image, as if it were a trademark or a brand.”192 Lord Hoffmann agreed that, while he and Lord Walker might differ as to the result of the case before them (which involved interpretation of the law of confidentiality), there was no question of creating “an ‘image right’ or any other unorthodox form of intellectual property.”193 Of course, to deny the existence of an image right (let alone an “identity right”) is not to say that an aggrieved party cannot, in certain circumstances, gain judicial assistance in preventing certain uses of his or her image or identity. Here, the claimants have sought to use any of a number of different legal bases for their claims (depending, in part, on the regulatory context, and the type of damage that the appropriation has brought about). Although claimants have used defamation,194 contract,195 copyright,196 and other regulatory mechanisms (such as far as it is represented by his name or likeness, and in so far as the use may be of benefit to him or others” (emphasis added). 188 Restatement (Third) of Unfair Competition § 46. 189 Id., cmt. (b). The commentary to the Restatement also notes that “like the right of privacy, the right of publicity protects an individual’s interest in personal dignity and autonomy.” 190 Preston v. Bregman Prods., 765 F. Supp 116 (S.D.N.Y. 1991) (inclusion of plaintiff, a prostitute, in opening titles for film “Sea of Love” for 9 seconds, with face showing for 4.5 seconds, was incidental use so not a violation of New York privacy statute). 191 Campbell v. Mirror Group Newspapers, [2004] A.C. 457, 501, ¶ 154. 192 Douglas v. Hello!, [2007] UKHL 21, ¶ 293. Lord Walker “Their claims come close to a ‘character right’ protecting a celebrity’s name or image such as has consistently been rejected in English law ….” Id. ¶ 285; see also Elvis Presley Trade Marks, [1999] R.P.C. 567, 580–82, 597–78; Q.B. 967, ¶¶ 74 & 75 (Brooke, L.J.). 193 Douglas, [2007] UKHL 21, ¶ 124. 194 Tolley v. J.S. Fry & Sons, [1931] A.C. 333 (amateur golfer’s action for defamation succeeded when caricature included in plaintiff’s advert having a bar of Fry’s chocolate in his trouser pocket). 195 Pollard v. Photographic Co., LR 40 Ch. Div. 345 (1888). 196 Merchandising Corp. v. Harpbond, [1983] F.S.R. 32 (pop star Adam Ant unable to protect new image as a painting).

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complaining to the Advertising Standards Authority),197 until recently the most promising option has seemed to be passing off. 1. Passing Off The central precept of the English law of passing off is that “no man has a right to sell his own goods as the goods of another.” 198 Under conventional rules, to succeed a claimant would have to show that he was a trader and had a trading reputation (so-called goodwill) and that another’s use of his name or image operated as a misrepresentation that would damage the claimant’s goodwill. While the mere use of the name or image of a private or public figure will not always amount to passing off, it might well do in cases where the person in question sold goods or provided services that had become associated with the particular name or image in such a way that the latter would be understood as indicating the origin of the goods or services. The actor Paul Newman or celebrity Lloyd Grossman might, for example, take up manufacture of various foods and, having done so, would be able to stop other traders “passing their goods off” as “Newman’s Own” pasta sauce or Lloyd Grossman Madras Curry Sauce. However, claimants seeking to protect their names and images have frequently failed to establish relevant elements of the action for passing off. As early as 1848,199 the Physician in Ordinary to the Queen, Sir James Clark, was denied an injunction against a defendant who was selling “Sir J. Clarke’s Consumption Pills” because Clark was not himself “in the habit of manufacturing and selling pills” so there was no damage “to property by the fraudulent misuse of the name of another, by which his profits are diminished.” Virtually one hundred years later, Derek McCulloch, the presenter of the BBC’s very popular radio broadcast programme, Children’s Hour, was denied an injunction preventing the defendants from selling “Uncle Mac’s Puffed Wheat.” Passing off required that the defendant’s misrepresentation damage the goodwill of the plaintiff’s business and, given that McCulloch was “not engaged in any degree in producing or marketing puffed wheat,” the court was unable to see how his business could be damaged.200 In Lyngstrad v. Annabas Products201 the pop group ABBA complained that the defendant was selling paraphernalia that bore the name and image of the group. Refusing to grant relief, Oliver J said that he did not think anyone could reasonably imagine that the pop stars had given their approval for the paraphernalia. He also added that the defendants were not doing “anything more than catering for a popular demand among teenagers for effigies of their idols.”202 Despite these precedents, in 2002 a celebrity finally succeeded, with the decision of Laddie J. in Irvine v. Talksport.203 In this case, the famous Formula 1 racing driver brought an action against Talksport for using his image on a promotional brochure (used to attract advertising for the radio station). The brochure comprised a picture of Irvine, which had been modified so that he was listening to a radio bearing the Talksport logo. Irvine brought an action for passing off, and Laddie J found in his favor. Laddie J reviewed the cases on personalities and passing off, and held that they indicated that a person might be able to utilize passing off 197 Appeal by the Number (UK) Ltd., Complaint by David Bedford Concerning the 118 Runners TV Advertisement, ITC, Ofcom Content Bd. (Jan. 27, 2004), available at http://www.ofcom.org.uk. Note also the decision of WIPO Arbitrator, David Perkins, in Jeanette Winterson v. Mark Hogarth, WIPO Case No. D2000-0235, May 22, 2000, [2000] ETMR 783 (holding that English law recognized Jeanette Winterson was a trade mark for the purposes of the Uniform Domain Name Dispute Resolution Policy, that Hogarth’s registration of, inter alia, jeanettewinterson.com, had been in bad faith, and requiring transfer of the domain name to Winterson). 198 (1843) 7 Beav. 84, 88. 199 (1851) 1 Beav. 112; 8 Law Magazine ¶ 236. 200 McCulloch v. May, (1848) 65 R.P.C. 58. 201 [1977] F.S.R. 62. 202 Id.

524 CHAPTER VI: TRADEMARK LAW to prevent a misrepresentation by a trader that its products or services had been endorsed by the personality. (In so doing the judge made it clear that endorsement was a narrower notion than merchandising.) On the facts in front of him, Laddie J found that Talksport’s brochure had given the impression that Irvine endorsed the radio station. In particular, Laddie J was impressed by evidence from an associate of Irvine to the effect that he sought a free radio from the racing-driver, an act which indicated that he believed Irvine had done a deal with the radio station. The Court of Appeal affirmed Laddie J.’s decision, emphasising, in particular, that the actual image of Irvine listening to the radio gave an impression of endorsement. 2. Privacy While passing off has long seemed the most promising avenue for those seeking to prevent the commercial use of their name or image — not least because there was no common law of privacy — exciting new possibilities were presented for the development of the law of privacy in October 2000, when the Human Rights Act 1998 came into force. As is well known, the Act gave legal force within the United Kingdom to the European Convention on Human Rights, as well as the jurisprudence of the European Court of Human Rights (“the Strasbourg Court”). Importantly, Article 8 of that Convention states that “everyone has the right to respect for his private and family life, his home and his correspondence.” Because of the wording relating to “respect,” Article 8 does not merely compel the State to abstain from interfering with private and family life but also requires the state positively to act to protect privacy, even in the sphere of the relations of individuals between themselves. In so doing, the state has “a certain margin of appreciation.” The impact of Article 8 on English law has not been straightforward, primarily because English law continues to deny the existence of a tort of invasion of privacy. Instead, the judiciary has acknowledged that it should develop existing causes action to provide protection sufficient to comply with Article 8. The most important decision so far is that of the House of Lords in Campbell v. MGN Ltd.204 As was widely reported in the media, this case concerned the famously irascible model, Naomi Campbell. The Daily Mirror had published articles relating to the fact that she was receiving treatment for drug addiction (“Naomi: I am a drug addict”), and these were illustrated with photographs of Campbell leaving meetings of Narcotics Anonymous (“Therapy: Naomi Outside Meeting”).205 Campbell sued claiming invasion of her privacy. The House of Lords held in her favor, by three votes to two, though the disagreement was more about application of the principles than over what they were. The House indicated that Article 8 was to be given effect to through adaptation of the rules on breach of confidence.206 The key question was whether the photographs related to matters with respect to which Campbell had a reasonable expectation of privacy.207 Given that Campbell’s medical treatment was a private matter, and that the newspaper was aware of this, the majority held that the Mirror had breached an obligation of confidence.208 [2002] F.S.R. 943. [2004] A.C. 457; [2004] 2 All E.R. 995; [2004] 2 W.L.R. 1232 (House of Lords). 205 Published on Feb. 1, 2001. 206 [2004] A.C. 457, 465, ¶ 17 (per Lord Nicholls) (“the values enshrined in Article 8 and 10 are now part of the cause of action for breach of confidence”); see also Lord Hoffmann, ¶ 51 (referring to a “shift in the centre of gravity”). 207 Id. ¶ 21 (per Lord Nicholls). 208 Lord Nicholls said that Campbell had put the issue of whether she was addicted to drugs into the public domain, and that the photographs disclosed nothing further than that she was attending Narcotics Anonymous and so did not relate to material over which she had a reasonable expectation of privacy. Lord Hoffmann held that the Mirror’s freedom of expression justified the publication of the photographs. Id. 203 204

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The Campbell case certainly indicates potential for the law of privacy to give a person control of their image, but that potential is limited to images over which a person has a reasonable expectation of privacy. The effect is thus limited to photographs that disclose private matter, or implicate the dignity of the subject. In Campbell itself, Lord Nicholls argued that (once it was accepted that the fact she was receiving treatment was in the public domain) the photographs contained no private information: she was shown in the street exchanging greetings with others and “there was nothing undignified or distrait about her appearance.”209 Lord Hoffmann also said that even where a photograph is taken of someone in a public place, its publication could be restrained if it revealed him or her “to be in a situation of humiliation or severe embarrassment,” but that here there was “nothing embarrassing” as Ms. Campbell was “neatly dressed and smiling.”210 Baroness Hale agreed that had the picture been presented merely as one of Ms. Campbell going about her daily business in a public street, there could have been no complaint (though she, and the majority, took the view that, in the context of the disclosures about her medical treatment, there was a reasonable expectation of privacy).211 The clear view that public figures have no expectation of privacy when going about their business in public was applied in Sir Elton John v. Associated Newspapers.212 Here, Elton John sought to prevent the Daily Mail from publishing a photograph of him standing in the street outside his home wearing a baseball cap and tracksuit. Denying interim relief, Eady J explained that nothing in the photograph pertained to Mr. John’s health, or social, personal, or sexual relationships, and thus there was nothing relating to which John could be said to have a reasonable expectation of privacy. While the Judge expected that the article would likely be dismissive or personally offensive, he said that as yet there is not “any doctrine operative in English law whereby it is necessary to demonstrate that to publish a photograph one has to show that the subject of the photograph gave consent.” 3. Confidentiality The recent decision of the House of Lords in Douglas v. Hello! indicates that, even without circumstances that give rise to a reasonable expectation of privacy, the law of breach of confidence can itself provide some protection against use of one’s image.213 The case arose out of events following the wedding of Catherine Zeta Jones and Michael Douglas in New York in 2000. Ten days before the wedding, the bride and groom entered into an arrangement with OK! Magazine concerning photographs of the wedding, for which Douglas and Zeta-Jones each received £500,000. The Douglases were to arrange security for the wedding (so that no publishers other than OK! could obtain images), to commission the photography and then select photos for publication by OK! (by November 22). The agreement purported to transfer “the exclusive right to publish … the photographs … from the date of the wedding and for nine months thereafter” and the Douglases undertook not to publish or authorize publication of any photographs during that period. There were some 350 guests at the wedding, all of whom had been informed that there was to be no photography. OK!’s chief rival, Hello!, obtained (for £125,000) six photos of the wedding taken by a paparazzo, Mr. Rupert Thorpe, and sought to publish them. Hello! was initially enjoined by court order, but the Court of Appeal reversed on November 23, 2000, and it published the photographs that day. The, by now, not-so-“happy couple” and OK! responded to these developments by rushing selection of the photographs and publication, so that OK! in fact was Id. ¶ 31. Id. ¶¶ 75–76. 211 Id. ¶ 154. 212 [2006] EWHC 1611 (QB); [2006] E.M.L.R. 27. 209 210

526 CHAPTER VI: TRADEMARK LAW also able to release its authorized coverage on November 23. The Douglases and OK! sued for damages, claiming breach of confidence, invasion of privacy, and deliberate interference with business relations. At first instance, before Lindsay J, they succeeded. The Douglases were awarded £3750 damages each for mental distress and £7000 for inconvenience they suffered as a result of the wrongful publication. OK!, in contrast, were awarded what would be called in tabloid language a “whopping” £1,026,706 for loss of profit. The defendants appealed. The Court of Appeal allowed the appeal in part — that is, the most financially significant part — as regards OK!’s claim. Lord Phillips MR, giving judgment for the Court, accepted that the photographs “plainly portrayed aspects of the Douglas’s private life and fell within the protection of the law of confidentiality, as extended to cover private or personal information.”214 Moreover, the fact that the Douglases had entered a contract with OK! allowing the latter to exploit some of the information did not mean all details of the wedding were in the public domain. However, as regards OK!’s claim, the Court observed that this was wholly based on interests purportedly derived from the Douglases. Scrutiny of the agreement between the Douglases and OK! revealed that it did not claim to give any rights in the residual details of the wedding (other than that in the authorized photographs).215 The agreement gave OK! the right to use the pictures of the wedding that the Douglases had selected, but the residual rights over all the other photos (including unauthorized ones) remained with the couple. Crucially, the unauthorized photos “invaded the area of privacy which the Douglases had chosen to retain. It was the Douglases, not OK!, who had the right to protect this area of privacy or confidentiality.”216 On appeal, the House of Lords reversed the ruling in respect of OK!. Lord Hoffmann, with whom Lord Brown and Baroness Hale agreed, took the view that photographic images of the wedding were regarded by the Douglases and OK! as confidential, and observed that OK! had required the Douglases to use their best efforts to ensure that no one else would take any photographs. Hello! knew that there was an exclusive arrangement between the Douglases and Hello! and the sort of provisions it would contain. Consequently, Hello! came under an obligation of confidence to OK! itself.217 Lord Hoffmann described the key matter as the fact that “OK! had paid £1m for the benefit of the obligation of confidence imposed upon all those present at the wedding in respect of any photographs of the wedding.”218 Lords Walker and Nicholls had difficulty with this analysis. Lord Nicholls held that Hello!’s actions did not reveal any information not already made public when OK! published its authorized photographs.219 Lord Walker emphasized that OK!’s right depended on establishing confidentiality, and he could not see any basis for treating Hello!’s photographs of the event as confidential. 4. Summation Although English law offers protection to persons for unauthorized use of their names and likenesses, it seems that at present this is only so where the effect of publication is to imply endorsement of a product, or where the photograph discloses matters in relation to which there exists a reasonable expectation of privacy, or are subject to obligations of confidence. What we should draw from this, however, is that while in specific contexts English law (or selfregulation) may provide remedies to those who find that their identities have been used for [2007] UKHL 21. [2006] QB 125, 159 ¶ 94. 215 Id., 168, ¶132. 216 Id., 169, ¶136. 217 [2007] UKHL, ¶ 129. 218 Id. ¶ 117. 219 Id. ¶¶ 257–59. 213 214

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commercial purposes, English law has never done so on the basis that “identity” is an attribute that deserves protection for its own sake. This leaves a number of circumstances where no such rights exist in England, but where protection would likely be available in the United States. For example, a depiction of a look-alike, such as Jackie Onassis at a party on a Dior advertisement would not incur liability, absent a belief on behalf of consumers that Onassis endorsed the product. The same would be true had the picture been one of Onassis from a photo-library of publicly available images, or indeed of her standing in an unembarrassing manner in a public place. C. Potential Implications of Case Law of the European Court of Human Rights If English law currently contains large gaps compared to that in the United States, there are some who argue that the logic of the European Court of Human Rights’ decision in Von Hannover v. Germany effectively demands that English law fill those gaps.220 In this case, Princess Caroline of Monaco had sought to restrain the publication of various pictures of her in a number of German newspapers and magazines. The pictures included some in a courtyard restaurant, some on a beach, some horse-riding, some on a skiing holiday, some leaving her Parisian home, and some shopping. She had relied initially on the German Civil Code’s provision protecting personality, as well as specific provisions in German copyright law enabling a person to protect their image.221 The Hamburg Court had held that, as a figure of contemporary society par excellence, Caroline had to tolerate this kind of publication, and this view was affirmed on appeal. The Federal Court of Justice allowed a further appeal in relation only to the pictures in the restaurant courtyard, since it was clear to third parties that she and her companion wanted to be alone. On further appeal, the Federal Constitutional Court also took the view that pictures with her children infringed her basic right to protection of her personality. Unhappy with the outcome under German law, Caroline took the German Government to the European Court of Human Rights, where it was held that the German law had not balanced appropriately the right to freedom of expression contained in Article 10 of the Convention with the right to respect for one’s private life (in Article 8). The court’s judgment began by considering the concept of private life in Article 8. It “extends to aspects relating to personal identity, such as a person’s name, or a person’s picture. Furthermore, private life, in the court’s view, includes a person’s physical and psychological integrity; the guarantee afforded by Article 8 of the Convention is primarily intended to ensure the development, without outside interference, of the personality of each individual in his relations with other human beings. There is therefore a zone of interaction of a person, with others, even in the public context, which may fall within the scope of ‘private life.’” 222 The court said that there “is no doubt that the publication … of photos of the applicant in her daily life either on her own or with other people falls within the scope of her private life.”223 Effectively, Article 8 was engaged. The court then went on to examine the inter-relationship between Article 8 and 10, the latter guaranteeing freedom of expression. The court noted that although freedom of expression “extends to the publication of photos, this is an area in which 220 App. No. 59320/00, (2005) 40 Eur. Ct. H.R. 1. For reviews of von Hannover, see M.A. Sanderson, “Is Von Hannover v. Germany A Step Backward for the Substantive Analysis of Free Speech and Privacy Interests?”, 6 Eur. Human Rights L. Rev. 631 (2004); N.A. Moreham, Privacy in Public Places, 65(3) Cambridge L.J. 606 (2006). 221 German Basic Law art. 2 (“Everyone shall have the right to the free development of their personality provided that they do not interfere with the rights of others or violate the constitutional order or moral law.”); Copyright (Arts Domain) Act § 22 (images can only be disseminated with the express approval of the persons concerned). 222 (2005) 40 Eur. Ct. H.R. 1, ¶50. 223 Id. ¶ 53.

528 CHAPTER VI: TRADEMARK LAW the protection of the rights and reputation of others takes on particular importance. The present case does not concern the dissemination of ‘ideas,’ but of images containing very personal or even intimate ‘information’ about an individual. Furthermore, photos appearing in the tabloid press are often taken in a climate of continual harassment that induces in the persons concerned a very strong sense of intrusion into their private life or even of persecution.”224 The court also observed that the pictures in the case “show her in scenes from her daily life” and that the “accompanying commentaries relate exclusively to the details of the applicant’s private life.” The “sole purpose was to satisfy the curiosity of a particular readership regarding the details of the applicant’s private life.”225 As she was not exercising any official functions, and the photographs related exclusively to details of her private life, there was no contribution “to a debate of general interest,” such as to require their publication under Article 10.226 Huw Beverley-Smith, Ansgar Ohly, and Agnès Lucas-Schloetter, in their book, Privacy, Property and Personality: Civil Law Perspectives on Commercial Appropriation, have argued that Von Hannover does seem to require recognition of a right to identity:227 In typical appropriation cases the case for the protection of privacy is even stronger. The use of a celebrity’s picture or name in advertising or merchandising does not provide the public with socially useful information or contribute in any way to a debate of public interest. Following the ECHR’s reasoning, article 8 of the Convention arguably imposes an obligation on the member states to protect individuals against any misappropriation of their personal indicia in advertising or merchandising. A free speech defence will only be available in exceptional cases.

The authors argue that the jurisprudence “will inevitably force English law to confront the issue of how best to develop a remedy for appropriation of personality.”228 There are four aspects on von Hannover that seem, possibly, to point towards recognition of identity rights (or at the very least “image rights”). The first is the occasional use of the language of “image rights.” For example, the court refers to the “positive obligation under the Convention to protect private life and the right to control the use of one’s image,” and, as we noted, the court also said that “the concept of private life extends to aspects relating to personal identity, such as a person’s name, or a person’s picture.” These comments could be taken to imply absolute rights of control over one’s image (and identity) subject to contravening Article 10 interests.229 The second is the implication, from the decision itself, that all photographs of an individual engage the Article 8 right, even mundane ones of a person shopping or horse-riding. In this respect the case went well beyond its previous holding in Peck (where the protected images were of Peck carrying a knife after attempting to commit suicide in public)230 and Campbell Id. ¶ 59. Id. ¶ 65. 226 Id. ¶ 76. 227 Huw Beverley-Smith, Ansgar Ohly & Agnès Lucas-Schloetter, Privacy, Property and Personality: Civil Law Perspectives on Commercial Appropriation 222–23 (2005). 228 Id. at 225. 229 A dissenting minority, comprising Judges Spielmann and Jebens, interpret von Hannover as having established “the right to one’s image” under Article 8. See Vereinigung Bildender Künstler v. Austria [First Section], App. No. 68354/01, Eur. Ct. H.R. Judgment of 25 Jan. 2007, § 14 (explaining that “control of one’s own image is one of the essential components of personal development, [and thus that] Article 8 may therefore be applicable simply on the ground that a person has not had the prior opportunity to challenge the reproduction of his or her image”). On the facts of the case, the artist had used a photograph of the claimant, Meischberger, taken from a newspaper. Arguably, however, it was the mode of presentation, that is, in a sexually explicit collage, rather than its mere use, that caused the use of the image to implicate Meischberger’s private life. Also, see the dissenting opinion of Judge Herndl in Verlagsgruppe News GmbH v. Austria (No. 2), App. No. 10520/02, Eur. Ct. H.R. Judgment of 14 Dec. 2006, who would have held that the publication of any picture of Mr. G, a businessman accused of tax evasion, would be “a gratuitous invasion” into his private life. 230 Peck v. United Kingdom, App. No. 44647/98 (1003) 36 Eur. Ct. H.R. Judgment of 28 Jan. 2003, (41) 719. 224 225

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(where, subject to a difference of opinion, the pictures were of the model outside the venue of a narcotics anonymous meeting which could be identified). If protection must also be provided over the mundane, one might ask, aren’t all photographic images protected? Indeed, subsequent case-law of the court indicates that “private life” was engaged in relation to publication by the press of a photo of a person taken for the purposes of an official file.231 The third is the heavy emphasis on the privacy interests in the balancing exercise between Article 8 and Article 10 (freedom of expression). It is this latter aspect, particularly, that seems to inform Beverley-Smith, Ohly, and Schloetter’s views. These commentators seem to treat von Hannover as suggesting that all uses of photographs impact on private life, and thus require justification under Article 10.232 Because there is little such justification for merchandising or advertising uses, they argue that consent is needed for any use of any picture. The fourth reason why von Hannover might be taken as indicating a requirement to recognize a right to identity lies in the justification offered for the protection of private life. Following earlier case-law, the court twice refers to ensuring the development, without outside interference of the personality of each individual in his relations with other human beings” (¶ 50) and “the fundamental importance of protecting private life from the point of view of the development of every human being’s personality.”233 Given the emphasis on self-determination, it might be argued, von Hannover does require that a person identified consent to any and every new use of the indicia of their identity (in particular, image, but also name or voice). There are, I would suggest, two reasons to be skeptical about this understanding of von Hanover. Firstly, we should note that the language of the case, in particular the references to image rights, reflects the German legal provisions under consideration (Article 22 of the Copyright Act), which protects a person’s image whether it relates to private life or not. German law is, of course, entitled to give individual greater protection than that required under article 8. The court objected to the derogation from the German law on image rights (in Article 23), which applied to figures of contemporary society, and, according to the court, seemed to deprive these persons of their rights under Article 8. Seen in this light, the court’s comments to “image rights” should be seen as part of the context of the decision, not statements as to the content of Article 8. Secondly, while the von Hannover case does clearly cast doubt on the assumptions of English law present in Campbell and Elton John that “ordinary photos taken of a famous person in a public place” are within the remit of Article 8, 234 it does not follow from the decision that all photographs, however made and whatever their content, contain private information. The images must engage “private life” in a non-trivial way before Article 8 is engaged.235 There must be some “legitimate expectation” of protection and respect for the person’s private life. In the von Hannover case the images may have been essentially uninteresting, in that Caroline was not doing anything controversial (carrying a knife, attending a meeting of NA), but as far as the court was concerned it was exactly these sorts of quotidian, routine actions that were private. They concerned her daily life. Moreover the images were created without Sciacca v. Italy, App. No. 50774/99, Eur. Ct. H.R. Judgment of 11 Jan. 2005. White v. Sweden, App. No. 42425/02, Eur. Ct. H.R. Judgment of 19 Sept. 2006, ¶ 19 (may support this view, for in this case the European Court of Human Rights assumed, without examining either the circumstances in which the photographs were initially created or disclosed, that the publication of pictures of White in several Swedish papers engaged Article 8, with the critical issue being whether this was justified under Article 10). 233 Citing Stjerna v. Finland, App. No. 18131/91, 24 Eur. Comm’n H.R. Judgment of 25 Nov. 1994, 195, ¶ 56 (Article 8 ensures a sphere within which everyone can freely pursue the development and fulfillment of one’s personality). 234 “There is little doubt that Von Hannover extends the reach of Article 8 beyond what had previously been understood ... .” McKennitt v. Ash, [2006] EWCA (Civ) 1714 (Dec. 14, 2006) ¶ 37 (per Buxton, L.J.). 235 See, e.g., Stjerna v. Finland, App. No. 18131/91, 24 Eur. Comm’n H.R. Judgment of 25 Nov. 1994, 195, ¶ 67 (inconveniences were not sufficient to implicate Article 8). 231 232

530 CHAPTER VI: TRADEMARK LAW Caroline’s consent, and distributed well beyond any audience to which she could have been taken to consent. As the court said “the context in which these photos were taken — without the applicant’s knowledge and consent — and the harassment endured by many public figures in their daily lives cannot be fully disregarded.”236 Importantly, then, images, such as those of Eddie Irvine in Irvine v. Talksport or the baseball players in Haelen, seem to fall well outside the scope of the von Hannover holding. For von Hannover to encompass such acts we would have to accept that photographs taken with the consent of the person depicted and distributed in public with their consent nevertheless involved aspects of the person’s private life so that explicit consent was required whenever the image was further distributed to a distinguishable or different audience. This is, of course, not beyond the bounds of what a legal system might require, but it seems a long way beyond what either Article 8 of the Convention or von Hannover demand. If von Hannover does require recognition of image rights, does it also require a general right to “one’s identity?” The statement that “the concept of private life extends to aspects relating to personal identity, such as a person’s name, or a person’s picture” might suggest so.237 However, one should be very careful to draw a distinction between the concept of private life in Article 8 and the legal content of the “right of respect” for one’s private life in Article 8. The European Court has happily identified matters, such as names,238 sexual identity,239 and so on, as matters falling within private life. However, just because names come within the idea of private life, and so a person can object when their choice of name is limited in a discriminatory manner, does not mean that Article 8 requires recognition of an exclusive right over one’s name. One might as well conclude that a person is to have exclusive rights in their own sexual identity, a self-evidently ludicrous proposition. Some court case-law does suggest that rights over a person’s “voice” might be included in the content of respect for “private life.” In PG and JH v. UK240 the applicants (who had been suspected of planning an armed robbery) were recorded while in police custody, in order to compare the applicants’ voices with those on certain other recordings. They were both later convicted of conspiracy to rob Securicor and sentenced to fifteen years’ imprisonment. As regards the recordings at the police station, which were primarily for use by voice experts, the court held that there was violation of Article 8(1). The right to respect for one’s private 236 Von Hannover, (2005) 40 Eur. Ct. H.R. 1, ¶ 68; see also id., ¶ 59. The argument that von Hannover was a special case of persistent media intrusion or harassment was rejected in McKennitt .v Ash, [2006] EWCA (Civ) 1714 (Dec. 14, 2006) ¶ 41, on the basis that the ECHR had already indicated it was a principle of general application in Sciacca v. Italy, App. No. 50774/99, Eur. Ct. H.R. Judgment of 11 Jan. 2005. 237 Von Hannover, (2005) 40 Eur. Ct. H.R. 1, ¶ 50. Note also: PG and JH v. UK, App. No. 44787/98, Eur. Ct. H.R. Judgment of 25 Sept. 2001; The Times, Oct. 19, 2001, ¶ 56 (“Article 8 protects a right to identity and personal development ...”); Bensaid v. UK, App. No. 44599/98, (2001) 33 Eur. Ct. H.R. 205, ¶ 47. 238 Earlier case-law, which has recognized that matters relating to the regulation of names may fall within the concept of private life in Article 8, has concerned administrative regulation of the choice of surname, something quite different to recognition of property in one’s name. In those cases the court has indicated that restrictions on a persons freedom to choose their own name may operate in a way that affect their private life, and be objectionable, in themselves or in combination with the prohibition against unjustified discrimination contained in Article 14. So, for example, a person should not be prevented from changing their name from a name that is humiliating (Stjerna v. Finland, App. No. 18131/91, (1997) 24 Eur Ct. H.R. 195, particularly the Commission decision at 206–06, ¶ 64), nor should the rules on adoption of surnames after marriage operate to allow only adoption of the name of a particular gender (Burghartz v. Switzerland, App. No. 16213/90, (1994) 18 Eur Ct. H.R. 101; Unal Tekeli v. Turkey, App. No. 29865/96, (2006) 42 Eur. Ct. H.R. 53). 239 Bensaid v. UK, App. No. 44599/98, (2001) 33 Eur. Ct. H.R. 205, ¶ 47 (“Private life” is a broad term not susceptible to exhaustive definition. The court has already held that elements, such as gender identification, name and sexual orientation, and sexual life, are important elements of the personal sphere protected by Article 8); Van Kuck v. Germany, App. No. 35968/97, (2003) 37 Eur. Ct. H.R. 973, ¶ 75 (“a fundamental aspect of her right to respect for private life, namely her right to gender identity and personal development”). 240 App. No. 44787/98, Eur. Ct. H.R. Judgment of 25 Sept. 2001.

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life included a right to prevent the recording of one’s speech, even where the content of the speech was wholly anodyne, at least where this was done covertly. Since the police were not authorized to make these recordings under any express legislative framework, the act of recording and use of the fixations were not done “in accordance with law” and violated the applicants’ Article 8 rights. However, by a majority,241 the court held that the use of the evidence in the applicants’ trial did not violate their right to a fair trial (under Article 6). Each was awarded £1000 compensation for “feelings of frustration and invasion of privacy.”242 It must be right that covert recording of a person in a private space (or a space in which they have a reasonable expectation of privacy) is as much an invasion of privacy as the use of a telephoto lens to take photographs of a person in private. However, when viewed in the light of some of the more expansive readings of von Hannover, this holding that respect for private life extends to covert recording of voice (including taping a celebrity in a public place) raises the possibility that Article 8 could be invoked to require prevention of the recording of lectures and performance.243 II. WHY BRITAIN, EUROPE— AND THE UNITED STATES — SHOULD THINK TWICE BEFORE MAKING IDENTITY INTO PROPERTY

Even if, as I have argued, the United Kingdom is not obliged to develop a notion of property in identity, there will doubtless be pressure to do so. Everyone who works in the field of intellectual property law is conscious of the tendency of legal norms to expand and, in areas of harmonization, to gravitate toward the most protective regime. Although there is no international framework that requires harmonization of “identity rights” between the United Kingdom and the United States, wherever foreign developments present greater levels of protection, they come to be cited as standards to which domestic law should aspire and models against which it should be judged. The use of the names, images, and voices of film, TV, and sports stars in advertising and in merchandising is already big business: those who invest in exclusive dealings with these figures, and the celebrities who benefit from such transactions, will doubtless press for the recognition of property in identity.244 I am unpersuaded that such recognition would be desirable. For one thing, I share the views of other commentators that the philosophical and policy justifications for such protection have not been made out.245 Neither arguments based on natural rights, nor those based on economics, for protection of intellectual property in intellectual creations, seem to apply satisfactorily to the names, voices, or images of individuals. In most cases, one’s name, face, or voice is not a creation requiring labor, skill, ingenuity, or inventiveness. Why then should it be made a property? To echo one English appellate judge,246 “monopolies should not be so readily created.” 241 Judge Tulkens dissented, arguing that evidence obtained in breach of a human right should not be admissible at trial. 242 PG and JH v. UK, App. No. 44787/98, ¶ 92. 243 The European Union has an elaborate regime for protecting rights in performances. Council Directive 92/100/ EEC, 1992 O.J. (L 346) 61, Rental and Lending Right and on Certain Rights Related to Copyright in the Field of Intellectual Property. 244 Hazel Carty, “Advertising, Publicity Rights and English Law”, Intell. Prop. Questionnaire 209–58 (2004). 245 Michael P. Madow, “Private Ownership of Public Image: Popular Culture and Publicity Rights”, 81 Cal. L. Rev. 125 (1993); Mark Lemley & Stacey Dogan, “What The Right of Publicity Can Learn from Trademark Law”, 58 Stan. L. Rev. 1161 (2006) (critiquing “a slew of sometimes sloppy rationalizations”). For other justifications, see Alice Haemmerli, “Whose Who? The Case for a Kantian Right of Publicity”, 49 Duke L.J. 383 (1999); Mark McKenna, “The Right of Publicity and Autonomous Self-Definition”, 67 U. Pitt. L. Rev. 225 (2005); and, on the same lines as McKenna, Michael Spence, “The Mark as Expression/The Mark as Property”, 58 Current Legal Probs. 491 (2005). 246 Elvis Presley Trade Marks, [1997] R.P.C. 543; [1999] R.P.C. 567, 598 (per Simon Brown, L.J.) (there should be no a priori assumption that only a celebrity may ever market his own character).

532 CHAPTER VI: TRADEMARK LAW This is not to say that aspects of identity should never be the subject of legal protection. Misuse of identity can be a vehicle for all sorts of wrongful activities and transactions. A person can defraud another by pretending to be someone else;247 impersonation can undermine the validity of consent to sexual intercourse;248 and adopting a person’s image in advertising one’s goods may deceive consumers into believing that the person featured endorsed the goods.249 In each case, use of attributes associated with another person is the vehicle for fraud, rape, or passing off. But the wrong, in my view, is not use of “someone else’s identity” per se. Rather, it is use of someone else’s identity in a way that deceives another person and thereby allows the deceiver to gain something they would not have otherwise achieved (money, sex, or custom). Other unauthorized uses of “identity” may also justify legal intervention under the associated rubric of privacy. Because the arguments relating to justifications of “identity rights” have been rehearsed at length by others (more able than myself) elsewhere, I do not want to interrogate them here. Instead, I want to make two broader points about the suitability of human identities as legal properties — points I hope that will make policymakers and judges think twice before. One concerns the meaning of “identity.” The second relates to the coherence of the category of identity. A. Definition My first concern with the idea of giving legal protection over “identity” is one of definition. To date, the U.S. statutes have mostly talked about “name, image, likeness,” etc.,250 and it is the commentators251 and judges252 that have replaced these specific notions with the broader category of “identity.”253 In fact, while it seems that Prosser first deployed the notion of identity to limit the scope of protection, stating for example that it was not a name per se which was pro247 R. v. Odewale, [2004] EWCA 145 (where “identity theft” is described as “a particularly serious form of conspiracy to defraud”). 248 Sexual Offences Act 2003 § 76 (no consent, and thus rape, where the defendant “intentionally induced the complainant to consent to the relevant act by impersonating a person known personally to the complainant”). In contrast, case law holds that there is no criminal assault when a person pretending to be a dentist gives dental treatment: a person’s professional status or qualifications is not, in general part of their “identity.” R. v. Richardson, (1998) 21 2 Cr. App. R. 200 (Ct. App.). 249 See Edmund Irvine Tidswell Ltd. v. Talksport Ltd., [2002] EWHC 367 (Ch); on appeal, Irvine & Ors v. Talksport Ltd., [2003] EWCA (Civ) 423. 250 N.Y. Civ. Rights Law § 50 (“name, portrait or picture”); Fla. Stat. § 540.08 (“name, portrait, photograph or other likeness”). 251 Prosser, supra note 160, at 403, explained that “[i]t is the plaintiff’s name as a symbol of his identity that is involved here, and not his name as a mere name.” Prosser also acknowledged that “It is not impossible that there might be appropriation of the plaintiff’s identity, as by impersonation, without the use of either his name or likeness, and that this would be an invasion of his right of privacy.” Id. at 401 n.155; see also McCarthy, supra note 184, at 687 (the privacy tort concerns “damage to human dignity” while the unfair competition action concerns “commercial damage to the business value of human identity”); Kahn, supra note 185; Dannean J. Hetzel, “Professional Athletes and Sports Teams: The Nexus of Their Identity Protection”, 11 Sports L.J. 141 (2004); Rosina Zapparoni, “Propertising Identity: Understanding the United States Right of Publicity and Its Implications — Some Lessons for Australia”, 28 Melb. U. L. Rev. 690 (2004). 252 Motschenbacher v. R.J. Reynolds Tobacco Co., 498 F.2d 821, 824 (9th Cir. 1974) (Koelsch, J.); Carson v. Here’s Johnny Portable Toilets, Inc., 698 F.2d 831, 835 (6th Cir. 1983); Onassis v. Christian Dior N.Y., Inc., 472 N.Y.S.2d 254 (1984) (in a privacy case based on the New York statute which refers to “name, portrait or picture,” the New York Supreme Court explained that “[w]hile the statute may not, by its terms, cover voice or movement, characteristics or style, it is intended to protect the essence of the person, his or her identity or persona”); White v. Samsung Elecs. Am., Inc., 971 F.2d 1395, 1398 (9th Cir. 1992); McFarland v. Miller, 14 F.3d 912, 919 (3d Cir. 1994) (“Unauthorized use of an individual’s name is nothing short of an ‘appropriation of the attributes of one’s identity’”); Abdul-Jabbar v. General Motors Corp., 85 F.3d 407, 414 (9th Cir. 1996). 253 Carson, 698 F.2d at 831.

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tected so much as a name as an indicator of identity,254 the conceptual shift that it inaugurated has resulted in an expansion of protection. The Californian courts, for example, granted protection to Bette Midler when an imitation of her rendition of “Do You Wanna Dance” was used in an advertisement for the Ford Lincoln Mercury, Circuit Judge Noonan explaining that “to impersonate her voice is to pirate her identity.”255 In other cases, the shift to “identity” has facilitated decision protecting matter “associated” with celebrities: an image of a distinctive racing car, normally driven by the claimant;256 protection to Johnny Carson in relation to his catchphrase “Here’s Johnny”;257 and, most remarkably of all, to the dress style of a game show host. In White v. Samsung the Court of Appeals for the Ninth Circuit allowed an appeal by Vanna White, hostess of TV game-show “Wheel of Fortune,” against a finding that an action by her against Samsung was bound to fail: Samsung had advertised its videocassette recorder with a depiction of a robot, dressed in a blond wig, long gown, and wearing large jewelry designed to resemble White’s, standing by a game board instantly recognizable as the “Wheel of Fortune” set, and turning over letters. The caption read “Longest-running game show. 2012 AD,” and was designed to suggest that the VCR was so good it would still be in use long into the future. While the Appeals Court agreed that the robot was not a “likeness” of White, it found that the common law right of publicity encompassed any indicator of “identity” and that White had alleged facts such that if proved could justify a finding of appropriation of her identity. The shift in language, from protection of “name or likeness” to “identity” has gone largely unremarked (though it appears to have been widely adopted).258 As we have noted, it clearly broadens the potential scope of the action so as to encompass all manifestations of identity. David Westfall and David Landau have suggested that this has occurred because the courts see no principled basis for confining protection to only particular attributes such as “name” and “likeness.”259 Unfortunately, in so doing the courts have shied away from providing a firm definition of identity.260 When is something a manifestation of identity? Is a person’s voice, 49 Cal. L. Rev. 383, 403 (1960). Midler v. Ford Motor Co., 849 F. 2d 460 (9th Cir. 1988); see also Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir. 1992). Tom Waits successfully complained when Frito-Lay used an imitation of him singing the song Step Right Up to advertise its snackfood “SalsaRio Doritos” on the radio. Waits had consistently refused to do commercials and had rejected numerous lucrative offers. He was awarded $375,000 in compensatory damages ($100,000 for the value of his services; $200,000 for injury to peace, happiness and feelings; $75,000 injury to goodwill, professional standing, and future publicity value) and $2 million in punitive damages ($1.5 million against Tracy-Locke, the advertising agency; $500,000 against Frito-Lay). 256 Motschenbacher v. R.J. Reynolds Tobacco Co., 498 F.2d 821 (9th Cir. 1974). 257 Carson, 698 F.2d at 831. 258 Newcombe v. Adolf Coors Co., 157 F 3d 686, 692 n.3 (9th Cir. 1998) (referring to “more broad, flexible identity standard”). However, to the extent that the rights are regarded as exclusively statutory, as in New York, the terms of the statute may be determinative. Booth v. Colgate-Palmolive Co., 362 F. Supp. 343 (S.D.N.Y. 1973); Stephano v. News Group Publ’ns, Inc., 485 N.Y.S.2d 220, 225 (1984); Tin Pan Apple, Inc. v. Miller Brewing Co., 737 F. Supp. 826 (S.D.N.Y. 1990) (plaintiffs, civic-minded rappers, known as Fat Boys, complained that Miller advertised beer on TV using three look-alikes performing in distinctive Fat Boy style and defendants moved to dismiss. Relying on Sections 55 and 51 New York statute does not cover sound-alikes); see also Matthews v. Wozencraft, 15 F. 3d 432, 438 (5th Cir. 1994) (Texas misappropriation law does not give protection to “general incidents from a person’s life”). 259 David Westfall & David Landau, Publicity Rights as Property Rights, 23 Cardozo Arts & Ent. L.J. 71, 94 (2005) (arguing judges see no logic in limiting right to name or likeness); Sheldon W. Halpern, The Right of Publicity: Maturation of an Independent Right Protecting the Associative Value of Personality, 46 Hastings L.J. 853 (1995) (approving the shift to “identity,” arguing that the means used for appropriation should be irrelevant); Lee Hetherington, Direct Commercial Exploitation of Identity: A New Age for the Right of Publicity, 17 Colum.-VLA J. L.& Arts 1, 42–43 (1992) (arguing that reference to identity removes “artificial distinctions” and suggesting test of “all recognizable incidents of one’s identity, whether now known or later developed,” but seeming in the same breath to require that the features be distinctive of the personality in the market place and unique); Lemley & Dogan, supra note 245, at 1162 (attributing expansion to absence of any clear theoretical foundation). 260 Dissenting in the Carson case, 698 F.2d 831, 837 (6th Cir. 1983), Circuit Judge Cornelia Kennedy would have confined the common law right of publicity to “an individual’s name, likeness, achievements, identifying... 254 255

534 CHAPTER VI: TRADEMARK LAW make- up, wedding ring, tattoos, hairstyle, gloves, pet, car, or bicycle part of their identity? Must something be a permanent feature or can temporary attributes be manifestations of identity? Must the feature go to their very essence, or can trivial aspects of a person’s appearance be protected? If the legal system is to create exclusive rights in relation to “identity” it is clearly important that there be some common understanding of what identity is, and when particular manifestations of identity are exclusively owned. The legal system demands then a clear definition of subject matter that itself has relatively clear borders. One way to define identity, previously used in English contract law, would be to distinguish identity (which concerns ones essence) from attributes. In a series of well-known cases, courts have been asked to decide whether misrepresentation by a purchaser as to his name, status, character or address rendered the contract of sale void or voidable.261 Early case-law suggested that mistake as to “identity” means a contract is void, whereas a mistake over the “attributes” of a person renders the contract voidable.262 In Lewis v. Averay, for example, Lewis sold a car to a fraudster X, purporting to be Richard Greene, a minor television celebrity, not void but voidable, so L could not recover from A. Megaw LJ adopted this, describing L’s mistake as being one regarding the creditworthiness rather than the identity of D.263 Nevertheless, the judiciary has seemed uncomfortable with drawing such a distinction, recognizing immediately the problem of differentiating between identity and attributes. In the same case, Lord Denning called the purported distinction between identity and attributes as “a distinction without a difference.”264 Lord Nicholls recently described the distinction as “unconvincing,” and “a reproach to the law.”265 Lord Millett referred to the “equivocal nature of a person’s ‘identity,’” agreeing that “it is often difficult to say whether [a mistake] should be classified as a mistake of identity or of attribute” and that the consequences of drawing such a distinction for third parties are “indefensible.” The lesson from English contract law is that, whatever a philosopher might characteristics or actual performances” but said it could not encompass “phrases or other things which are merely associated with the individual.” 261 J. Cundy v. Lindsay, (1878) LR 3 HL 459 (where L, based in Belfast, believed he was dealing with Blenkiron when he was in fact dealing with Blenkarn, the House held there was no contract for sale of handkerchiefs, the property in which remained with L); Lake v. Simmons, [1927] AC 487 (no bailment where jeweler handed over jewels to customer, EE, who tricked him into believing she was Mrs. V and was taking them for inspection to Mr. V); Ingram v. Little, [1960] 1 QB 31 (sale by I of car to X, purporting to be H, void, so I recovered from L to whom X had transferred); Lewis v. Averay, [1972] 1 QB 198 (sale by L of car to X, purporting to be RB, not void but voidable, so L could not recover from A) (at 206, Lord Denning rejected a purported distinction between identity and attributes as “a distinction without a difference,” though Megaw, LJ, adopted this, describing L’s mistake as being one regarding the creditworthiness rather than the identity of D); Shogun v. Hudson, [2004] 1 AC 919 (hire-purchase sale of car to X, believing him to be P, void because no contract existed). 262 The classic contrast is between J. Cundy v. Lindsay, (1878) LR 3 HL 459 (mistake as to identity), and King’s Norton Metal Co. Ltd. v. Edridge, Merrett & Co. Ltd., (1897) 14 TLR 98 (mistake as to size of defendant’s business rendered contract voidable). See Ingram v. Little, [1960] 1 QB 31, 69; Shogun Fin. Ltd. v. Hudson, [2004] 1 AC 919, 931 (per Lord Nicholls of Birkenhead, ¶¶ 2–5). 263 [1972] 1 QB 198. 264 Id. at 206 (“A man’s very name is one of his attributes. It is also a key to his identity … . These fine distinctions do no good to the law.”). Most commentators have tended to agree. See, e.g., Glanville Williams, “Mistake as to Party in the Law of Contract”, (1945) 23 Can. Bar Rev. 271 (“If every ‘thing,’ and therefore every person, can be reduced verbally to a bundle of attributes, it follows that ‘error of identity’ (i.e. error of person) can be reduced verbally to error of attributes; also error of personal attribute can be reduced verbally to error of person.”); Guenter H. Treitel, The Law of Contract (11th ed. 2003) (a person may be identified by any one of his attributes, if a mistake is made as to that attribute there can then be a mistake of identity); Karen N. Scott, “Mistaken Identity, Contract Formation and Cutting the Gordian Knot”, Lloyds Mar. & Com. L.Q. 292, 294 (2004) (refers to the distinction between identity and attributes as “illusory” and “specious”). For an exception, see Richard Bronaugh, “The Place of Identity in Contract Formation”, 18 U. W. Ont. L. Rev. 185 (1979–80) (defending the distinction between identity and attributes on philosophical grounds). 265 Shogun Fin. Ltd. v. Hudson, [2004] 1 AC 919, 931 ¶¶ 2–5 (per Lord Nicholls of Birkenhead); see also Lord Millett (¶ 59).

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say, the courts are not comfortable drawing a distinction between “attributes” and “identity.” An alternative strategy would be to look outside law, to the social sciences, to locate a definition of identity. The definition of identity employed in social psychology, one of the fields in which more general discourses of identity find their roots,266 treats identity as equivalent to a person’s perception of their own character over time. As Peter Burke says, identity comprises the “sets of meaning that people hold for themselves that define ‘what it means’ to be who they are as persons, as role occupants and as group members.”267 Such a definition of “identity” seems to get to the very nub of what social psychologists are interested in: why do person behave as they do? Why do they have the attitudes they do? How far are behaviors and attitudes related to concepts of the self? And, applying their insights, what possibilities are there to make them feel happier? Such matters might be relevant, too, to questions that call for decision in courts. A court might well take notice of the importance accorded by psychologists to a name as a key factor in identity-formation.268 But it is quite a different thing to suggest that a person’s beliefs about their own “selves” can become property. The social psychologist’s understanding of identity is too elusive, fluctuating, and subjective to constitute the basis of a property right which third parties are expected to appreciate and respect. B. The Components of Identity Even if the legal concept of identity can be adequately defined, my second concern with its deployment as a legal category derives from the fact that different elements of “identity” seem to have very different characteristics. As regard protection for identity under the rubric of privacy, it is easy to see that uses of one’s image or name can implicate one’s autonomy or dignity (the protection of which constitute the main justifications for privacy laws). But it is not obvious that the use of one’s name infringes one’s privacy in the same circumstances as use of one’s image. One of the chief characteristics of names (that is, that they are rarely unique) means that they rarely refer to a particular person.269 In contrast, at least on some views, one’s physical attributes are unique.270 If a person claims that a photograph of them was featured in an advertisement or commercial publication, it should be possible to tell whether that was so.271 As a result a law relating to 266 Sheldon Stryker & Peter J. Burke, “The Past, Present and Future of an Identity Theory”, 63(4) Soc. Psychol. Q. 284 (2000). 267 Peter J. Burke, “Identities and Social Structure”, 67(1) Soc. Psychol. Q. 5 (2004). 268 In re L, [2007] 1 F.C.R. 804, ¶ 37 (considering an application to change a child’s surname from that of its absent father to its grandparents, the Court of Appeal said it thought the “identity” of the child would best be stabilized by “keeping her circumstances as faithful to reality and the truth of her situation as possible”). 269 As Lord Phillips explained in Shogun v. Hudson, [2004] 1 AC 919, 963, “[w]henever a name is used, extrinsic evidence, or additional information, will be required in order to identify the specific individual that the user of he name intends to identify by the name.” 270 In a case awarding Jackie Onassis injunctive relief against Dior with respect to an advert featuring a look-alike, Justice Greenfield observed that “For some people, even without their American Express Cards, the face is total identification, more than a signature or coat of arms.” Onassis v. Christian Dior N.Y., Inc., 472 N.Y.S.2d 254 (1984); see also Yale Elecs. Corp. v. Robertson, 26 F.2d 972, 974 (2d Cir. 1928) (Learned Hand, J.) (“[A] reputation, like a face, is the symbol of its possessor and creator, and another can use it only as a mask”). Copyright discourse has often alluded to the fact that the expressive form of a literary work reflects the individuality of its author as much as his face: it is, “as singular as his countenance.” See Jeffreys v. Boosey, 4 H.L.C. 815, 869, 10 Eng. Rep. 681, 703 (H.L. 1854) (1854); Francis Hargrave, Argument in Defence of Literary Property (1774) (“[A] literary work really original, like the human face, will always have some singularities, some lines, some features, to characterize it, and fix it and establish its identity.”). 271 Cohen v. Herbal Concepts, Inc., 472 N.E.2d 307 (N.Y. 1984) (claim under § 51 New York Civil Rights Law objecting to use of photograph of non-celebrity plaintiff bathing nude in advert for product to help eliminate cellulite, the photograph having been taken without permission, but revealing only her back. The Court held that the plaintiff “must be capable of identification from the objectionable material itself”).

536 CHAPTER VI: TRADEMARK LAW privacy thus needs to establish different criteria concerning when use of a names invades privacy and when use of an image does so.272 Moreover, while “names” and “images” may be uncontroversial subject matter for privacy laws, it is less obvious that look-alikes or soundalikes,273 let alone use of associated objects or catch-phrases, involve invasions of privacy, or the underlying interests which privacy laws are seen as protecting. The problem seems more complex still when we consider protection of “identity” as property. Even the core examples of identity — names, images, and voice — present a diversity of qualities that makes me skeptical whether it makes sense to treat them as a single category. One common justification for private property concerns one’s natural rights in the products of one’s labor: where a person produces something through their own labor, there is a prima face claim to property, as long as the recognition of such property does not diminish the capacity of another to create property through their labor.274 It is possible that in some circumstances a case can be made out that through one’s physical appearance one’s image is “created.” A natural rights argument might justify property in one’s tattoos, make-up, hairstyle, and, in extreme cases, other aspects of one’s appearance. Given the possibility of voice training, a natural rights argument might justify protection of one’s voice (as long as the boundaries of one’s vocal property could be clearly defined). However, it is difficult to argue that one’s name (as opposed to one’s goodwill, or reputation — interest protected by the laws of passing off and defamation) is a product of one’s labor. Moreover, in each case there are distinct questions outstanding as to whether such property leaves sufficient room for others to create and exploit their own attributes. As long as the attributes being claimed are “unique,” as judges have in some cases held appearance and voice to be,275 there may be no objection to transforming them into properties. But, given the limited powers of human recognition, one cannot help wondering whether creating property rights in such matters would not, in practice, affect the freedoms of others to exploit their own attributes. As one early Massachusetts case said, when denying a claim to protection of voice, “[w]e might hesitate to say that an ordinary singer whose voice, deliberately or otherwise, sounded sufficiently like another to cause confusion was not free to do so … .”276 Moreover, we know that names are rarely unique: anything approaching a property right in a name needs to be very severely circumscribed to ensure that it does not inhibit the freedom of others to adopt the name, to use it in building their own reputation or practicing their own trades. The law of passing off developed a restricted system of protecting names from misuse in trade that, for more than 150 years has required that the person themselves be a trader, and that the allegedly infringing use of the name damage their trade reputation, particularly by diverting custom. No persuasive case has yet been made that such a restricted view is anything other than optimal. 272 T.J. Hooker v. Columbia Picture Indus., Inc., 551 F. Supp. 1060 (N.D. Ill. 1982) (professional woodcarver of international renown, specializing in ducks, objected to broadcast of show about fictional policeman in California who was coincidentally named T.J. Hooker, under common law tort of appropriation of plaintiff’s name. The claim was rejected because of lack of evidence that there was “appropriation” or “piracy of identity”. There was no reason to think that the TV character was the same person as the woodcarver); see also John Doe a.k.a. Tony Twist v. TCI Cablevision, 110 S.W.3d 363 (8th Cir. 2003). 273 Although the sound-alike cases are based heavily on “dignitarian” claims, for example, that the singers refused ever to allow their recorded sound to be used in advertisements, it is not obvious why one person’s privacy should entitle them to prevent others exploiting what, evidently, are also their own attributes. 274 There is not space in what follows to discuss the application of other theories of property to the various attributes of identity. 275 Midler v. Ford Motor Co., 849 F. 2d 460 (9th Cir. 1988) (per Circuit Judge Noonan, remarking that “[a] voice is as distinctive and personal as a face. … We are all aware that a friend is at once known by a few words on the phone. … To impersonate her voice is to pirate her identity.”). 276 Lahr v. Adell Chemical Co., 300 F.2d 256, 259 (1st Cir. 1962).

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III. CONCLUSION

Today, in the writings of legal scholars, the most common use of the term “identity” is not to refer to potential proprietary interests discussed here, but rather as a rubric under which to describe the operation of various aspects of the law concerning discrimination. Contemporary commentators are concerned with how modern law operates (or fails) to redress centuries of discrimination against particular groups which focused on specific aspects of their identity: most obviously, race, gender, sexual orientation and disability. Some of these commentators are concerned with the way discrimination law itself constructs particular identities, and marginalizes others. Drawing on this scholarship, legal anthropologist Rosemary Coombe has expressed real concern over the potential for private, exclusive properties in identity (of the sort discussed in this paper) to limit the ability of marginalized groups to develop and explore their own identities. For example, she observes that “celebrity images provide the cultural resources which those in marginalized groups us to construct alternative gender identities.”277 Echoing this, Michael Madow has observed that When the law gives a celebrity a right of publicity, it does more than funnel additional income her way. It gives here … power to deny to others the use of her persona in the construction and communication of alternative or oppositional identities or social relations.278

The extent to which these criticisms are well-made depends, of course, on the breadth of any proprietary rights in identity,279 as well as the manner in which they are policed and enforced. What is useful about these criticisms, however, is to remind us that we should be careful before giving in to any instinct or intuition that our identities are “our own” and thus should be regarded as properties. Such property rights may have unforeseen impacts well outside the “easy” cases of use of name, likeness, voice, and imagery in advertising. Not long after the English courts declined to recognize a property right in a name, the case of Belisle Du Boulay v. Jules Réné Herménégilde du Boulay came before the Privy Council.280 277 Rosemary J. Coombe, “Objects of Property and. Subject of Politics: Intellectual Property Laws and Democratic Dialogue”, 69 Tex. L. Rev. 1853 (1991), updated and revised in Rosemary J. Coombe, Cultural Appropriations: Authorship, Alterity, and the Law (1997); Rosemary Coombe, “Publicity Rights and Political Aspiration: Mass Culture, Gender Identity, and Democracy”, 26 New Eng. L. Rev. 1221, 1224 (1991–92). 278 Madow, supra note 245. 279 It should be recalled that, at least in the United States, the right of privacy and publicity frequently give way to the right of free expression. Moreover, where rights exist in Europe, they are constrained by Article 10 of the European Convention on Human Rights. For a recent example, see Vereinigung Bildender Künstler v. Austria, App. No. 68354/01, Eur. Ct. H.R. Judgment of 25 Jan. 2007 (breach of art. 10 where court restrained exhibition of collage, Apocalypse, by Otto Mühl, depicting many public figures, including the claimant, Mr. Meichberger, former General Secretary of the Austrian Freedom Party, naked and involved in sexual activities with, amongst other Jor Haider). 280 (1869) LR 2 PC 430 21. Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), provides “a right of action to persons engaged in interstate and foreign commerce, against deceptive and misleading use of words, names, symbols, or devices, or any combination thereof, which have been adopted by a … merchant to identify his goods and distinguish them from those manufactured by others.” Whereas the right of publicity protects the pecuniary right and interest in the commercial exploitation of one’s identity, (see Herman Miller, Inc. v. Palazzetti Imports and Exports, Inc., 270 F.3d 298, 325 (6th Cir. 2001); Restatement (Second) of Torts § 652C, cmt. a (1977) (the right created by the publicity prong of the right of privacy tort “is in the nature of a property right. …”)), the Lanham Act was enacted primarily to protect consumers from misrepresentations or deceptions and to protect trademark owners from the misperception that they are associated with or endorse a product. Mattel Inc. v. Walking Mountain Prods., 353 F.3d 792 (9th Cir. 2003). The legislative history of the Lanham Act makes clear that there is a “sound public policy” in the protection of trademarks, which is the same as the “protection of good will, to prevent diversion of trade through misrepresentation, and the protection of the public against deception. …” S. Res. No. 1333, 79th Cong., 2d Sess. (1946), reprinted in 1946 U.S.C.C.A.N. 1277. The Lanham Act’s goal is not to protect “the person or entity that originated the ideas or communications that ‘goods’ embody or contain.” Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 32–38 (2003) (holding that the phrase “origin of goods” in Lanham Act § 43(a) does not require attribution to authors). Over the years, through amendments to the Lanham Act and court interpretations,...

538 CHAPTER VI: TRADEMARK LAW In this case, the claimant was a member of a family long resident in St. Lucia, which for many generations had been known by the name Du Boulay. The defendant was the son of a former slave, named Rose, who, on being freed in 1831, adopted the name Du Boulay. The defendant, in turn, on attaining the age of sixteen, began using the same surname. The claimant called on the defendant to abandon the use of the surname. The claimant succeeded at first instance (in the Royal Court of St. Lucia), the defendant successfully appealed (to the Court of Appeal for the Windward Islands), and the claimant finally sought vindication in the Privy Council. The Council, however, found that though the law applicable to St. Lucia included French law, various French laws concerning names had never been brought into force in the island. Moreover, Sir Robert Phillimore added that In this country we do not recognise the absolute right of a person to a particular name to the extent of entitling him to prevent the assumption of that name by a Stranger. The right to the exclusive use of a name in connection with a trade or business is familiar to our Law … . But the mere assumption of a name, which is the patronymic of a family, by a Stranger who had never before been called by that name, whatever cause of annoyance it may be to the family, is a grievance for which our Law affords no redress.281

The case seems to me a salutary lesson. Property rights in “identity,” unless heavily circumscribed, have the potential to curtail the liberties of those who wish to build their own the scope and protection of the Lanham Act has expanded to cover more general notions of unfair competition and false advertising. Yet the gist of a Lanham Act claim requires consumer perception that the plaintiff is somehow associated with, sponsors, or endorses defendant’s goods or services. See generally Barbara A. Solomon, Can the Lanham Act Protect Tiger Woods? An Analysis of Whether the Lanham Act Is a Proper Substitute for a Federal Right of Publicity, 94 Trademark Rep. 1202 (2004), available at http://www.frosszelnick.com/assets/20061017163214_ 3_PUBLISHED_PDF.pdf. Notwithstanding the fact that the right of publicity and the Lanham Act address different interests, plaintiffs have tried to use § 43(a) and, specifically, claims for false endorsement and unfair competition, as a substitute for a federal right of publicity claim. Claims under the Lanham Act, unlike claims for violation of the right of publicity, face barriers that include the statutory fair use defense (15 U.S.C. § 1115(b)(4)), the judicially created nominative fair use defense, lack of likelihood of confusion and lack of protectable rights. For this reason, as noted by one court, “[a] lthough publicity rights are related to laws preventing false endorsement, they offer substantially broader protection.” Cardtoons v. Major League Baseball Players, 95 F.3d 959, 967 (10th Cir. 1996); see also White v. Samsung Elecs. Am., Inc., 989 F.2d 1512, 1515 (9th Cir. 1993) (the right of publicity “is not aimed at or limited to false endorsements … ; that’s what the Lanham Act is for” (Kozinski, J., dissenting)). Some celebrities have been able to successfully use the Lanham Act to redress right of publicity claims. See, e.g., Jackson v. MPI Home Video, 694 F. Supp. 483 (N.D. Ill. 1988) (Jesse Jackson obtained relief against a company that sold a video tape of his address to the 1988 Democratic National Convention in packaging that bore his name and likeness on the grounds that the public might believe that the tapes were approved or produced by him); Allen v. Nat’l Video, Inc., 610 F. Supp. 612 (S.D.N.Y. 1985) (Woody Allen stopped the use of look-alikes in ads for a video club.); Rostropovich v. Koch Int’l Corp., 34 U.S.P.Q.2d 1609 (S.D.N.Y. 1995) (cellist Mstislav Rostropovich defeated a motion for summary judgment to dismiss his claim that the use of his likeness on CDs featuring his early performances would cause consumers to believe he had endorsed the CDs). Whether protection will be granted is uncertain, however, and many celebrities have not been on the winning side. See, e.g., ETW Corp. v. Jireh Publ’g, Inc., 332 F.3d 915 (6th Cir. 2003) (Tiger Woods unable to use the Lanham Act to stop distribution of limited edition prints featuring his image); Seale v. Gramercy Pictures, 964 F. Supp. 918 (E.D. Pa. 1997) (Bobby Seale was unable to prevent the use of his likeness in a brochure accompanying a CD soundtrack to the film “Panther”); Pirone v. MacMillan, Inc., 894 F.2d 579 (2d Cir. 1998) (Babe Ruth’s daughters were unable to prevent depictions of the Babe in a baseball calendar); Cairns v. Franklin Mint Co., 292 F.3d 1139 (9th Cir. 2002) (heirs of Diana Princess of Wales were unable to prevent the use of her likeness on plates and other commercial products). However, to pursue claims under the Lanham Act, fame is needed. See, e.g., Albert v. Apex Fitness Inc., 44 U.S.P.Q.2d 1855 (S.D.N.Y. 1997) (non-celebrity model could not recover under Lanham Act when photograph of model was used in advertisement without permission); Pesina v. Midway Mfg. Co., 948 F. Supp. 40 (N.D. Ill. 1996) (to succeed on a false endorsement claim, plaintiff must be a “celebrity” or have public recognition); Newton v. Thomason, 22 F.3d 1455 (9th Cir. 1994) (recognized but not widely-known country-western singer had no claim under the Lanham Act against producers of television series “Evening Shade,” which had a character with singer’s name). 281 Id.

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identities, in whatever way, and for whatever reason. The English legal system should think very carefully before recognizing a property in name, likeness, or other aspects of identity.

CHAPTER VI

Trademark Law Part C: Protection for Famous and Well-known Marks What is the current state of the law in the United States? Is the Second Circuit decision in the Bukhara Grill case an indicator for the future or a precedent that is weakened by the fact that the plaintiff originally had a mark in the United States and then abandoned it? Considering the Second Circuit’s acknowledged conflict with the Ninth Circuit decision in Grupo Gigante, is forum shopping a likely result? Which circuit is right on protection for famous marks? What role is there for state law? What are other countries doing with regard to famous and well-known marks? What strategies are available to a mark owner to receive greater U.S. and global protection for its famous mark? Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker MICHELLE MARSH

Kenyon & Kenyon (New York) Panelists PROF. BARTON BEEBE

PROF. JANE GINSBURG

Benjamin N. Cardozo School of Law, Yeshiva University (New York)

Columbia Law School (New York)

PROF. ROBERT BRAUNEIS

PROF. DAVID LLEWELYN

George Washington University Law School (Washington, DC)

Kings College London; External Director, IP Academy (Singapore)

PROF. ROBERT BURRELL

JONATHAN MOSKIN

University of Queensland, Brisbane (Australia)

White & Case (New York)

542 CHAPTER VI: TRADEMARK LAW PROF. HANSEN: Welcome. We are about to start our “famous marks” session. By “famous marks,” we are talking not about the famous marks in dilution, but the foreign famous marks and their protection in this country. We have an outstanding panel. We will be starting off with Michelle Marsh from Kenyon & Kenyon, a Fordham Law graduate, who actually litigated this case for seven years or so to a successful conclusion. Interesting that the parties could afford this litigation, now that I think about it. In any case, why don’t you start off, Michelle, and then we will introduce the panel after you finish your remarks?

Famous Marks Doctrine Not Recognized by New York Appeals Court Michelle Mancino Marsh* Thank you, Hugh. It is a pleasure to speak here today. As a Fordham grad, it is really an honor to be back. I have only twelve minutes to talk about a fairly complex issue, so, as a fast-talking New Yorker, I am going to go pretty quickly. My materials did not make it into the program. If you would like any of the materials, please just drop your card off and I will be happy to email them to you. Just a second of background as to why I am speaking to you today, which Hugh sort of alluded to. I have been practicing law for about eleven years, and for seven of those years, I was actually litigating, amongst other cases, the case called ITC v. Punchgini, Inc.,1 better known as the “Bukhara Grill” case, or better known yet, at least in my office, as the “case that killed the ‘famous marks’ doctrine in the Second Circuit.”2 For those of you who are not familiar with the subject matter, the “famous marks” doctrine — or, as some prefer to call it, the “well-known marks” doctrine, to distinguish it from dilution protection for famous marks — provides for protection of a trademark by a foreign owner that has not used or registered the mark in a particular jurisdiction but can show that the mark is well known in the country in which it is asserting it, and presumably in the country of its own origin. In the United States, trademark rights are territorial in nature. A trademark owner must have used its mark in the United States to gain protection and the ability to stop others. Just a practical example to give the doctrine, perhaps, some life. Let’s say an Italian company owns a famous brand in Italy for chocolate but has no use of the mark in the United States. If an entrepreneurial American should adopt the mark, whether in good faith or in bad faith, and use it in the United States, the Italian company may take issue with that and try to stop the use or registration in the United States. It may try to do so under this theory of the famous marks doctrine. Would the Italian company be successful in the United States? As of this moment, the answer really depends on where they would bring the case. * Kenyon & Kenyon, New York. 1 ITC Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007) (rejecting “famous marks” doctrine). Opinion available at http://www.kenyon.com/files/tbl_s10News/FileUpload44/10074/Opinion%20(US%20Court%20of%20Appeals%20 for% 20The%20Second%20Circuit).pdf. 2 For more details on ITC Ltd. v. Punchgini, Inc., 373 F. Supp. 2d 275 (S.D.N.Y. 2005), see Kenyon & Kenyon, District Court Decision Sparks Debate over “Famous Marks” Doctrine, INT’L L. OFF. NEWSL., Nov. 28, 2005, available at http:// www.internationallawoffice.com/Newsletters/detail.aspx?g=12795c85-7e6f-4276-8041-a10c6e53bcbb. For more details on ITC Ltd. & ITC Hotels Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007), see Press Release, Kenyon & Kenyon, Second Circuit Rejects Foreign “Famous Marks Doctrine” For Foreign Trademark Owners — New York Restaurant Chain Prevails On All Federal Claims In Closely Watched Trademark Case (Mar. 30, 2007), available at http://www.kenyon.com/pubs/detail_press.aspx?news_id=321642905.

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The genesis of the doctrine lies in the Paris Convention, Article 6bis3 — I will not go over the verbiage here; it is a little complicated — but also in the TRIPs Agreement,4 the agreement on trade-related aspects of IP rights. I will talk about that a little later. The most recent U.S. case to discuss and dismiss the “famous marks” doctrine for federal claims was the Bukhara Grill case in 2007. The fact pattern involved a New York small chain of Indian restaurants that adopted the name “Bukhara Grill” after it had assessed properly that the prior owner of the name, ITC Ltd., also known as the Indian Tobacco Company, a very large Indian conglomerate, had abandoned the mark in the United States for the very same services. ITC, in trying to stop this small, unassuming New York restaurant chain, asserted that it had not abandoned its mark; but that, even if it had, it should be permitted to stop this restaurant because its mark was famous in the United States; and, therefore, it should be able to prevent the defendant’s use. The Bukhara Grill case is one of only two Federal Circuit cases to address the applicability of the “famous marks” doctrine in the United States. The first case was the Grupo Gigante case out of the Ninth Circuit in 2004.5 The Ninth Circuit considered whether the mark GIGANTE, used and registered in Mexico since 1963 for grocery stores but not in the United States, could prevent a U.S. owner from using the same mark on the same services. The court held that there was a famous marks exception to the general territoriality rule, as a matter of public policy. The court, interestingly enough, made no reference to any statutory authority or treaty authority. It was simply a matter of public policy that they based this decision on. They adopted sort of a peculiar standard, in retrospect, because it had never been formulated or articulated before. They required that the plaintiff prove that it had a substantial percentage of customers in the relevant market familiar with that trademark. This has been interpreted to be a fairly high level of notoriety that is required. It has been called “the secondary meaning plus” standard. And let there be no doubt: This is truly judge-created law. The Bukhara Grill case has a long and tortured history, which I will briefly outline. It started in the Southern District of New York, with the judge granting summary judgment in favor of the defendants on all claims, and particularly giving every benefit of the doubt to the plaintiff, saying that even if there were a “famous marks” doctrine, its mark was simply not famous, citing the interesting fact that its own expert had never even heard of its restaurant in India until he had been introduced as an expert into the case.6 The Second Circuit disagreed with the reasoning and conclusion of the Ninth Circuit and held that ITC could not maintain a federal cause of action for unfair competition based on 3 Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, 13 U.S.T. 1, T.I.A.S. No. 4931, revised, Stockholm, July 14, 1967, 21. U.S.T. 1583, 423 U.N.T.S. 305, available at http://www.wipo.int/treaties/en/ip/paris/ trtdocs_wo020.html. Article 6bis, Marks: Well–Known Marks: (1) The countries of the Union undertake, ex officio if their legislation so permits, or at the request of an interested party, to refuse or to cancel the registration, and to prohibit the use, of a trademark which constitutes a reproduction, an imitation, or a translation, liable to create confusion, of a mark considered by the competent authority of the country of registration or use to be well known in that country as being already the mark of a person entitled to the benefits of this Convention and used for identical or similar goods. These provisions shall also apply when the essential part of the mark constitutes a reproduction of any such well-known mark or an imitation liable to create confusion therewith. (2) A period of at least five years from the date of registration shall be allowed for requesting the cancellation of such a mark. The countries of the Union may provide for a period within which the prohibition of use must be requested. (3) No time limit shall be fixed for requesting the cancellation or the prohibition of the use of marks registered or used in bad faith. 4 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF TRADE NEGOTIATIONS 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1125, 1197 (1994), available at http://www.wto.org/english/ tratop_e/trips_e/t_agm0_e.htm. 5 Grupo Gigante S.A. v. Dallo & Co., 391 F.3d 1088 (9th Cir. 2004). 6 ITC Ltd. v. Punchgini, Inc., 373 F. Supp. 2d 275 (S.D.N.Y. 2005).

544 CHAPTER VI: TRADEMARK LAW the renown of its unused mark.7 The court put aside completely one finding by the district court that the mark has been abandoned. The Second Circuit agreed that the mark had been abandoned, but, really, that did not enter into their thinking with respect to analyzing the mark under the famous marks doctrine. In summary, the court found: • With respect to denying the federal claims on the famous marks doctrine, that the Paris Convention created no substantive United States rights beyond those independently provided in the Lanham Act.8 • Second, that Section 44 of the Lanham Act requires only national treatment to foreign mark owners.9 That is, the foreign mark owners must be given the same rights and protections as a U.S. citizen. U.S. citizens are required to prove use of a trademark in order to prevent others from using that same mark. That requirement remained the same. • Third, the sort of penultimate conclusion was that, even as a matter of public policy, before they were going to depart from well-accepted principles of territoriality, and granting trademark rights to owners that do not otherwise own protectable federal trademark rights in the United States, they would wait for Congress to express its intent more clearly through the Lanham Act. They stated numerous times that the Lanham Act had been amended several times by Congress without hesitation when a snag in the law came up and, therefore, it was incumbent upon Congress to do the same here. In sum, the current state of the law is certainly in flux. Hugh asked me: Is forum shopping likely? Absolutely. You bet it is going to be. So you may be asking yourselves: Will the Supreme Court save the day and clarify everything for us? No, at least not any time soon. ITC petitioned for certiorari and argued that the Paris Convention and TRIPs require the United States to recognize rights and famous foreign marks, and that it was an issue of international importance to American businesses who want their brands respected abroad. As a bit of background, while I was researching these international treaties, I found it to be not unlike searching for the Da Vinci Code. There was not an easy answer as to whether these treaties actually said what plaintiff was purporting them to say. We had argued that the Paris Convention neither mandated its signatories to enact a famous foreign marks doctrine, nor did the United States — even if it did — implement those treaties into U.S. law via the Lanham Act. I found support in an unlikely place. My formulation of what the Paris Convention and TRIPs Agreement said was a bit unpopular. The support came from the American Intellectual Property Law Association (AIPLA) amicus brief filed to the Supreme Court, which was written by Prof. Graeme Dinwoodie, who is a friend of and a frequent speaker at this Conference.10 His brief urged the Supreme Court to take up the petition, but the brief candidly stated that the test ITC Ltd. & ITC Hotels Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007). Lanham Trademark Act of 1946, 60 Stat. 427 (July 5, 1946) (codified, as amended, at 15 U.S.C. 1051 et seq. (1994)). The Lanham Act authorizes trademark registration only for marks that are “used in commerce.” 15 U.S.C. § 1051. In the context of the restaurant “services” at issue in this case, “use in commerce” is defined by Section 45 of the Lanham Act as: “bona fide use of a mark in the ordinary course of trade, and not made merely to reserve a right in a mark. … [A] mark shall be deemed to be in use in commerce … on services when it is used or displayed in the sale or advertising of services and the services are rendered in commerce, or the services are rendered in more than one State or in the United States and a foreign country and the person rendering the services is engaged in commerce in connection with the services.” 9 15 U.S.C. § 1126. 10 See Brief of Amicus Curiae American Intellectual Property Law Association in Support of Petitioner (Graeme B. Dinwoodie) on Petition for Writ of Certiorari to the United States Court of Appeals for the Second Circuit, ITC Ltd. v. Punchgini, Inc., 2007 WL 2174224 (July 25, 2007), 482 F.3d 135, cert. denied, 128 S. Ct. 288 (2007), available at http://www.aipla.org/Content/ContentGroups/Issues_and_Advo cacy/Amicus_Briefs1/2007/ITCbrief_Final_Rev ised2.pdf. 7 8

PART C: PROTECTION FOR FAMOUS AND WELL-KNOWN MARKS 545

of Article 6bis mandated protection for well-known marks that had not been registered in the country where protection was sought, and the provision imposed only minimal obligations on the United States. That’s pretty shocking stuff. He went on to state that in the United States the protection of marks used but not registered here was largely accomplished by the availability of protection for unregistered marks in the Lanham Act, but that, in essence, the requirement for use was consistent with the Paris Convention’s acknowledgement that each nation could develop its own trademark law, independent of other Member States. The Supreme Court denied the petition for certiorari — in my opinion, because they tacitly agreed with the Second Circuit that they got it right: namely, if American businesses are being so horribly hurt by the United States not having a consistent position on the famous marks doctrine with the rest of the international community, then Congress should amend the statute that governs U.S. trademark law. In an interesting twist, the Second Circuit, in addition to finding that there was no famous marks doctrine, did not want to answer the questions regarding state law without reference to the New York Court of Appeals’ opinion. So they, in an unusual move, certified two questions of law to the New York Court of Appeals, asking them whether New York State law had a famous marks doctrine; and, if so, what the level of fame should be.11 The Court of Appeals declined to define its holding under the rubric of the famous marks doctrine, as several courts had done, or even mention the Paris Convention, but instead found that the state’s large body of unfair competition law and misappropriation law supported a claim, if a mark owner had sufficient goodwill in the state. They set up the following rule of law: For a foreign mark owner to assert a claim of unfair competition without having any use in the United States, they have to show that the defendants appropriated the mark or the trade dress and that the relevant consumer group for defendant’s goods or services primarily associates the mark or trade dress with the plaintiff — that is, that they have sufficient secondary meaning within the United States. It also could be read as “being known or notorious in the United States.” So the New York State court may be a haven for these types of claims, assuming that the defendant’s use is in the State of New York. It could create somewhat of a patchwork quilt of protection for foreign famous marks throughout the United States. In conclusion, Hugh asked me: What are foreign brand owners to do? Are they out of luck in protecting their marks if they have no use in the United States? One, they can target U.S. consumers either in the United States directly or in their home country. The case may have gone differently had ITC proven that it had actually targeted U.S. consumers and shown that it had any level of notoriety in the United States, which it did not. The other thing is that they can register in the United States under Section 44, with foreign priority. It does not require use. At the very least, you can stop the entrepreneurial American at the front door of the U.S. Patent and Trademark Office. That’s it for now. We can chat later. PROF. HANSEN: Thank you very much, Michelle.

We have a distinguished panel of commentators: Professor Barton Beebe from Cardozo School of Law; Professor Bob Brauneis from George Washington University Law School; Professor Robert Burrell from University of Queensland in Brisbane; Professor Jane Ginsburg from Columbia Law School; David Llewelyn, a professor at Kings College London, a partner 11 9 N.Y.3d 467, 476, 479 (2007), available at http://www.ca2.uscourts.gov:8080/isysnative/RDpcT3BpbnNcT1B OXDA1LTA5MzMtY3Zfb3BuLnBkZg==/05-0933-cv_opn.pdf.

546 CHAPTER VI: TRADEMARK LAW in White & Case, based in London and the Executive Director, IP Academy Singapore; and Jonathan Moskin a partner in White & Case, based in New York. We are going to give each five minutes, after which we will have the general discussion and include the audience in that. Barton, would you start off, please? PROF. BEEBE: Sure. Thank you very much, Hugh. It is an honor to be invited back again. As I have been telling some of my co-panelists in the few minutes before the panel began, I may sound by the end of this panel like a complete fool, because I am not sure there is anything really of significance in the ITC v. Punchgini case.12 I think that the famous marks doctrine is reasonably alive and well in the United States. Certainly, Lanham Act amendments would fix things without any problem. But until then, we can rely on state law and we can rely on the Ninth Circuit’s interpretations of public policy to get by. Also, the ITC v. Punchgini case is a weird case, because Bukhara Grill of Delhi is a company that believes its own advertising. It claims that it is one of the top fifty restaurants in Asia, which is ridiculous. It is not one of the top fifty restaurants in Delhi. It just was not a very strong mark, for one thing, as I think the Second Circuit eventually found. If it had been a truly well-known mark, the kind of well-known mark that we see in the great well-known marks cases internationally, then I think the result would have been different; it would have been non-controversial, and there would have been protection found for it without too much fuss. But instead, it was an unexceptional restaurant in Delhi. So the famous marks doctrine did not apply. I would actually say that the doctrine was not killed by ITC v. Punchgini. It is still alive and well at the state level. That is one point. Another point is just to raise an issue that Michelle didn’t have time to talk about, which is the International Bancorp approach to well-known marks protection in the United States.13 This is a Fourth Circuit case from 2003 that I think it is important to know about. I will just put it out on the table. I am curious to hear what other panelists think about this approach to protecting well-known marks. International Bancorp, the declaratory plaintiff in this case, operated online gambling Web sites. In connection with this business, it registered forty-three domain names that included, in one way or another, the trademark of the declaratory defendant in the case, which was CASINO DE MONTE CARLO. After losing a WIPO dispute resolution,14 International Bancorp sued in the U.S. district court, saying, “Do not follow the WIPO resolution. Instead give us a declaratory judgment that we are entitled to these marks.” At that point, Casino de Monte Carlo counterclaimed under Section 43(a) of the U.S. Lanham Act, which is colloquially called the “unfair competition” section, claiming that International Bancorp’s conduct constituted unfair competition, caused consumer confusion — just a simple trademark infringement claim. ITC Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007). International Bancorp, LLC v. Société Des Bains De Mer et Du Cercle Des Etrangers à Monaco, 192 F. Supp. 2d 467 (E.D. Va. 2002). In a declaratory relief summary judgment action, the court held that International Bancorp’s use of the term “Casino de Monte Carlo” in forty-three of its domain names and/or Web sites constituted a direct infringement of Société’s trademark. The court held that there was a high likelihood of confusion because of International Bancorp’s use of the mark on its Web site and because the content of the Web site, consisting of online gambling services, was similar to the services offered by Société. The court did not rule on the issue of trademark dilution because plaintiffs provided no evidence of economic harm. Finally, the court held that International Bancorp was in violation of the Anticybersquatting Consumer Protection Act (ACPA), 15 U.S.C. § 1125(d), because trademark infringement had been found and eight of the nine factors used to determine bad faith weighed in favor of Société, in particular International Bancorp’s intent to divert consumers from Société’s Web site. 14 WIPO Arbitration and Mediation Center, Case No. D2000-1323, Société des Bains de Mer et du Cercle des Etrangers à Monaco v. I. Bancorp EuropeGrande Media, Administrative Panel Decision (Jan. 8, 2001), available at http://www.wipo.int/ amc/en/domains/decisions/html/2000/d2000-1323.html. 12 13

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To this International Bancorp responded: “Who are you to be filing under Section 43(a) in the United States? You do not use your mark in the United States. If the United States follows the basic principle that property rights only follow from use, then you have no property rights in the United States.” To which Casino de Monte Carlo responded: “Well, we do not use our mark in the United States, but (1) we advertise our mark to U.S. citizens in the United States; and (2) we actually engage in commerce with U.S. citizens abroad. We engage in foreign commerce, which the U.S. Congress can reach through its Commerce Clause power when it is foreign commerce between a U.S. national and a foreign company. Therefore, we are able to say that we are using a mark under the Lanham Act.” This argument persuaded the Fourth Circuit. Now we have pretty good doctrine. It is sort of floating around. We will see what its vitality is in the coming years. But there is pretty good doctrine suggesting that if you do advertise to U.S. citizens and you can show that a couple — well, probably more than a couple — U.S. citizens show up at your establishment abroad, then you might be able to claim well-known marks protection via that. It is not through 6bis, not even through state law, but through 43(a), in a claim that essentially — and Graeme Dinwoodie would love this — shifts the whole debate away from well-known marks protection towards the definition of use in commerce under U.S. law. Conceivably, Bukhara Grill could, if it had in fact advertised to U.S. citizens, certainly show that U.S. citizens eat at the Bukhara Grill in Delhi, and maybe they it have had a better avenue under this Fourth Circuit approach. However, the Second Circuit very explicitly said we are not pursuing that approach here and so we are not going to talk about it. And we see that in a couple of other cases that were mentioned already. So the Fourth Circuit approach is, I think, something to keep in mind. PROF. HANSEN: Let me ask you this about the Bukhara Grill case. Assuming companies in litigators are rational profit maximizers, if there is no goodwill in the name, why on earth is this small little company litigating in the Southern District, then the Second Circuit and also the New York Court of Appeals? Does it make any sense? If there is no goodwill in the name, why wouldn’t they change the name rather than spend all that money? PROF. BEEBE: That is a totally fair claim. Why did they choose the name Bukhara Grill? If it is a silly little restaurant in Delhi, why did they choose it? Well, they were former employees of Bukhara Grill in Delhi. It was sort of a knock-off restaurant. MS. MARSH: We like to use the word “inspiration.” PROF. BEEBE: It was inspired by the Delhi restaurant, to the extent that the menus were the same, the trade dress. PROF. HANSEN: In homage. PROF. BEEBE: Yes. Actually, I have eaten at the old Bukhara Grill in New York, and it was close to exactly the same. One could say that they were following the concept rather than the goodwill, but I accept that is a weak response to your challenge. PROF. HANSEN: Thank you. Bob? PROF. BRAUNEIS: I would like to make two quick comments, one on a very highly theoretical level and one on a very practical level. The theoretical comment is just to raise the issue of the distinction between the view of trademark law as consumer-oriented and having the goal of lowering consumer search costs and so forth, and the view of trademark law as protecting property and goodwill of companies. It does seem to me at a very general level that if you have been schooled in the consumer protection side of trademark law, then it is very hard to see territoriality as an important barrier. That is to say, if consumers in the United States know about another company, even though

548 CHAPTER VI: TRADEMARK LAW it operates solely outside the United States, and if they identify the use of a mark inside the United States with that other company, then you have the consumer side problem. So that is the highly theoretical view. The very practical comment is yet another answer to the question, “Well, what can foreign mark owners do after the ITC case?” With respect to U.S. registration practice, not infringement — and I raised this in an email I sent around to the rest of the panel yesterday — I wonder whether the 2(a)15 ground of refusal based on false association or false suggestion of a connection might actually work in many cases. That ground for refusal has traditionally been seen as implementing a kind of federal right of privacy or publicity. But it is not by the terms of the statute limited to natural persons. It says “institutions.” Institutions have been held to include commercial entities. In order to gain protection under 2(a) false association, you do not have to be involved in commercial activity at all. So if I were to brand my water “Nicolas Sarkozy Water,” Sarkozy could have an action against me under 2(a) false association, even though he doesn’t produce water or anything. So one might say: “Well, if you do not engage in commercial activity at all, then, a fortiori, why do you need commercial activity in the United States?” What is the standard for a false association claim? The Trademark Trial and Appeal Board (TTAB) language currently is that the “plaintiff’s name or identity is of sufficient fame or reputation that, when defendant’s mark is used on defendant’s goods or services, a connection with plaintiff would be presumed.”16 So, interestingly enough, it is a famousness or reputation standard that is used there. I note that I do not think that this Section has been put to the particular use of famous foreign marks, but it has been recently put to increasing use by examiners who really want to refuse registration on dilution grounds, but they cannot under the Lanham Act. So when somebody tries to register HEINEKEN or DOM PÉRIGNON for meat juices, as a Canadian citizen tried to, the examiner comes back and says, “Well, I don’t know about a 2(d)17 refusal on likelihood of confusion grounds, because meat juices are unlike beer or sparkling wine or champagne, but I will get them on 2(a) grounds. This is a false association with, as it turns out, 15 15 U.S.C. § 1052(a): Consists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute; or a geographical indication which, when used on or in connection with wines or spirits, identifies a place other than the origin of the goods and is first used on or in connection with wines or spirits by the applicant on or after one year after the date on which the WTO Agreement (as defined in section 2(9) of the Uruguay Round Agreements Act [19 U.S.C. § 3501(9)]) enters into force with respect to the United States.” 16 Consolidated Natural Gas Co. v. CNG Fuel Sys. Ltd., 228 U.S.P.Q. 752, 754 (T.T.A.B. 1985). 17 15 U.S.C. § 1052(d): Consists of or comprises a mark which so resembles a mark registered in the Patent and Trademark Office, or a mark or trade name previously used in the United States by another and not abandoned, as to be likely, when used on or in connection with the goods of the applicant, to cause confusion, or to cause mistake, or to deceive: Provided, That if the Director determines that confusion, mistake, or deception is not likely to result from the continued use by more than one person of the same or similar marks under conditions and limitations as to the mode or place of use of the marks or the goods on or in connection with which such marks are used, concurrent registrations may be issued to such persons when they have become entitled to use such marks as a result of their concurrent lawful use in commerce prior to (1) the earliest of the filing dates of the applications pending or of any registration issued under this Act; (2) July 5, 1947, in the case of registrations previously issued under the Act of March 3, 1881, or February 20, 1905, and continuing in full force and effect on that date; or (3) July 5, 1947, in the case of applications filed under the Act of February 20, 1905, and registered after July 5, 1947. Use prior to the filing date of any pending application or a registration shall not be required when the owner of such application or registration consents to the grant of a concurrent registration to the applicant. Concurrent registrations may also be issued by the Director when a court of competent jurisdiction has finally determined that more than one person is entitled to use the same or similar marks in commerce. In issuing concurrent registrations, the Director shall prescribe conditions and limitations as to the mode or place of use of the mark or the goods on or in connection with which such mark is registered to the respective persons.

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foreign companies, although of course both Heineken and Dom Pérignon do business in the United States. I will leave it with that. PROF. HANSEN: Thank you. Robert. PROF. BURRELL: Thanks. I suppose I am sitting here slightly mystified because, compared to what I have just heard, I think Australia adopts very generous protection for unused marks that enjoy reputation amongst consumers in Australia, although you might note that that protection flows primarily from our consumer protection statute, the Trade Practices Act (TPA),18 rather than from the trademark system directly. If you have use of a confusingly similar mark that might lead to consumer confusion, there is no need for use within the jurisdiction and there is no need to show intent to use in the future. In fact, even if the defendant has obtained an Australian registration, that will not actually provide a defense to either a damages claim or an injunction. Even if the person has a local registration, that will not protect them against a claim under the TPA. Where Australia has gotten itself into slightly more of a mess is, in fact, where the owner of a mark that enjoys a reputation but which is not actually being used is seeking to prevent a later application for registration. There, within the Trademarks Registry, we see quite a bit of confusion about the relationship between Sections 42(b)–43 and Section 30 of our Act. The key cases in question are a bit of a mess. But given that, as I say, even if the junior user actually goes ahead and gets a registration, since that will not actually give him any protection against a subsequent claim, then I am not sure how important that is in practice. The other thing I was quite interested to know is the slightly different point that Bob raised about the U.S. Patent and Trademark Office’s willingness to use Section 2(a) to, if you like, provide a back door for providing protection against dilution in examination proceedings. There has been a very similar debate within Australia. I feel Australia has really set its face against examiners taking on that kind of role, even though there are provisions of the Act that would allow them to do that. They have made it very clear that it is down to owners in inter partes proceedings to prevent that type of harm. PROF. HANSEN: Thank you very much, Robert. Jane. PROF. GINSBURG: I would like to step back and ask some normative questions. What conduct do we think the foreign famous marks doctrine is supposed to prevent? I think there are two different types of conduct. One has already been referred to, what one might call “duping immigrants.” That is Grupo Gigante.19 A Californian adopts a mark well-known in Mexico. The Californian happens to be in San Diego, right across the border, and it is perfectly plausible that the target audience is immigrants from Mexico. A variation on that theme is “duping tourists.” Perhaps Bukhara Grill20 exemplifies this variant: if there is an Indian business community that knows the restaurant in Delhi, the businessmen and women might see it in New York and think it is related. This version might not be as compelling as duping immigrants, but it still is supported by a consumer protection rationale. Another kind of consumer protection rationale concerns businesses that may be duping locals who have been tourists somewhere else and encountered the mark abroad. That is the Monte Carlo kind of situation.21 As Barton points out, we might have an additional way of Trade Practices Act, 1974 (Austl.), available at http://www.austlii.edu.au/au/legis/cth/consol_act/tpa1974149/. Grupo Gigante S.A. v. Dallo & Co., 391 F.3d 1088 (9th Cir. 2004). 20 ITC Ltd. & ITC Hotels Ltd. v. Punchgini, Inc., 482 F.3d 135 (2d Cir. 2007). 21 International Bancorp, LLC v. Société Des Bains De Mer et Du Cercle Des Etrangers à Monaco, 192 F. Supp. 2d 467 (E.D. Va. 2002) 18 19

550 CHAPTER VI: TRADEMARK LAW addressing that kind of situation, by ruling that the foreign trademark claimant has used the mark in U.S. commerce because the American has transacted business with the foreign right holder. The foreign famous marks doctrine addresses all of those variants. Whether you call the doctrine “the foreign famous marks doctrine,” or, as in New York, you look for the “local goodwill” that the well-known foreign mark has garnered, the consumer protection interests will find one way or another to be advanced. It might be unfortunate that where one must rely on state law protection rather than Lanham Act coverage, the way will be somewhat haphazard in our federal system, but I think that the normative concern can be addressed successfully. The other type of concern might be less compelling. We might call this objective the promotion of the foreign trademark owner’s interest in projecting its brand and brand image from abroad into the United States before it actually begins doing business here. The protection sought resembles copyright: Under the Berne Convention, once a work is created in one Berne Convention country, it is automatically protected in every other Berne Convention country; no further action is necessary in order to obtain that protection. Contrast that result with a usebased theory of trademark protection, where if there is no trade there is no trademark. Thus the second characterization of the foreign famous mark doctrine would help entrepreneurs who are not yet trading in the United States. Whether or not we want to help those entrepreneurs depends a lot on how important we think the “no trade, no trademark” precept of U.S. trademark law remains, particularly in a world where territoriality may not be what it used to be. Even at common law, there is a very old U.S. case, which is often cited as exemplifying the heyday of territoriality, Rexall Drug,22 which involved two users of the REXALL mark, one in Massachusetts, and a junior user in Kentucky. When the junior user adopted the mark, it was in good faith, without knowledge of the Massachusetts user. The Massachusetts user becomes a nationwide user. When the Massachusetts user came to Kentucky, it could not oblige the Louisville local to cease using the mark because trademark rights are territorial; each business may therefore build up its own goodwill in separate areas of the country. Under a “no trade, no trademark” theory of the law, that is perfectly fine. Nonetheless, the Supreme Court did emphasize that Mr. Rectanus (Rex) in Louisville adopted his mark in good faith, with no knowledge of Ellen Regis and her REXALL mark in Massachusetts. The Court thus may have left a slim read of negative inference, that if Rex had known about Ellen Regis and had adopted the mark in bad faith, perhaps the result might have been different. Returning to the Bukhara Grill kind of situation, where a local operator clearly knows about the senior foreign user, because the local adopts not only the trademark but the trade dress, and it is a pretty close clone right down to the menu design (although on a somewhat cheaper scale), there seems to be a fair amount of bad faith. Do we therefore think that in that sort of instance the foreign famous mark doctrine ought to come to the rescue of the brand name/ brand image of the foreign operator, or do we think normatively that we should stick with “no trade, no trademark,” bad faith notwithstanding? PROF. HANSEN: Interesting. And the Southern District found that even if it was a famous mark, there was no likelihood of confusion; isn’t that correct? MS. MARSH: It didn’t reach that question. PROF. GINSBURG: There wasn’t any local goodwill. PROF. HANSEN: Is that necessarily true? If bad faith is shown, then there is an inference, if not prima facie proof, of likelihood of confusion. Bad faith in this case would be the attempt to free ride on goodwill and/or confuse the public. So bad faith under the “NY rule” can support 22

United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90 (1918).

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both view that there is goodwill and likelihood of confusion. But apparently that approach was not invoked by the plaintiff in this case. One of the things that might have influenced the courts in this case is that the company claiming famous mark protection had previously been held to have abandoned its mark in the U.S. It is a rare U.S. case where a company has been held to have actually abandoned its mark.23 So here, for the plaintiff to win, the court would have had to, in effect, allow the famous mark doctrine to remove the litigated abandonment decision. So I think there was even a higher hurdle here because of that. If there had not been the abandonment, the case might have gone the other way, just because I do think the defendants in this case are not the cleanest or purest of heart. On the other hand, I think there is something of an estoppel argument. There were letters back and forth. The defendant said, “Look, if we don’t hear from you in a certain amount of time, we will assume we can go on.” It goes on for two years, and then the plaintiff shows up again. So I think this is a case where there are a lot of things on both sides that you might not find in a normal case. PROF. GINSBURG: Can I pick up on that? I am uncomfortable with making all those presumptions from the fact of copying, even blatantly copying, the trade dress. It is not necessarily true that the reason you copied was that you thought that you would capture the goodwill of the business you copied. It might be that you copied because you thought your predecessor had a really good concept that it hadn’t yet exploited in the United States. Trademark law does not — at least not yet — protect marketing concepts. So at least up until now, I think we have always said that whether you copy the concept from a local or from a foreigner, that is fair game. PROF. BRAUNEIS: Or that you thought just the name was good. You liked the name “Bukhara,” without wanting to copy the goodwill of a particular restaurant. PROF. GINSBURG: Right. Taking the name does not help. MS. MARSH: That was actually the Person’s case in the TTAB.24 PROF. GINSBURG: Exactly. That is what I was thinking of. MS. MARSH: They decided that it was okay under U.S. law for you to go be inspired by a name in Japan, come back to the United States, use that name for the same goods, apply for it, 23 International trademark practice presumes that marks are abandoned if they are not used for a period of time. In the United States, this period is three years. 15 U.S.C. § 1127. See, e.g., Major League Baseball Props., Inc. v. Sed Non Olet Denarius, Ltd., 817 F. Supp. 1103 (S.D.N.Y. 1993) (holding that the Los Angeles Dodgers had abandoned the rights to the Brooklyn Dodgers trademark). The U.S. courts have differed in defining the burden a trademark owner must meet to rebut a presumption of abandonment. See generally Laurence R. Helfer, “US Courts in Quandry Over Abandoned Trademarks: Is an Ex-Trademark Protected if it Remains Known and Loved by Consumers?”, IP Worldwide, May/June 1999, available at http://www.finnegan.com/resources/articles/articlesdetail. aspx?news=408a5bd2-a74e-4152-ba14-95e055b2ed3f; Stanley A. Bowker, Jr., “The Song Is Over but the Melody Lingers On: Persistence of Goodwill and the Intent Factor in Trademark Abandonment”, 56 Fordham L. Rev. 1003 (April 1988) (discussing in detail the federal courts’ treatment of how the rebuttable presumption of abandonment shifts the burden of proof). The Fifth Circuit, for example, has strictly followed the language of the Trademark Act in holding that “the mark’s owner has the burden to demonstrate that circumstances do not justify the inference of intent not to resume use.” See, e.g., Exxon Corp. v. Humble Exploration Co., 695 F.2d 96, 99 (5th Cir. 1983) (emphasis added); Intrawest Fin’l Corp. v. Western Nat’l Bank, 610 F. Supp. 950, 958 (D. Colo. 1985); Restatement (Third) of Unfair Competition § 32, cmt. b (Tentative Draft No. 3, 1991). Other courts have held that a trademark owner need only produce evidence of an intent not to abandon the mark. See, e.g., Seidelmann Yachts, Inc. v. Pace Yacht Corp., 14 U.S.P.Q.2d 1497 (D. Md. 1989); Citibank v. City Bank of S.F., 206 U.S.P.Q. 997 (N.D. Cal. 1980) (“The party seeking to prove abandonment must prove an intent to abandon on the part of the trademark owner.”). This appears to place a lighter burden on trademark owners. Yet even in these cases, it remains unclear whether a court will treat evidence of continuing goodwill as evidence inconsistent with an intent to abandon the mark. Moreover, even some courts that have accepted evidence of residual goodwill have wondered how strong consumers’ memories of the mark must be to justify warehousing the mark at issue. Sterling Brewers, Inc. v. Schenley Indus., Inc., 441 F.2d 675 (C.C.P.A. 1971). 24 Person’s Co. Ltd. v. Christman, 10 U.S.P.Q.2d 1634 (T.T.A.B. 1989) (holding use of PERSON’S mark in Japan has no effect on U.S. commerce and thus cannot form basis for holding that party has priority of use in the United States).

552 CHAPTER VI: TRADEMARK LAW register for it. In opposition, the TTAB said: “Sorry, Japanese company, you are not here. We have strict rules of territoriality.” So that issue has been addressed. PROF. HANSEN: Yes, except that was a rare exception and stands out. The usual fact is someone copies and they argue that “we just think it’s a good idea.” Jane, I don’t think you are going to find too many courts will buy that, and especially if the defendant proceeds into expensive litigation. Would they do that for just a good idea? No. I pay a lot of money to defend it because I think there is some goodwill here that is going to justify me expending money on this. PROF. BURRELL: But two years later you might be defending your own goodwill here. MS. MARSH: That’s exactly right. PROF. HANSEN: Yes, it does depend upon at which stage you have the lawsuit. PROF. BURRELL: Maybe in that case it is two years later. PROF. HANSEN: Right. MS. MARSH: You have built the name. PROF. HANSEN: How much goodwill did you have? MS. MARSH: They were very successful. They actually had great write-ups in The New York Times and in Crain’s, based on their extensive wine list, the good food, the good service. PROF. HANSEN: David? PROF. LLEWELYN: Somewhat unusually, I have read the program for this session. I usually don’t because there is a new version before I have read it. Only in a program drafted by Hugh Hansen could one pose the question, “What strategies are available to a mark owner to receive greater U.S. and global protection for its famous mark?” In the real world, famous marks that the man and woman in the street would recognize as famous marks will be protected. Those that are not famous marks will not be. From what I have heard, the courts seem to have been basically making decisions on that basis. I think one needs to look back at Article 6bis and where it comes from and when it comes from. Trademark laws have moved on since the Paris Convention. They’ve moved on since the days when use was required before you could register. It was difficult to register trademarks because there was a serious examination. The world has moved on. I have to question whether really Article 6bis is necessary at all, because where a mark is famous there will be protection found either through registered trademark systems, because the mark has been registered, or through the law of passing-off, or through some other way, like Section 52 of the TPA in Australia. So in terms of greater protection, please, Hugh. In the United Kingdom, we have actually amended our trademarks law in 1994 — some would argue a bit late — to include specific protection for well-known marks under Article 6bis by Section 56 of the Trade Marks Act.25 But it is not really necessary. There is only one case on the subject. Most famous, really famous, brand owners will rely on dilution, whereas dissimilar marks will just rely on a normal infringement action. 25 U.K. Trade Marks Act 1994 (as amended), available at http://www.ipo.gov.uk/tmact94.pdf. 1) References in this Act to a trade mark which is entitled to protection under the Paris Convention or the WTO agreement as a well known trade mark are to a mark which is well-known in the United Kingdom as being the mark of a person who — (a) is a national of a Convention country, or (b) is domiciled in, or has a real and effective industrial or commercial establishment in, a Convention country, whether or not that person carries on business, or has any goodwill, in the United Kingdom. References to the proprietor of such a mark shall be construed accordingly. (2) The proprietor of a trade mark which is entitled to protection under the Paris Convention or the WTO agreement as a well known trade mark is entitled to restrain by injunction the use in the United Kingdom of a trade mark which, or the essential part of which, is identical or similar to his mark, in relation to identical or similar goods or services, where the use is likely to cause confusion. Id. § 56.

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So do we really need this famous marks doctrine any longer? PROF. HANSEN: Aren’t you assuming that which we are trying to determine here: that there is protection. So if you assume that, you’re right we don’t have to be here. Maybe you’re right on the question but I’m assuming some people came to this session because they aren’t sure about how much protection there is. In any case, it doesn’t hurt to think about it a little bit. And you’ll notice it said “U.S. and global protection,” meaning abroad as well. But I appreciate your contribution, David. Jonathan? MR. MOSKIN: I can thank my partner, David. Otherwise, I am feeling entirely out here on the edge. Maybe, after you have finished hearing me, you will want me to be sitting in the next room, or maybe I won’t even be invited to lunch. I think I will have the one unpopular set of views on this panel, that the “famous marks doctrine,” if it can really be called that, makes absolutely no sense to me. I can explain a little bit why. I can ask anyone in the audience. How many of you would have ranked BUKHARA RESTAURANT as one of the 100 or 200 most famous marks? How many of you had ever heard of it before this litigation? PARTICIPANT: Which mark, India or the United States? MR. MOSKIN: United States. [No response] All right. Well, that makes the point pretty well. There is no reason that the parties should have been litigating for seven years over a doctrine that has no basis in law. Ultimately, to the extent that the courts have spoken here, the Second Circuit said: “We are not going to follow what the Fourth Circuit said in the International Bancorp case”26 — and I will come back to that in a moment, which Professor Beebe spoke about — “This doesn’t make any sense to us. It is fundamental trademark law that merely advertising a mark is not use in commerce.” Not only do the courts say that, but the Trademark Trial and Appeal Board says that and the Trademark Office says that. That is not a controversial point. What the Second Circuit did then was say: “Well, before we throw these people out of court for good, we will send this matter to the New York State court, because it has considered this a couple times in the distant past. Maybe it has some wisdom to share with us.” What the New York State court said was: “Yes, we think there should be some protection. We will not call it famous marks protection. But if you have goodwill, then under the time-honored” — and those were the words that were used by the court of appeals — “misappropriation doctrine we will not rule out the possibility that some obscure Indian restaurant can come in here and tie up the federal courts for years.”27 The time-honored misappropriation theory has been preempted. I do not know why there was no discussion of that fact in the court of appeals. It did cite the Motorola case,28 where the Second Circuit made very clear that except in the “hot news exception”29 — which we could 26 International Bancorp, LLC v. Société Des Bains De Mer et Du Cercle Des Etrangers à Monaco, 192 F. Supp. 2d 467 (E.D. Va. 2002). 27 “Prunier and Vaudable fit logically and squarely within our time-honored misappropriation theory, which prohibits a defendant from using a plaintiff’s property right or commercial advantage — in Prunier and Vaudable, the goodwill attached to a famous name — to compete unfairly against the plaintiff in New York.” 9 N.Y.2d at 478 (emphasis added). 28 National Basketball Ass’n v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), available at http://www.law.cornell.edu/ copyright/cases/105_F3d_841.htm. 29 The Second Circuit found that under some circumstances a claim of misappropriation under a “hot news” exception may survive (citing Financial Info., Inc. v. Moody’s Investors Serv., Inc., 808 F.2d 204, 208 (2d Cir. 1986))....

554 CHAPTER VI: TRADEMARK LAW go into more, but it is completely irrelevant here — the 1976 Copyright Act preempted the misappropriation theory or the time-honored misappropriation theory.30 On the Grupo Gigante case,31 of course I am very sympathetic to Professor Ginsburg’s point that consumer protection does matter, and Congress can if it wants to step in here and create a system of protection. It has not done that yet. I will ask you, Professor Hansen: at Fordham do we still teach that Erie v. Tompkins32 is the law? PROF. HANSEN: Yes. But we also teach that the Copyright Act doesn’t preempt trademark protection. MR. MOSKIN: Admittedly, it has been twenty-five years since I left another Jesuit institution where I studied the law. PROF. HANSEN: By the way, just because Erie v. Tompkins removed federal common law, it did not prohibit states from adopting misappropriation law. MR. MOSKIN: No. I have moved on from the state courts. I think I have said enough on New York State’s view about misappropriation theory. I was referring now to the Ninth Circuit in the Grupo Gigante case, a very good example where hard cases make bad law. This was a case where, understandably, there was a risk of consumer confusion. But the Mexican company, which had a very successful grocery store business, had never thought to do anything about protecting its trademark in the United States. Having failed to do that, it threw itself on the mercy of the court. The court, feeling merciful, made up some federal common law. I do not understand the basis for that as a matter of law. I think it is still very much the case that Erie v. Tompkins is the law, there is no federal common law, and if Congress cares to step in and amend the statute it is free to do that. I would also now turn very quickly to the International Bancorp case.33 Unless we are going to say that the Occupational Safety and Health Administration can regulate job conditions in Monaco or the Internal Revenue Service can tax the transactions in the Monaco casino, the Lanham Act does not speak in any way to the transaction of business in a foreign country. Therefore, the case, which has not been followed by any other case and was accompanied by a stinging dissent,34 does not make any sense either. The court found the information time-sensitive, but determined that the NBA had failed to show that Motorola’s products had any competitive effect on the NBA’s primary business — producing basketball games for live attendance and licensing live broadcasts of those games (the pagers were not a substitute for attending NBA games or watching or listening to licensed broadcasts). In addition, Motorola and Stats expended their own resources to collect and disseminate the factual information, since Stats staff monitored the games and entered changes in the score and other factual information into its computers. Id. The “hot news” doctrine is based upon unfair competition, and dates back to the days when East coast newspapers would wire the content of competitors’ stories to the West Coast of the United States for their early edition. Int’l News Serv. v. Associated Press, 248 U.S. 215 (1918). The elements of a hot news claim are: the plaintiff collects information at some cost or expense; the value of the information is time sensitive; the defendant’s use of the information constitutes free-riding on plaintiff’s costly efforts to generate or collect it; the defendant’s use of the information is in direct competition with a product or service offered by the plaintiff; and the ability of other parties to free-ride on the efforts of plaintiff would so reduce the incentive to produce the product or service that its existence or quality would be threatened. 30 “Indeed, the New York cases cited by the District Court and the Second Circuit as embodying the famous or well-known marks doctrine in New York common law — Prunier and Vaudable — were, in fact, decided wholly on misappropriation theories.” 9 N.Y.2d at 477 (emphasis added). 31 Grupo Gigante S.A. v. Dallo & Co., 391 F.3d 1088 (9th Cir. 2004). 32 Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). 33 International Bancorp, LLC v. Société Des Bains De Mer et Du Cercle Des Etrangers à Monaco, 192 F. Supp. 2d 467 (E.D. Va. 2002). 34 The dissenting judge, Judge Diana Gribbon Motz, would have insisted that both elements of the statutory definition — advertising and the rendering of services — occur in the United States in order to satisfy the use in commerce requirement. International Bancorp, 329 F.3d at 383 (Motz, J., dissenting).

PART C: PROTECTION FOR FAMOUS AND WELL-KNOWN MARKS 555

If Congress wants to do something, that is fine. I would submit that many users, such as in the Person’s case,35 who decide in the United States to open a business that is similar to even a well-known, or maybe even an obscure, foreign business — we might call it bad faith, but maybe they are doing that because they have spoken with an attorney who told them: “That is the law. If somebody has not gone to the trouble of protecting their foreign mark in the United States, too bad. You are free to use it.” That is not bad faith; it is simply foolishness. I think as David said, famous marks will be protected. PROF. HANSEN: You’ve raised some points — and I think it is valid — about where does policy come up. Misappropriation law is just using a policy against “wrongful taking” and giving it a doctrinal name. So where does policy play a role? Court-created doctrine based upon policies that courts favor is what U.S. IP law is all about. Most of the important IP doctrines generally are not found in the statutory language. As for trademark law and the Lanham Act you have to name a few: the court-created functionality defense, 36 spectrum of distinctiveness, Polaroid factors, and various infringement doctrines such as initial interest confusion. The whole law of infringement in copyright, patents and trademarks is almost completely judge-driven. As everyone knows, the infringement provisions of the applicable statutes are bare-boned. So I am not sure where you draw the line as to what is OK statutory interpretation and not OK common law protection. The courts are doing both. Jonathan, are you disagreeing with David, who seems to be saying that famous are already protected here? MR. MOSKIN: No. I think that obscure marks or modestly known marks are probably not protected. There have been occasional cases, such as the Maxim’s case in New York37 or the Grupo Gigante case,38 but it is very rare. In most of these instances courts have said rights are territorial and if you do not have a use and/or a registration here, you are out of luck. I would also distinguish between a defense and an affirmative right. It does not trouble me in the least that courts can create defenses such as functionality. It does trouble me somewhat that courts can create affirmative rights. PROF. LLEWELYN: Sorry, Hugh. Can I just correct how you just described what I said? In this week of misspeaking, may I just point out to you that I didn’t actually say that everything was all right here. What I said was that really famous marks, the marks that should be protected, will be protected. That is what I said. MS. MARSH: I just have a quick point. Really famous marks are protected in the United States because they are used in the United States primarily. There are very few famous marks that will come to mind that are not being used in the United States. PROF. LLEWELYN: Well, you register a mark. MS. MARSH: Exactly. They are probably both. PROF. HANSEN: As a practical strategic matter, does it make sense, instead of suing in the Southern District in this situation, just to sue in New York Supreme Court for misappropriation? 35

Person’s Co. Ltd. v. Christman, 900 F.2d 1565 (Fed. Cir. 1990). The functionality doctrine is a judicially created rule that prevents trademark law from thwarting interbrand competition by foreclosing use of functional features of a product design or configuration mark. See J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition, § 7:63 (4th ed. 1997); see Epic Metals Corp. v. Soulliere, 99 F.3d 1034, 1038 (11th Cir. 1996) (“A products features are protectable as trade dress if they are primarily non-functional.”). This proscription serves two purposes. First, by ensuring that competitors remain free to copy useful product features, it prevents the trademark law from undermining its own pro-competitive objectives. Qualitex Co. v. Jacobson Prods. Co., Inc., 514 U.S. 159, 164 (1995). Second, the functionality doctrine prevents the trademark law from conflicting with the patent law by eliminating trademark monopolies of potentially unlimited duration on a product’s utilitarian features. Id. at 165. 37 Vaudable v. Montmartre, Inc., 20 Misc. 2d 757 (Sup. Ct., N.Y. County 1959). 38 Grupo Gigante S.A. v. Dallo & Co., 391 F.3d 1088 (9th Cir. 2004). 36

556 CHAPTER VI: TRADEMARK LAW Michelle, if you were advising on, say, the next case, where you have a client who wants to assert famous mark protection, would it make sense to sue in state court? In fact, the Second Circuit invited the plaintiff to drop the case and go into state court, which they declined to do. Which forum would you choose? You could use state law in both forums, in the federal through supplemental jurisdiction, but what forum would be more favorable? MS. MARSH: It is really very fact-driven at this point. The standards that we have in place right now — you have the Ninth Circuit with a fairly high standard; you have this state court regime now that has been set up that requires a two-step process. In New York you have to (1) show that the defendants purposefully, intentionally copied the mark; plus (2) you have to show that there is a primary association with the mark. So that is not a low burden by any means. Your mark cannot just be kind of known; it has to be well known. So it really is a very fact-driven analysis. I would not say there is any one jurisdiction right now that is superfavorable. PROF. HANSEN: Does state law require that a mark be “well known?” MS. MARSH: They used the language “primary association.” They created again their own definition. PROF. HANSEN: If there is goodwill in there, at least you can invoke misappropriation. MS. MARSH: But it is a measure of goodwill. PROF. HANSEN: And then there has to be a primary association, which might be another word for likelihood of confusion. MS. MARSH: Right. The Second Circuit interpreted primary association to mean secondary meaning, which is something that trademark lawyers can understand. But there’s still a fairly high burden there. PROF. HANSEN: By the way, the interesting thing about this case is that Judge Oakes was on the three-judge panel but it was decided by two judges without him. It said he could not decide the case because he retired.39 Of course, he was a senior judge but he was a senior judge when this case started. And senior judges might choose not to hear cases but normally they would not do that in the middle of a case. It’s very strange. Even if that was the case, they would normally say the absent judge concurred in the result or opinion of the two remaining judges. When that is not mentioned, it is normally because the judge was going to dissent. Maybe Judge Oakes had some problems with the decision. Actually, I think it is a pretty well-written, careful decision. MS. MARSH: It was sixty pages long. PROF. HANSEN: Any other audience questions? QUESTION [Howard Shire, Kenyon & Kenyon, New York]: I am a partner of Michelle Marsh’s. One question I have is this case seems to me to pose a conflict between the doctrine of abandonment and famous marks. Should the famous marks theory apply where the foreign plaintiff has abandoned its rights in the United States? Should it get a second bite at the apple? In other words, it once had a valid trademark here. It was abandoned. Should it get a second bite at the apple is my question. MS. MARSH: Well, we argued that actually went to good faith. If you know that the mark has been abandoned and adopted it knowing that it had been abandoned, doesn’t that go to good faith? The law of abandonment is pretty well established in the United States. If you have nonuse, any party can adopt a mark that has previously been in use. Just to answer Howard’s point, yes, we think it went to the point of good faith. PROF. HANSEN: Sir Hugh? 39 Judge James L. Oakes was a member of the panel, but retired following oral argument. The remaining two panel members decided the appeal pursuant to Local Rule §0.14(b).

PART C: PROTECTION FOR FAMOUS AND WELL-KNOWN MARKS 557 QUESTION [Prof. Hugh Laddie, University College London]: Three points.

First of all, I was very glad to hear, Hugh, that you thought that the law of copyright and trademarks are different. Pity that you don’t apply that to your analysis of trademark law, because it sounds to me like you have approached trademark law on the corrupted basis that, prima facie, what is worth copying is worth protecting, which was bad enough in copyright law and it is absolutely awful in trademark law. There is in this city a wonderful fish-and-chips shop, called “A Salt and Battery.” I think it is a great name. England is a home of fish-and-chips shops. I would love to set up a fish-andchips shops chain in England called “A Salt and Battery,” because it is a good name. But it has nothing to do with whether or not that name should be protected in England. I think Jane has put her finger on it. When you consider questions of territoriality, you have to consider what is it that you are protecting. Are you protecting the public from being deceived, or are you protecting the rights of the proprietor? It is very easy to say that a trader who has only traded in one country has no proprietary rights elsewhere — hence the doctrine of territoriality. But if you say that the underlying philosophy of trademark law or unfair competition law is one of protecting the public against confusion, then, although our right of property — your trade may be limited to one country; the public knowledge of you may extend far further; therefore, the protection of the public extends beyond territoriality. So territoriality raises a great question: Is it right that there should be a territorial limitation on trademark rights? That is dependent upon whether the trademark rights are there to protect the proprietor or the consumer. I do not think actually that has ever been finally determined in the United Kingdom, and I suspect it is not terribly well considered here in the United States. You say you have the solution: if it is a copy, it is okay. You get around it by saying that if it is a copyist, it is okay. PROF. HANSEN: I actually didn’t say that. I just said that is what the law is. It is the law. It is even called the “New York rule.” The bottom line is all of this is “good guy/bad guy.” Misappropriation is strictly “good guy/bad guy.” Bad faith drives it. You need bad faith. New York misappropriation law talks about a property interest. They are not even using consumer deception laws. The only property interest possible is goodwill. That is the bottom line, Goodwill is what drives trademark law here. If someone tries to use someone else’s goodwill, free riding on it, you are likely to lose that case. Now, you can say it shouldn’t or whatever but it is the situation here. And it is starting to happen in the U.K. as you know in the Arsenal case.40 And the European Court of Justice is starting to do it. It’s a disease that’s spreading. QUESTION [Prof. Laddie]: Hugh, it’s wonderful listening to you. You are the epitome of a person who uses pejorative language. It is misappropriation. Once you have described it as misappropriation, of course it is bad; it’s got to be stopped. You are the sort of fellow who talks about copyright infringers as being pirates. Anybody who uses somebody else’s work is a pirate. Why can’t we just say that if the same mark is being used by two people it is bad if the defendant is found guilty; it is not misappropriation if he is not found guilty? Don’t start by calling it “misappropriation.” Don’t start by calling it “piracy.” You have to look at some 40 Arsenal Football League plc v. Matthew Reed, [2001] R.P.C. 922 (Laddie, J.) (finding no infringement); Case 206/01, Reference for a preliminary ruling by the High Court of Justice (England & Wales), Chancery Division, by order of that court of 4 May 2001, in the case of Arsenal Football Club plc against Matthew Reed, 2002 O.J. (C 333) 22 (suggesting that only use that jeopardizes the essential function of a trade mark is an infringing use); Arsenal Football League plc v. Matthew Reed, [2003] E.W.C.A. Civ. 696, May 21, 2003; [2003] E.T.M.R. 73 (CA) (on remand from ECJ). Decision available at http://www.hmcourts-service.gov.uk/judgmentsfiles/j1751/arsenal_v_reed.htm (reversing Laddie, J., and finding infringement).

558 CHAPTER VI: TRADEMARK LAW underlying philosophy first, and the philosophy is: What are you protecting? Are you protecting the rights of the proprietor? PROF. HANSEN: Thanks, Hugh. But the doctrine is actually called “Misappropriation.” As much as you dislike the name of the doctrine, that’s what it is called. QUESTION [Sean Pager, University of Richmond School of Law, Richmond, VA; Michigan State]: I would like to get the panel to squarely answer David Llewelyn’s postulate, that famous marks will be protected. I do not want to settle for the artifice that, “Well, as a practical matter, famous marks will have been used.” There are from time to time marks that will not have been used that are famous, for example the De Beers case,41 where they were lying low for antitrust reasons. In any case, it certainly happens to U.S. companies abroad. I would like to see if what is sauce for the goose works for the gander. Without having to show how famous you are, without the factual question, without having to litigate that, without any use, can a defendant get a trademark lawsuit dismissed merely on the lack of use, without having to show a level of fame or litigate that question? PROF. BEEBE: I actually heard a series of questions in there. It is very much a factual question, so it is hard to answer a hypothetical. I will retreat for a moment back to the idea that I am not sure why we are here talking about this. There are so few cases that meet this hypothetical definition. But, then, that itself is a factual question. One could ask what about Tata, for example, which recently bought Jaguar and Land Rover. If you open a company in the United States named Tata, would that be a famous mark? Are they registered in the United States? I don’t know. But that is maybe a slightly more famous mark than BUKHARA GRILL. But even in the United States, one must say that it is not necessarily on the order of a Ford or anything else. As for the issue of use, I’m not sure. Are you challenging the International Bancorp42 reasoning? QUESTIONER [Mr. Pager]: Without going into the Fourth Circuit’s reasoning, which I do not think has been adopted anywhere else — the Second Circuit certainly didn’t adopt that, and it said that we don’t have a famous mark doctrine either. So if New York got rid of its common law protection, there is no federal protection. So is that correct as a matter of federal law? MS. MARSH: You have to go west, young man, to get the answer. You have to go to the Ninth Circuit to get some bit of protection for famous marks under a federal claim. In the Second Circuit you will not. In the rest of the country, other than the Fourth Circuit, which kind of addressed it, sort of, there really is no rubric for it. QUESTIONER [Mr. Pager]: The answer is no? MS. MARSH: The answer is no. QUESTIONER [Mr. Pager]: So you are not protected? MS. MARSH: That is correct, under federal law. Under state law, that is also an open question. You can come to New York State. MR. MOSKIN: What’s wrong with state law? MS. MARSH: It is not developed. It has never really been addressed, other than in New York, so it is pretty much a wide-open question. PROF. HANSEN: One of the advantages for plaintiffs, I think, of going into state court is that the courts don’t anguish over the policy implications of finding for the trademark owner. There is little analysis. They identify who is bad and who is good, misappropriation or whatever, and that’s it. Whereas the federal court wrings its hands, appropriately so, in many instances. 41 De Beers LV Trademark Ltd. v. DeBeers Diamond Syndicate, Inc., 2005 U.S. Dist. LEXIS 9307 (S.D.N.Y. May 18, 2005). 42 International Bancorp, LLC v. Société Des Bains De Mer et Du Cercle Des Etrangers à Monaco, 192 F. Supp. 2d 467 (E.D. Va. 2002).

PART C: PROTECTION FOR FAMOUS AND WELL-KNOWN MARKS 559

Justice Roger Hughes from Canada? QUESTION [Justice Roger Hughes, Federal Court of Canada, Ottawa]: A follow-up on Sir Hugh’s remarks. Are you protecting a property right or a future property right of a trademark owner, or are you protecting the public against duplicity? So much of this rests in the person of the judge hearing the case or in the Trademarks Office in the examiner. We had a situation where PARMA ham from Italy, a well-known ham in my view, was not allowed to be imported into Canada. So some opportunist registered the trademark PARMA for processed meats. Then finally, when the Italians came to Canada, the judge, who had never I think had a ham dinner in his life, decided that nobody had ever heard of PARMA. In other words, in the judge’s mind this mark was not famous.43 Now, who decides that a mark is famous? In the United States, if I ask for Chablis, I get any old white plunk. But if I was in France, if I asked for Chablis and got that damn white plunk, I would throw it back, and the Frenchman would throw it back too. Who decides these what I will call “effete marks,” which opportunists like to jump on in other countries, are to be protected or not? If you leave it to the province of the judge, the judge may be some guy from the boondocks who never heard of it. That is a problem. The same with the trademark examiners. So how does one bring to the attention of the court the so-called famousness of marks that are famous only in a very small but very significant circle. PROF. HANSEN: Does anyone want to respond to that? Robert? PROF. BURRELL: I am not sure what Canadian judges do, but in Australia and the United Kingdom judges just take evidence on the extent of fame. A judge had never heard of PARMA ham, fine. But why wasn’t evidence submitted to its fame amongst consumers in Canada? QUESTIONER [Justice Hughes]: If it is only famous to 2 percent of the people — PROF. BURRELL: Well then, it is probably not famous. QUESTIONER [Justice Hughes]: Then, from your technical legal point of view, it ain’t famous, even though it is famous to 2 percent of the people. How do you deal with that? PROF. BURRELL: If the market is the 2 percent, then yes, it enjoys consumer recognition. But it seems strange just to say that it is up to some judge to decide, whether or not he has ever heard of PARMA ham. PROF. HANSEN: If in the so-called niche marketplace for the product it is famous, then other things kick in, because the people in that niche are going to be either deceived, confused, or something else. If you have a consuming public which will be confused, and that is clear, then should it matter if the consumer for that product constitute only 2 per cent of the population? QUESTIONER [Justice Hughes]: Our Supreme Court held that BARBIE’S for a restaurant could not be prevented by Mattel, for instance,44 and CLICQUOT for ladies’ clothing could not be protected against VEUVE CLICQUOT.45 We get the bang on stuff but do not have a doctrine covering the aura of protection stuff. PROF. HANSEN: Thank you, Roger. Unfortunately, our time is ended. I want to thank the panel very much and thank the audience as well.

Consorzio del Prosciutto di Parma v. Maple Leaf Meats, Inc., [2000] F.C.J. No. 1962 (Jan. 25, 2001). Mattel, Inc. v. 3894207 Canada Inc., 2006 SCC 22, [2006] 1 S.C.R. 772. 45 Veuve Clicquot Ponsardin v. Boutiques Cliquot Ltée, [2006] 1 S.C.R. 824, 2006 SCC 23. 43 44

CHAPTER VI

Trademark Law Part D: Event-Driven Marks and “Ambush” Marketing Protection of a Special Event’s (e.g. Olympics) Mark and Protection Against Unofficial Business Deriving Official-sponsor-like Benefits Moderator JEFFREY M. BUTLER

Jones Day (New York) Speakers DR. PETER RUESS

PROF. COENRAAD VISSER

Freshfields Bruckhaus Deringer (Düsseldorf)

University of South Africa (Pretoria)

PROF. DORIS LONG

John Marshall School of Law (Chicago, IL) Panelists JUSTICE ROGER HUGHES

PHILLIP JOHNSON

Judge, Federal Court of Canada (Ottawa)

Barrister, 7 New Square (London)

JEFFREY D. NEUBURGER

Thelen Reid Brown Raysman & Steiner LLP (New York)

MR. BUTLER: Good afternoon. We have, I think, a very interesting panel discussion today.

There are two very difficult time slots in any seminar. One is just before lunch and one is the last one of the day. I think Hugh put this session now — just before lunch — because it is one of the most exciting. I appreciate your attending. Please do ask some questions, because

562 CHAPTER VI: TRADEMARK LAW that will make it even more interesting for us on the podium, and, hopefully, more interesting for you, too. My name is Jeffrey Butler, from the law firm of Jones Day. It is a pleasure to be here today. Today’s topic is “ambush marketing.” The Conference began today on the third floor in the patent session with a discussion of “ambush patenting” [see Chapter V.E.1, supra this volume] and we end before lunch with “ambush marketing.” Ambush marketing,1 as you certainly know, has been defined by a number of practitioners, including of course Prof. J. Thomas McCarthy, who has described it as “a type of marketing by a company that is not an official sponsor of an event but that places advertising using the event to induce customers to pay attention to the ad.”2 So, by innuendo or by word play or by images or otherwise, the advertiser tries to associate a particular event with that advertiser’s goods or services. We will see, hopefully, in the course of this short program today whether that is in every instance unlawful, or perhaps whether in certain instances it’s perfectly legitimate and just good old aggressive advertising. Let me give you a quick example or two to tee this off. One occurred during the Barcelona Olympics — and I think also during other Olympic Games we’ve seen similar tactics. Visa, the credit card company, paid some $20 million to be an official sponsor of the event. American Express did not pay to be an official sponsor of the event but, during the Barcelona Games, and shortly before the Games as well, AmEx ran some ads on TV and in print media using images in the background that clearly were recognizable as Barcelona, and it used the tagline “Remember: to visit Spain you don’t need a visa.” In other places, AmEx advertised: “Obviously we’re here for more than just the fun and games.” Quite predictably, connections to the Barcelona Games were made in the minds of consumers.3 I know that this is a very international IP conference, but I want to give you a very recent further example, this one involving the U.S. Super Bowl. What used to be Kentucky Fried Chicken (KFC now) offered to donate $260,000 to a charity of a U.S. football player’s choice if the player would do the “chicken dance” after scoring a touchdown in the Super Bowl. The chicken dance, presumably, would be associated in the minds of consumers with Kentucky Fried Chicken. Kentucky Fried Chicken was not an official sponsor of the event.4 Did American Express and KFC do something improper or actionable in these instances? 1 “Ambush marketing” is not a legal category. “Guerilla marketing,” “parasite marketing,” “piggy-back marketing,” “gorilla marketing,” and, in relation to TV broadcasts and digital means of communication, “viral marketing” are other expressions to describe the same practice. 2 J. Thomas McCarthy, McCarthy’s Desk Encyclopedia of Intellectual Property (2d ed. 1995). Clause 48 (c) of the IOC’s Host City Contract puts a requirement on the parties to combat ambush marketing: “‘Ambush Marketing’ is defined as any attempt by an individual or an entity to create an unauthorized or false association (whether or not commercial) with the Olympic Games, the Olympic Movement, the IOC, the National Olympic Committee of the Host Country or the Organising Committee of Olympic Games (‘OCOG’) thereby interfering with the legitimate contractual rights of official marketing partners of the Olympic Games.” 3 Visa was an official sponsor of the 1992 Barcelona Olympics and obtained, as part of its sponsorship package, an agreement that official Olympic tickets and merchandise vendors only take Visa cards in the Olympic Village. American Express, a non-sponsor, responded to Visa’s TV campaign “The Olympics don’t take American Express” with its advertising campaign “to visit Spain you don’t need a visa.” For the 1992 Winter Games in Albertville, an AmEx advertisement displaying athletes said “if they want to enjoy the fun and games they don’t need a visa.” See Anon, “American Express Replies to Criticism”, N.Y. Times, Jan. 27, 1992 at B8. The fight continued during the 1994 Lillehammer Games with the now-famous “If you are traveling to Lillehammer, you’ll need a passport, but you don’t need a visa.” See Robert N. Davis, “Ambushing the Olympic Games”, 3 Vill. Sports & Ent. L.J. 423 (1996). 4 See Donna Goodison, “NFL: Players Should Duck Chicken Promo”, Boston Herald, Jan. 25, 2008, at 21 (“The National Football League is calling KFC’s chicken dance challenge to Super Bowl players a ‘textbook case of ambush marketing 101.’”).

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We should be asking ourselves whether the reason behind attempts to control and limit ambush marketing is to save the very large flow of moneys that are paid by sponsors5 of Olympic events,6 Fédération Internationale de Football Association (FIFA) World Cup events,7 and football events in this country8 and so on. Is it to protect the flow of money or is it to protect consumers? Is there a trademark right at issue (or another protectable right)? Should these event sponsors be protected from ambush marketing; and, if so, how? Our first speaker is Dr. Peter Ruess from the firm of Freshfields Bruckhaus Deringer in Düsseldorf. He is a German attorney at law and also has an LLM degree from the United States. He will be talking about “Ambush Marketing and Risks for Events: Do We Need More Protection? We will then hear from Professor Coenraad Visser from the University of South Africa at Pretoria, talking about “The Soccer World Cup 2010: Special Event and Ambush Marketing Protection in South Africa.” We will follow that with Professor Doris Long from John Marshall School of Law, who will talk about an event that is taking place even sooner, the Beijing Olympics, and what is being done in China to stop ambush marketing.

“Ambush” Marketing and Risks for “Event” Marks — Do We Need More Protection? Dr. Peter Ruess* Thanks, Jeff. It is an honor to be invited back. If you are looking at this panel, this is the only obstacle between you and lunch. We will make every effort to make it as enjoyable as an obstacle can possibly be. 5 Sponsorship has been defined as “a cash or in kind deal under which a sponsor pays a sponsorship fee to a sport entity (athlete, league, team, event) to support overall organizational objectives and promotional strategies.” Claude Jeanrenaud, Sponsorship, HANDBOOK ON THE ECONOMICS OF SPORT 49 (Wladimir Andreff & Stefan Szymanski eds., 2006). In return, the event organizer makes a number of promises to the sponsor, consisting of, among others, warranting advertising space, certain privileges, and some level of exclusivity. Sponsoring is particularly important in sports, which attracts 90 percent of sponsoring activities out of a roughly $26 billion overall sponsoring activity. Anita M. Moorman & T. Christopher Greenwell, “Consumer Attitudes of Deception and the Legality of Ambush Marketing Practices”, 15 J. Legal Aspects Sport 183 (2005). 6 According to the IOC, the Olympic Movement generated a total of more than $4,000 million in revenue during the most recent Olympic quadrennium (2001–2004). The breakdown of the Olympic marketing revenue generated from each major program managed by the IOC and the OCOGs during this period were: broadcasting 53 percent, corporate sponsorship 34 percent, and ticketing 11 percent, with the remaining 2 percent coming from other licensing activities. http://www.olympic. org/uk/organisation/facts/revenue/ index_uk.asp. “Without the support of the business community, without its technology, expertise, people, services, products, telecommunications, its financing — the Olympic Games could not and cannot happen. Without this support, the athletes cannot compete and achieve their very best in the world’s best sporting event.” Dr Jacques Rogge, President, IOC. http://www.olympic.org/uk/organisation/facts/introduction/index_uk.asp. See also “IOC Marketing Media Guide, Benefits of Olympic Partnerships”, at 8, available at http://multimedia.olympic.org/ pdf/ en_report_1329.pdf. 7 According to FIFA’s 2006 financial statements, 58 percent of its revenues in 2006 came from TV broadcasting rights and 24 percent from marketing rights (i.e., sponsoring), http://fr.fifa.com/mm/document/affederation/ administration/2006_ fifa_ar_en_1766.pdf. FIFA’s overall yearly revenue for the period 2003–2006 reached CHF 3.238 billion. 8 See “Long and Short of Super Bowl Sponsors”, Forbes.com, Jan. 2, 2008, http://www.forbes.com/2008/02/01/ super-bowl-commercials-pf-ii-in_bgm_0201optionswatch_inl.html. * Freshfields Bruckhaus Deringer, Düsseldorf.

564 CHAPTER VI: TRADEMARK LAW Jeff has already kindly outlined what the topic is mainly about. I will add to this that in Germany there is a notion that we need to do more to protect event marks. It is one or two voices in legal literature.9 It is nothing official yet. I just took up on this to see what event marks are. Do we need different kinds of protection?10 I will jump between event marks and ambush marketing. What I am trying to do here is just open the issues, open the questions, and hope we have a very good discussion. Sir Hugh Laddie offered some comments before, but he left, maybe to fight with Hugh Hansen in a concurrent session. Maybe he will come back soon. I. AMBUSH MARKETING

I am sure you are already familiar with some of these event marks: The yellow one on the left-hand side is the FIFA World Cup Germany in 2006; the Beijing Olympics 2008, which Professor Long is going to talk about; the very weird one on the right-hand side is supposed to be the numbers 2, 0, 1, and 2, for the London Olympics 2012 (I saw an article in which Martyn Perkins, a graphic design consultant, said that it looks like Lisa Simpson doing something11); the one on the bottom right is UEFA Euro 2008 Austria-Switzerland. If these were the only things we were to talk about — if you were an official sponsor and you were acquiring a right in one of these trademarks and somebody was to use them — we could just go to lunch right now, because that is easy. This is a trademark. If somebody has the right to use it, someone using it without proper permission is subject to legal action. But this is going to be a more sophisticated issue. As Jeff has already described, there are various ways of sneaking around. Allow me to take one step back and show you the business issues. Obviously, big international sports events are expensive. For example, the 2006 Soccer World Cup in Germany cost $420 million. It is more now. I calculated that on a euro basis two weeks ago, and, since your currency is in steep decline, I have to readjust that. We are talking about $420 million in cost, the vast majority of which comes from sponsors. Not surprisingly, sponsors are buying the right to use the “event mark.” Sponsors are certainly looking for other opportunities to get reimbursements as well, and their understandable interest is to prevent others from cashing in on the event and to use their sponsor position in every imaginable way. In this case, Lufthansa put soccer balls on the nose of its airplanes and in its advertisements featured athletes, planes and a soccer ball, and a swoosh of a logo, “LH2006,” along with an invitation to “share the passion with Germany’s soccer airline.” This might have led people to believe that Lufthansa was a World Cup sponsor.12 In fact, Emirates, the Dubai-based airline, 9 See, e.g., Boris Uphoff, Larry Cohen, Sarah Brown, Rohan Massey & Thies Bösling, “Ambush Marketing: How Can Official Sponsors of Sporting Events Prevent Competitors From Using the Event for Marketing Purposes? Views From the United States, the United Kingdom and Germany”, 9 ICC United Kingdom Members Handbook, available at http://www.mwe.com/info/pubs/ambush_marketing.pdf; Pierre Kobel, “International Report on Question B: Ambush Marketing Too Smart to Be Good ? Should Certain Ambush Marketing Practices Be Declared Illegal and If Yes, Which Ones and Under What Conditions?”, available at http://www.ligue.org/files/rapport_international_-_ question_b.doc. Several relevant articles in German are available at http://www.ppl.nl/bibliographies/all/cloudresults. php?bibliography=sports&wrd1= Olympic%20Games. 10 See Trade Mark Code (MarkenG) § 14: If an ambush marketing campaign includes the unauthorized use of any words, symbols, logos, or slogans that are similar to or identical with protected trademarks, the mark owner may ban such use and seek injunctive relief to end damages. 11 See Martyn Perks, “It looks like Lisa Simpson giving head”, Spiked Online, June 7, 2007, http://www.spikedonline. com/index.php?/site/article/3454. 12 See Doreen Carvajal, “Can’t Tell the Sponsors Without a Scorecard: Soccer authorities gearing up to battle ‘ambush marketing’ ahead of World Cup”, Int’l Herald Trib., May 31, 2006, available at http://www.iht.com/ articles/2006/05/03/ business/sportsbiz.php.

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had paid millions of euros for the rights to function as an official sponsor of the 2006 World Cup.13 Here we come to the very surprising interest of the sponsors, which is certainly diametrically opposed to the interest of third parties. The official sponsors want to refer to the event in a descriptive manner (i.e., “The airline that brings you to the Olympics”). They want to design their marketing, their promotional material, around it. Jeff has already given some examples. If you remember, during the 1997 New York Marathon, which was sponsored by Toyota, planes were writing “Mercedes-Benz” in the air space over the route, and that is what stuck in people’s minds.14 How many sports events did Nike sponsor? The answer is not one, in its entire corporate history. Nike is very good at building itself around events, such as Nike Town at the Olympic Games Atlanta 1996, all that kind of stuff.15 We have to think of how to reconcile the interests of the one side wanting to, understandably, get its money back — sports events would not work without sponsor money — and the diametrically opposed notion of people who say, “Well, if I am going to advertise goods in the vicinity of an event, I want to refer to it.” Let me give you one example, the AOL Arena in Hamburg. It is a big stadium, seating 50,000. For the 2006 World Championship (Weltmeisterschaft in German, abbreviated as “WM”), AOL was contractually obliged to take down the letters “AOL,” because FIFA certainly wanted to clear this space for its official sponsors. The letters weigh 4.5 tons. AOL complied with its obligations, which cost it $150,000. After having done so, AOL said, “Now the World Cup is really happening in our AOL Arena. Why not just mention it?” And mention it they did, saying, “AOL Arena — location of the WM 2006.”16 I submit the following question to you: Is that ambush marketing or is that just an accurate and clever statement? 13 Press Release, United Air Emirates, Emirates 2006 FIFA World Cup Global Advertising Campaign Finds Favour With Football Fans (Mar. 2, 2005), available at http://www.ameinfo.com/55006.html (“Emirates Airline recently launched its worldwide advertisement campaign to mark its Official Partner status of the 2006 FIFA World Cup, and already the campaign is winning fans around the globe.”). 14 In practice, it appears that the public does not properly identify the official sponsors. When surveyed, only very famous brands are cited, often in confusion with other famous non-sponsor brands. Less famous companies are not identified as sponsors at all. For instance, a survey made by Global Market Institute, Inc., shows that, in relation to the World Cup 2006, only two sponsors were properly identified worldwide, Adidas and Coca-Cola (38 percent recognition). Mastercard and McDonald’s were also identified, but in lesser proportions (24 percent and 20 percent, respectively). In certain countries, Pepsi was identified as the official sponsor instead of Coca-Cola and Visa was getting a level of recognition as official sponsor almost equivalent to Mastercard. Of course, Nike, not an official sponsor, was identified as an official sponsor in 31 percent of the cases overall, in some countries at par levels with Adidas (U.K. and U.S.) or even higher (Brazil). Fujifilm, Hyundai, Toshiba and Yahoo! Managed only 8 percent recognition. 15 For example, during the 1992 Olympics, Nike placed large murals of USA basketball team members Michael Jordan and Charles Barkley on the sides of buildings in Barcelona. Nike was not an official sponsor of the Games. See supra note 13; see also Davis, supra note 3. Although Adidas has doled out millions to be the official sponsor at each World Cup since 1994, Nike has shown up every time. In 1994, an unmarked van pulled up to the Citrus Bowl in Orlando, Fla., before a World Cup match and dropped off 150 free Nike caps —“Just Do It, Brasil” — which soon became one of the hottest items at the event (Nike was a sponsor of the Brazil team). Nike bought a vast number of billboards in the vicinity of the Olympic Games Atlanta 1996. In France, Nike’s “Tour de Foot” caravan brought free clinics to some 50,000 children around the country, and the company set up a 70,000-sq.-ft. interactive “Nikepark” in northwest Paris. British Marketer OMD found that after the World Cup in South Korea and Japan, more British consumers thought Nike was the official sponsor than thought Adidas was. Sean Gregory, “Global Game”, Time, May 22, 2006, at 43. 16 The AOL Arena was temporarily renamed FIFA World Cup Stadium Hamburg, and HSV paid its stadium sponsor a settlement of half a million euros. See “World Cup Organizer Riles with Stadium Fiefdoms”, Spiegel Online Int’l, Jan. 9, 2006, http://www.spiegel.de/international/spiegel/0,1518,395891,00.html.

566 CHAPTER VI: TRADEMARK LAW Courts never got to decide the issue. After FIFA threatened to take the AOL Arena in Hamburg off the list of official locations, AOL stopped this campaign. So much for the ambush marketing. II. TRADEMARK ISSUES

Let us look at the trademark issue now, from the legal side. I was referring at the beginning to the fact that some people try to make a point, saying that we need event marks. We do have trademark protection for events. Cultural and sports events are included in Class 41, and therefore can be protected.17 You can certainly invent anything you like and protect it. A. 2006 FIFA World Cup The issue is distinctiveness. Going back to the 2006 World Cup in Germany, are the terms “World Championship” and “WM” protected by FIFA, descriptive? Yes, arguably, for a world championship it might be descriptive. If that is the case, does this need to be remedied by some case? For example, Olympic Symbols and terms are subject to special protection, protected via special legislation in many states, be they descriptive or not.18 Do the same ideas mandate any kind of pro-trademark consequences? Do we need to step in here and say that this is such an important event that we need to keep others from free riding on it? Let me add to the example story here. Ferrero sells sweets. During the World Championship 2006, where everybody was busy doing ambushes — that is, as Hugh Laddie would point out, a prejudgment — Ferrero advertised and sold sweets with “WM” stickers inside. FIFA sued. Ferrero took quite aggressive action and said, “Well, then, I will go and have your trademarks canceled; they are purely descriptive,” and initiated cancellation actions against FIFA trademarks “WM 2006,” “Fussball WM 2006” [German for soccer], and “World Cup 20006” in the German Patent Court and in the EU Trademark Office. With respect to FIFA’s Community Trade Marks, the case came before the Office for Harmonization in the Internal Market (OHIM), the EU Trademark Office. They said: “No, we are not canceling them. They are not descriptive. The source indicator function is relevant. Everybody can clearly see this is FIFA.”19 I don’t know whether you can really say this without a doubt. The appeal is still pending. We should continue to monitor this because the EM, the European Championship 2008, will face the very same problems. In the German situation, the cancellation action for the German trademarks finally reached the Federal Supreme Court.20 The Supreme Court said that the trademark “WM 2006” is distinctive for some things but not distinctive for other goods and services, such as organizing 17 Community Trade Mark (CTM) Class 41 (Education; providing of training; entertainment; sporting and cultural activities). A Community Trade Mark Registration covers all twenty-five member counties of the European Community. 18 In Germany, protection is granted under Trade Mark Code (MarkenG) § 50 Abs. 1 Nr. 3 i.V.m. § 8 Abs. 1 Nr. 4. See discussion, infra, for other countries’ protection. 19 OHIM, Reference Nos. 969C 002155521, 970C 002153005, 971C 002152635, 972C 002152817, 968C 002047843, Decisions of the Cancellation Division of Oct. 28, 2005 (confirming FIFA’s rights in its “2006 FIFA World Cup” trademarks, holding that only FIFA’s commercial partners may use FIFA’s event marks including “WM 2006,” “World Cup 2006,” “World Cup Germany,” “Germany 2006,” and “World Cup 2006 Germany” for any commercial purposes in Europe, including host country Germany). All these decisions are currently under appeal at OHIM. 20 Cases I ZB 96/05 and I ZB 97/05, BGH (June 27, 2006) (the Bundesgerichtshof revoked the mark “Fussball WM” a few months before the tournament began).

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a world championship. It remanded the issue to the Federal Patent Court.21 In Germany, infringement and validity are dealt with by several different courts. Even worse, the Federal Supreme Court said “Fussball WM 2006,” is not distinctive at all for what FIFA had registered, and remanded it to the Patent Court for cancellation. All the Federal Patent Court could have done with these instructions was to cancel the trademark. The Federal Supreme Court is not bound by OHIM decisions. FIFA, well advised as they were, withdrew the trademarks to avoid precedent. But we certainly have a situation here that is worth monitoring for other events as well. What do you do if you register a trademark on a national level and you have a court that says the trademark “World Championship” doesn’t hold water and they are just not going to accept it? FIFA doesn’t care about this single event. This is over. It still has its EU Trade Marks. Even after this ruling, they went after infringers in Germany and just held high the EU Trade Marks. But this is a box that has been opened. I think it will be very interesting to see how far they can get. III. SUPER BOWL

In my remaining thirty-nine seconds, for all those who dozed off and said, “I’m not interested in German events,” I have something for the U.S. audience, the Super Bowl. Is “Super Bowl” a trademark? Yes, it is. Could you have the same issues? You might have the same issues, in theory, if it is descriptive. The NFL owns Community Trade Marks. I have not checked whether it owns national trademarks, but I am pretty sure it is well-advised and does that.22 But it is not descriptive. “Super Bowl” is actually a fanciful invention of Lamar Hunt, thenowner of the Kansas City Chiefs. His daughter said “Super Ball,” a then-popular toy, and the events were called “bowl games.”23 But if it were called “Bowl Games,” you could have the same problem. I hope you have had some fun listening. Thank you very much.

The Soccer World Cup 2010: Special Event and Ambush Marketing Protection in South Africa Prof. Coenraad Visser* Thank you for this opportunity. I was wondering about the timeline, being placed between Peter and Doris. We are talking about the World Cup event in 2010. The Beijing Olympics 2008 will be between us. Maybe I should have spoken last. Then, remembering that South Africa lost the 2006 World Cup by one vote to Germany, maybe it is just as well that I speak so close to Peter. I want to talk about non-trademark legislation protecting the interests of FIFA. FIFA holds about 500 trademarks in South Africa. These consist mainly of word marks, such as “World Cup,” “FIFA World Cup,” “South Africa 2010,” “World Cup South Africa 2010”; device Joined Cases 32 W (pat) 238/24 & 32 W (pat) 237/04, Bundespatentgericht 2006. See Eriq Gardner, Super Bowl, Super Trademarks: Protecting the NFL’s IP, IP/TECH, Jan. 29, 2007, available at http://web.archive.org/web/20070701050745/http://www.hollywoodreporteresq.com/thresq/ip/article_display.jsp? vnu_con tent_id=1003538980. 23 See archive footage of an interview with Lamar Hunt, SportsCenter, ESPN, Dec. 14, 2006. * University of South Africa, Pretoria. 21 22

568 CHAPTER VI: TRADEMARK LAW marks incorporating “World Cup,” and things like that.24 Yet, FIFA felt that was not enough; it needed more protection for the World Cup. It seems also, if you look at the bidding process for international events, as if this kind of protection against ambush marketing is taken for granted as part of the bidding process. I. SOUTH AFRICAN LEGISLATION PROTECTING FIFA MARKS

So what did South Africa do? South Africa added two further pieces of legislation and a selfregulation by the Advertising Standards Authority:25 the Merchandise Marks Act,26 as amended in 2002, when South Africa was bidding for the Olympic Games; the Trade Practices Act of 1976,27 as amended in 2001, also in anticipation of the bid for the Olympic Games. I want to concentrate on the first two of these and show you how FIFA operates within these two statutes. A. Merchandise Marks Act The Merchandise Marks Act operates on the basis that the Minister of Trade and Industry can designate any event as a “protected event.” Once that is done, Section 15A, which was inserted in 2002, comes into play.28 It says that, once the event is designated as protected, “for the period during which an event is protected, no one may use a trade mark in relation to such event in a manner which is calculated to achieve publicity for that trademark and thereby to derive special promotional benefit from the event, without the prior authority of the event organizer.”29 The significance of this is that by being a protected event, a trademark owner can be prevented from using his or her own trademark in respect of that event without the prior 24 See http://www.fifa.com/mm/document/afmarketing/marketing/2010_fifa_public_guidelines_en_06062008_520 84.pdf. FIFA has established a Rights Protection Programme (RPP) to prevent ambush marketing. The RPP involves a wide range of activities including a global trade mark registration programme, the worldwide appointment of legal experts and collaboration with customs and police authorities in all key regions of the world. 25 Advertising Standards Authority, Code of Advertising Practices, http://www.asasa.org.za/Default.aspx?mnu_ id=11. Sponsorship Code art. 11 specifically provides for seven unacceptable and prohibited ambush marketing strategies, i.e. media strategies; usage of athletes/sports personalities/performers/artists; supporting sports federations and bodies; sales promotions before and during an event; corporate hospitality; sponsors ambushing sponsors and event “airspace.” Id. 26 Republic of South Africa, Merchandise Marks Act 1941 (MMA), amended by The Merchandise Marks Amendment Act no. 61 of 2002, which came into effect on 17 January 2003, available at http://www.info.gov.za/ gazette/acts/2002/a61-02.pdf. The Amendment Act introduced into the Merchandise Marks Act definitions of “event” and “protected event,” and a new Section 15A prohibits the use of an ambusher’s trade mark in relation to a designated sporting, entertainment, or other event, where such use is unauthorized by the event organizer but is nevertheless “calculated to achieve publicity for that trade mark and thereby to derive special promotional benefit from the event.” Id. § 15A.2 27 Republic of South Africa, Trade Practices Act of 1976(Cth), amended by Trade Practices Amendment Act no. 6 of 2001 (TPA), available at http://www.info.gov.za/view/DownloadFileAction?id=67165. Section 9 was amended to provide that “a false or misleading advertisement, statement and the like will include such advertisement, statement, or the like which is intended, directly or indirectly, falsely to imply or suggest a contractual or other connection or association with any event or organisation by virtue of patronage or sponsorship.” 28 MMA § 15A makes it unlawful to abuse the right to use a trade mark in the context of a sponsored event. Anyone who contravenes these provisions commits a criminal offense. “For the period during which the World Cup is protected in South Africa, no person may use a trade mark in relation to this event in a manner which is calculated to achieve publicity for that trade mark and thereby to derive special promotional benefit from the event, without the prior authority of the organizer of the World Cup” Id. § 15A.2. The use of a trade mark includes: • any visual representation of the trade mark upon or in relation to goods or in relation to the rendering of services; • any audible reproduction of the trade mark in relation to goods or the rendering of services; or • the use of the trade mark in promotional activities, which in any way, directly or indirectly, is intended to be brought into association with or to allude to an event. Id. § 15A.3. 29 Id. § 15A.2.

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authority of the event organizer. So this deals with one form of ambush marketing, ambush marketing by intrusion. The second possibility is that the Minister of Trade and Industry may, by notice in the Government Gazette, conditionally or absolutely prohibit the use of any mark, word, letter, or figure, in any arrangement or combination thereof, in connection with any trade, business, profession, or occupation, or event, like the World Cup. The important thing to note about this kind of prohibition is the wide ambit. Unlike trademarks, it is not limited to any class of goods or services, and it is not limited to the use of the mark, word, etc., as a trademark. So what did FIFA do? FIFA approached the Minister of Trade and Industry to ask for certain prohibitions — it has a long list of names and devices — against their use in connection with any event other than the use thereof by FIFA or its mandatories — basically, its licensees. Some of the words for which FIFA sought blanket protection included “Africa 2010,” “South Africa 2010,” “World Cup,” and “2010.” When the prohibition was granted by the Minister of Trade and Industry, the prohibition was limited to the use of these words and devices only to the 2010 World Cup, in the area of football or soccer — “2010 FIFA World Cup.”30 Those are the words of the prohibition. Then there is a weird add-on to the prohibition, which is that “the prohibition does not apply to the media, provided the reportage is fair and not imbued with unscrupulous business enterprising.”31 This slide shows what FIFA wanted and what FIFA got.32 The marks in green are prohibited. You can see the extent of what FIFA requested the Minister of Trade and Industry to prohibit: all the insignia relating to all previous World Cups; the mascots of all previous World Cup soccer events. It did not get protection for any of them. It did get protection for images of the FIFA World Cup Trophy and the Jules Rimet Trophy.33 FIFA also wanted protection for word marks. If you look at the list on the right, for example, those are merely the names of the cities where the events will be played, with the date 2010. If that protection had been granted, for example, it would have made reporting virtually impossible, because how could you report about a match if you cannot say where the match was played and during what tournament? The only protection there is for the Confederations Cup, which is the curtain-raiser to the World Cup. It is like a practice tournament to see whether all the facilities are in order to stage the World Cup. So that is basically the protection in terms of the Merchandise Marks Act. B. Trade Practices Act In terms of the Trade Practices Act, there is a similar prohibition: No one may “in connection with a sponsored event, make, publish or display any false or misleading statement, communication 30 The Minister of Trade and Industry, by General Notice 1791 in Government Gazette 30595 of Dec. 14, 2007, prohibited the use of certain of the requested marks and words, available at http://www.thedti.gov.za. The prohibition “only applies to activities connected to 2010 FIFA World Cup SOUTH AFRICA in the area of Football or Soccer 2010 FIFA World Cup. The prohibition does not apply to the media, provided the reportage is fair and not imbued with unscrupulous business enterprising.” 31 Id. 32 For further information on FIFA’s request for protection, see Chris Moerdyk, FIFA Applies for 2010 Trademark Control, BizCommunity.com, July 11, 2007, available at http://www.biz-community.com/Article/196/147/16117. html. 33 The Jules Rimet Cub was originally the prize for winning the World Cup. The Jules Rimet Trophy, originally named Victory, but later renamed in honor of former president Jules Rimet, was made of gold-plated sterling silver and lapis lazuli and depicted Nike, the Greek goddess of victory. Brazil won the trophy outright in 1970, prompting the commissioning of a replacement. The Jules Rimet Trophy was stolen in 1983 and never recovered. It was replaced by the FIFA World Cup Trophy, first used in 1974.

570 CHAPTER VI: TRADEMARK LAW or advertisement which represents, implies or suggests a contractual or other connection or association between that person and the event, or the person sponsoring the event, or cause such statement, communication or advertisement to be made, published or displayed.”34 Again, it is an extraordinarily wide-ranging prohibitI think it takes us back to what we started to talk about in the previous session: What is the orientation of the proper protection of the rights here? Is this consumer protection or is this over-protection of the rights of an already-wellprotected trademark owner? Remember, FIFA has 500 trademarks. You wouldn’t have thought that it needed much more than that. But anyway, this is what it asked for and this is what it got. It seems to set the precedent for future events of this kind.35

Ambush in Beijing: New Efforts to Curb Ambush Marketing at the Beijing Olympics Doris Estelle Long*

Abstract “Ambush marketing” remains a potent problem in the months leading up to the Summer Olympics in Beijing as companies vie for the benefits of sponsorship without paying the expensive licensing fees required for official sponsor status. To combat the increasingly inventive methods advertisers use to create an aura of sponsorship, without the costly price charged for such sponsorship, China has created a potent mix of new legal protections, and practical methodologies, which may prove useful in combating at least the most egregious efforts at usurping the economic value of “unpaid” Olympic “sponsorship.” Whether these new techniques ultimately prove useful in the digital era will depend upon a variety of factors, including the willingness of enforcement officials to monitor unauthorized uses and the ability of the relevant parties to educate the public about the limits of Olympic “spirit” in the marketing arena. I. INTRODUCTION

In 2001 Beijing was announced as the host city for the 2008 Summer Olympics.36 With this announcement, China joined a special club of countries that have faced the challenge and opportunity of hosting an Olympic event. Similar to earlier Olympic Games and other singleevent mega sporting events, such as the Super Bowl and the FIFA World Cup, the 2008 Beijing TPA, § 9(c). See generally Steve Cornelius, “South African Measures to Combat Ambush Marketing in Sport”, 1 Int’l Sports L.J. 38 (2003); Max Duthie, “It’s just not cricket: Ambushing the Ambushers in South Africa” (Feb. 7, 2003), available at http://www.freehills.com.au/publications/publications_1548.asp; Roshana Kelbrick, “The W****D C*P of 2*1*: FIFA’s intellectual property rights in South Africa”, J. Intell. Prop. L. & Practice, Mar. 5, 2008, available at http:// jiplp. oxfordjournals.org/cgi/content/abstract/jpn033v1. * Professor of Law and Chair, Intellectual Property, Information Technology and Privacy Group, The John Marshall Law School. I would like to thank Professor Hugh Hansen and the participants of the Fordham Annual Conference on Intellectual Property Law and Policy whose comments helped shape this Article. I would also like to thank Konstantino Muhtaris for his research assistance. As always, any errors belong solely to me. 36 Beijing was selected as the Host City for the 2008 Summer Olympics at the 112th Session of the International Olympic Committee (IOC) in Moscow on July 13, 2001. See Beijing 2008 Election, http://www.olympic.org/uk/games/ beijing/election_uk.asp. 34 35

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Olympics has already proven a bonanza for what has been referred to as “ambush” marketing. Briefly, ambush marketing can be broadly defined as the use of diverse marketing techniques to give the appearance of sponsorship of an event where no such official sponsorship status exits. The techniques covered by the term are as diverse as the strategists who engage in what has loosely been termed in some quarters “guerilla marketing” or “parasitic marketing,” depending on your point of view. While some engage in ambush marketing to avoid the high costs associated with corporate sponsorship of an event, others may engage in such tactics to blunt the advantage their competitors may gain from such sponsorship.37 As early as 1996, Tony Meenaghan identified a variety of techniques employed by ambush marketers, including sponsoring the broadcast of the event, purchasing advertising time during commercial breaks in such broadcast, giving away licensed souvenirs and free tickets to the event, and using photos of famous landmarks in advertising that coincides with the event. 38 Ambush marketing is an extremely long-lived technique. The first well-known instance of ambush marketing in connection with Olympic events most likely occurred in 1984, when Kodak became the broadcast sponsor of the Los Angeles Olympics and the “official film” of the U.S. track and field team. As a result of its actions, many consumers mistakenly believed that Kodak was the official sponsor of the Games, even though Fuji Film actually filled that role.39 Because “ambush” marketers do not generally use the Olympic Symbols in a typical sponsorship or direct trademark sourcing method, the question of the extent to which so-called ambush marketing should be regulated remains problematic.40 There are numerous issues raised by the question of the regulation of so-called ambush marketing techniques, including the relationship of non-source designating uses and commercial free speech, trademark authenticity and consumer information costs, business ethics, and the limits of protection for commercial goodwill.41 The extent to which such techniques should be regulated may be hotly debated.42 Regardless of whether or not all such marketing techniques should be prohibited, what is undeniably clear is that ambush marketing techniques are becoming more complex and more entrenched than ever before. So is the potential economic impact of such marketing. II. AMBUSH MARKETING WITH CHINESE CHARACTERISTICS

Coca-Cola is one of the official sponsors of the Beijing Olympics. To achieve this status, it is estimated to have paid over $100 million to be a global sponsor of the Olympics.43 In 37 See, e.g., John A. Tripodi & Max Sutherland, “Ambush Marketing — ‘An Olympic Event’” 7 J. Brand Mgmt. 412 (2000). 38 Tony Meenaghan, “Ambush Marketing — A Threat to Corporate Sponsorship”, 38 Sloan Mgmt. Rev. 103 (1996). 39 Id.; see also Edward Vasallo, Kristin Blemester & Patricia Wenner, “International Look At Ambush Marketing”, 95 Trademark Rep. 1338 (2005) (discussing diverse instances of ambush marketing globally). 40 See, e.g., Anita M. Moorman, “Consumer Attitudes of Deception and the Legality of Ambush Marketing Practices”, 15 J. Legal Aspects Sport 183 (2005) (discussing the debate over the ethical objections to ambush marketing); Stephen McKelvey, “An Analysis of the Ongoing Global Efforts to Combat Ambush Marketing: Will Corporate Marketers ‘Take’ the Gold In Greece?”, J. Legal Aspects Sport 191 (2004); Jason K. Schmitz, “Ambush Marketing: The Off-Field Competition at the Olympic Games”, 3 Nw. J. Tech. & Intell. Prop. 203 (2005), available at http://www.law.northwestern.edu/ journals/njtip/v3/n2/6/spring 2005. 41 Id. 42 For example, some have suggested that differing rules should apply based on the size of the ambush marketer, or its status as a direct competitor of an official sponsor of the sporting event in question. See, e.g., Erinn Batcha, “Who Are the Real Competitors in the Olympic Games? Dual Olympic Battles: Trademark Infringement and Ambush Marketing Harm Corporate Violations Against the USOC and its Corporate Sponsors”, 8 Seton Hall J. Sport L. 229 (1994) (suggesting differing applications for differently placed marketers); see also articles cited supra in note 33 and infra in note 42 for additional dimensions of the debate. 43 Frederik Balfour, “Ambush in Beijing: Official Sponsors or Not, Companies Are Rushing to Tie Their Products to the Summer Olympics”, BusinessWeek.com, Mar. 13, 2008, http://www.businessweek.com/magazine/content/08_12/ b4076054803579.htm?campaign_id=rss_daily.

572 CHAPTER VI: TRADEMARK LAW fact, eleven global sponsors — including Coca-Cola — have reportedly spent a combined $850 million to sponsor the Turin and Beijing Olympics.44 These monies are exclusive of the additional costs in promotional activities tied to the Games themselves. Given the strong cultural significance of the Olympics in China,45 such affiliation with the Games is undoubtedly expected to have a positive effect on the merchandising activities and the brand reputation of Coca-Cola, and other global sponsors in China.46 While Coca-Cola is an Olympic sponsor, its competitor, Pepsi Cola is not. Yet such nonsponsorship does not mean that Pepsi has withdrawn from the expected bonanza in goodwill and/or business expected from Olympic affiliation. To the contrary, in China Pepsi’s wellknown blue-and-red can has undergone a significant transformation. It has now become solid red and bears in Chinese characters the slogan “Team China.”47 Similarly, Adidas is an Olympic Sponsor in China; its competitor Nike is not. However, over the past several months Nike has sponsored a series of advertisements in China featuring Chinese Olympic Gold Medalist Liu Xiang. Like Pepsi, Nike’s ads do not feature the familiar Olympic five-ring mark or make other direct reference to the Beijing Olympics. Yet, at a minimum, both companies’ promotional endeavors are clearly designed to wrap the product in question with the aura of Olympic sponsorship and earn for their companies the anticipated benefits in goodwill and increased market sales such sponsorship may bring. Nike has gone even further and has entered into agreements with twenty-two of the twenty-eight Chinese teams scheduled to compete in the Beijing Olympics so that these athletes will be wearing Nike-branded clothing while competing.48 There is no question that these efforts have been effective in confusing the public with regard to the relationship between the product company and Olympic sponsorship. A recent survey of consumers conducted by Ipsos Group revealed that the Chinese company Li Ning, which sells athletic gear and was started by the Chinese Olympic athlete of the same name, is among the top-ten-ranked Olympic sponsors in China.49 By contrast, Adidas ranks seventeenth in sponsorship recognition. Adidas is an official sponsor of the Olympics. Li Ning is not, although its advertisements rely heavily upon associations with former and present-day Chinese 44 Shaun Rein, “Beijing Olympic Sponsorship’s a Waste”, Forbes.com, Apr. 24, 2008, http://www.china successstories.com/2008/05/01/marketing-campaigns-olympics-china. 45 See also Doris Estelle Long, “Trademarks and the Beijing Olympics: Gold Medal Challenges”, J. Marshall Rev. Intell. Prop. L. (China Symposium Issue) (forthcoming, 2008). 46 For a contrary view, see Rein, supra note 43(contending that Olympic sponsorship is less important than reputation in China as a high-quality product). The issue has become even more difficult to determine in light of diverse protests during the torch relay raised about China’s conduct in connection with potential human rights abuses in Darfur and Tibet. See generally Joe McDonald, Wash. Post, Mar. 19, 2008, available at http://www.huffingtonpost. com/2008/03/19/tibet-conflict-increases-_n_92467.html (discussing the role of politics in diverse Olympic events including the scheduled Beijing Olympics and sponsor concerns); “Navigating Olympic Sponsorship: Marketing Your Brand without Alienating the World”, Knowledge@Wharton, Apr. 16, 2008, http://knowledge.Wharton.upenn.edu/ article.cfm?articleid=1938 (discussing various strategies sponsors may use in the face of political protests around sports events); Sophia Banay, “Are the Olympics Worth It?”, CondeNastPortfolio.com, Apr. 11, 2008, http://www. portfolio.com/news-markets/top-5/2008/04/11/Olympic-Sponsorship-Dangers (discussing the potential adverse economic impact of political protests on sponsorship brands). 47 Balfour, supra note 43. For a sampling of Pepsi commercials featuring “Team China” see generally http:// youtube.com under the heading “Pepsi Chinese Advertisements.” 48 “Nike, Adidas and the Olympics”, China Econ. Rev., Aug. 16, 2007, available at http://www.chinaeconomicreview. com/ olympics/category/adidas; see also “Nike Hopes for Strong Olympic Performance”, China Rev. (Apr. 16, 2008), available at http://news.xinhuanet.com/english/2008-04/16/content_7985926.htm. 49 See, e.g., Wang Shanshan, “Olympic Sponsors’ Ranking Released”, China Daily, Oct. 8, 2007, available at http://www. chinadaily.com.cn/bizchina/2007-08/09/content_6018475.htm; Daniel Allen, “One World, One Dream Five Billion Consumers”, Beijing This Month, Oct. 10, 2007, available at http://www.btmbeijing.com/contents/en/ business/2007-10/economy/olympicmarketing; Gareth Powell, “Companies are rushing to tie their products to the Summer Olympics”, China Econ. Rev., Mar. 18, 2008, available at http://www.chinaeconomicreview.com/olympics/ category/adidas.

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Olympic athletes.50 In another survey, thousands identified Pepsi as an Olympic sponsor.51 It is not clear precisely why Coca-Cola and Adidas fared less well in the consumer recognition. What is clear is that attempts to confuse consumers regarding a company’s sponsorship relationship to the Olympics are certainly working. Such victories are even more important in light of a report by R3 that indicates that roughly three-quarters of Chinese consumers say they would give preference to products they associate with the Olympics.52 I do not mean to suggest that the problem of ambush marketing is unique to China. To the contrary, ambush marketing has a long career, which has never been bounded by either geography or ingenuity.53 It is also not limited to Olympic events.54 Reports indicate that it is on the rise.55 Part of the reason for the rise is the perceived economic value of athletic sponsorships in promoting consumer loyalty, and the increasing costs of legitimate sponsorships. According to the official Web site for the Beijing Organizing Committee for the Summer Olympic Games (BOCOG), eleven companies share the vaunted status of global sponsors (including Kodak, McDonald’s, and Lenovo, the only Chinese company in the list56), at a reputed cost of between $80–$100 million, including in-kind benefits.57 In addition to providing valuable market benefits to sponsoring companies, sponsorships also provide much-needed income to support the mega events in question. Sponsor payments and other marketing revenues are expected to cover the Games operating costs, estimated at about $2.1 billion — a figure that does not include spending on venues and public facilities.58 Indeed, for the Beijing Olympics, the BOCOG has developed five sponsorship categories,59 thus spreading the wealth in Olympic sponsorship while potentially also spreading confusion among the public over what it means to be an Olympic sponsor. Yet, while expanding the categories of sponsorship, China has also developed some new methods for combating ambush marketing that may prove useful in future endeavors. Aware of the history of ambush marketing problems in connection with previous Olympic Games, the BOCOG has already conducted seminars directly aimed at dealing with the problem of ambush marketing.60 It has also taken direct action to enhance the protection of Olympic Symbols in general, including against unauthorized business uses of the Olympics name. III. SPECIAL PROTECTION FOR OLYMPIC SYMBOLS In November 2001, the Beijing Municipality enacted Provisions for the Protection of Olympic Intellectual Property, effective November 1, 2001, which provided for protection for a broadly defined category of protected Olympic Intellectual Property, including “any trademarks, special Allen, supra note 49. Powell, supra note 49. 52 Id. 53 For some interesting examples of previous attempts at ambush marketing in connection with the Olympics, see, e.g., Erinn M. Batcha, “Who Are the Real Competitors in the Olympic Games? Dual Olympic Battles: Trademark Infringement and Ambush Marketing Harm Corporate Sponsors”, 8 Seton Hall J. Sport. L. 229 (1998); “Companies are rushing to tie their products to the Summer Olympics”, China Econ. Rev., Mar. 18, 2008, available at http://www. chinaeconomic review.com/olympics/category/adidas. 54 Id. 55 See articles cited supra note 43. 56 See Sponsors of the 2008 Beijing Olympics Game, http://en.beijing2008.cn/bocog/sponsors/sponsors. 57 See, e.g., Balfour, supra note 43; Rein, supra note 44. 58 McDonald, supra note 46. 59 See Sponsors of the 2008 Beijing Olympics Game, http://en.beijing2008.cn/bocog/sponsors/sponsors. 60 BOCOG, “Sponsors Join Hands to Fight Ambush Marketing”, Dec. 12, 2007, available at http://www.ebeijing. gov.cn/ Recommendations/t908105.htm. 50 51

574 CHAPTER VI: TRADEMARK LAW symbols, patents, works and other creations related to the Olympics as stipulated in the Olympic Charter and any agreements concluded by the Beijing Municipal People’s Government and the Chinese Olympic Committee (hereafter, the COC) with the International Olympic Committee (hereafter, the IOC).”61 The protected Olympic Symbols included not merely the traditional Five Ring emblem of the Olympics, but also the “Flag, Anthem, Motto as well as the terms or designs containing the words OLYMPIC, OLYMPICS, OLYMPIAD, OLYMPIC GAMES, or any type of combination thereof,” as well as “the logos, mascots, names, symbols (including Beijing 2008), anthem and slogans developed by the Beijing 2008 Olympic Games Bid Committee and the BOCOG or others entrusted by them for their use during the period when Beijing bid for or host the Games of the XXIX Olympiad; and other Olympic intellectual property rights objects related to the Olympics.”62 This broad definition for covered intellectual property was matched by an equally facially comprehensive definition of prohibited unauthorized uses, including “using the same or similar trademarks, special symbols, patents, works and other creations without authorization in production, business operations, advertising, propaganda, performance and other activities.” 63 The Declaration authorized municipal intellectual property, cultural, and enforcement offices, including the Beijing Administration for Industry and Commerce (BAIC), to enforce its provisions64 and cited the “principles of safeguarding the dignity of the Olympic Games” as the basis for protection.65 The Chinese Government similarly enacted special regulations for the protection of the Olympic symbols.66 Similar to the Declaration by the Beijing Municipality, the Regulations define the protected “Olympic Symbols” broadly, including “the Five Olympic Rings of the International Olympic Committee Flag, Motto, Emblem, and Anthem of the Olympic Games; the special terms of OLYMPIC, OLYMPIAD, OLYMPIC GAMES 61 Protection of Olympic Intellectual Property Provisions by the Beijing Municipality, art. 2 (entered into force Nov. 1, 2001), English language translation available at http://www.beijing12312.com/newsshow. asp?id=A2007121916535060 83091 (hereinafter Declaration). For an in-depth discussion of the special laws established to protect Olympic Symbols in China, see generally Long, supra note 45. 62 Declaration, art. 3. 63 Id. art. 8. 64 Id. arts. 10 & 14. In Article 15, in keeping with the traditional “two paths” of enforcement, the Declaration provides that intellectual property owners also have the right to choose to file a lawsuit with the civil courts in lieu of pursuing administrative relief. It should be noted, that unlike the United States, administrative tribunals, such as the State Administration for Industry and Commerce (SAIC), which has primary administrative jurisdiction for trademark enforcement matters, the National Copyright Administration (NCA), which has primary administrative jurisdiction for copyright enforcement matters, and the State Intellectual Property Office (SIPO) which has primary administrative jurisdiction for patent enforcement matters, generally have enforcement powers, including the ability to investigate claims, secure evidence, seize infringing goods and adjudicate liability. They also usually have the power to issue injunctive relief (using in the form of a cease and desist orders) and to impose fines. They do not, however, have the ability to secure compensation for the intellectual property owner. Such relief is generally available, if at all, through civil litigation through the court system. This is an extremely telescoped explanation of Chinese enforcement modalities. The reality is far more complex, with numerous overlapping jurisdictions between the agencies listed above and several other agencies, including for example the Technical Supervisory Bureau. For a brief discussion of these issues, see generally Peter Ganea & Thomas Pattloch, Intellectual Property Law in China 289–341 (2005). 65 Declaration, art. 5 (“The protection of Olympic intellectual property rights shall comply with the principles of safeguarding the dignity of the Olympic Games, prohibiting any infringement of proprietary rights, as well as protecting and using such rights according to law.”) (emphasis added). 66 Regulations on the Protection of Olympic Symbols, Promulgated by Decree No. 345 of the State Council on Feb. 4, 2002, with an effective date of Apr. 1, 2002 [hereinafter Symbol Regulations], English translation available at http://www.china.org.cn/english/China/208301.htm. The State Council is the Highest Executive Organ of the Chinese Government. These Symbol Regulations and the Beijing Municipal Declaration are not the only special laws and regulations enacted in China in connection with protection of the Olympic Symbols. China also enacted a special registration processes to assure protection of the Olympic Symbols. See generally Stacey Wang, “Great Olympics, New China: Intellectual Property Enforcement Steps Up to the Mark”, 27 Loyola L.A. J. Int’l & Comp. L. Rev. 29 (2005).

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and their abbreviations” as well as “the mascots, anthem and slogans of the XXIX Olympic Games; the ‘Beijing 2008,’ the XXIX Olympic Games and their abbreviations” and “other symbols related to the XXIX Olympic Games prescribed in Olympic Charter and Host City Contract for the Games of the XXIX Olympiad.” 67 Under the Regulations, unauthorized uses of the Symbols “for business purposes” (commercial use) are prohibited, including the unauthorized use of “the Olympic Symbols in advertisements, commercial exhibitions, commercial performance and other commercial activities.”68 The Regulations expressly prohibit “[a]ny other activities [that] may make the third parties believe that there are sponsorship or other support relationships between the users and the right owners of the Olympic Symbols.”69 The enforcement of these Regulations is given to the SAIC (State Administration for Industry and Commerce).70 The Regulations, however, do not grant the SAIC exclusive jurisdiction over Olympic Symbol violations. Instead, Article 14 of the Regulations provides that Olympic Symbols “shall also be protected under the provisions of related laws and regulations, such as Copyright Law, Trademark Law and Regulations on the Administration of Special Signs” (famous marks).71 Furthermore, Article 10 specifically recognizes the right of the owner to seek relief in the court if it so chooses.72 The Chinese government has mobilized an impressive array of enforcement measures to combat illegal use of the Olympic Symbols, including increased training programs for enforcement personnel and the establishment of a “rapid city Olympic intellectual property protection linkage mechanism” to provide fast action on potential infringements.73 These enforcement efforts have not been limited to Beijing. To the contrary, enforcement sweeps have been planned for other major cities in China, including Quingdao, Tianjin, and Shanghai during the critical pre and post Olympic Games period.74 In addition to mobilizing traditional enforcement personnel, the government has also mounted a public relations and education campaign that directly involves the public in protecting the Olympic Symbols. Not only have articles appeared stressing the harm that counterfeit products can cause,75 consumers have been drafted into the front lines of the enforcement effort. A 67 Symbol Regulations, art. 2. With its reference to protection of “other symbols prescribed in the Host Contract for the Games.” art. 2(6), the Symbol Regulations are clearly designed to assure that any Olympic Symbol required to be protected in accordance with the Host Contract with the IOC falls within their scope of protection. Unfortunately, it is not clear precisely which terms fall within the scope of this protection since the Host Contract is not publicly available. For purposes of this article I will be focusing largely on efforts to protect the traditional Olympic symbols, including the five-circle design, as well as the specialized symbols of the Beijing Olympics itself, including the five “mascots” of the Beijing 2008 Olympics and other marks containing Olympic references. For images of some of these symbols, see Beijing Olympics Web site, http://en.beijing2008.cn. The five special mascots are generally referred to as “fuwa.” Each one represents one of the colors of the Olympic Rings. See generally “The Official Mascots of the Beijing 2008 Olympic Games”, http://en.Beijing2008.cn/ spirit/beijing2008/graphic/n214068254.shtml. 68 Symbol Regulations, art. 4. 69 Id. art. 5(6). 70 Id. art. 6. This agency is sometimes referred to as “AIC” for Administration for Industry and Commerce. Like the other administrative agencies referred to in this article, SAIC has diverse offices including those at the local level, such as the Beijing Administration for Industry and Commerce (BAIC), which would be on the agencies with primary responsibility for enforcement activities around Olympic sites. 71 Id. art. 14. 72 Id. art. 10. 73 Protection of the Olympic Symbol: Beijing is Resolutely, Sept. 26, 2007 [hereinafter Symbol of Protection], available at http://www.china-fun.net/2008/preparation/200709261/1510291.shtml. 74 Id. 75 See, e.g., “Beijing Seizes Nearly 30,000 Fake Olympic Products”, available at http://english.ipr.gov.cn/ipr/en/ info (in case involving seizure of 12,800 partially finished Fuwa (the five mascots of the Beijing Olympics) and more than 12,700 finished products confiscated in February 2007, local official quoted in Beijing Daily Messenger as warning people against the health hazard posed by the products, which were sometimes filled with industrial waste that could threaten people’s health).

576 CHAPTER VI: TRADEMARK LAW hotline has been set up in Beijing and rewards are being offered for truthful information regarding infringing activity.76 Corporations are further being urged to take pledges to avoid infringing the Symbols.77 Those who violate the Olympic Symbols may also find themselves subject to public criticism in the press.78 IV. CHALLENGING AMBUSH MARKETING

A. The Direct Approach The Chinese Government has developed a wide array of methodologies for combating ambush marketing. Significantly, both the Beijing Declaration and the Olympic Symbol Regulations contain express language that could be used as the basis for civil action against ambush marketers. The language in the Beijing Declaration and the Symbol Regulations regarding “other commercial activities”79 that might be actionable could arguably include false sponsorship associations or false advertising claims regarding such sponsorship status. Thus, for example, Article 8 of the Beijing Declaration expressly prohibits “using the same or similar trademarks, special symbols, patents, works and other creations without authorization in production, business operations, advertising, propaganda, performance and other activities.”80 It further prohibits “using the same or similar trademarks, special symbols, patents, works and other creations in a disguised form.”81 The “other activities” language and the language regarding the use of Olympic Symbols “in a disguised form” might provide a regulatory basis for challenging certain types of ambush marketing. The potential for such challenge appears heightened by the concluding section of Article 8, which prohibits “other infringements in violation of relevant laws and regulations of the State.”82 Since Article 8, however, is largely based on the presence of unauthorized Olympic Symbols, it may prove less effective in mounting challenges to marketing techniques, such as those employed by Pepsi or Nike, where none of the Olympic symbology appears.83 By contrast, however, Article 5(6) of the Regulations, prohibiting “any other activities [that] may make the third parties believe that there are sponsorship or other support relationships between the users and the right owners of the Olympic Symbols,” appears to provide direct legal support to combat ambush marketing. Although the language itself is contained in a list of activities based on unauthorized use of Olympic Symbols, Article 5(6) does not contain 76 Symbol of Protection, supra note 73; see also Declaration, art. 11 (providing “[a]ny organization and individual may report any activity in violation of Olympic intellectual property rights to the administrative departments of industry and commerce, intellectual property rights, copyright, etc.; and shall be rewarded if the case reported proves to be true.”). 77 Id. 78 “Fake Ties”, China Daily, Mar. 17, 2008, available at http://www.sipo.gov.cn/sipo_English/news/iprspe cial/200803/ t20080317_236971.htm. 79 Symbol Regulations, art 5(3)(defining unauthorized uses as including “[t]o use the Olympic Symbols in advertisements, commercial exhibitions, commercial performance and other commercial activities”) (emphasis added); Declaration, art.8 (providing “The following acts that infringe upon Olympic intellectual property rights are prohibited … (1) using the same or similar trademarks, special symbols, patents, works and other creations without authorization in production, business operations, advertising, propaganda, performance and other activities.”) (emphasis added). 80 Declaration, art. 8(1). 81 Id. art. 8(3). 82 Id. art. 8(6). 83 Actions based on violations of unfair competition and anti-monopoly provisions, however, are arguably included within these prohibitions, thus tying the special protection of the Beijing Declaration directly to the Chinese Unfair Competition Law. For a discussion of the application of Unfair Competition Law in China to ambush marketing, see notes 88–90 infra and accompanying text.

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such introductory wording. In fact, it is notable for the absence of any such direct reference to Olympic symbology in its prohibition.84 To the contrary, the provision seems to anticipate false sponsorship claims even where Olympic marks do not directly appear. It is too soon to tell if such civil actions will be successful, but at least the legal infrastructure is in place for them if any Olympic sponsor decides to seek relief. In addition to the promise of enforcement contained in Article 5(6) of the Regulations, public enforcement against ambush marketers who use descriptive references to the Olympics appears readily available. Reported cases involve a wide array of Chinese businesses using references to the Olympics on packaging, napkins, and other service items, including a Chinese fireworks manufacturer who used the phrase “Wishing Success to the Beijing Olympics” on his product.85 He was not only fined and the packaging confiscated, his illegal activity was used as a public education tool so that others would learn about why such uses are illegal. This enforcement effort represents two interesting developments in ambush marketing protection. The first is the public relations aspect. In addition to seizing the items bearing the unauthorized references to the Olympics, reported stories indicate that enforcement officials are taking time to explain the regulations and the importance of protecting Olympic sponsorship. Unauthorized users are depicted as appreciating the need to protect the Olympic symbols after such educational efforts.86 The simple reporting of these efforts itself is a notable demonstration of a relatively new technique in China of directly engaging the public in the battle against ambush marketing and other false association efforts. Second, these reported enforcement efforts demonstrate an interesting use of copyright law to combat ambush marketing. Problematic issues regarding whether the use of “Olympics” was as a source or association designator, or was simply a descriptive “fair use” of the term, are eliminated. Instead, the unauthorized use of such phrases as “Wishing you success in the Olympics” or “Wishing success to the Beijing Olympics” is deemed a copyright infringement.87 Since China provides for administrative remedies in cases of copyright infringement, the National Copyright Administration (NCA) has jurisdiction and has bureaus throughout China that can be engaged in enforcement efforts aimed at such tactics. In addition to legal infrastructures devised specifically to deal with the demands of the Beijing Olympics, existing unfair competition laws may also serve as a potent basis for supporting ambush marketing regulation. Article 9 of Chinese Unfair Competition Law expressly provides that “[m]anagers shall not use advertisement or the other methods to make a false propaganda for the quality, composition, function, usage, producer, time of efficacy and place of production of commodities.”88 The “quality” of a good as being produced by an Olympic sponsor should qualify as the type of representation which, if false, is actionable under this provision. This argument is bolstered by Article 2 of the same law, which provides “Managers shall abide by the principle of voluntariness, equality, impartiality, honesty and good faith, and 84 By contrast, Sections 1–5 of Article 5 all expressly refer to the use of Olympic Symbols. Symbol Regulations, arts. 5(1)–5(5). 85 Fake Ties, supra note 78. 86 The fireworks manufacturer described his reaction to the enforcement effort against him as follows: “Originally, I felt the fine was undeserved as our incentive was to show our enthusiasm for the Games. However, after I learned the detailed regulations, I felt ashamed and became aware of the importance of the IPR.” Id.; see also Symbol of Protection, available at http://www.bjreview.com.cn/olympic/text/2007-01/16/content (describing efforts of enforcement personnel to explain to a restaurant owner why it could not use the phrase “Wishing The 2008 Beijing Olympics success” on its napkins). 87 Although short phrases are often seen as lacking the necessary originality under copyright, even under US law such minimal phrases as “E.T. Phone Home” have been held protectable. Universal City Studios, Inc. v. Kamar Indus., Inc., 217 U.S.P.Q. 1162 (S.D. Tex. 1982), 88 Anti Unfair Competition Law of the People’s Republic of China, art. 9 [hereinafter Unfair Competition Law], English text available at http://en.chinacourt.org/public/detail.php?id=3306.

578 CHAPTER VI: TRADEMARK LAW also adhere to public commercial moral in their business transactions.”89 The term “manager” is defined under the law as “the legal person, the other economic organisations and individuals who deal with commercial business or profitable service (commodities in this Law in hereafter as to commodity which includes service)”90 and should include most companies that might engage in ambush marketing. The SAIC and the courts have joint enforcement responsibilities under this act. B. Beyond Legal Infrastructure In addition to providing a legal infrastructure for combating ambush marketing, China has also planned a variety of other protection measures. In addition to public relations efforts to gain public participation in Olympic enforcement, the BOCOG has also entered into an extensive public relations effort to educate both Chinese businessmen and the general public about what qualifies as appropriate use of Olympic Symbols. The main Web site on the Beijing Olympics, sponsored by the BOCOG, contains extensive English- and Chinese-language instructions regarding licensing and use of Olympic Symbols.91 As noted above, as opposed to offering two standard sponsorship categories, global sponsorship and China partnership, the BOGOC has arguably made sponsorship for smaller companies more affordable by offering lowercost categories. As a result, as of March 2008, over sixty companies had become registered Olympic sponsors.92 The BOCOG is also applying practical solutions to reduce the economic benefit that might be derived from ambush marketing. Thus, for example, while athletes on Nikesponsored teams will be wearing Nike gear, if any of the athletes win, they are required to switch to Adidas clothing for all platform ceremonies, including the awarding of any medals.93 Similarly, the BOCOG has established a blackout in areas around and inside Olympic stadia and playing fields during the Games. Non-authorized beverages will be banned from Olympic venues.94 T-shirts that prominently feature corporate logos or names not linked with the Olympic Games will similarly be banned.95 A ban has also been established on all non-Olympic national and international conferences in the city from August 1–September 23.96 Tight restrictions have been placed on outdoor advertising around Olympic venues and TV broadcasts will be monitored for illegal Olympic-related advertising. In addition to monitoring advertising content, the BOCOG has also placed a ban on any athletes making advertisements for non-Olympic-affiliated companies during the Games and will expel any athletes who violate the ban. This monitoring effort is not limited to advertising venues in the hard-goods world. To the contrary, the BOCOG has granted China Central Television (CCT) exclusive rights to stream Olympic events on the Internet. CCT has established a working arrangement with MySpace and the on-line video site Tudou.com to run an interactive Web site for the August Games. The Web site will go live on August 8, 2008, the opening day of the Games. It is not yet clear who will be responsible for monitoring violations of these bans, or the extent to which such exclusivity will be effective particularly in the face of current disputes Id. art. 2. Id. 91 Beijing Olympics, http://en.beijing2008.cn. 92 Beijing Olympics, Sponsors, http://en.beijing2008.cn/bocog/sponsors/sponsors. 93 Balfour, supra note 43. 94 Karolos Grohmann, “IOC Braces for Beijing Ambush Marketing”, Reuters, Jan. 18, 2008, http://www.reuters. com/ article/sportsNews/idUSL186277520080118. 95 Id. 96 “Fake Ties, Chofn Trademark” (March 2008), available at http://www.bj-chofn.com/chofn_en/list.asp?id=420. 89 90

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between two Chinese Web site operators over who has the exclusive right to post Internet advertising for Olympic sponsors. Sohu, the Internet content sponsor of the Beijing Games, claims that online ads from other sponsors with the Beijing Olympics logo can only appear on its Web site. By contrast, Sina claims it has the right to attract advertisers, including Olympic sponsors, to its own Web site.97 Who will ultimately win this dispute remains to be seen. C. Self-Help In addition to the legal and practical efforts underway in China, many sponsors are also using self-help methods to combat ambush marketing. Thus, for example, Coca-Cola held an outdoor concert in Beijing on December 31, 2007, featuring a fifty-foot-high Coke bottle covered with LED screens flashing Olympic images. Lenovo, another Olympic sponsor has booked CCTV1 just before the 7 p.m. evening news — the top ad slot in China — and is running an animated “countdown to the Olympics” every day. These and other efforts serve as a useful adjunct in curbing the effectiveness of ambush marketing. V. CONCLUSION

“Ambush marketing” remains a potent problem in the months leading up to the Summer Olympics in Beijing as companies vie for the benefits of sponsorship without paying the expensive licensing fees required for official sponsor status. To combat the increasingly inventive methods advertisers use to create an aura of sponsorship, without the costly price charged for such sponsorship, China has created a potent mix of new legal protections and practical methodologies, which may prove useful in combating at least the most egregious efforts at usurping the economic value of “unpaid” Olympic “sponsorship.” Combining new uses for old doctrines, such as copyright, with broadening bans on venue activities, China is struggling to deal with the mounting problem of ambush marketing in new ways. Whether such approaches ultimately prove effective remains to be seen. MR. BUTLER: Thank you very much, Peter, Coenraad, and Doris.

I now would like to open up the discussion for our panelists. We will hear first from The Honorable Mr. Justice Roger Hughes from the Federal Court of Canada. Those of you who were here last year and heard his discussion on extraterritoriality98 probably remember the comments that he made — some of the most memorable comments in a conference with a great many memorable comments — talking about the BlackBerry case.99 Then, we will hear from Phillip Johnson, Barrister, 7 New Square in London. Then, finally, from Jeff Neuburger, who is with Thelen Reid Brown Raysman & Steiner here in New York. JUSTICE HUGHES: I am not going to talk about BlackBerry today. We have followed along what I understand China and South Africa have done in Canada. We have in 2010 the Winter Olympic Games in Vancouver and Whistler. We have created very 97 “Olympic War of Words on Web”, China Daily, Sept. 21, 2007, available at http://www.chinadaily.com.cn/ olympics/ 2007-09/21/content_6124879.htm. 98 See Hon. Roger Hughes, “Jurisdiction of the State: Respecting the Incorporeal, Session III, Part B, Extraterritoriality and Related Principles: To What Extent Have and Should National Courts Apply their Domestic Patent Laws and Policies to Activities in Other Countries”, 10 Intellectual Property Law and Policy 163 (Fordham University Fifteenth Annual Conference on Intellectual Property Law and Policy, Apr. 12–13, 2007) (Hugh C. Hansen ed., 2008). 99 NTP Inc. v. Research in Motion Ltd. (RIM), 418 F.3d 1282 (Fed. Cir. 2005), cert. denied, 546 U.S. 1157 (2006).

580 CHAPTER VI: TRADEMARK LAW specific special legislation100 that sort of smells a little bit like trademarks but is very, very draconian. We have created about three pages’ worth of trademarks as exciting as “WINTER OLYMPIC GAMES 2010” and just “WINTER GAMES 2010.” These are just put on a list. You can add marks to that list by petitioning your local member of Parliament and getting something put on. Once you are on that list, the Olympic Association, the organizing committee, in Canada can, without showing damage, without showing irreparable harm or likelihood of harm, simply get an injunction to stop the use. So it is put in the hands of the Organizing Committee and taken out of all the usual criteria that one uses for getting injunctions and getting people to stop. You simply get a court order saying “Stop.” That is the evolution of our special legislation. It started with the Montreal Olympics101 and then the Calgary Olympics.102 We have evolved to this kind of very special legislation specific to Olympics to prevent the so-called ambush marketing and so on. So that is one thing. The second thing we have done is we have had an evolution. Hugh Laddie isn’t here, but he is the originator of the Anton Piller order.103 He was counsel in the case of that name, where he devised that order. I commend him for it. We have morphed that into a very special order, what we call a “Rolling John Doe Order.”104 That is, if you have trademarks or trademark-like rights, you simply start an action in the name of the appropriate plaintiffs naming “John Doe” — and now the egalitarians have “John and Jane Doe” — as defendants. As you find people that are ripping off your goods and so on, you simply serve them with this order. That allows you, in effect, a civil search warrant to go into their premises and start rummaging through their stuff, grabbing it, seizing it, and what have you, provided you come within a certain number of days (usually ten) back to the court to justify what you have done. So we have this sort of SWAT team of people enforcing by a civil measure these kind of rights that are trademark-like rights, and rather effectively used, I must say. I have signed these orders several times during the last couple of months. Enough said. MR. JOHNSON: There are a few things I would like to say. Firstly, I think when one looks at trademarks, in Europe in particular, this is an issue which has been changed significantly over the last couple of years with decisions like Adam Opel105 and Céline,106 where the Court of Justice has been looking at whether or not certain things are actually trademark use anymore. When it comes to ambush marketing, whether something is going to be use as a trademark is quite significant. But I am going to leave that one side, because I think this session is looking at event marks specifically. Event marks are not limited to the Olympics.107 Other notable examples are the Red Cross symbol, which has special protection,108 as do the ANZACs in Australia, the Boy Scouts in 100 The Olympic and Paralympic Marks Act 2007, S.C. 2007, c.25, An Act respecting the protection of marks related to the Olympic Games and the Paralympic Games and protection against certain misleading business associations and making a related amendment to the Trade-marks Act, 39th Parliament, 1st Session, 2007, available at http://www.parl. gc.ca/ common/bills_ls.asp?lang=E&ls=c47&source=library_prb&Parl=39&Ses=1. 101 Olympic and Paralympic Marks Act (1976). 102 Olympic and Paralympic Marks Act (1988). 103 An Anton Piller court order provides for the right to search premises and seize evidence without prior warning. Anton Piller KG v. Mfg. Processes Ltd., 1976 1 All E.R. 779, [1976] Ch. 55 (C.A.). 104 See, e.g., The Polo/Lauren Co. LP v. John Doe et al., Federal Court T-1704-03 (Judgment, June 23, 2005) (single largest award ever granted in counterfeit litigation in Canada). For a description of the use of Anton Piller and Rolling John Doe Orders in other cases, see Christopher J. Pibus, “Counterfeit Enforcement in Canada: A Challenging Environment” (2007), available at http://www.ipcrimecongress.org/ipcrime2007/documents/IPRMR7.pdf. 105 Case C-48/05, Adam Opel AG v. Autec AG, [2007] E.C.R. I-1017. 106 Case C-17/06, Céline SARL v. Céline SA, [2007] E.C.R. I-7041 (Grand Chamber). 107 Internationally, the Nairobi Treaty, which prohibits registration of the Olympic Symbol as a trademark without authorization by the International Olympic Committee, was signed on Sept. 26, 1981, available at http://www.wipo.

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Australia, and in England we have protected the names of certain universities under Private Acts of Parliament. So the idea of an event market or a specific mark for something in itself is not that unusual. But what is quite unusual about sporting events is the fact that they have such broad protection. We have just heard about the sort of injunctions that are granted. In the United Kingdom, for the London Olympics, we have gone further and, in theory at least, we are allowing the police to break down your door to take down an Olympic poster. So it is amazing the breadth of powers that have been given by Parliament.109 It is intriguing also that it is not just for the Olympics and similar major events. When the Olympic Symbols etc. (Protection) Act 1995110 was first passed in the United Kingdom, it was said to be because of the unique dignity and unique nature of the Olympics. But now we have the Commonwealth Games that are being given similar rights as well.111 Outside the United Kingdom, in countries like Portugal, the protection that was originally given to the 2004 European Championships, a significant sporting event across Europe, is now being given to the 2006 European Under-21 Championship,112 which just about gets onto EuroSports at midnight. So it is not just significant events which this is relevant to. What I think also has to be drawn out is the idea of what an ambush is. “Ambush” is a pejorative term, of course, as Sir Hugh said, as are its other pseudonyms, “guerilla” and “parasitic” marketing. Always the best way to do it is to label it as “bad” and then go after it using the label. I think that, in itself, makes the whole process quite difficult. You see something taking advantage of sponsorship, and from that you decide you have to find a way of stopping it. Ambush marketing — and I’ll use that term, with that caveat I just gave — of course covers a number of things. One thing, which was mentioned earlier, was the difference between ambush marketing by intrusion and ambush marketing by association. Ambush marketing by intrusion has little to do with traditional intellectual property. It is the idea in the United Kingdom of using things like planning law to stop posters being placed around venues. In Australia, they have specific provisions to stop airplanes flying over a stadium that has been designated as hosting an important sporting event.113 I think South Africa has similar things about posting advertising on buildings that are too close to such a stadium. These aren’t really intellectual property matters. int/ treaties/en/ip/nairobi/trtdocs_wo018.html. To date, it has been ratified by only forty-four countries, http://www. wipo.int/ treaties/en/ShowResults.jsp?lang=en&treaty_id=22. Thereafter, the International Olympic Committee started requiring from every Candidate city a demonstration that adequate legislative protection is in force to protect the Olympic Games intellectual property and to somehow prevent ambush marketing during the Games. 108 Protected and defined in art. 38 of the Geneva Convention for the Amelioration of the Condition of the Wounded and Sick in Armed Forces in the Field; Aug. 12, 1949. 109 London Olympic Games and Paralympic Games Act 2006, available at http://www.opsi.gov.uk/acts/acts2006/ ukpga_20060012_en.pdf. The Act protects the words “Olympic,” “Olympiad,” and “Olympian,” Olympic rings, Team GB and British Olympic Association logo, “London 2012,” London’s bid logo and derivatives of London2012.com, the 2012 Games logo and mascots (not designed yet), Olympic motto Citius, Altius, Fortius/Faster, Higher, Stronger, The British Paralympic Association and team logos. Other banned words include games, medals, gold, silver, bronze, 2012 and sponsor. Sale of unofficial merchandise will be illegal. See id. 110 Olympic Symbol etc. (Protection) Act 1995 (c. 32), available at http://www.opsi.gov.uk/ACTS/acts1995/ ukpga_ 19950032_en_1. 111 The 2014 Glasgow Commonwealth Games Bill (Nov. 16, 2008) “puts in place measures to help protect the Games from ticket touts and ‘ambush’ marketing … .” Press Release, Scottish Government, Royal Assent for Commonwealth Games Bill (Nov. 6, 2008), available at http://www.scotland.gov.uk/News/Releases/2008/06/11122814. 112 Law-Decree Nr. 86/2004 (to combat ambush marketing of Euro 2004); Law-Decree Nr. 84-A/2006 (May 19, 2006) (defining the legal protection for names and symbols of the European Under-21 Tournament 2006). 113 The New South Wales legislation, the Olympic Arrangements Act 2000, was targeted substantially toward “intrusion” ambush activity. It effectively prohibited advertising in and around Olympic venues, in airspace above venues, and in major thoroughfares.

582 CHAPTER VI: TRADEMARK LAW On top of that, there is something that is more of an intellectual property matter, ambush marketing by association. The rights that have been granted there are indeed very broad. The first one, I think, was the South African law passed in relation to the Cricket World Cup 2003.114 So it is a relatively new idea. But these rights are proliferating in such a way that often you will find that events you would never think of as having unique association are attracting them. And the exceptions to them are also quite unclear. So I think, from the point of view of practitioners, when these events come to town, it actually can be very, very difficult to know what you can and cannot do. This is not only because of the scope of protection, but these events only come to town for a very, very short period of time, which means the sort of action before the courts is the sort of action that was mentioned a moment ago: quick actions, interim actions, injunctions granted with judgments that are never fully reported. So nobody really knows the scope of these powers when they come along for the next event a number of years later. I am not saying, although I seem to be very against the breadth of these powers, that they are totally unnecessary. Sponsorship is an important thing for sports and sporting events could not survive without significant sponsorship. But the risk with this, of course, is that as the protection grows, sponsorship values increase because the protection is there; in turn, this means you need more protection because there is more sponsorship — until you have a system whereby everything is within the exclusive rights of the event organizers. What I think is very commendable about a particular jurisdiction, New Zealand, where they now have the Major Events Management Act 2007,115 is that they have tried to systematically come up with what sort of things should be characterized by a particular event before this sort of protection is given; whereas other countries determine it as part of the bargaining process for getting an event. This being the case, I think we need to look at a systematic approach. New Zealand is the place to look. Although, that said, I am not sure some of the events discussed during the debates for the Major Events Management Act 2007 are of international stature. World Rowing is very important to rowers, but I am not sure it is something that will make it onto that much television. Similarly, netball. Those are my comments so far. MR. NEUBURGER: Well, at least from the U.S. point of view, as you can tell, there is not a clear answer to ambush marketing from an intellectual property point of view. One of the questions that comes up quite often is: From a practical perspective, what can an event operator or a sponsor do to minimize the effect of ambush marketing? The first point is to remember that not all ambush marketing is necessarily something you want to do something about. I just read about something going on in Massachusetts. A urology clinic in Springfield, Oregon, has a promotion going now, running on sports radio, tied to the NCAA basketball tournament, urging men to get vasectomies during the tournament.116 I am not sure that is the kind of thing that you would necessarily want to do anything about. 114 The Trade Practices Amendment Act 26 of 2001, which amended the Trade Practices Act 1976 and Merchandise Marks Act 1941, was initially intended to protect the staging of the Cricket World Cup, but the scope of the amendment is much broader and may be extended by order of the Minister of Trade and Industry to any other event, as will be the case for the 2010 World Cup. See supra notes 19 & 20 and accompanying text. 115 New Zealand, Major Events Management Act 2007 Major Events Management Bill (enacted to protect 2011 Rugby World Cup, 2015 Cricket World Cup, and other international events. Bans advertising within a five-kilometer radius of venues in “clean zones,” such as venue premises, or areas nearby, such as the adjacent footpaths, road, and parking lots, areas visible from clean zones and on “clean transport routes” (motorways, state highways, and railway lines) within five kilometers of the venue). 116 See Associated Press, Ore. Urologists: NCAA Tourney Good Time for Vasectomy, USA TODAY, Mar. 9, 2008, available at http://www.usatoday.com/news/offbeat/2008-03-09-vasectomy_N.htm. “When March Madness approaches you need an excuse ... to stay at home in front of the big screen,” the clinic’s radio ad says. “Get your...

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But there are practical things that event sponsors and owners and operators of events can do to reduce the possibility of ambush marketing. First of all, I think it is very important to have sponsors work together. If you have an exclusive broadcaster and some other exclusive airlines, I think it is very important to try to get rights of first refusal back and forth, so that if the broadcaster of an event is going to run an ad for an airline, they are obligated to go back to the exclusive airline provider of the event and offer that opportunity to them first. It is key to get sponsors to exploit their rights. It is surprising how many times you see somebody obtain sponsorship rights associated with a particular event, particularly in sports, and not exploit them, which leaves open the opportunity for an ambush marketer to come in and establish themselves. So if you are an operator of an event, it is important to put in incentives to have sponsors exploit their events and fill the space. From the other perspective, if you are a sponsor, it is important to have the operator use whatever means they have to reduce ambush marketing. That can be tied to fee structures. Professor Long talked about venue prohibitions. That is a key area. If you are a sponsor of a sporting event, you want to make sure that the operator of the event delivers a clean venue — no signage, tries to reduce the amount of filming that is going on in the premises. I don’t know if anybody here watches “American Idol,” but last season in the middle of the show somebody held up a sign that was an ad for a financial institution. “American Idol” is a very marketing-savvy production. They are supposed to be scrubbing all signs, looking at everybody’s T-shirts. Somebody slipped through. It made a big wave in the advertising community. Ticket backs. If you are running a sporting event or if you are a sponsor of a sporting event, ticket backs should be cleared of signage and prominent use of trademarks should be restricted. The flip side of that is if you are an ambush marketer, should you use a disclaimer? Does that help you? Disclaimers, at least under U.S. law, have been litigated quite often. At one point, there were a couple of cases brought by the NFL117 and NHL118 that supported the use of disclaimers to reduce the likelihood of confusion and ambush marketing. More recently, there have not really been any cases. Ambush marketers are deciding not to use disclaimers. In fact, in the cases that have been brought recently with respect to disclaimers, the judges have focused on the disclaimer and questioned whether or not the disclaimers were vasectomy at Oregon Urology Institute the day before the tournament starts. It’s snip city.” The sports radio station broadcasting the clinic’s ads promises to send each patient a recovery kit of sports magazines, free pizza delivery and a bag of frozen peas. Id. 117 See N.Y. Football Giants Inc. v. Clear Channel Commc’ns, Inc., No. 05-5414, complaint filed (D.N.J. Nov. 15, 2005); Nat’l Football League v. Governor of the State of Del., 35 F. Supp. 1372, 1379 (D. Del. 1977) (NFL sued the State of Delaware for conducting a state lottery based on the results of NFL games). The District Court of Delaware held that: “the state [failed] to adequately distinguish its service from an NFL-affiliated one. The law of trademark and unfair competition imposed a duty on the state to take affirmative steps to avoid the confusion which led the consuming public to believe that the NFL sponsored, sanctioned, or was in some way associated with the lottery.” Id. 118 See National Hockey League et al. v. Pepsi Cola Can. Ltd., 92 DLR.4th 349 (BC 1992), aff’d, CanLII 2102 (B.C.C.A. 1995). The NHL alleged that Pepsi’s “Pro-Hockey Playoff Pool’ deliberately created confusion with the NHL Stanley Cup Playoffs, which Coca-Cola sponsored. Pepsi ran a strong advertising campaign to promote a competition that required consumers to match NHL Playoff results with information found on Pepsi bottle caps. Pepsi included disclaimers in its merchandising, advertising material, and contest entry forms to the effect that the items were not associated with the NHL The Court held that while “the Coke NHLS agreement obligates NHLS, so far as it is able, to protect the rights of Coke from ambush marketing, such an obligation cannot impose on a third party a duty to refrain from engaging in advertising its products in a manner which, although aggressive, is not, by the law of Canada, unlawful. … It may be that, due to Coke’s failure to secure the right to advertise its product during the television broadcasts of NHIC and the securing of such rights by the defendant, the commercial value to Coke of the right to describe its product as the ‘official Soft Drink of the NHL’ has less commercial value than would have been the case if Coke had also obtained the right to advertise on NHIC. But that cannot diminish the defendant’s rights.” Id. at 369.

584 CHAPTER VI: TRADEMARK LAW really actually effective. As a result, most ambush marketers are not using disclaimers. If you are in the business of ambush marketing, it is an issue to be considered, but probably you would want to leave off the disclaimer. MR. BUTLER: Thank you all very much. The International Olympic Committee requires host cities to propound and take various measures before they will be considered as host cities. They also have to make representations to do certain things to ward off ambush advertising before they will be named as host cities. What New York proposed to do, when it was vying for the 2012 Olympic Games, was buy all billboards located anywhere near an Olympic stadium or arena, and all billboards located anywhere along the route from the airports into the city.119 New York also undertook to buy up TV and radio air time so that no one who is not a sponsor would be able to advertise during the Olympic Games, and so on. London essentially did the same thing. Sochi did this also, and others. I presume Beijing as well. How far is too far? Whom are we protecting here? Let me open up to any questions that we have from the audience. QUESTION [Emily Hudson, Melbourne Law School, Melbourne, Australia]: Thank you. There was recently a review of ambush marketing legislation in Australia.120 I was one of the principal researchers on that project. I just wanted to make a couple of points. The first relates to the interest groups associated with ambush marketing. I think the one group that has not been mentioned so far is sport itself. One of the things that we found in our discussions with people in relation to the impact of legislation in Australia, which tends to be event-specific rather than systematic121 — though sport is calling for systematic legislation, because they ask, “Why are the Olympics so special? The AFL Grand Final in Australia is just as big.” — is they say that under their contractual negotiations with sponsors they are required to deal with ambush marketing in any event. So it is not so much just the sponsors who lose out, but the sport does itself, because the level of resources required to police ambush marketing and deal with it, and the possible penalties if it is not dealt with, in terms of reduction in fees and so forth and contracts that get terminated. So they see the legislation actually as very important to protect the sport’s interest, not just the sponsors. Second, in relation to the ambit of the legislation, the degree to which it overlaps with trademark and trade practice law, what a lot of people report is that writing to an ambusher to 119 In 1997 the International Olympic Committee announced that any city bidding to host the Olympic Games in the future must purchase all advertising space for use by official sponsors within the host city for the entire month during which the Olympic Games are held. Vasallo, Blemester & Wenner, supra note 39, at 1353. 120 Andrew Christie & Emily Hudson, Intellectual Property Research Institute of Australia (IPRIA), Review of Ambush Marketing Legislation (March 2007), available at http://www.ipaustralia.gov.au/pdfs/news/Ambush%20 Marketing%20 Legislation%20Review.pdf 121 The Trade Practices Act 1974 (Cth) (TPA) prohibits certain forms of ambushing by association. TPA deems it unlawful for an ambushing corporation “to engage in conduct that is misleading or deceptive” (§ 52) or “to falsely represent that it has (or its products have) a sponsorship involvement with the event organizer” (§ 53). Prior to the Sydney Olympics, the Federal Parliament passed the Olympic Insignia Protection Act 1987 (Cth) and the Sydney 2000 Games (Indicia and Images) Protection Act 1996 (Cth), and the New South Wales Parliament passed the Olympic Arrangements Act 2000. Since 1987 the federal legislation has deemed the Australian Olympic Committee (AOC) to be the owner of the design of the Olympic five rings symbol and the copyright in that symbol; prevented others from registering certain Olympics-related images as trade marks; and prohibited the commercial use of the word “Olympics” (and certain variations thereof) without an AOC license. The 1996 Act added a number of other expressions, such as the “Sydney Games,” to the protected list. The New South Wales legislation was targeted substantially toward “intrusion” ambush activity. It effectively prohibited advertising in and around Olympic venues, in airspace above venues, and in major thoroughfares. The Melbourne 2006 Commonwealth Games (Indicia and Images) Protection Act 2005 was enacted to provide protection for M2006 images and indicia prior to, during, and immediately following the Games (the Act ceased to have effect on 30 June 2006). See also Graeme Orr, “Marketing Games: The Regulation of Olympic Indicia and Images in Australia”, 9 Eur. Intell. Prop. Rev. 504 (1997).

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say to them “Under the Olympic Insignia Protection Act or under the Commonwealth Games Insignia Act, we believe that what you have done is a prohibition” is much more likely to lead to conduct stopping than just “Under Section 52 of the Trade Practices Act, we believe that … .” So even though the scope of the legislation may not be broader than the general law provisions, it sounds like it is more readily enforceable. The final point I would briefly like to make is that there is also, in terms of the interest groups, a conflict between what I would call “feeder” sports and “lower associations” and the big associations that may get rights underneath legislation. So there is an issue that a lot of associations involved with training athletes and running lower-level competitions find that when they come to the Commonwealth Games or the Olympic Games they cannot use their own athletes and so forth to talk about the role they had in feeding these athletes through to those big competitions. So there are also conflicts that ambush marketing legislation does not just stop other commercial competitors from ambushing but also people who you might claim have a legitimate interest to publicize their involvement with the event. MR. BUTLER: So we are protecting sports just as much as the sponsors. Perhaps the panel later, after this question, will be able to address the issue of how far they think that can and should go. QUESTION [Patricia Judd, Association of American Publishers, Washington, D.C.]: I specialize in copyright enforcement in China. Professor Long’s last word got my attention, so I’m interested in picking up on that particular theme. This question is particularly for her, or for any of the panelists who wishes to address it: How do you see the intersection of copyright with the concepts that have been discussed today playing out in any particular context or in general? PROF. LONG: Thank you for the question. What I find really interesting is that if you look at the Special Regulations,122 they are modeled on trademark law, but they give broad enforcement rights, specifically mentioning that enforcement under the Regulations will be carried out by “all of the state and local intellectual property offices, including copyright.” 123 Some of the enforcement activities have been under copyright — not just for the logos and the mascots, which I understand, since such mascots are also understandably copyrightable — but the copyright agencies have actually been the ones who have pursued those using “Wishing you success in the Olympics” in a commercial capacity.124 So that even tag lines are being treated as a copyright violation, which gets me away from the problems of goodwill and all of the other hang-ups that I might have in trying to enforce the Olympic Symbols as trademarks per se. So it looks like at least the Olympics is giving a little more impetus to the slightly stronger enforcement activity on the copyright side beyond simply pirating. I think that is an interesting development, because I think it is a way to sidestep some of the more problematic issues that you have on the trademark side. JUSTICE HUGHES: It comes up with music. A lot of times these events are associated with certain songs or certain music, and you find that it enters into popular music; it suddenly becomes a popular song or other advertisers use it as background music, and that sort of thing. So it does arise in that way. 122 Regulations on the Protection of Olympic Symbols, Promulgated by Decree No. 345 of the State Council on Feb 4, 2002, with an effective date of Apr. 1, 2002. English translation available at http://www.china.org.cn/english/ China/ 208301.htm. 123 Id. art. 6. 124 See, e.g., Symbol of Protection, available at http://www.bjreview.com.cn/olympic/text/2007-01/16/content (describing efforts of enforcement personnel to explain to a restaurant owner why it could not use the phrase “Wishing The 2008 Beijing Olympics Success” on its napkins).

586 CHAPTER VI: TRADEMARK LAW PROF. LONG: Interestingly, the Chinese regulations list the anthem as a protectable symbol.125 They are definitely crossing lines on both sides. It is like “We are just going to put it all out there and then start trying to enforce it.” MR. JOHNSON: If I can come back to the point raised a moment ago by Emily Hudson, it has to be remembered that the 1976 Montreal Olympics almost bankrupted Montreal City, whereas the 1984 Los Angeles Games, where the exclusivity and the idea of official sponsors really began, made a profit. So it shows that sponsorship is vital for sport. I think anyone who says otherwise would be naïve. Also, what I think is interesting about Australia is that event-specific rights began with the Australian Grand Prix, before it moved out to Albert Park.126 When it was in Adelaide, certain anti-ambush laws were passed (although not any association rights); then that was sort of copied when it went to Albert Park in Melbourne; in turn, that was sort of copied by the Olympics;127 that was sort of copied by the Commonwealth Games;128 then copied by the FINA World Swimming Championships.129 It shows the proliferation of protection each time. If you look at it on an international scale, this also plays a part. So each sporting body demands these things. Because the Olympics got it, the Commonwealth Games want it; after the Commonwealth Games got it, the swimmers want it. MR. BUTLER: And then the urologists will want it. Peter? DR. RUESS: Just one point. We are certainly not disputing that sponsors need to be granted some exclusive rights. But there always will be — and maybe need to be — ways to legally sidestep it, if we talk about billboards and all that stuff. On the occasion of one of the previous soccer championships, somebody not officially a sponsor (I think it was Nike) had a contract with Velotaxis, which were allowed to enter the stadium compounds and thus could display “Nike” advertising. So what are you going to do? Do you want a city ordinance banning people privately contracting with cab drivers so they can just put official sponsors’ signs on cabs that enter the grounds?130 I think the question that Jeff correctly stated is: Is that not going to take it too far? I mean we are monopolizing the vast majority of contractual freedom in advertising because we say, “Well, it is important for sports.” That’s true. But it still has to be within the confines of the law and balance all interests, not just safeguard those of the sponsors at any cost against anybody. MR. BUTLER: Peter, Coenraad, Doris, Roger, Phillip, and Jeff, thank you very much for your insightful comments about association rights and these super-trademark rights and so on. And thank you all for your attention. Symbol Regulations, art. 2; see also Long, supra note 45. In respect of the FIA Formula One Grand Prix motor racing, the Victorian Parliament passed the Australian Grands Prix Act 1994, and the Australian Grands Prix (Formula One) Regulations 1996 were made thereunder. These deter ambushers from using, in certain circumstances, phrases like “Grand Prix” or ”Albert Park Circuit” in their promotions or packaging, by criminalizing such activity, and making it punishable by fines of up to $100,000. 127 See supra note 121. 128 See Commonwealth Games Arrangements Act of 2001, No. 57 of 2001, Victoria Consolidated Legislation, available at http://www.austlii.edu.au/au/legis/vic/consol_act/cgaa2001314 . The Melbourne 2006 Commonwealth Games (Indicia and Images) Protection Act (the M2006 Act) of June 26, 2005 restricts the use of key words, phrases and images associated with the Melbourne 2006 Commonwealth Games. The M2006 Act is administered by the Department of Communications, Information Technology and the Arts (DCITA). 129 World Swimming Championships Act (2004), Victoria Consolidated Legislation. Additional information is available at http://www.melbourne2007.com.au/?s=committee. 130 “There are no special rules for taxis with or without advertising. There is no need to cover any advertising or manufacturers’ badges on taxis. And naturally, there is no differentiation between taxis manufactured by FIFA World Cup Official Partner Hyundai and taxis from other manufacturers.” FIFA Marketing FAQs for 2006 World Cup, available at http://www.fifa.com/mm/document/afmarketing/marketing/mtv_qa_en_1814.pdf. 125 126

CHAPTER VII

International Trade & Intellectual Property Part A: Multilateral and Bilateral Relations Section 1: The World Intellectual Property Organization Who will be chosen to lead it? Will it make a difference? What will be WIPO’s future role? Would adoption of the norms of the Development Agenda make it more or less relevant as a multilateral institution? Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker RICHARD WILDER

Associate General Counsel for IP Policy, Microsoft Corp. (Redmond, WA) Panelists MIHÁLY FICSOR

JAMES LOVE

Director, Center for Information Technology and Intellectual Property (CITP) (Budapest)

Director, Knowledge Ecology International (Washington, D.C.)

PROF. JOHANNA GIBSON

Executive Vice President Global Legal Policy, International Federation of the Phonographic Industry (IFPI) (London)

SHIRA PERLMUTTER

Queen Mary Intellectual Property Research Institute (QMIPRI), University of London

588 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. HANSEN: Our first session is going to be on the World Intellectual Property

Organization (WIPO). It is in somewhat of a turmoil right now; looking for a new Director General.1 What is the WIPO’s role in the world? Will it maintain its role as a multinational organization that for years and years helped to establish norms in the intellectual property law? Will it take on a different role? What will happen? Richard Wilder, who is now Associate General Counsel for IP Policy at Microsoft, will start us off with an introduction. Our panelists are: Mihály Ficsor, who used to be a big, muckety-muck at WIPO and certainly knows it from the inside. He is the Director of the Center for Information Technology and Intellectual Property (CITP) in Budapest. He has asked us to say that he is not speaking on that institute’s behalf today. Professor Johanna Gibson, Queen Mary, University of London, is Co-Director of Queen Mary Research Institute. James Love is the Director of Knowledge Ecology International, which is a public-interest organization based in Washington, D.C. Finally, Shira Perlmutter, who also has WIPO and U.S. government experience, is Executive Vice President of Global Legal Policy, International Federation of the Phonographic Industry (IFPI), in London. Without further ado, Dick, would you like to start us off? MR. WILDER: Thank you, Hugh. One of the reasons I am here is I used to be a low muckety-muck at WIPO some years ago. That’s my qualification. Thanks for the opportunity to speak here. Thanks, Hugh, for inviting me. My goal really is not to answer the questions directly that are presented in the Conference agenda, but rather to talk about some of the issues confronting WIPO, some of the processes that are ongoing, and to use that then as a context to try and address some of these questions. I do not think WIPO really is in crisis as much as there are a number of challenges. So my discussion here today is going to be more in that sense, of the challenges that face us. Before going into the challenges, I think it is important to recall that WIPO as an organization is working. There are things at WIPO that are working. It is not completely falling apart. • The program and budget for 2008–2009 was not adopted at the last meeting of the assemblies. There is a meeting next Monday, March 31, and every expectation is that that budget will be adopted, so there will be a program and budget for this year and next.2 Several months late, but better late than never. • The global protection systems for patents, trademarks, and industrial designs are operating. • Applications under the Patent Cooperation Treaty (PCT)3 are up, a growth rate of 5.9 percent over the previous year.4 • The Madrid System5 is operating well, a growth rate of 9.5 percent over the previous year. 1 Subsequent to the Conference, on May 13, 2008, the Coordination Committee of WIPO nominated Mr. Francis Gurry, an Australian national, to become the next Director General. The Director General-elect will assume his duties on Oct. 1, 2008, following appointment by the General Assembly, scheduled in September. See Press Release, WIPO, Key WIPO Body Nominates Candidate for Director General (May 13, 2008) [hereinafter WIPO nominates Mr. Francis Gurry], available at http://www.ipo.int/pressroom/en/articles/2008/article_0025.html. 2 See Press Release, WIPO, WIPO Member States Adopt 2008/09 Program and Budget (Mar. 31, 2008), PR/2008/545, available at http://www.wipo.int/pressroom/en/articles/2008/article_0017.html. 3 WIPO Patent Cooperation Treaty (PCT), June 19, 1970, amended Sept. 28, 1979, modified Feb. 3, 1984, and Oct. 3, 2001 (as in force from Apr. 1, 2002), T.I.A.S. 8733, 9 I.L.M. 978 (1970), available at http://www.wipo.int/pct/en/ texts/pdf/pct.pdf. 4 In 2007, 158,400 PCT international applications were filed, representing a 5.9 percent rate of growth over 2006. See WIPO, The International Patent System Yearly Review 8 (2007), available at http://www.wipo.int/export/sites/ www/pct/en/activity/pct_2007.pdf. Monthly and yearly statistics on the PCT system are available at http://www.wipo. int/ ipstats/en/statistics/pct/.

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• The Hague Agreement6 continues to operate. Indeed, the U.S. government is going to join the Hague Agreement. Late last year, the U.S. Senate passed a Resolution of Advice and Consent to ratify the Geneva Act of the Hague Agreement.7 So the Hague system is growing. • The Development Agenda8 was adopted. • The process for the selection of the next Director General is under way, which I will talk about in a moment.9 • WIPO continues its mission to provide development assistance, capacity building, and so on, and engaging with intergovernmental organizations on IP issues. So there are challenges, but basically the organization continues to function. On to the Development Agenda. I am going to go over the process and I will talk a little bit about its substance. Procedurally, at least in its current iteration, it began in September of 2004. It was an original proposal by Argentina and Brazil,10 motivated by a desire to integrate the development dimension into policymaking on IP protection. In addition to events outside of WIPO, which I am not going to recount here, you can trace the origins of the proposal back to things like the earlier discussions on substantive patent harmonization in the early 1980s-to-early-1990s that did not succeed; even before that, the attempted revision of the Paris Convention,11 which ended without revision in the early 1980s. There is now in WIPO the Intergovernmental Committee on IP and Genetic Resources, Traditional Knowledge, and Folklore. I am sure that if you go further back you will find other streams, if you will, that led to the Development Agenda. The point that I wanted to make here is that the issues in the Development Agenda are not of immediate recent vintage. But, no doubt, they are giving a sharper focus and emphasis now within WIPO. I am not going to go over all of the now-concluded aspects of the Development Agenda. These are the baskets of issues, if you will, that are being taken up. They are in the form of clusters. Within these clusters, the WIPO Member States agreed on a set of forty-five distinct proposals that will be undertaken by WIPO, nineteen of which were immediately implemented.12 In addition to adopting the proposals, the General Assembly established a Committee on Development and Intellectual Property (CDIP). That committee began its work in the first 5 WIPO, Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (1989), MM/DC/27 (adopted at Madrid on June 27, 1989 and amended on Oct. 3, 2006), available at http://www. wipo.int/ export/sites/www/madrid/en/legal_texts/pdf/madrid_protocol.pdf. 6 Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs, July 2, 1999, 12 World Intell. Prop. Org., Industrial Property Laws and Treaties, Multilateral Treaties, Text 4-007, available at http://www.wipo.int/hague/en/legal_texts/wo_haa_t.htm. 7 Treaty No. 109-21, December 7, 2007 (Resolution of Advice and Consent to Ratification, agreed to in U.S. Senate by Division Vote on Dec. 7, 2007). The United States is now a full member of the Hague Adoption Convention, which entered into force for the United States on Apr. 1, 2008. As of that date, the Convention will govern intercountry adoptions between the United States and other Convention member countries in accordance with the provisions of the Inter-country Adoption Act of 2000, Pub. L. No. 106-279, 114 Stat. 825 (2000). 8 See WIPO, General Assembly Decision on Development Agenda (Oct. 4, 2004), available at http://www.cptech. org/ip/ wipo/wipo10042004.html. The text of the Development Agenda and related documents are available at http:// www.cptech. org/ip/wipo/da.html. 9 See WIPO nominates Mr. Francis Gurry, supra note 1. 10 WIPO, Proposal by Argentina and Brazil for the Establishment of a Development Agenda for WIPO (2004), WO/GA/31/11, available at http://www.wipo.int/documents/en/document/govbody/wo_gb_ga/pdf/ wo_ga_31_11.pdf. 11 Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, revised, Stockholm, July 14, 1967, 21 U.S.T. 1583, 828 U.N.T.S. 305, available at http://www.wipo.int/treaties/en/ip/paris/t rtdocs_wo020.html. 12 When formally establishing the Development Agenda in October 2007, the WIPO General Assembly adopted a set of forty-five recommendations, available at http://www.wipo.int/ip-development/en/agenda/recommendations. html.

590 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY week of March based on a document prepared by the Secretariat with input from some Member States.13 They agreed to a methodology, and they are marching through these proposals one by one, starting with those contained in the list of the twenty-six recommendations that were not implemented immediately. So the WIPO General Assembly has agreed on the Development Agenda and it is under way. Going to some of the high-level issues that are here, we have been asked to opine on WIPO’s future role and whether the adoption of the norms in the Development Agenda will make it more or less relevant as a multilateral institution. There is no reason the Development Agenda cannot be implemented in a principled way to meet the objectives of the Development Agenda while staying true to WIPO’s mission, which, among other things, is to promote the protection of IP throughout the world. This can be done in a manner consistent with economic development, which is really the challenge within the Development Agenda. Looking at IP as a policy tool that induces certain desired behavior, the focus should be on ensuring that IP systems can be implemented and individual rights used and managed to achieve the understood and agreed ends. Moreover, IP systems should be viewed in an integrated way, with the grant of rights and their use and enforcement in concert within the allowed exceptions and limitations. So rather than balkanizing intellectual property, approaching it in a unitary fashion. We also have to be clear about the limits as to what IP can do. I have to draw a distinction between problems that IP systems and the use of IP rights can solve and those that they cannot. In the global health arena, intellectual property can play a role, but it may be more or less limited depending on the markets that are being served. In other industries, including the one that I am coming from now, software, intellectual property may serve different roles depending on the markets being served and the product development and business models chosen. In either case, intellectual property is relevant and has a role. The WIPO Member States have adopted the Development Agenda and, as I indicated, work is going forward. Kamil Idris, the current Director General, announced that he would advance the process for the selection of his successor by about a year. I am not going to go through all of the history, sordid or otherwise, that led to that decision. On February 13, 2008, fifteen candidates were nominated.14 In May the Coordination Committee will nominate a single candidate.15 The Coordination Committee is a fairly large body. It is comprised of eighty-three Member States, largely reflective of the membership of WIPO as a whole in terms of the geographic distribution, developed versus developing countries and the like. There is a process within the Coordination Committee for a series of secret ballots, straw polls, that will eventually drop out two or three candidates in each successive stage until you end up with a precious few that will be either voted on or a decision will be taken by consensus. One name will go to the WIPO General Assembly in September. They will elect the Director General. The plan now is that the new Director General would take up his or her post on October 1, 2008. 13 See Press Release, WIPO, New Body on Development and IP Wraps up Inaugural Meeting (Mar. 10, 2008), PR/2008/540, available at http://www.wipo.int/pressroom/en/articles/2008/article_0012.html. 14 The candidates were: Alicia Adamczak (Poland), Toufiq Ali (Bangladesh), Jorge Amigo (Mexico), Gjorgji Filipov (the former Yugoslav Republic of Macedonia), José Graça Aranha (Brazil), Francis Gurry (Australia), Masood Khan (Pakistan), Enrique A. Manalo (Philippines), Mauro Masi (Italy), James Otieno Odek (Kenya), Philippe Petit (France), Bojan Pretnar (Slovenia), Boris Simonov (Russian Federation), Yoshiyuki Takagi (Japan), and José Delmer Urbizo (Honduras). In the last round of voting, Mr. Gurry received forty-two votes and Mr. Graça Aranha received forty-one votes. 15 See WIPO nominates Mr. Francis Gurry, supra note 1.

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I am not going to discuss the fifteen candidates in detail. They come from a broad range of countries geographically, developed/developing countries. If you go to their c.v.’s, which are on the WIPO Web site, you will get a sense of their qualifications. I think it is more important, rather than talking here about the individuals and their c.v.’s, to talk about the qualities: • It should be a person of proven integrity who will operate the organization in an open and transparent manner on matters of budget and staffing. • In my view, given the technical nature of WIPO, there has to be a strong appreciation for the role that intellectual property plays. I would suggest that appreciation could best be gained by having worked in national or international offices dealing with the protection of intellectual property. • It is also important that they come with an understanding of the role that intellectual property plays broadly and, given the current issues in play at WIPO, the role that it plays specifically in development. There are a number of candidates that are listed in that list of fifteen that meet those qualifications. • In addition, they have to be able to run a large, complex technical organization, which WIPO is; engage and work effectively with the Member States and all of the constituencies; and engage and inspire the staff. I wanted to talk a bit about norm-setting exercises, because I think it tees up an issue for WIPO over the long term. There has not been a lot of progress over the last few years in norm setting in WIPO. There is, of course, the Singapore Treaty,16 the trademark law treaty. There were efforts on patent harmonization that have yet to bear fruit.17 There is a development on a broadcasting organizations treaty that, for reasons that are well known to you here, has not concluded.18 The one thing I wanted to make mention of, just sort of parenthetically and by example, is that there are the needs of some Member States that have large industrial property offices and large patent offices, to be able to move forward on reducing the workload — so share work, if you will. That was the goal behind patent harmonization back in the 1980s and 1990s. It is the goal of harmonization now. Indeed, if you look at the early preparatory work for the PCT,19 that was one of the ideas behind that treaty. The need for these offices to be able to conduct searches and examinations and share work has led to the development of initiatives outside of WIPO. Patent Prosecution Highways between the U.S. Patent and Trademark Office, the Japanese Patent Office, the U.K. Office, the Korean Office, and the like have provided mechanisms for them to be able to do that.20 And again, this is outside of WIPO. I don’t intend to set this up as a counterpart to implementation of the Development Agenda ― that is one issue for developed countries, another issue for developing countries ― but it is 16 Singapore Treaty on the Law of Trademarks, Mar. 27, 2007, available at http://www.wipo.int/export/sites/www/ treaties/en/ip/singapore/pdf/singapore_treaty.pdf. 17 The SCP, WIPO’s committee on patent harmonization, meets once or twice annually. During the last couple of years this committee has attempted to negotiate a draft “Substantive Patent Law Treaty” (SPLT), but has to date been unsuccessful. See WIPO, Substantive Patent Law Harmonization, available at http://www.wipo.int/patent-law/en/ harmonization.htm. 18 Proposed WIPO Treaty on the Protection of Broadcasting Organizations. For latest developments and related documents, see Consumer Project on Technology, The Proposed WIPO Treaty — New Documents, http://www.cptech.org/ip/ wipo/bt/latest_docs.html. 19 PCT, supra note 3; see also Verbatim and Summary Minutes of the Washington Diplomatic Conference on the Patent Cooperation Treaty, 1970, available at http://www.wipo.int/export/sites/www/pct/en/texts/pdf/washington_ p551_to_738.pdf. 20 For a discussion of the Patent Prosecution Highway and other cooperation initiatives among patent offices, see presentation by Masayuki Shinohara, “The Japan Patent Office Initiative for Work Sharing Among IP Offices”, and discussion thereof, in Chapter V.E.2, “Japanese Patent Law Developments”, supra this volume.

592 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY a challenge for the new Director General going forward to recognize the unique and specific needs of WIPO Member States and that they may be different for different groups or different issues. Ways need to be found to address these needs in a very principled, systematic way. Such is the state of the union as I see it. The challenges I have outlined are not just to the new Director General alone but extend to the organization as a whole, the Member States and WIPO’s constituencies, of which we are a part. In the short term, next Monday there will be an adoption of the program and budget.21 In the medium term, there are implementation issues with respect to the Development Agenda, which I have gone over, and the need for the entire WIPO program to be implemented in a principled way, as I have explained. I think there appears to be a reservoir of goodwill at the moment to move forward constructively in these areas, and maintaining this goodwill will be a central responsibility of the new Director General. There is a danger in this context that some of the more rancorous discussions that emerged in the early days of the Development Agenda can rise up again. That is where the new Director General, possessing the qualifications that I have indicated, can play a very active and public role. Another area of potential danger over the long term is the difficulties in moving forward on norm development or in moving forward on focused issues of interest to certain Member States. I gave the example of patent harmonization and work-sharing needs. Lastly, let me say something on behalf of the WIPO staff, having been formerly with WIPO — and Mihály Ficsor was also formerly with WIPO. The Member States give the overall direction. The Director General provides guidance, but it is the staff that implements what the organization does. They have been the subject of expressed and implicit criticism over the past few years. There are divisions in the house over questions surrounding the Director General, over the Development Agenda, what WIPO has or has not done, what the staff has or has not done in that regard, and other substantive issues. The next Director General will have some healing to do internally with the staff, and to a certain extent with the Member States. Thank you very much. PROF. HANSEN: Thank you very much, Dick. It is time for some discussion. Who would like to start off with some thoughts? Jamie, how about you? MR. LOVE: First, I think the Development Agenda, to start off with that, is very important. It signals, among other things, that there were a lot of people who want WIPO to change its culture and they want to change its objective. They want very basic changes. One thing that will come out of the committee that is working on the Development Agenda is: What is the capacity of WIPO to do economic analysis? What is the capacity of WIPO to do the kind of evidence-based analysis that is coming to the intellectual property field? The intellectual property field has operated in kind of this special space of policymaker. It is kind of the faith-based, highly ideological world of different churches and things. I think that is coming to an end. I think people are becoming a little bit more pragmatic and they are looking for more analysis and evidence. I think WIPO is going to be asked to hire an economist, do a few things like that, and begin to work in this area. Second, in terms of the committee work programs, the Copyright Committee is now being asked to develop norm setting in the area of minimum limitations and exceptions, particularly for the most vulnerable populations, but not entirely, and also for innovating services.22 See supra note 2. See WIPO, Standing Committee on Copyright and Related Rights, WIPO Study on Limitations and Exceptions of copyright and Related Rights in the Digital Environment, 9th Sess., Geneva, June 23–27, 2003 (prepared by Sam .... 21 22

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The first thing that is going to be a fight, I think, will be the request by the World Blind Union to have some kind of a treaty or something to deal with the problems of the visually impaired so they can take a book on a non-voluntary basis and create a Braille copy or service in one country and deliver it in a different country under a relatively common set of rules, seeking a whole norm-setting, cross-border solution that will address their problems.23 It will be an important case because people will look at this as: Can WIPO do anything that involves norm setting, and can they solve a problem confronting consumers, and can they agree to do norm setting in this area of limitations and exceptions? I think this is a very compelling case. This will be discussed quite a bit in the fall, I think. That is my prediction. PROF. HANSEN: What is your prediction as to the result? MR. LOVE: My prediction is that there will be a serious push for a diplomatic conference on this topic within a fairly compressed time, say, twenty-five months or so. But I could be wrong. Sometimes these things never seem to get to the finish line at WIPO. It is hard to say. In the Patent Committee, there are two areas on which you are going to see a lot of focus. It is not so much the pre-grant harmonization, because there is a lot of opposition to harmonization of standards of inventive step, but I think there will be a lot more attention to the post-grant patent quality problems and sharing of information. That is an area where a lot of people think WIPO could do a lot of good. The second area is the area of standards. There are a lot of consumer groups and publicinterest groups that are beginning to think standards are too important to leave up to the industry trade associations to fight over. They are going to push for more of a conversation both in the area of disclosure and in things like compulsory license and exceptions in the area of standards. So I think WIPO is going to look different in the next couple years than it has looked in the past. PROF. HANSEN: So the WIPO is going to be more sympathetic to the Development Agenda and developing nation arguments? MR. LOVE: Well, it already is. Things have changed somewhat. WIPO is quite a different institution than it was a couple years ago. But I think it is going to change in ways that are interesting for everybody in the room. It is going to be asked, instead of just bringing “white man’s wisdom” to the unwashed in developing countries, to actually think about intellectual property policy, and try to solve problems and deal with things in a more interesting way. It is less of a propaganda place, and I think the demand will be that it become smarter. PROF. HANSEN: That is certainly an interesting point. I am impressed that treaty on braille and access for the blind is taking center stage. If that can’t get that through, it probably is a good indication that nothing is going to get through. One would think that everyone would be for it. I can’t imagine people wouldn’t be for it. Shira seems to be — I don’t know if agitated is the word — interested in speaking. And Mihály is just going crazy, but we’ll get to him in a little while. MS. PERLMUTTER: There is a tendency of people to assume that no serious analytical discussions involving issues of development have ever happened at WIPO until they recently came on the scene or until the debate became broader and more players were there. I think development issues have always been very important there. There has always been an analysis Ricketson, University of Melbourne) SCCR/9/7 (Apr. 5, 2003), available at http://www.wipo.int/ documents/en/meetings/2003/sccr/pdf/sccr_9_7.pdf; see also remarks of Prof. Justin Hughes and Prof. P. Bernt Hugenholtz and discussion thereof, Chapter IV.D.1, “Copyright Law Exceptions and Limitations”, supra this volume. 23 See WIPO, Standing Committee on Copyright and Related Rights, Study on Copyright Limitations and Exceptions for the Visually Impaired, SCCR/15/7, 15th Sess., Geneva, Sept. 11–13, 2006, available at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=75696.

594 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY of the extent to which anything that was discussed was good or bad for society as a whole certainly in my experience, which goes back now about thirteen years at WIPO. I just wanted to make a couple of points. One is that I think we do need to accept that we are at a stage where norm setting at WIPO is in something of a fallow period. That’s not necessarily a bad thing. What is interesting, and one of the questions posed in the materials, is that some norm setting on IP issues is in fact moving elsewhere ― there will be some discussion of the Anti-Counterfeiting Trade Agreement (ACTA),24 for example, later on ― where perhaps some countries are getting frustrated with how difficult it is to set norms now in WIPO and are looking to do it elsewhere.But there is plenty for WIPO to do. It should be focusing on all kinds of activities of value. Everything doesn’t have to be a treaty to be worthwhile. There is a tremendous amount of information gathering, resource gathering and presentation, training — all kinds of things that can go on in terms of helping countries, helping creators, helping users get a better grasp of the IP system and how its benefits can be maximized. That can include economic analysis. I support the idea of WIPO doing economic analysis. That is already starting. The Creative Industries Division has been doing some very good economic work on the contribution of copyright industries to the economies of different countries, for example, just as one type of work that is being done there.25 And finally, on the Development Agenda, I think, first of all, there need not be a sharp distinction between development goals and intellectual property goals. In fact, they are very congruent in most respects. What we are seeing at WIPO now is that the Development Agenda is certainly going to be an area of increased focus and emphasis. But I think that can and should be done within 24 The Anti-Counterfeiting Trade Agreement (ACTA), a plurilateral trade agreement, would impose strict enforcement of IP rights related to Internet activity and trade in information-based goods. The agreement was negotiated by the governments of the United States, the European Commission, Japan, Switzerland, Australia, New Zealand, South Korea, Canada, and Mexico. The treaty would establish an international coalition against copyright infringement, imposing a strong, top-down enforcement regime of copyright laws in developed nations. The agreement would allow border officials to search laptops, MP3 players, and cellular phones for copyright-infringing content. It would also impose new cooperation requirements upon Internet service providers (ISPs), including perfunctory disclosure of customer information, and restrict the use of online privacy tools. The proposal specifies a plan to encourage developing nations to accept the legal regime. See Proposed U.S. ACTA Multi-lateral Intellectual Property Trade Agreement (2007), available at http://wikileaks.org/wiki/Proposed_US_ACTA_multi-lateral_intellectual_property_trade_agreement_(2007); see also Presentation by Victoria Espinel and discussion in Chapter VII.A.3, Ad Hoc Multilateral Agreements: The Way Forward? The Proposed Anti-Counterfeiting Trade Agreement (ACTA): Its Scope, Rationale, Possible Duplication in Other Areas, and Effect on the Role of WIPO and Other Multilateral Organizations, infra this volume; Chapter VII.C, IP Developments in China, infra this volume. Note: Subsequent to the Conference, ACTA was discussed at the 34th G8 Summit in July 2008. See Monika Ermet, “G8 Governments Want ACTA Finalised This Year, SPLT Talks Accelerated”, Intell. Prop. Watch, July 9, 2008, available at http://www.ip-watch.org/weblog/index.php?p=1136 (“Despite issues like the current food, energy and climate crises having taken centre stage at this week’s Group of 8 summit in Japan, governments did not lose sight of earlier plans to promote and more strictly protect intellectual property rights. The eight leaders in their document on the ‘World Economy’ called for finalising negotiations of the much-debated Anti-Counterfeiting Trade Agreement (ACTA) by the end of the year and also declared patent harmonisation a topic of high importance, asking for ‘accelerated discussions of the Substantive Patent Law Treaty (SPLT).’”). 25 See, e.g., WIPO Guide on Surveying the Economic Contribution of the Copyright-Based Industries, WIPO Publication No. 893(E) (2003), available at http://www.wipo.int/copyright/en/publications/pdf/copyright_pub_893. pdf; National Studies on Assessing the Economic Contribution of the Copyright-Based Industries, WIPO Publication No. 624 (Aug. 2006), available at http://www.wipo.int/ip-development/en/creative_industry/economic_contribution. html, presents the results of the first five national studies on assessing the economic contribution of copyright-based industries. The studies were carried out in Canada, Hungary, Latvia, Singapore, and the United States, on the basis of the methodology contained in the WIPO Guide, supra. The publication is the first in the Creative Industries series and will be produced on a regular basis, presenting country reports. The studies contained in the publication have been prepared by local researchers, in most cases assisted by WIPO experts.

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the WIPO-specific mandate. It is an organization dedicated to promoting good intellectual property systems, and that job should continue. But what we really need to do is to make sure that the Development Agenda leads to meaningful results, so that it doesn’t get too bogged down in debates over procedure and general principles, but actually develops real programs that can assist creators and users in developing countries. So to borrow one of Jamie’s words, I think the more that the Development Agenda program can be made pragmatic, the better off everyone will be. PROF. HANSEN: Thank you. Mihály, you have the floor. MR. FICSOR: First of all, I would like to say that the way I see it, WIPO has always had a development agenda. Actually, WIPO was born together with a development agenda. WIPO was established forty-one years ago at the Stockholm Diplomatic Conference.26 For example, at the parallel revision conference of the Berne Convention,27 the issue of preferential treatment for developing countries was already on the agenda; the protection of folklore was also there. So it is not new for WIPO to deal with development aspects. Perhaps there are some new emphases, some new elements of the methodology applied; only this is what is truly new. In my view, the basic question among the four you have posed in the program, Hugh, is what should be the role of WIPO in the future. On the basis of answering this question we may also give a kind of identikit of a candidate for the post of the Director General who would be suitable to be elected. I have my opinion about the fifteen candidates, and I know them by heart — who is serious, who is not; who would be good, who would be a disaster. I have a four-member short list of those who, according to me, may have a good chance. PROF. HANSEN: Are you just going to tease us? MR. FICSOR: Actually, I’ve got even a super-short list of one candidate I would like to see in the seat of the Director General. I have not prepared a slide about that. However, I may announce his name. Are you interested? You should read my lips. [The panelist says something, but by covering both the microphone and his mouth.] I have announced the name. But, of course, I am not crazy. I would like to remain a WIPO consultant even if I may turn out to be wrong, which I hope will not be the case. So the basic question is the role of WIPO. In a way, we should take into account that there is a certain answer to that in WIPO’s constitution, the WIPO Convention adopted in Stockholm in 1967.28 Under it, the basic task of the Organization is the promotion of an efficient intellectual property system. This does not contradict the Development Agenda, which, however, should be interpreted and dealt with in due harmony with this basis task. The new Director General cannot disown the basic objectives and functions of WIPO and equally cannot disown what is reflected in the Development Agenda. I hope that he will take care that this Agenda be implemented in a reasonable way in accordance with the general mandate of WIPO. “Reasonable” is maybe too demanding in the present atmosphere. Let us say, as close as possible to reasonable. PROF. HANSEN: Prof. Gibson? 26 Convention Establishing the World Intellectual Property Organization, Stockholm, July 14, 1967, amended Sept. 28, 1979 [hereinafter WIPO Convention], available at http://www.wipo.int/treaties/en/convention/trtdocs_ wo029.html. 27 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 14, 1967, 102 Stat. 2853, 828 U.N.T.S. 221; see also Universal Copyright Convention, revised, Paris, July 24, 1971, 25 U.N.T.S. 1341 [hereinafter UCC]. See generally Sam Ricketson, The Berne Convention for the Protection of Literary and Artistic Works: 1886–1986 at 919 (1986). 28 WIPO Convention, supra note 26.

596 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. GIBSON: My feeling is that, although there has been perhaps some sort of compromised trust in WIPO, I think that it is actually very important that its role is expanded and continues, because it is the only forum that is dedicated to intellectual property, intellectual property as an abstract legal concept. Most of my experience comes from the Intergovernmental Committee on Intellectual Property and Traditional Knowledge and Genetic Resources, Traditional Knowledge and Folklore.29 There is a lot of tension in those meetings to move some issues out, or to try and take some issues out of WIPO and into other arenas, such as the Convention on Biological Diversity (CBD)30 and World Trade Organization (WTO). Now while that discussion is very important in other arenas as well, I think that to an extent my concern would be that if you break up that discussion completely and just rely upon that dissipation amongst other arenas, then in each arena those specific issues become a mere bargaining chip in a wider negotiation. And I think similar things can happen to other intellectual property issues more broadly. If you dissipate the role of WIPO, intellectual property becomes merely a bargaining chip in other discussions. That is something that I think Dick has alluded to when he spoke about the sharper focus of the Development Agenda in the WIPO forum. I think this is part of the efficiency that you have spoken of, that this is really part of this. Intellectual property without WIPO would not be a coherent system; it wouldn’t have that internal coherence that we see in those discussions. I think, then, that what is very interesting about WIPO’s role in terms of policymaking and norm setting that Jamie referred to is that there is an opportunity within WIPO ― and particularly with respect to your discussion of exceptions, access to education tools and so forth for visually impaired persons ― an opportunity to focus specifically and clearly on the use of intellectual property; not merely the value of intellectual property or the trade of intellectual property, but the uses. The Intergovernmental Committee, again, is a very interesting example of this because they are seeing quite an innovation in procedure. The delegations from indigenous groups are able to make interventions and negotiate on effectively an equal footing although obviously unable to vote as Member states. So there is a sense that there is an opportunity for a genuine negotiation between Member States and the beneficiaries, for the users of the system. That is something that I think is very useful. PROF. HANSEN: Thank you. Dick, do you want to say something? MR. WILDER: One of the things that I mentioned in my presentation was the fact that when WIPO is dealing with intellectual property issues, whether it is in the Development Agenda or norm setting, they should be reviewed in an integral fashion. Intellectual property systems set rights. They also make allowance for exceptions and limitations. So I just have questions about dividing things up in a piecemeal fashion and having, say, a specific focus, as Jamie mentioned, on exceptions and limitations, and having that be something that should be developed either in a treaty or otherwise as a specific topic. PROF. HANSEN: One big issue ― and this has been alluded to by a number of people ― is that the WIPO might be bypassed by other bilateral or trilateral treaties or arrangements. It will remain as a building and other things, but players are no longer going to look to it for norm 29 Currently, the WIPO Intergovernmental Committee on Intellectual Property and Genetic Resources, Traditional Knowledge and Folklore, which met for the first time in 2001, is discussing draft provisions for the enhanced protection of TK and traditional cultural expressions against misappropriation and misuse. Additional information on the Committee is available at http://www.wipo.int/tk/en. 30 Convention on Biological Diversity, June 5, 1992, 1995 U.K.T.S. No. 51 (Cmnd. 2915), 31 I.L.M. 818, (entered into force Dec. 29, 1993) (adopted at Earth Summit, Rio de Janeiro), available at http://www.cbd.int/convention/ convention. shtml.

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setting, are not going to look to it for solutions. From the developing nation point of view, that would be terrible. Just quickly going down the line. Is there a possibility of the WIPO and multilateral treaties and negotiation being bypassed, or will the WIPO be looked to for constructive, norm-setting dialogue and perhaps treaties in the future? MR. FICSOR: My answer is that there is a slight possibility for this to happen. However, I hope, and I am quite sure, that it will not happen. PROF. GIBSON: Similarly, while it is important to take things into the World Trade Organization, to talk about things in the CBD, I still think that technical role of WIPO is absolutely crucial. PROF. HANSEN: Jamie? MR. LOVE: Well, negotiating free trade agreements by the Europeans, by the Japanese, by the United States, particularly by Switzerland, is a very aggressive norm-setting process that is going on right now. It is way beyond WTO. It is way beyond WIPO. So yes, sure, there is a lot of norm setting that takes place outside. People are going to still fight a lot about the control over WIPO and what its mission is and everything else. It has a “UN” brand. It has enormous resources through the Patent Cooperation Treaty. PROF. HANSEN: Is the “UN brand” a positive identification for the role it needs to play in the future? MR. LOVE: I think that the key to making WIPO work is to get the European Commission and the American government to rethink internally what is in their interest in terms of global norm setting for intellectual property. As long as they think “more is better” and that is what is going to protect and raise living standards everywhere, they are going to have a huge fight with the South at WIPO. But if they begin to change their minds and begin to look at intellectual property in the same way that IBM and other companies are beginning to look at it, they will go back to WIPO. Then it will be a more interesting place to work. PROF. HANSEN: Shira? MS. PERLMUTTER: I think WIPO lost its monopoly on intellectual property norm setting when TRIPs31 was adopted. There is going to be some splintering going on ― we’re seeing it already ― where some norm setting is happening in other forums. But if the new Director General is good and has the qualities that Dick outlined as being important, and because of all the reasons of history and resources, including resources of expertise, WIPO should still maintain its central role. I think that is a good thing. PROF. HANSEN: If WIPO were on the stock market, would you buy any shares? MR. WILDER: I’d hold. PROF. HANSEN: We are out of time. Thank you all very much.

31 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1125, 1197 (1994), available at http://www.wto.org/english/ tratop_e/trips_e/t_agm0_e.htm.

CHAPTER VII

International Trade & Intellectual Property Part A: Multilateral and Bilateral Relations Section 2: United States v. China in the WTO The WTO Dispute Resolution Panel has been appointed. Eleven countries and the European Union have reserved their right to participate in the panel proceedings as third parties. The USTR has filed its first brief and made it public (proceedings and filings are not made public by the WTO). What are the issues? Is the WTO panel decision in the copyright dispute over the “Fairness in Music Licensing” provisions in 17 U.S.C. § 110 relevant? Was it a mistake for the United States to initiate this dispute? What is and/or will be the reaction of other nations? How will the dispute be resolved? Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker PROF. VICTORIA ESPINEL

George Mason University School of Law (Arlington, VA) Panelists PROF. SUSY FRANKEL

PROF. DANIEL GERVAIS

Victoria University of Wellington (New Zealand)

Acting Dean of Common Law, University of Ottawa (Canada)

PROF. JUSTIN HUGHES

Benjamin N. Cardozo School of Law, Yeshiva University (New York)

600 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. HANSEN: We are now going to discuss “United States vs. China” in the World Trade Organization, a very interesting case. Political, legal, all sorts of things can be happening as a result of this dispute — or not happening. We have an excellent panel. Victoria Espinel, formerly in the United States Trade Representative’s Office (USTR), which brought this action and started the process, is now at George Mason University School of Law. Susy Frankel is from Victoria University of Wellington, New Zealand. Professor Daniel Gervais is the Acting Dean of Common Law at the University of Ottawa, an acknowledged expert in this area. Professor Justin Hughes, from Cardozo School of Law, right across town, is also a serious scholar in this area. Victoria, would you like to start?

The U.S. Case Against China at the WTO Victoria Espinel* Thanks, Hugh. Good morning, everyone. I’m very happy to be here. The topic of this panel is the case that the United States brought against China at the World Trade Organization (WTO). I am going to very briefly describe the claims in the case and then also talk a little bit about some of the comments that have been made since the case was brought. As all of you are probably aware, the United States engaged in a very long discussion with China about a number of concerns that were related to intellectual property enforcement. Ultimately, although litigation was not an easy decision, it was deemed necessary by the U.S. government. And so in April last year, the United States brought the first ever intellectual property cases against China, requesting formal consultations at the WTO.1 There are actually two cases: one related to intellectual property rules per se,2 and one related to rules with respect to market access that have a tremendous impact on the intellectual property (IP) industry.3 For the sake of brevity, I am going to confine my remarks to the first case, the one that relates to IP rules per se. * George Mason University (formerly Assistant U.S. Trade Representative for Intellectual Property and Innovation, at the Office of the U.S. Trade Representative). 1 See Press Release, Office of the U.S. Trade Representative, United States Files WTO Cases Against China Over Deficiencies in China’s Intellectual Property Rights Laws and Market Access Barriers to Copyright-Based Industries (Apr. 9, 2007), available at http:// www.ustr.gov/Document_Library/Press_Releases/2007/April/United_States_ Files_WTO_Cases_Against_China_Over_Deficiencies_in_Chinas_Intellectual_Property_Rights_Laws_Market_ Access_Barr.html; see also Press Release, Office of the U.S. Trade Representative, United States Requests WTO Panel in Case Challenging Deficiencies in China’s Intellectual Property Rights Laws (Aug. 13, 2007), available at http://www.ustr.gov/Document_Library/ Press_Releases/2007/August/United_States_Requests_WTO_Panel_in_ Case_Challenging_Deficiencies_in_ Chinas_ Intel lectual_Property_Rights_Laws.html. 2 See Request for Consultations, China — Measures Affecting the Protection and Enforcement of IP Rights, WT/ DS362/1 (filed by the United States Apr. 16, 2007), available at http://docsonline.wto.org/DDFDocuments/t/G/L/819. doc. The four matters on which the United States requests consultations are: (1) the thresholds that must be met in order for certain acts of trademark counterfeiting and copyright piracy to be subject to criminal procedures and penalties; (2) goods that infringe intellectual property rights that are confiscated by Chinese Customs authorities, in particular the disposal of such goods following removal of their infringing features; (3) the scope of coverage of criminal procedures and penalties for unauthorized reproduction or unauthorized distribution of copyrighted works; and (4) the denial of copyright and related rights protection and enforcement to creative works of authorship, sound recordings, and performances that have not been authorized for publication or distribution within China. Current information on this dispute can be accessed at http://www.wto.int/english/tratop_e/dispu_e/cases_e/ds362_e.htm. 3 See Request for Consultations, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/1 (filed by the United States Apr. 10,...

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In terms of the status of that case, the United States requested that a panel be formed in August 2007. At this point, that panel has been composed and the United States has submitted its first brief in the case, which is publicly available on the USTR Web site.4 So far, twelve developed and developing countries have joined the case as third parties. Argentina, Australia, Brazil, Canada, the European Union, India, Japan, Korea, Mexico, Chinese Taipei, Thailand, and Turkey have all joined the case as third parties, evidencing a significant amount of interest among the WTO membership in the outcome of this case. The U.S. case against China focuses on three practical enforcement failings of the Chinese law that the United States alleges to be inconsistent with TRIPs:5 • The first is thresholds for criminal liability. The United States has alleged that China is inconsistent with Articles 41 and 61 of TRIPs because of procedures that require either a high-quantity or high-value threshold of goods to exist before it is possible for criminal penalties to apply in China. Under Chinese existing thresholds, a retailer could stock up to 499 copies of an illegal DVD and face no possibility of criminal prosecution until he stocks 500. Pirates and counterfeiters, not being idiots, are structuring their operations around these thresholds so that they can engage in what the United States would believe is criminal activity without facing any possibility of criminal prosecution in China. Likewise, China’s value thresholds are calculated on the basis of the selling price of the pirated product, rather than the legitimate product, further limiting the impact of these procedures as a deterrent. • The second claim in the case relates to disposal of infringing goods, goods that are seized by Customs. The United States has alleged that China is inconsistent with TRIPs Articles 46 and 59 because the relevant Customs authorities are not granted the effective power that they need to order the destruction of infringing goods. In fact, it appears that it is often the case in China that infringing goods are released back into the channels of commerce in a manner that the United States believes is inconsistent with the TRIPs Agreement. • The third claim relates to denial of copyright protection for goods that are awaiting censorship review. I personally think that in some respects this is the most interesting claim in the case. The United States has alleged that Chinese copyright law denies copyright protection to imported products while they are waiting for government approval to enter the Chinese market. That means that a work can be copied with impunity while it is awaiting approval from the Chinese censorship authorities because until that approval comes it is not, under Chinese copyright law, protected by the law; therefore, the right holders (or the enforcement authorities, for that matter) would have no recourse. In a system where censorship review can take a significant amount of time, that is not an insignificant failure in the enforcement system. So USTR took the step, and they took it very deliberately, after extensive discussions with China made clear that these issues were not going to be resolved without turning to the WTO 2007), available at http://www.worldtradelaw.net/cr/ds363-1(cr).pdf. The United States requested consultations with China concerning: (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g., video cassettes and DVDs), sound recordings and publications (e.g., books, magazines, newspapers, and electronic publications); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products. Current information on this dispute can be accessed at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds363_e.htm. 4 See Office of the U.S. Trade Representative, Pending WTO Disputes, http://www.ustr.gov/trade-topics/ enforcement/dispute-settlement-proceedings/wto-dispute-settlement/pending-wto-disputes. 5 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

602 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY as a neutral arbiter. There has been lots of discussion before and since about whether it was a good or a bad decision for the United States to take this case. One general pro is that the United States has rights at the WTO, and if a trading party is violating those obligations and violating those obligations in a manner that is causing significant harm to U.S. interests, then the United States should exercise its rights. But there have been a number of arguments for why this case was not a good idea. I am going to just refer to a few, and I think the panel may pick up on some of these as well. A first criticism is that the United States could lose the case. In my view, this would be deeply unfortunate, not just in terms of U.S. pride in our General Counsel’s Office at USTR, but, seriously, in terms of the consequences for TRIPs and what that means in terms of whether or not TRIPs has any effective meaning in terms of enforcement. On the other hand, litigation is always a risk. The United States has a strong case. To wait for a case without any risk would effectively mean that the United States would wait forever before litigating at the WTO. A second general criticism is that the case isn’t big enough, it’s not effective enough, it’s too limited in its scope. But where would this leave the United States, or any WTO member for that matter? Does that mean don’t bring a case until you are going to be able to bring a case that would wipe out piracy altogether, or don’t bring a case until you could put together a case that would revamp the entire enforcement system of China in one go? I think that is an unrealistic basis on which to judge the case. I think that if this case can remove some significant barriers from the Chinese enforcement system, then that is a benefit, and a benefit that would justify bringing the case. It is also true that the scrutiny from this case on China’s enforcement system may itself cause China to take a longer look at its system and make more sweeping changes. A third argument is that China will retaliate against U.S. companies. This was a risk. But fortunately, so far China has not resorted to those types of tactics, and I think that is in line both with China’s own interests and its recognition on some level that the WTO case, while not the happiest moment perhaps in the U.S.-Chinese IP relationship, is not intended by the United States as a hostile action, and it is not appropriate that U.S. companies should suffer for the United States’ making that decision. Another similar argument is that China will stop cooperating with the United States on IP matters. But to have that be a reason not to bring the case would essentially leave the United States hostage to China’s desires. China has taken the position formally that it is not cooperating, not discussing IP matters with the United States. I hope China will reconsider its position to not openly cooperate with the United States soon. But I also think that it is an open question regarding how significant the advances coming from future JCCT meetings would have been in any event.6 The last argument is that this case is unfair to China in some way, or this case is a sign that the United States does not adequately appreciate the kind of progress that China has made over the last few years. They have reformed some aspects of their system. I think it is undeniable that they have made some improvements, some significant improvements in some areas, less in other areas. But I think it is also undeniable that there are some significant deficiencies in China’s enforcement system. The issues that the United States is asking China to address in this case are not unreasonable. They are limited, and they fall squarely within China’s obligations under the TRIPs Agreement. To sum up, the cons I have heard tend to fall into one of several categories: the first being that the United States could lose; the second being some variation of the idea that the case isn’t big enough; and the third being some variation of China will be upset and there will be 6 Established in 1983, the U.S.-China Joint Commission on Commerce and Trade (JCCT) is a government-togovernment consultative mechanism that provides a forum to resolve trade concerns and promote bilateral commercial opportunities.

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negative consequences from that. All of these are risks and factors to weigh, and risks and factors that the United States did weigh. None of them to me are compelling reasons for the United States to not ultimately decide to exercise its rights at the WTO. In conclusion, I would like to raise one last point. There has been a fair amount of discussion about whether or not the United States can win this particular case and whether the United States could bring another, bigger case successfully against China’s enforcement system. The stats on the scope and extent of the counterfeiting problem in China have been recited exhaustively, so I am not going to repeat them here. However, I think it is clear to even a casual observer that there are criminal elements operating inside of China that are responsible for a vast amount of counterfeit and pirated consumer products and copyright works. The fact that there can be a reasonable debate about whether the United States has a case against China could be viewed as an indication of gaps in the TRIPs Agreement. Certainly it is true that TRIPs was negotiated at a time when counterfeiting and piracy operations did not have the sophistication and scope that they have today, and that the Internet had not made piracy and distribution of counterfeit goods as easy to do and as difficult to enforce against. That leads to the question of whether or not TRIPs is adequate to address the enforcement challenges that we face today and whether there is a need for new international standards to fight counterfeiting and piracy, such as those that the United States negotiates in its free trade agreements or those that the United States has proposed in the Anti-Counterfeiting Trade Agreement (ACTA) negotiations that the United States launched in October.7 I am not going to say more on that at this moment, but I think that is one of the interesting questions that we are facing right now in the international community. PROF. HANSEN: Thank you very much.

I think Justin wants to say something. PROF. HUGHES: I want to respond to a couple of the issues Victoria raised. As to those people who think the United States will lose the case or worry about the United States losing the case, no, the United States will not lose the case. The United States is not going to lose the case. The question is which part of the case the United States will lose. 7 The Anti-Counterfeiting Trade Agreement (ACTA) is a plurilateral trade agreement would impose strict enforcement of IP rights related to Internet activity and trade in information-based goods. The agreement is being secretly negotiated by the governments of the United States, the European Commission, Japan, Switzerland, Australia, New Zealand, South Korea, Canada, and Mexico. The treaty would establish an international coalition against copyright infringement, imposing a strong, top-down enforcement regime of copyright laws in developed nations. The agreement would allow border officials to search laptops, MP3 players, and cellular phones for copyright-infringing content. It would also impose new cooperation requirements upon Internet service providers (ISPs), including perfunctory disclosure of customer information, and restrict the use of online privacy tools. The proposal specifies a plan to encourage developing nations to accept the legal regime. See Proposed U.S. ACTA Multi-lateral Intellectual Property Trade Agreement (2007), available at http://wikileaks.org/wiki/ Proposed_US_ACTA_multi-lateral_intellectual_property_trade_agreement_(2007); see also http://jamie.com/2008/ 06/02/the-proposed-anti-counterfeiting-trade-agreement-acta-global-policy-implications; Presentation by Victoria Espinel and discussion, Chapter VII.A.3, Ad Hoc Multilateral Agreements: The Way Forward? The Proposed AntiCounterfeiting Trade Agreement (ACTA): Its Scope, Rationale, Possible Duplication in Other Areas, and Effect on the Role of WIPO and Other Multilateral Organizations, infra this volume; Chapter VII.C, IP Developments in China, infra this volume. Note: Subsequent to the Conference, ACTA was adopted at the 34th G8 Summit in July 2008. See Monika Ermet, G8 Governments Want ACTA Finalised This Year, SPLT Talks Accelerated, INTELL. PROP. WATCH, July 9, 2008, available at http://www.ip-watch.org/weblog/index.php?p=1136 (“Despite issues like the current food, energy and climate crises having taken centre stage at this week’s Group of 8 summit in Japan, governments did not lose sight of earlier plans to promote and more strictly protect intellectual property rights. The eight leaders in their document on the ‘World Economy’ called for finalising negotiations of the much-debated Anti-Counterfeiting Trade Agreement (ACTA) by the end of the year and also declared patent harmonisation a topic of high importance, asking for ‘accelerated discussions of the Substantive Patent Law Treaty (SPLT).’”).

604 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY I think if you study WTO IP disputes, you find that there is always some political cutting of the pie. If you look at the Fairness in Music Licensing case8 or the U.S.-EU Geographical Indications case9 or the EU-Canada Pharmaceutical case,10 panels and appellate bodies always search for something that they can give to each side. So when you bring three or four discrete issues in a case, you are kind of begging to ask which one are you going to lose. I am not sure which one the United States will lose, because I think they are all three very interesting arguments. So I don’t think anyone should walk out of this room asking, “Will the United States win or lose?” You need to look at the three components of this IP case and think about which one the United States might lose, or you think it is most likely to lose. Is the case big enough? I think the case is more than big enough, because I am a big believer that we need to be filling out over time a jurisprudence of Articles 41 and 61, the enforcement provisions of TRIPs, and you shouldn’t do that with a big case; you actually need to start small. Victoria knows ― she has heard me say it to her many times when she was in her office in D.C. ― that I thought we should have started with little cases against little countries — you know, bring an Article 41 action against Moldova — and get some meaning in some of these enforcement provisions before the United States takes on China. But in that sense, I think that these are pretty well crafted, narrow arguments. The only question I am worried about is which one might we lose politically, because I think that all three of them are good arguments. The only other thing I would say is that if you are actually talking to people about this case, do take a little bit of time to study it, because these are three very narrow claims: one brought on trademark thresholds and copyright thresholds; the straightforward copyright issue that Victoria described to you; the third one on Customs officials’ destruction of infringing seized goods. It is a complex argument. You know, we all gripe about WTO cases being long, the decisions being hundreds and hundreds of paragraphs. This is how bad it is: the United States’ executive summary in this dispute is fifteen pages and seventy-six paragraphs. Well, most executives I know wouldn’t consider that much of an executive summary. This is a very complex area. If you find yourself talking about it, try to think about in detail what is going on. PROF. HANSEN: Thank you. Susy? PROF. FRANKEL: Certainly there are gaps in the enforcement provisions, and I wouldn’t dispute that, but I want to look at this issue from a different angle. 8 Request for Consultations, United States — Section 110(5) of US Copyright Act, WT/DS160/1 (filed by the European Communities Jan. 26, 1999) [hereinafter WTO Dispute DS160], available at http://docsonline.wto.org/ DDFDoc uments/t/IP/d/16.DOC. The EC requested consultation on Section 110(5) of the U.S. Copyright Act, as amended by the Fairness in Music Licensing Act, Pub. L. No. 105-298, 112 Stat. 2827 (codified at 17 U.S.C.A. § 110(5)(B)), which was enacted on Oct. 27, 1998. The EC contended that Section 110(5) of the Copyright Law of the United States, 17 U.S.C. § 110(5), permits, under certain conditions, the playing of radio and television music in public places (bars, shops, restaurants, etc.) without the payment of a royalty fee. The EC considered that this statute is inconsistent with U.S. obligations under Article 9(1) of the TRIPs Agreement, which requires Members to comply with Articles 1–21 of the Berne Convention. A summary of the dispute is available at http://www.wto.org/english/ tratop_e/dispu_e/cases_e/ ds160_e.htm. 9 Request for Consultations, European Communities — Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs, WT/DS174/1 (filed by the United States June 1, 1999), available at http://docs online.wto.org/DDFDocuments/t/IP/d/19.DOC; Panel Report, European Communities — Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs, WT/DS174/R (Mar. 15, 2005), available at http:// docsonline.wto.org/DDFDocuments/t/WT/DS/174R.doc. A summary of the dispute is available at http://www. wto.org/ english/tratop_e/dispu_e/cases_e/ds174_e.htm. 10 Request for Consultations, Canada — Patent Protection of Pharmaceutical Products, WT/DS114/1 (filed by the European Communities Dec. 19, 1997), available at http://docsonline.wto.org/DDFDocuments/t/G/L/221.WPF. A summary of the dispute is available at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds114_e.htm.

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The TRIPs Agreement, as many of you know, is a minimum standards agreement. If one looks at the wording of Article 61, which Victoria mentioned, its opening sentence says, “Members shall provide for criminal procedures and penalties to be applied at least in cases of willful trademark counterfeiting.” “At least in cases” is significant ― we must consider why it is that the Agreement uses these words “at least.” First, at the time of negotiation, the idea of having these enforcement provisions was very much disputed. But what does this tell us about the U.S./China dispute? It tells us that it may be very difficult to resolve under these provisions because they do not go into the detail of enforcement that perhaps the United States seeks here. Additionally, Article 41(5) of TRIPs states that “it is understood that this Part does not create any obligations to put in place a judicial system for the enforcement of intellectual property rights distinct from that for the enforcement of law in general, nor does it affect the capacity of Members to enforce their law in general. Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.” This sub-article must influence any Panel to interpret the enforcement provisions in a way that is realistic, given a member, such as China, that is applying best endeavors to improve enforcement. The dispute settlement body of the World Trade Organization is not in this context a normmaking body. It frequently, in fact, calls on the World Intellectual Property Organization (WIPO) to advise it of current norms (the Copyright Section 110(5) case before the WTO being a case on point, where WIPO was asked for norms on fair use11). There is a danger in having a panel attempt to set norms within the framework of this dispute. It is neither its role nor function within the WTO. The WTO Dispute Settlement Understanding (DSU) expressly states that panels must interpret the treaties, not add to the treaties.12 Potentially, anything that looks like norm setting also might undermine negotiations in free trade agreements and in the WTO itself. It is likely that a panel will steer away from any direct norm setting, and that, because of that difficulty, it may therefore be better to pursue this out of the dispute settlement regime. PROF. HANSEN: Well, where could you do it? Is what you are saying is that TRIPs’ provisions are just really the start of negotiations in a dispute; that there is really no penalty or enforcement aspect? PROF. FRANKEL: No, that is not what I am actually saying. I am saying that the Dispute Settlement Body, under the DSU, is charged with interpreting the TRIPs Agreement, and the interpretation of the TRIPs Agreement is a matter of interpreting what is there. What is there is thin. If you want to make it thicker, I am suggesting you have to negotiate to make it thicker. Now, that does not mean that I am suggesting that there have not been negotiations. But, as many speakers have said in different contexts, that is a long and hard road. I do not think this diversion into the litigation mode is necessarily good for that process, partly because the body that is hearing it is ill-equipped to set norms. It is three people in a panel who are excellent experts (and I don’t just say that because one of them is a New Zealander) plus they have a secretariat. That is not an international negotiation on enforcement. If you want to progress enforcement worldwide ― certainly piracy is a problem ― you need to focus on that. There is, picking up on Johanna Gibson’s point earlier this morning,13 a danger of fragmentation of the enforcement issue here. WTO Dispute DS160, supra note 8. WTO Dispute Settlement: Legal Text, Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), Annex 2 of the WTO Agreement, available at http://www.wto.org/english/tratop_e/dispu_e/dsu_e. htm. 13 See Chapter VII.A.1, “The World Intellectual Property Organization”, supra this volume. 11

12

606 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. HANSEN: Daniel? PROF. GERVAIS: Thank you.

I will be a bit controversial, perhaps, and say that I think the legal outcomes, whatever the panel decides, even if the United States wins the case, may not have a huge legal impact on the Chinese system. However, the political impact of the United States’ winning this case will be potentially very significant. In fact, it may induce a reexamination of other aspects of Chinese law. Let me explain. This is a small-arms fire case, as has been mentioned by others. The heavy artillery is still in the hangar somewhere. For example, the complaint focuses on the limit on which criminal cases may be prosecuted. We all know that prosecutorial discretion exists, and that generally nobody prosecutes for one dollar. Somewhere between one dollar and the current minimum range in China there is a point where minds would meet. The counter-argument to that, of course, is that discretion is harder for pirates to guess than a set minimum amount in the law, which keeps them on their toes.On the approval for distribution issue, this is censorship. I think the United States is likely to win. But again I say so what? It is probably illegal under Berne14 and TRIPs for China to remove copyright protection when it censors a work or to make copyright dependent on the formality of distribution approval. However, Article 17 of Berne says that they can censor a work. So even if the panel were to restore copyright protection, the result is that you could use copyright law to fight pirates who are distributing that banned work illegally, but you still could not distribute your own work legally. Again, it looks like a political case more than a legal case. Still, its main practical application will be infringement cases filed between creation and the decision on censorship, which at this time do not seem to proceed. I do not know how significant the issue is, but it may be very real. Then there is the technical issue of auctioning goods after the removal of the trademark. A very interesting legal issue, but again not a crucial one. Yet, this case is very interesting. The way the panel will get to its conclusion may impact all future enforcement-related cases involving TRIPs. Many observers assumed, in the early days of TRIPs at least, that any enforcement-related case would be a non-violation case based on the language of Chinese laws and regulations. But I still think that any large case would be a non-violation case at some point. That would then force a panel to look at actual practice. PROF. HANSEN: Please explain “non-violation” case. That’s a term of art of which a lot of people might not be aware. PROF. GERVAIS: The traditional GATT,15 not TRIPs, being a very strange body of law — some people even hesitate to call it law, but I think it is — has a provision that says that there is a type of violation of the Agreement that does not require literal violation of an obligation in the Agreement. Basically, it is an effects-based test. You do not measure whether the Chinese statute measures up to TRIPs but whether the effect of implementing that statute meets the standard that is set in TRIPs. There is a political suspension of non-violation disputes in TRIPs. That suspension was originally in the Agreement itself for the first five years. It has been extended politically. That prevents a panel from saying: “Well, let’s forget what the statutes says in China and let’s look instead at the actual effect of enforcement and how it is actually applied.” As someone who works on WTO law, I would be curious to see a panel perform that kind of analysis. It would be significant work. But it is not going to happen in this particular case, obviously. 14 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 114, 1967, 102 Stat. 2853, 828 U.N.T.S. 221. 15 General Agreement on Tariffs and Trade (GATT), Oct. 30, 1947, 61 Stat. A-3, 55 U.N.T.S. 187 (1950).

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If I may, I can give you one quick example, namely the issue of these famous flexibilities in TRIPs, and specifically what is “commercial scale?” TRIPs says that criminal penalties must be available when the violation is on a commercial scale. I certainly agree with the U.S. submission that “commercial scale” is not the same as profit-making. But the question that has been raised is: Is there a conceptual link between “normal commercial exploitation” that you see in Articles 13, 26, and 30 and commercial scale? A great question. I think some unexpected things can come out of this panel report that will be much more important than who wins and who loses. PROF. HANSEN: Let me ask one question on the censorship issue. It seems to me that if China were really interested in censorship they would want copyright protection, because it would limit distribution before they make a decision whether it is proper. To drop copyright protection in connection with censorship seems like a scam because it would allow wide spread circulation before they get to censor it. Is a TRIPs panel able to look at the Chinese provision and say or indicate that a backdoor way to limit copyright protection rather than support censorship? In any case, pretty much everyone predicts that on this issue the U.S. will be a win. Am I right on that? PROF. GERVAIS: There is clearly a technical violation in not granting copyright, at least between the creation of the work and the decision on censorship. PROF. HANSEN: Do you agree that the U.S. will win on this issue, Susy? PROF. FRANKEL: Yes. I think that is a technical violation because it creates a formality for the grant of copyright. However, I agree with Daniel that “Where does that take you?” It is pretty clear under the Berne Convention Article 17 that you can censor. The difficulty is that there needs to be copyright protection before publication, before the circulation. When the Berne Convention provision was written, no one anticipated that censorship would be a mechanism by which copyright works would get pirated in the interim. People, in fact, thought they wouldn’t circulate until the censorship mechanism had taken place. So time has changed that and we need to be clear how you can combine the competing interests of copyright and censorship. PROF. HANSEN: Let me ask you, Susy: If you were in the USTR, would you have said don’t bring one of the claims; or perhaps don’t bring all three? PROF. FRANKEL: I think it reveals a very interesting debate about the link between censorship and copyright, which has a long and rich history. It goes back a long way. PROF. HANSEN: Beyond censorship, talking about the whole process, where would you have stood about bringing this case? PROF. FRANKEL: I agree that the censorship claim is a legal winner, because it is a clear violation of the formalities provision. But I also agree with the “So what?” Okay, you win this. What does a win achieve? How will the United States achieve enforcement of this? What are we going to have on the TRIPs enforcement stage? Perhaps, “Well, the United States doesn’t comply with the wins against it, and China doesn’t comply with the wins against it. And so where is the rest of the world?” PROF. HANSEN: The win is actually a psychological win. PROF. GERVAIS: That’s right. PROF. FRANKEL: Okay. But what is the point of the psychological win? PROF. HANSEN: What is the point of a psychological win anywhere? It is a better win than almost anything else. Give me the psychological win. You get more reaction from a psychological win than you get from anything else. PROF. FRANKEL: Not necessarily more enforcement action. That’s the point.

608 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. HUGHES: But “What do you get when you win?” comes up in every case. After the United States won the Geographical Indications case against the European Union, the European Union changed the law in a way that is extremely frustrating. PROF. FRANKEL: When is the United States changing its law? PROF. HUGHES: And the United States also fails to change its law. So “What do you get when you win?” is not a particularly interesting question to ask in a case brought against China. But one thing you do get, which we can’t talk about officially, whether we win or not, is what are we getting within China? That is extremely, extremely hard to measure. Obviously, the official Chinese reaction is: “You shouldn’t have done this. We are working extremely hard. You aren’t giving us adequate credit.” But I think that one realistic thing that is going on is this case actually helps those within China who are trying to push forward IP enforcement. In October 2007, Tian Lipu, the head of the Patent Office in China (SIPO), who has come out strongly against the U.S. case brought against China, said to a Communist newspaper in China: “Is intellectual property protection a problem? Yes, it is. But is it as serious as some say? Not necessarily. To a greater degree it’s hyped up and politicized. We cannot accept that. In fact, if China does not do [intellectual property] well, the biggest victim will be China itself. In these enforcement actions we discovered something more than 90 percent of the pirated disks were of Chinese artists.”16 Who is he talking to? Is he telling the United States, “Calm down, the piracy problem is our problem?” A little bit. But he is really talking to the Chinese constituency. He is saying, “Yes, the Americans brought this case, and yes, we can be a little angry about that, but the real thing is that the lack of enforcement is hurting us.” So he is trying to leverage the case to increase enforcement and to increase political acceptance within China of enforcement. And so those people who say, “Oh, this was a terrible idea for U.S.-China relations,” I just don’t think they are looking at the subtlety of what is going on at different levels.17 PROF. HANSEN: That is a very good point. Victoria, would you like to say something? MS. ESPINEL: I just want to pick up on a few comments. First, I agree with what Justin said. When in my remarks I talked about China’s openly cooperating with the United States, in some ways I was trying to signal that I think there is some distance between the Chinese official reaction to this case, which I think in some ways has to be what it is — in other words, official displeasure at the United States for bringing this case — and the reality, at least among some people in the Chinese government who do see intellectual property protection as a benefit, not just in terms of a better relationship with the United States, but as a benefit for China as a whole. It is my expectation that at some point China will reconsider its official position, but even before it does so, I think the situation is not necessarily as bleak as it may seem officially. I will not comment more on the back-and-forth about the pros and cons of the case, except that I just want to make clear that the United States’ goal in bringing that claim was not to get rid of China’s censorship system — that is clearly beyond the scope of this case — but it was to address what in China can be a significant amount of time before works are publicly distributed. 16 Reuters, “China Anti-piracy Battle ‘Will Take Generations’”, ZDNet News, Oct. 18, 2007, http://news.zdnet. com/2100-9588_22-6214154.html (statement by SIPO Commissioner Tian Lipu). 17 See Hearing on Intellectual Property Rights Issues and Imported Counterfeit Goods Before the U.S.-China Economic and Security Review Commission, June 7–8, 2006 (Statement of Professor Justin Hughes), available at http://www.uscc.gov/hearings/2006hearings/written_testimonies/06_00006_7_8_Hughes_Justin.pdf.

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Yes, that does raise some interesting ironies about how much the Chinese government is really concerned about the populace having access to these works. But there is a significant period of time in China where enforcement is literally impossible, legally impossible, under the Chinese system. I think that is a significant barrier and one that needs to be addressed. PROF. HANSEN: We have twelve other countries that are in this case. What have they been saying? What will they say? Are they going to be supporting the United States or are they going to be supporting China? Why did they join this case? Victoria? MS. ESPINEL: I think the fact that so many countries have signed on is a sign that there is a lot of interest. I’m certainly not going to speculate on the views of those countries. But I will say that I think there are a number of countries besides the United States that have pretty serious concerns about what is going on in China and I see them being impacted as well as the United States. PROF. HANSEN: Thank you all very much.

CHAPTER VII

International Trade & Intellectual Property

Part B: The Development Agenda – Current Issues with Regard to the Development Agenda Moderator PROF. COENRAAD VISSER

University of South Africa (Pretoria) Speakers JAMES LOVE

EVELYN MONTELLANO

Director, Knowledge Ecology International (Washington, D.C.)

Tauil, Chequer & Mello Advogados, Affiliated with Thompson & Knight LLP (Rio de Janeiro)

Commentator WEERAWIT WEERAWORAWIT

Deputy Secretary General, National Rights Commission, (Kingdom of Thailand) Panelists PROF. MARTIN J. ADELMAN

PROF. JOHANNA GIBSON

George Washington University Law School (Washington, D.C.)

Queen Mary, University of London Co-Director, QMIPRI

HON. RANDALL R. RADER

Court of Appeals for the Federal Circuit, (Washington, D.C.)

612 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. VISSER: Welcome to the session “Current Issues with Regard to the Development Agenda.”1 If you look at the topics, you will see that they are not really Development Agenda issues, although they are about exploiting TRIPs flexibilities. The way I want to organize the session is that we will have two main papers: first, James Love on TRIPs flexibility and exclusive rights, and we will have a fifteen-minute discussion after that; and then Evelyn Montellano on Brazil and patent law and TRIPs, and then we will have a further discussion after that. Without any further ado, James, would you give the first presentation?

The Overlooked Trips Flexibility: The Elimination Of Exclusive Rights James Love* I am here to talk about an overlooked flexibility in the TRIPs Agreement,2 in Article 44 of TRIPs. My argument is going to be that the TRIPs Agreement does not obligate parties that sign the TRIPs Agreement to implement patent or copyright laws in a way that involves the enforcement of the exclusive right; as long as countries provide either remuneration of compensation for the use of the work, every country could implement their patent laws and their copyright laws as liability rules. This has got to be a tough audience for that argument. I made this presentation at WIPO about two weeks ago. Have you ever looked at the second half of the second sentence of the second paragraph of Article 44 of the TRIPs Agreement? My presentation has to do with a few words in the last part of this paragraph. JUDGE RADER: Yes, but I have read it in context. MR. LOVE: I will go through it, I will make my argument, and then we can see what the rebuttals look like. The first paragraph of Article 44 of TRIPs deals with injunctions: 1. The judicial authorities shall have the authority to order a party to desist from an infringement, inter alia, to prevent the entry into the channels of commerce in their jurisdiction of imported goods that involve the infringement of an intellectual property right, immediately after customs clearance of such goods. Members are not obliged to accord such authority in respect of protected subject matter acquired or ordered by a person prior to knowing or having reasonable grounds to know that dealing in such subject matter would entail the infringement of an intellectual property right.

How many people here have read TRIPs? [Show of hands] So we have some TRIPs experts and some people who have heard of TRIPs, but probably from secondary sources. 1 Proposal by Argentina and Brazil for the Establishment of a Development Agenda for WIPO, available at http://www.wipo.int/documents/en/document/govbody/wo_gb_ga/pdf/wo_ga_31_11.pdf; see WIPO General Assembly Decision on Development Agenda, Oct. 4, 2004, available at http://www.cptech.org/ip/wipo/wipo10042004. html. When formally establishing the Development Agenda in October 2007, the WIPO General Assembly adopted a set of forty-five recommendations, available at http://www.wipo.int/ip-development/en/agenda/recommendations.html. * Director, Knowledge Ecology International, Washington, D.C. 2 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

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TRIPs has different parts. Part I is general principles. Part II specifies the obligations you have in terms of the rights that you have to give patents or copyrights, and they have some discussion of exceptions to rights. I think most people, since TRIPs came into force, have paid most of their attention to Part II. For example, in patents, Article 31, which describes limitations and exceptions in the area of patents. Or you would read maybe the parts of the copyright and trademark provisions that have to do with limitations and exceptions. There is another section after that, which is the enforcement part of TRIPs, Part III. Then, there are other parts down the road too, which I am not going to get to. There is only one Article in TRIPs that specifically deals with injunctions, and that is Article 44. The first paragraph more or less mirrors U.S. law. It says that the normal rule is that a country has to give a judicial authority the authority to issue injunctions to desist from infringements. That is normally the rule even in the United States, but it is not always the rule in the United States. The second paragraph deals with exceptions to the first paragraph: 2. Notwithstanding the other provisions of this Part and provided that the provisions of Part II specifically addressing use by governments, or by third parties authorized by a government, without the authorization of the right holder are complied with, Members may limit the remedies available against such use to payment of remuneration in accordance with subparagraph (h) of Article 31. In other cases, the remedies under this Part shall apply or, where these remedies are inconsistent with a Member’s law, declaratory judgments and adequate compensation shall be available.

Now, if you read this carefully — and I am not going to bother you with a careful parsing of the language — the language used in this Paragraph 2 is a little bit different than the language that you find in other parts of the TRIPs Agreement. It is not specifically, for example, only about Article 31 of TRIPs dealing with patents. And it is not even really specifically only about use by or for governments. It is “by governments, or by third parties authorized by a government.” The difference would be a judge would not be considered “authorized by a government” per se. So if a government would, for example, issue a compulsory license, that would be covered by the second sentence. Also, it is not even specifically about patents. That is another important point about this. I think you will see that as we look at some examples in U.S. law. But it is this last sentence that perplexed me: “In other cases, the remedies under this Part shall apply or, where these remedies are inconsistent with a Member’s law, declaratory judgments and adequate compensation shall be available.” To motivate how I got interested in this, I was looking at the eBay decisions.3 The United States was issuing basically compulsory licenses in lieu of enforcing an injunction in patent infringement cases. We were writing about this. We were wondering if the United States was consistent with the TRIPs Agreement, because they did not seem to be following the requirements of Article 31 of TRIPs.4 They did not, for example, limit exports only to cases involving 3 See MercExchange, LLC v. eBay, Inc., 500 F. Supp. 2d 556 (E.D. Va. 2007); eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 4 TRIPs, supra note 2, § 5: Patents, art. 31, Other Use Without Authorization of the Right Holder: Where the law of a Member allows for other use [other than that allowed under art. 30] of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected: (a) authorization of such use shall be considered on its individual merits; (b) such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.In...

614 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY remedies to anticompetitive practices. They did not require prior negotiation at “reasonable commercial terms.” All the things that you find in Article 31 were more or less thrown out by the judges in eBay. But when I looked at this Article 44, I found that the judges were actually consistent with TRIPs, because TRIPs does not require any of those things if it is dealing with a remedy to an infringement, as opposed to a front-end authorization. So you have to make a distinction between making an authorization on the front-end and a remedy to an infringement on back end. The eBay decisions are basically remedies to infringement. I am going to go through some provisions. One way Article 44 is implemented in the United States is 28 U.S.C. § 1498.5 This statute has four separate paragraphs. It deals with patents, copyright, plant breeders, and mask works and designs. situations of national emergency or other circumstances of extreme urgency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public non-commercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly; (c) the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive; (d) such use shall be non-exclusive; (e) such use shall be non-assignable, except with that part of the enterprise or goodwill which enjoys such use; (f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use; (g) authorization for such use shall be liable, subject to adequate protection of the legitimate interests of the persons so authorized, to be terminated if and when the circumstances which led to it cease to exist and are unlikely to recur. The competent authority shall have the authority to review, upon motivated request, the continued existence of these circumstances; (h) the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization; (i) the legal validity of any decision relating to the authorization of such use shall be subject to judicial review or other independent review by a distinct higher authority in that Member; (j) any decision relating to the remuneration provided in respect of such use shall be subject to judicial review or other independent review by a distinct higher authority in that Member; (k) Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f) where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive. The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases. Competent authorities shall have the authority to refuse termination of authorization if and when the conditions which led to such authorization are likely to recur; (l) where such use is authorized to permit the exploitation of a patent (“the second patent”) which cannot be exploited without infringing another patent (“the first patent”), the following additional conditions shall apply: (i) the invention claimed in the second patent shall involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent; (ii) the owner of the first patent shall be entitled to a cross-licence on reasonable terms to use the invention claimed in the second patent; and (iii) the use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent. 5 28 U.S.C. § 1498. Patent and Copyright Cases: (a) Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture. Reasonable and entire compensation shall include the owner’s reasonable costs, including reasonable fees for expert witnesses and attorneys, in pursuing the action if the owner is an independent inventor, a nonprofit organization, or an entity that had no more than 500 employees at any time during the 5-year period preceding the use or manufacture of the patented invention by or for the United States. Notwithstanding the preceding sentences, unless the action has been pending for more than 10 years from the time of filing to the time that the owner applies for such costs and fees, reasonable and entire compensation shall not include such costs and fees if the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust. ...

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Basically, these are cases where, if you use a patent or a copyright and the government is either the user or the government authorizes someone like Boeing or West Publisher or a contractor that works on behalf of the government to do something for them, you cannot get an injunction against the U.S. government, and you also cannot get an injunction against the other party. For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States. The court shall not award compensation under this section if the claim is based on the use or manufacture by or for the United States of any article owned, leased, used by, or in the possession of the United States prior to July 1, 1918. A Government employee shall have the right to bring suit against the Government under this section except where he was in a position to order, influence, or induce use of the invention by the Government. This section shall not confer a right of action on any patentee or any assignee of such patentee with respect to any invention discovered or invented by a person while in the employment or service of the United States, where the invention was related to the official functions of the employee, in cases in which such functions included research and development, or in the making of which Government time, materials or facilities were used. (b) Hereafter, whenever the copyright in any work protected under the copyright laws of the United States shall be infringed by the United States, by a corporation owned or controlled by the United States, or by a contractor, subcontractor, or any person, firm, or corporation acting for the Government and with the authorization or consent of the Government, the exclusive action which may be brought for such infringement shall be an action by the copyright owner against the United States in the Court of Federal Claims for the recovery of his reasonable and entire compensation as damages for such infringement, including the minimum statutory damages as set forth in section 504(c) of title 17, United States Code: Provided, That a Government employee shall have a right of action against the Government under this subsection except where he was in a position to order, influence, or induce use of the copyrighted work by the Government: Provided, however, That this subsection shall not confer a right of action on any copyright owner or any assignee of such owner with respect to any copyrighted work prepared by a person while in the employment or service of the United States, where the copyrighted work was prepared as a part of the official functions of the employee, or in the preparation of which Government time, material, or facilities were used: And provided further, That before such action against the United States has been instituted the appropriate corporation owned or controlled by the United States or the head of the appropriate department or agency of the Government, as the case may be, is authorized to enter into an agreement with the copyright owner in full settlement and compromise for the damages accruing to him by reason of such infringement and to settle the claim administratively out of available appropriations. Except as otherwise provided by law, no recovery shall be had for any infringement of a copyright covered by this subsection committed more than three years prior to the filing of the complaint or counterclaim for infringement in the action, except that the period between the date of receipt of a written claim for compensation by the Department or agency of the Government or corporation owned or controlled by the United States, as the case may be, having authority to settle such claim and the date of mailing by the Government of a notice to the claimant that his claim has been denied shall not be counted as a part of the three years, unless suit is brought before the last-mentioned date. (c) The provisions of this section shall not apply to any claim arising in a foreign country. (d) Hereafter, whenever a plant variety protected by a certificate of plant variety protection under the laws of the United States shall be infringed by the United States, by a corporation owned or controlled by the United States, or by a contractor, subcontractor, or any person, firm, or corporation acting for the Government, and with the authorization and consent of the Government, the exclusive remedy of the owner of such certificate shall be by action against the United States in the Court of Federal Claims for the recovery of his reasonable and entire compensation as damages for such infringement: Provided, That a Government employee shall have a right of action against the Government under this subsection except where he was in a position to order, influence, or induce use of the protected plant variety by the Government: Provided, however, That this subsection shall not confer a right of action on any certificate owner or any assignee of such owner with respect to any protected plant variety made by a person while in the employment or service of the United States, where such variety was prepared as a part of the official functions of the employee, or in the preparation of which Government time, material, or facilities were used: And provided further, That before such action against the United States has been instituted, the appropriate corporation owned or controlled by the United States or the head of the appropriate agency of the Government, as the case may be, is authorized to enter into an agreement with the certificate owner in full settlement and compromise, for the damages accrued to him by reason of such infringement and to settle the claim administratively out of available appropriations. (e) Subsections (b) and (c) of this section apply to exclusive rights in mask works under chapter 9 of title 17, and to exclusive rights in designs under chapter 13 of title 17, to the same extent as such subsections apply to copyrights.

616 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY This came up in the BlackBerry case,6 where BlackBerry said, “You can’t get an injunction against BlackBerry to the extent that BlackBerry was providing services not only to federal employees, but to contractors who were doing work for the government.” This is how BlackBerry basically opposed. The Justice Department entered a Statement of Interest in that case.7 So there is no possibility of an injunction — zippo, zero — and it is actually consistent with this. But also they do it in copyright cases. You cannot sue the U.S. government for copyright infringement and get an injunction. You can just sue for damages. So there is no injunction available against the U.S. government. A less-well-known statute is 42 U.S.C. § 2184,8 which deals with injunctions on compulsory licenses involving atomic energy. When the U.S. government issues a compulsory license in the United States to someone like Westinghouse for civilian nuclear energy, there are no injunctions available. You can get damages; you can get money. In this case, actually it is not really damage, but you get a royalty. But no injunctions. That is the law here. That goes to even civilian uses. The Copyright Office did another analysis in its 2006 Report on Orphan Works.9 One idea is you get a compulsory license on the front end. But they thought maybe that was too hard, with the Berne three-step test and everything.10 They said maybe a better way to do it is to think about remedies, and just limit remedies for uses of orphan works.11 So rather than give a compulsory license on the front end for orphan works, like Canada has done, the United States decided to focus on the issue of remedies. In the report, they noted that the Berne Convention has almost no rules on remedies.12 If you read what the Berne Convention has on remedies in the report, basically they leave it up to the governments what the remedies are. So the Berne Convention is very strong on the rights but almost silent on the issue of remedies. NTP Inc. v. Research in Motion Ltd. (RIM), 418 F.3d 1282 (Fed. Cir. 2005), cert. denied, 546 U.S. 1157 (2006). The Department of Justice filed a Statement of Interest in the BlackBerry litigation, explaining that the government had a substantial interest in ensuring that any injunction entered in that litigation would not interfere with government users. The Justice Department further stated that “the federal government may have a further interest in this case to the extent that it is vital for it to be able to communicate in real-time with private parties, including government contractors, through BlackBerry™ devices. The government is currently assessing the extent of its interest in such communications, and the extent to which the public interest would be impaired by the award of any injunctive relief” in favor of the plaintiff in that case. United States’ Statement of Interest, NTP Inc. v. Research in Motion, Ltd., 397 F. Supp. 2d 785 (E.D. Va. 2005), at 2. 8 42 U.S.C. § 2184, The Public Health and Welfare (January 2003): No court shall have jurisdiction or power to stay, restrain, or otherwise enjoin the use of any invention or discovery by a patent licensee, to the extent that such use is licensed by section 2183(b) or 2183(e) of this title. If, in any action against such patent licensee, the court shall determine that the defendant is exercising such license, the measure of damages shall be the royalty fee determined pursuant to section 2187(c) of this title, together with such costs, interest, and reasonable attorney’s fees as may be fixed by the court. If no royalty fee has been determined, the court shall stay the proceeding until the royalty fee is determined pursuant to section 2187(c) of this title. If any such patent licensee shall fail to pay such royalty fee, the patentee may bring an action in any court of competent jurisdiction for such royalty fee, together with such costs, interest, and reasonable attorney’s fees as may be fixed by the court. 9 Register of Copyrights, U.S. Copyright Office, Report on Orphan Works (Jan. 23, 2006), available at http://www. copyright.gov/orphan/orphan-report-full.pdf [hereinafter Report on Orphan Works]. 10 See id. at 61–62; see also Berne Convention for the Protection of Literary and Artistic Works, S. Treaty Doc. No. 99-27 (1986), 1161 U.N.T.S. 3 [hereinafter Berne Convention]. Art. 9.2 sets out the three-step test: “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author” (emphasis added). The United States formally acceded to Berne in 1988. Berne Convention Implementation Act, Pub. L. No. 100-568, 102 Stat. 2853 (1988). 11 Report on Orphan Works, supra note 9, at 115–19. 12 Id. at 65. 6 7

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The only real remedies obligations you have are under TRIPs or under some bilateral agreements that the Europeans, the Americans, or the Japanese impose on you.13 In the current proposal on orphan works, H.R. 5439,14 they take away the right of an injunction in the case where “the infringer recasts, transforms, adapts, or integrates the infringed work with the infringer’s original expression in a new work of authorship.”15 So this is a case where, if you pay reasonable compensation to the owner of the infringed copyright work, you cannot get an injunction to stop him from using it, even though he is clearly infringing. That is consistent with the TRIPs Agreement. I think the Copyright Office has done a good job of finding a clever way to deal with the orphan works problem without having to issue a front-end compulsory license. Now let me talk about some of the patent cases. These are the easy ones because they are discretionary. There is a possibility of injunction; it’s just that sometimes it is not given. The most recent patent case I read carefully was the Abbott decision, where the appeals court ordered the district court to issue a compulsory license in that case for Abbott for the life of the use.16 Johnson & Johnson was a compulsory license on a patent on a medical device from the Czech inventor.17 Microsoft protects its DRM technology, which is actually an infringing technology, infringing the z4 patents, and it got a compulsory license.18 And DirecTV,19 Toyota,20 and other companies too. They have used it in copyright in cases where architectural plans were infringed and they didn’t want the person to have to tear down the house.21 But actually, it turns out that this architectural issue is something that comes up. For example, in Canada and in India, there is black letter law that you cannot get an injunction to enforce a copyright for architectural plans. So there are other countries that are exploiting this idea that you can put a remunerative right in instead of an exclusive right. Now, there is nothing in Article 44 that says that it is just limited to architectural plans or civilian nuclear power or use by the United States government and not, say, the Brazilian government. These are just rules. Some countries have figured out different ways that they can use them. I was told by WTO that during the negotiations Singapore put in the last sentence of Article 44. The first sentence was very much the American sentence, because it followed very much American practice. But the second sentence looked very much like something else. I have asked someone in Singapore to do some research. Mary Wong is going to take a look at this to see why Singapore wanted that sentence in. But it was quite open-ended. So you could do a lot of things other than the ones I have given as examples. You could use it in education settings. For all I know, perhaps it is being used there. We are trying to look at some countries to see if the systems they have work this way. You could use it in standard setting. You could use it basically in all sorts of different ways. You could decide to impose remuneration systems instead of exclusive rights if you meet the compensation standard. Id. at 59. Orphan Works Act of 2006, H.R. 5439, 109th Cong. (2d Sess. 2006) (“To amend title 17, United States Code, to provide for limitation of remedies in cases in which the copyright owner cannot be located, and for other purposes”), available at http://thomas.loc.gov/home/gpoxmlc109/h5439_ih.xml. 15 Id. § 514(b)(2)(B). 16 Innogenetics, N.V v. Abbott Labs., 512 F.3d 1363 (Fed. Cir. 2008). 17 Voda v. Cordis Corp., No. CIV-03-1512, 2006 WL 2570614 (W.D. Okla. Sept. 5, 2006). 18 z4 Techs., Inc. v. Microsoft Corp., 507 F.3d 1340 (Fed. Cir. 2007), reh’g and reh’g en banc denied (Jan. 30, 2008), cert. dismissed, 128 S. Ct. 2107 (May 8, 2008). 19 Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323 (Fed. Cir. 2008), reh’g and reh’g en banc denied, 2008 U.S. App. LEXIS 13888 (May 29, 2008). 20 Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed Cir. 2007). 13 14

618 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY I will just remind people it is not an exception to the exclusive right; it is what you do to enforce the right. The Berne Convention, as I mentioned, does not set out norms for enforcement. Now, to read it in context — and Judge Rader is correct on that — you have to look at the rest of TRIPs. You have to read Article 41, Article 45, and particularly some people look at Article 50 and mention that. There are some standards that have to be met, and I think you have to look at those standards in light of how state practice has been done in the United States, in Canada, in India, and in other countries that are using this exception. Article 45 is interesting because you are allowed to specify “pre-established damages,” which could be a good way to think about upping liability rules in some areas of particular interest.22 I think it was designed to go in the other direction, but the words are what the words are. As you know, TRIPs is fairly literal. And then there is Article 50 on Provisional Measures: The judicial authorities shall have the authority to order prompt and effective provisional measures: (a) to prevent an infringement of any intellectual property right from occurring, and in particular to prevent the entry into the channels of commerce in their jurisdiction of goods, including imported goods immediately after customs clearance; (b) to preserve relevant evidence in regard to the alleged infringement.23 See Christopher Phelps & Assoc., LLC v. Galloway, 492 F.3d 532 (4th Cir. 2007). TRIPs Agreement, supra note 2, art. 45 Damages: 1. The judicial authorities shall have the authority to order the infringer to pay the right holder damages adequate to compensate for the injury the right holder has suffered because of an infringement of that person’s intellectual property right by an infringer who knowingly, or with reasonable grounds to know, engaged in infringing activity. 2. The judicial authorities shall also have the authority to order the infringer to pay the right holder expenses, which may include appropriate attorney’s fees. In appropriate cases, Members may authorize the judicial authorities to order recovery of profits and/or payment of pre-established damages even where the infringer did not knowingly, or with reasonable grounds to know, engage in infringing activity. 23 Id. art. 50. Provisional Measures: 1. The judicial authorities shall have the authority to order prompt and effective provisional measures: (a) to prevent an infringement of any intellectual property right from occurring, and in particular to prevent the entry into the channels of commerce in their jurisdiction of goods, including imported goods immediately after customs clearance; (b) to preserve relevant evidence in regard to the alleged infringement. 2. The judicial authorities shall have the authority to adopt provisional measures inaudita altera parte where appropriate, in particular where any delay is likely to cause irreparable harm to the right holder, or where there is a demonstrable risk of evidence being destroyed. 3. The judicial authorities shall have the authority to require the applicant to provide any reasonably available evidence in order to satisfy themselves with a sufficient degree of certainty that the applicant is the right holder and that the applicant’s right is being infringed or that such infringement is imminent, and to order the applicant to provide a security or equivalent assurance sufficient to protect the defendant and to prevent abuse. 4. Where provisional measures have been adopted inaudita altera parte, the parties affected shall be given notice, without delay after the execution of the measures at the latest. A review, including a right to be heard, shall take place upon request of the defendant with a view to deciding, within a reasonable period after the notification of the measures, whether these measures shall be modified, revoked or confirmed. 5. The applicant may be required to supply other information necessary for the identification of the goods concerned by the authority that will execute the provisional measures. 6. Without prejudice to paragraph 4, provisional measures taken on the basis of paragraphs 1 and 2 shall, upon request by the defendant, be revoked or otherwise cease to have effect, if proceedings leading to a decision on the merits of the case are not initiated within a reasonable period, to be determined by the judicial authority ordering the measures where a Member’s law so permits or, in the absence of such a determination, not to exceed 20 working days or 31 calendar days, whichever is the longer. 7. Where the provisional measures are revoked or where they lapse due to any act or omission by the applicant, or where it is subsequently found that there has been no infringement or threat of infringement of an intellectual property right, the judicial authorities shall have the authority to order the applicant, upon request of the defendant, to provide the defendant appropriate compensation for any injury caused by these measures. 8. To the extent that any provisional measure can be ordered as a result of administrative procedures, such procedures shall conform to principles equivalent in substance to those set forth in this Section. 21 22

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I have been in a lot of correspondence with the U.S. government and WIPO and WTO about the difference between the provisional measures and injunctions. It is our position that the provisional measures can only take you so far as the merits of the case will take you at the end of the day. So that’s my argument. Thank you very much. PROF. VISSER: Thank you.

May we have the first round of comments from the panel? I will limit them to two minutes each. PROF. ADELMAN: This is all very interesting. But remember, it turns on what is “adequate compensation.” I know that Jamie Love really doesn’t want the adequate compensation standard because his heroes, the generic drug companies, would be out of business if they lost a case, because the damages would be very great indeed. So I think this may really not take us very far. The only generic that I know of right now that is clearly challenging a patent is the one I mentioned yesterday, the Tarceva® patent in India, which is plainly valid.24 So far no preliminary injunction. There may be no injunction, but the court has ordered them to keep a complete accounting. If the court is honest — and we don’t know that for sure — Cipla will lose the case and suffer very, very substantial damages, which might put it out of business. And it should be out of business. This behavior really is beyond the pale. Okay, let’s say there is no injunction. How does that really advance the agenda, and the agenda is: “Let somebody else pay for the drugs. Don’t look at me. Don’t look at him. Tax the man behind the tree.” You essentially have things set up where you just do not want to pay. Jamie Love is trying to find all kinds of legal reasons to have somebody else pay for drugs. I think it’s a pretty bad idea. But I don’t see how just saying there are no injunctions helps, if the courts are honest in those jurisdictions that are supposed to provide adequate damages. Judge Rader, do you have a comment? JUDGE RADER: My comment would be somewhat along similar lines. You do have to have a remedy. You do have to enforce intellectual property. The standard, and probably the most effective remedy, will always be an injunction. If you give adequate damages, even in the United States, we will take into consideration in instances suggested by the eBay case,25 where there is a public interest, or maybe there is no reason to impose an injunction because damages will fully compensate. But the key will still remain on full and adequate compensation. As long as you are honest in enforcing the intellectual property, I am not sure what the advantage is of one form of enforcement over another, although in reality a strong injunction system does enhance the value of the intellectual property. And so at its core this argument is really intended to undermine the value of intellectual property. That in my mind never advances the agenda of any developing or developed state. I think intellectual property is the key to the economy. The economies of the world are geared to innovative products. We all have to have the fastest and the best. The economies will always be dominated by the innovative products. The nations that try to avoid innovation and policies that stimulate innovation are condemning themselves to a perpetual developing status, which we would hope they would choose to avoid. 24 On Mar. 19, 2008, the Delhi High Court granted a temporary reprieve to Cipla to manufacture and sell its generic version of Erlotinib (Tarceva®) in India. See Shaleen Agrawal, “HC Allows Cipla to Sell Roche Drug”, DNA Money, Mar. 20, 2008, available at http://sify.com/finance/equity/fullstory.php?id=14626687; see also discussion in Chapter V.B.1(b), “KSR and its Aftermath—Europe and Asia”, supra this volume. 25 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

620 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. VISSER: Johanna? PROF. GIBSON: I just have a couple of points.

One was more of a question regarding the possible limitation of this flexibility. It is not, strictly speaking, the elimination of exclusive rights. It is not about the scope or existence of rights, but merely about the sanctions. Certainly in the United Kingdom, for instance, we do have permitted use of a patent for limited purposes. For instance, we have Crown use for certain medical and defense purposes.26 Some of these things are in place. Regarding adequate compensation, the definition in the EU Enforcement Directive27 is “lost profits, unfair profits, and full economic loss.” I feel that, as a flexibility, perhaps the kind of potential that maybe you are looking at is more limited. I wonder if you could comment on that a little bit more. I have more questions coming out of the paper than answers. MR. WEERAWORAWIT: I think there is one constant in life, and that is death. When we talk about the TRIPs Agreement, I think it gives a lot of flexibilities. But when you talk about human life, about drugs, there is a very easy question: If you give a private patentee the absolute right, without any way that a state can intervene in reducing that kind of exclusive right, in certain circumstances it is as if you have handed him the power of God, if you believe in God, that God creates life and that we are born to die. So that is more than patent. I think that when we talk about the TRIPs Agreement it is the trade-related aspects of intellectual property rights. But trade has to be fair. I think throughout the history of patents they were meant to give the patentees the power of God. That is to say: “Hey, if you don’t pay us what we want, then you are doomed to die. You have to pay up.” That is a bit extreme, but that is one way of thinking, because intellectual property rights cannot be viewed in isolation from other rights that befit us as human beings. Should the AIDS/HIV-infected people be allowed to die because their governments, for whatever reason, cannot pay up, the people cannot pay up? That is my question. So I think flexibilities have been written in and should be exercised, and with courage, by developing countries rather than in a very haphazard way, like what we have seen up to now. PROF. ADELMAN: That can’t be a serious argument. Look, Thailand can afford to pay. It is a question of whether Thailand wants to pay. If they can get away without paying, so much the better for Thailand, so much the worse for the world. Canada used to do it, so it isn’t only Thailand. When I grew up, I didn’t know Canada was a Third World country. It turned out it was. They then changed after a while, which I didn’t really realize at the time, having grown up in Detroit. Canada did not want to pay and they felt that it would be better if the Americans paid. I understand that. Why aren’t the people in the United States — and they are getting close to this — saying, “Why should we pay?” So we’ll all die. These AIDS drugs were not developed in Thailand. These people would die if it were not for these drugs. The developers have to be paid. For Thailand to say, “The hell with it, it’s health, and therefore we are just going to steal it” — I don’t think that washes. So you do have to talk about fairness and who should pay and how much people should pay. There are many very wealthy Thais who should pay, just like there are very many wealthy Indians who should pay. There are many billionaires. I can take you down a street in Bombay and show you the houses of various billionaires. They shouldn’t pay? This argument goes nowhere. 26 U.K. Copyright, Design and Patent Act 1988, §§ 240, 244, 252; see also U.K. Intellectual Property Office, Manual of Patent Practice, § 58.1, available at http://www.ipo.gov.uk/practice-sec-058.pdf. 27 Parliament & Council Directive 2004/48, IPR Enforcement Directive, 2004 O.J. (L 157) 45, available at http:// europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_157/l_15720040430en00450086.pdf.

PART B: THE DEVELOPMENT AGENDA 621 PROF. VISSER: Thank you.

Let’s get some comments from the floor. Rochelle? QUESTION [Prof. Rochelle Dreyfuss, New York University Law School, New York]: I am not sure I agree with this interpretation of Article 44. But the following issue could come up in Article 31 also, so I am going to ask a question. How are you measuring remuneration? I would assume remuneration is what the patent holder could earn in that market. If the market cannot afford to pay, it doesn’t seem like remuneration would be very high. So if you are giving the drug to somebody who is rich in Bombay, then obviously remuneration would be high. That is, I take it that Jamie and Mr. Weeraworawit are trying to give this drug to the people who cannot afford to pay. I don’t know how you measure remuneration when the market can afford zero, when the patentee clearly was not counting on getting anything out of these people when they developed the drug. PROF. ADELMAN: I know a little about that. If you take the Novartis proposal for the drug Gleevec® in India, they make it available for people who cannot pay.28 QUESTIONER [Prof. Dreyfuss]: But if the right holder chooses not to do that, that is where the question arises. PROF. ADELMAN: Well, if the right holder chooses not to do that, but there are no damages because the people cannot pay, then the adequate compensation is very low. But what about the people who can pay? There are many people in Thailand and there are many people in India who can pay. They should pay. QUESTIONER [Prof. Dreyfuss]: I agree with that, but I don’t know whether those are the people Jamie is worried about. MR. WEERAWORAWIT: I think the problem is that you think of it as theft. PROF. ADELMAN: It is theft. MR. WEERAWORAWIT: It is not theft because it is allowed in the development of patents. What about state use? What about the announcement by the U.S. government on anthrax? There is the so-called state use. PROF. ADELMAN: Want me to tell you about anthrax? This is actually a fairly interesting story. Anthrax mainly reacts to Doxycycline, which is off-patent, a relatively cheap drug. At the same time, it was believed that Saddam had developed an anthrax that was resistant to Doxycycline, that the only thing it would respond to was Ciprofloxacin. Ciprofloxacin was still on-patent in the United States. There is a long story to that. There was an antitrust case against Bayer going on at the same time.29 Now, Secretary Thompson is a politician. One day he was panicked. Is he going to buy Doxycycline and all of a sudden it turns out that it’s ineffective? “I’ve got to have Cipro.” So he said, “I’m going to just buy it from a generic.” Now, somebody might have told him, “That’s very interesting, but you are going to have to pay a huge sum because Judge Rader is going to get hold of that case and there is going to be a huge award against the U.S. government. Why don’t you do the sensible thing and go negotiate with Bayer?” Now, Bayer wasn’t going to fight the U.S. government because there was an antitrust case against it. So guess what? Bayer got $100 million of found money, because we never did have to use the Cipro, and everybody walked away happy. This is the thing that is constantly thrown out — “Oh, the United States does this or that.” The story doesn’t wash. 28 See Ed Silverman, Novartis to India: ‘Generics Don’t Solve the Issue’, PHARMALOT, May 19, 2008, available at http://www.pharmalot.com/2008/05/novartis-to-india-generics-dont-solve-the-issue/. 29 See In re Ciprofloxacin Hydrochloride Antitrust Litig., 363 F. Supp. 2d 514 (E.D.N.Y. 2005).

622 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY MR. WEERAWORAWIT: That’s why we have international cooperation, rather than having the U.S. law imposed on other parts of the world. That is what is meant by international cooperation. We have the right to interplay the TRIPs Agreement for development. JUDGE RADER: Let’s think for just a second of the implications of what our colleague from Thailand suggests. Let’s assume that Thailand says they are not going to participate in the fight against AIDS. Now remember, this is not a Thai disease, it is not an American disease, it is not a Brazilian disease; it is a human disease. We all should do our full and fair share to fight and to try to find a cure. We have not yet found a cure for this disease. But let’s assume we all listen to the Thais; they say they don’t want to participate. Brazilians are probably next; they at different times have said they do not want to participate. India. We soon have all of Africa. What’s to stop many European countries, Canada? Before long, who will pay at all for the development of new drugs? Why wouldn’t I invest my capital in developing a new skin care drug, or maybe something that deals with removing wrinkles? I’ll invest my billions there. I’ll withdraw all my money from the research on AIDS and cancer drugs because those are going to be stolen by the world. No one is going to pay. What are the implications of this? It is very nice for us to advocate we don’t want to pay. But if the world begins to adopt the rather selfish perspective of some governments, wouldn’t we end up in a really sorry circumstance? Who would develop the cures? Who would pay for the development of the drug once it was developed? PROF. VISSER: We can have one more comment from the floor before we move on. QUESTION: I would suggest moving away from this being pharmaceutical products or not, because you can make a case with a lot of products. If I don’t eat, I will eventually die. So you can do the same with anything that has to do with food. I understand that there is a notion to say that when people are suffering and are in desperate need for a certain product, then it is politically a valid point to say, “I want to make it available to them.” However — and this is the point Judge Rader in my view correctly made — we should not center on whether this is theft or not. I don’t even think we need this. If you force a private enterprise to contribute to a need that we do not want to discuss why — this is existing — if you force a private enterprise to pay the bill, it is not the business of the private enterprise. What the patent system does is it gives a monopoly for a limited time and gives people the possibility to get back their invested money. I can find a likely cause of action for every patent, why people shouldn’t pay for this or that — decent housing materials should be available to poor people, and stuff like that. I think the bottom line is do not let private people pay for political targets. If you want the entire society to pay, you have to do it via taxes. That is the only way you can do it. PROF. VISSER: Thank you. We will have one short comment from Johanna and then Jamie. PROF. GIBSON: Just very quickly, I wonder if perhaps the target isn’t necessarily the patent system itself but the business models that are built on the patent system. I think that one thing the various positions have in common is that there are problems with the way the rights available are perhaps exercised in certain circumstances, which is more a question of the business model. If you look at the compulsory licenses in Thailand,30 one thing that is very interesting when we refer to the development aspect of that flexibility is that it is a question of capacity building and producing greater capacity in local drug development. 30 During 2006 the Thai government granted compulsory licenses for three patented drugs to the Government Pharmaceutical Organization of Thailand: On Jan. 26, 2006, for the heart disease drug clopidogrel (Aventis-Sanofi’s Plavix®) and the HIV/AIDS drug, lopinavir/ritonavir (Abbott’s Kaletra®); Nov. 29, 2006 for the HIV/AIDS medicine, efavirenz (Merck Sharp & Dohme’s Stocrin®). The compulsory licenses were granted on the ground that Thailand...

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Also, even defining what sorts of diseases qualify in times of national emergencies is important. The compulsory licenses were not just for HIV drugs, they were also for heart medication. Plavix® is a really interesting example, because it is a drug that patients cannot come off once prescribed because of the great risk of stroke and other side-effects of stopping the treatment. It is something that actually you become bound to. That was one of the drugs for which a compulsory license was sought. The European position is really more in favor of differential pricing, as distinct from compulsory licensing, because that seems to be more in keeping with the rationale of the patent system. It sustains the business models as such. It creates the markets that are required. It really answers these questions of adequate remuneration and so forth. I think one of the key issues is actually not so much this idea of the patentee, but the question of manufacturing capacity. What is critical when it comes to the supply of drugs is that if you do have a license to a particular manufacturer, do they even have the capacity to meet all of these demands? That is when a compulsory license can be incredibly relevant, because if you can produce it locally, then you can fulfill those production needs that may not even be possible by the manufacturer that has the license. So to me it’s business models. PROF. VISSER: Thank you. Jamie, two minutes. MR. LOVE: I think it is a bit unfair to sit here and have eight people go after everything except for what I presented on and then give me two minutes to respond. But I’ll do my best. First, I will say that no one said anything about my presentation in terms of the substance. The statement that TRIPs doesn’t require you to issue injunctions to enforce the exclusive right of patents or copyrights in cases where you provide adequate compensation has nothing to do with the conditions that are placed on compulsory licenses on the front-end. It’s not even subject to the three-step test under the copyright regime or the provisions of Article 31. All the examples I gave — and I hate to disappoint the panel on this — were from the U.S. market; they weren’t from Thailand or the People’s Republic of wherever. It is the United States of America. And it was actually by the Federal Circuit Court in the most recent one I looked at, which was the Abbott case.31 The royalty in the Toyota patent case was $25 per automobile for a car that can cost up to $30,000.32 You do the math on the rate. DirecTV was $1.60.33 JUDGE RADER: That one we rescinded and sent it back. That wasn’t enough. MR. LOVE: All right. But the Federal Circuit, a court in the United States of America, not in Thailand — $25 per automobile in Toyota and $1.60 per customer in DirecTV. JUDGE RADER: You’re missing the point that Professor Adelman, Johanna, and I made. The focus is on adequate compensation. In the case you mentioned, we did not impose an injunction, but we sent it back saying that $25 per car was not adequate compensation and ordered them to recalculate the adequate compensation. So we said, “You’ve got to pay for it.” Does that coincide with your understanding? MR. LOVE: The cases that I quoted were all from the United States. They were not from developing countries. is suffering a health emergency and the same are necessary for the government to fulfill its obligations of providing universal access to medicines to its people. See “Thailand Ministry of Pub. Health & Nat’l Sec. Office, Facts and Evidences on the 10 Burning Issues Related to the Government Use of Patents on Three Patented Essential Drugs in Thailand, Document to Support Strengthening of Social Wisdom on the Issue of Drug Patent” (2007), available at http://eng.moph.go.th/SpecificHealth/index.php. 31 Innogenetics, N.V v. Abbott Labs., 512 F.3d 1363 (Fed. Cir. 2008). 32 Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed Cir. 2007). 33 Finisar Corp. v. DirecTV Group, Inc., 523 F.3d 1323 (Fed. Cir. 2008), reh’g and reh’g en banc denied, 2008 U.S. App. LEXIS 13888 (May 29, 2008).

624 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY JUDGE RADER: That’s the system in your thesis, right, that they would have to pay

completely? MR. LOVE: No. I am the author of a 100-page report for UNDP and WHO on rules for remuneration in cases of non-voluntary authorization to use patents for medical technology.34 I can tell you that the statements that have been up here are consistent with some parts of U.S. law, not consistent with other parts of U.S. law, and totally not consistent with the TRIPs obligations. The TRIPs obligations don’t use the words “full compensation.” You do find that in 28 U.S.C. 1498, the government use provision.35 You do not find it in other compulsory licensing statutes in the United States, such as the ones involving the Clean Air Act or nuclear power.36 You don’t find it in the Orphan Drug Act compulsory licensing provision.37 You don’t find it in all sorts of other areas in U.S. law. In TRIPs they have multiple standards that they refer to. “Adequate remuneration” is a low standard. “Adequate compensation” is a low standard. “Reasonable commercial terms” is a higher standard. If you use a front-end compulsory license, in some cases you have to use the high standards; in other cases you do not. But for injunctions it is a low standard in the TRIPs Agreement. Now, people may think the TRIPs Agreement is a bad agreement. Most of the arguments here were based on policy, not what TRIPs says. As far as Thailand, I think it deserves a comment. The average income of the bottom 80 percent in Thailand in 2006 is $5.20 per day. Plavix®, which is owned by a French, not an American, patent owner, was priced at $2.00 a day. Their sales to the bottom 80 percent of the population were basically zero. They weren’t selling anything to that population. The government did a compulsory license for a heart disease drug. One of the persons in the government involved in it was suffering from heart disease himself. The price went from 77 baht to 1 baht in a couple of months. There was a pretty large mark-up on the product. It is only available for people in the public health service in Thailand. Now, $5.00 a day, which is what people live on in that country, the bottom 80 percent, is what some of the panel members here spend as a gratuity for lunch. There is a huge difference in income. If you don’t recognize that, it is, frankly, appalling. I think that you should really sober up a bit about the realities in developing countries before you make statements like that, because it is not really appropriate, in my opinion, in an international forum to be that insensitive to the problems and challenges people face, and basically living up to the obligations that we agreed to in 2001 in the Doha Declaration,38 to permit countries to use the flexibility of the TRIPs 34 James Love, “Remuneration Gudelines for Non-voluntary Use of a Patent on Medical Technologies”, TCM Series No. 18 (Dec. 2005) (published jointly by UNDP and the WHO), available at http://www.cptech.org/ jamie/papers/WHOremuneration4cl.pdf. 35 See supra note 5. 36 See Clean Air Act, 42 U.S.C. § 7608 (mandatory licensing of air pollution prevention inventions) (Title 42, the Public Health and Welfare); 42 U.S.C. § 2183 (nuclear energy) (“The Commission may, after giving the patent owner an opportunity for a hearing, declare any patent to be affected with the public interest if (1) the invention or discovery covered by the patent is of primary importance in the production or utilization of special nuclear material or atomic energy; and (2) the licensing of such invention or discovery under this section is of primary importance to effectuate the policies and purposes of this chapter.”); see also NASA Office of Technology Commercialization Program Office, Note on Governmental Use as Eminent Domain (Oct. 25, 1999); Nat’l Insts. of Health, Report of the National Institutes of Health (NIH) Working Group on Research Tools (June 4, 1998) (“As a government agency, NIH may use and manufacture any patented invention, whether or not developed with federal funds, and authorize its use and manufacture by others for the United States, without a license, subject to liability for ‘reasonable and entire compensation.’”). 37 The Orphan Drug Act (P.L. 97-414) amended the Federal Food, Drug and Cosmetic Act (FFDCA) as of Jan. 4, 1983. Additional orphan drug amendments were passed by Congress in 1984, 1985, and 1988. Orphan Drug Act 1983, § 527. 38 World Trade Organization (WTO), Ministerial Declaration of 14 November 2001, WT/MIN(01)/DEC/1, 41 I.L.M. 746 (2002), available at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm. See…

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Agreement to promote access to medicine for all in order for us to get a round of negotiations on things like services agreements. We should live up to our agreement. Thank you. PROF. VISSER: Thank you. Let’s move on to the second paper on Brazil and TRIPs.

Brazil And TRIPs: Does its Patent Protection Measure Up? Evelyn Montellano* Thanks, everyone, for having me here today. I must say that is quite a challenge to speak before this audience and especially in this panel, where two of my dear professors and mentors are sitting. It feels like I am defending a paper here. Thanks, again, for this opportunity. So, let’s talk about Brazil. Victoria Espinel was here yesterday explaining the reasons why the US decided to file that WTO case against China.39 She listed the Articles of the TRIPs Agreement that are being infringed, and I am here thinking … why not against Brazil? There are so many TRIPs violations taking place in that side of the equator. Like China, we fail to establish decent criminal procedures and penalties sufficient to prevent and discourage infringement. The remedies available in Brazil are far from being an efficient way to stop acts of infringement. But that is just a sample of several other TRIPs violations taking place in my country. Let me begin by saying that the Brazilian Patent Law introduced a forth patentability requirement for pharmaceutical patents. It says: “The granting of patents for pharmaceutical products or processes shall be dependent on prior ANVISA [National Sanitary Supervision Agency] consent.” 40 That means that ANVISA (our FDA) has the final word on whether an invention will be granted a patent or not. Yes, the decisions are very discretionary. And the National Institute of Industrial Property (INPI) (our Patent and Trademark Office) supports ANVISA’s hostile takeover of the patent system. generally Carlos M. Correa, Integrating Public Health Concerns into Patent Legislation in Developing Countries (2000); Carlos M. Correa, Implications of the Doha Declaration on the TRIPs Agreement and Public Health, WHO/ EDM/PAR/2002 (2002). * Tauil, Chequer & Mello Advogados, affiliated with Thompson & Knight LLP. 39 See Victoria Espinel, The U.S. Case Against China at the WTO, Chapter VII.A.2, “United States v. China in the WTO”, supra this volume; see also Request for Consultations, China — Measures Affecting the Protection and Enforcement of IP Rights, WT/DS362/1 (filed by the United States Apr. 16, 2007), available at http://docsonline. wto. org/DDFDocuments/t/G/L/819.doc; Request for Consultations, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/1 (filed by the United States Apr. 10, 2007), available at http://www.worldtradelaw.net/cr/ds363-1(cr).pdf. 40 By means of a provisional measure, a temporary law issued by the President of the Federal Republic of Brazil and later converted into federal law (Law 10.196 of Feb. 14, 2001), the Executive Branch introduced, as from Dec. 14, 1999, the mechanism of the “prior consent” (Anuência Prévia) into the Brazilian Industrial Property Act, available at http://www.wipo.int/clea/en/text_html.jsp?lang=EN&id=547. Article 229-C establishes that: “The grant of patents for pharmaceutical products and processes shall be subject to prior consent by the National Sanitary Supervision Agency (ANVISA).”Due to the lack of further regulation on the prior consent mechanism, ANVISA itself approved an Internal Administrative Norm implementing its competence for the concession of prior consent. Administrative Norm No. 593, (Aug. 25, 2000) art. 73-A: “The Coordination of Intellectual Property, based in the state of Rio de Janeiro, is competent to: … grant or deny prior consent by means of an analysis of the requests for patents for pharmaceutical products and processes, filed before the INPI, body bound to the Ministry of Development, Industry and International Trade, in accordance with the Law no. 10.196/2001, with the accessory of the General Management of Medications.” See generally Maristela Basso, “Intervention of Health Authorities in Patent Examination: The Brazilian Practice of the Prior Consent,” 1 Int. J. Intell. Prop. Mgmt. 54–74 (2006).

626 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY Our former Commissioner issued specific regulations stating that the INPI does not have the means to examine pharmaceutical applications without ANVISA’s discretionary interference on patentability requirements (usefulness) and claims against public health. Last but not least, ANVISA’s office actions and final decisions on prior approvals are not made public. So, one never knows why a patent application that was examined and approved by INPI was later rejected by ANVISA. ANVISA’s discretionary right of prior approval of any pharmaceutical patent application has stalled the patent system. It effectively denies patent rights to the industry. Exclusive rights on data packages submitted as a condition for approving the marketing of pharmaceutical products are being disregarded. Marketing approval for copies of patented products are being granted. TRIPs Article 39 and local laws are being violated, and nobody seems to care. The provisions for compulsory licensing in Articles 68–74 of the Brazilian Patent Law appear to violate Brazil’s obligations under the TRIPs Agreement. By allowing for compulsory licensing based on the “failure to manufacture or incomplete manufacture of the product,” the Brazilian Patent Law violates TRIPs Article 27.1 (i.e., particularly the prohibition against discrimination with respect to the enjoyment of rights based on “whether products are imported or locally produced”). Article 68 of the Brazilian patent law grants to third parties the right to seek a compulsory license in case of non-exploitation of every single independent claim of a patent in Brazil, by lack of manufacture or incomplete manufacture of the product. That means that, if a patent has ten independent claims, and nine of them are being produced in a Brazilian plant, the entire patent is subject to compulsory license for lack of local working. Also, the Law does not seem to include a specific requirement that a proposed user of a compulsory license make unsuccessful “efforts to obtain authorization from the right holder on reasonable commercial terms and conditions” prior to receiving a compulsory license, pursuant to TRIPs Article 31(b). Further Article 71 of the Law allows for ex officio granting of a compulsory license in “cases of … public interest,” which appears to be a more lenient standard than cases of “a national emergency or other circumstances of extreme urgency” pursuant to TRIPs Article 31(b). Brazil excludes subject matter that must be eligible for patent protection pursuant to TRIPs Article 27. ANVISA decided that second medical use patent applications will not be granted the necessary prior approval under the argument that those patents may cause “damages to the public health, to the country’s scientific and technological development, and difficult access to medicines overall.” Brazil’s sui generis system for plant variety protection also fails to protect many types of plant varieties, and thereby appears to lack the overall effectiveness required by TRIPs Article 27.3(b). The portion of the Brazil Examining Guidelines related to biotechnology and pharmaceuticals,41 as issued by the Brazilian Patent and Trademark Office, clarifies, in particular, that plants, animals, and parts thereof, including cells, are not patentable regardless of whether they are found or isolated in nature, or resulting from human manipulation.42 The permitted exclusions from patent eligibility pursuant to TRIPs Article 27.3(b) are limited to “plants and animals other than micro-organisms.” Articles 10 (IX) and 18 (III) of the Brazilian IP Law go far beyond this restriction, excluding from patentability “all or part of living beings, except transgenic microorganisms... .”43 To the extent that this exclusion for “all of part of living beings” excludes more than just “plants” and “animals,” the Brazilian IP Law violates Article 27 of the TRIPs Agreement. 41 See Guidelines for Examination of Patent Applications in the Fields of Biotechnology and Pharmacy filed after December 31, 1994 (unofficial translation). 42 Biotechnology Examining Guidelines, paras. 2.12.1–2.12.2, 2.13.4, 2.14. 43 Law No. 9279/96.

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The practice of reviewing patent applications in Brazil is known to be extremely slow, such that it may be possible to persuade a panel that the application systems lead to “unwarranted curtailment of the period of protection” for purposes of supporting an as applied action for violations of TRIPs Article 62.2. And, still, Brazil wants to talk about a Development Agenda. Last week I attended a luncheon organized by the Brazilian Intellectual Property Association (ABPI),44 where the speakers were our current Commissioner for the Brazilian Patent and Trademark Office and the Deputy Chief for the Brazilian Ministry of External Relations, Kenneth da Nóbrega. The latter made a presentation about the Development Agenda, which he described as “a necessary measure that will favor our current level of development and a fair property distribution.” I don’t know why it sounded like a communist speech. According to him, “the development agenda leaves room for the developing countries to create their own development policies.” In my view, intellectual property is only one element of the infrastructure needed to promote development. An appropriate policy framework in areas such as education, taxes, investment regulations, production and technical incentives, trade and competition is critical to stimulate development. Even a strong intellectual property system will not fulfill its potential as a means for development if no positive actions are taken by the government of each Member State. In this context, I believe that an intellectual property system can only be effective as a tool for development if there is in the Member States a commitment to pursue a decent governance, where extortion and corrupt practices are not permitted. PROF. VISSER: Thank you. We have five minutes for comments. Comments from the panel? JUDGE RADER: May I ask a question first? In the United States, if an administrative agency

like the FDA took an action, I could require, under the Administrative Procedure Act or some other Act, for them to justify their action. Is there nothing similar in Brazil that would require ANVISA to give stated reasons why it declines to give approval for something that the Patent Office has already granted? MS. MONTELLANO: Brazil is certainly a different animal. They said in public, actually on TV once, that it is really discretionary and the only things they are really taking into consideration while reviewing patent applications for approval is the public health and what they think is good or bad for the country.45 It is really that discretionary, unfortunately. JUDGE RADER: So there is no way to make them list in each case why they have rejected that patent? MS. MONTELLANO: Unfortunately, no. PROF. VISSER: Anyone from the floor? QUESTION [Prof. Susy Frankel, Victoria University of Wellington, New Zealand]: I want to return briefly to Article 44 and Jamie’s interpretation. When it comes to adequate remuneration I am sympathetic with the view that you are looking at the very territorial nature of where the patent is and you pay according to the market. However, I have spent a long time reading these provisions, largely in the context that was mentioned of the China dispute.46 Reading the whole enforcement section together gives a lot of context in light of the object and purpose about what these provisions are about. 44 The ABPI is a Brazilian association of members of the national and international industry. Its main goal is the local defense of the interests of those industries in the field of intellectual property. For ABPI’s position on ANVISA prior consent, see Resolution no. 63, Oct. 21, 2004, available at http://www.abpi.org.br/resolucoes/resolucao63.htm. 45 On May 4, 2007, Brazilian President Luiz Inácio Lula Da Silva announced on national television a compulsory license on patents controlled by Merck for the AIDS drug Efavirenz. 46 Request for Consultations, China — Measures Affecting the Protection and Enforcement of IP Rights, WT/ DS362/1 (filed by the United States Apr. 16, 2007), available at http://docsonline.wto.org/DDFDocuments/5/...

628 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY The sentence has troubled me for different reasons than you. It is in a weird place. What is it supposed to mean? Now, one of the difficulties of being the second sentence of a second paragraph there is how far can you take that context. I didn’t realize that it had come from Singapore, but I suspect that part of the rationale behind that is the kinds of things you cannot get injunctions for in Singapore. That would go beyond government use issues as well. It is very much directed to protect some of the things that Johanna mentioned also, that you cannot get injunctions for certain things in certain countries. It is not to be read as in any way attempting to change that law, just like the whole enforcement section is not to be read as saying “you have to change all of your law; you have to provide these adequate remedies.” I also think it is directed in part to the idea that injunctions are discretionary. Nothing in this is intended to say that an injunction becomes mandatory in any sense. I am sympathetic to looking at the interpretation in a broader way, but I suspect that that is some of the negotiation history that might be relevant. MR. LOVE: May I respond to that? PROF. VISSER: Any more comments on Evelyn’s paper before we revert to Jamie? If not, Jamie. MR. LOVE: I am certain the sentence originated because there were some cases where they did not give injunctions and they didn’t want to change their domestic law, just like the sentence before, I’m sure, was designed to protect U.S. state practice. The question is: Once it is there, what can you do with it? I think that the areas for fruitful discussion are similar. If you look at what the United States is doing, the United States is proposing in the Orphan Works Act47 that injunctive relief be eliminated for certain kinds of uses of orphan works, where there is a value-added function by a publisher. Someone else may think that there is an area, for example, in standard setting, where it really becomes problematic for high-technology firms that are investing a lot of money to be able to bring their products to market in a timely basis, and they may feel that you could take what is already happening in the eBay decision,48 which has changed the negotiating stance, and you could formalize it in a system. That may happen down the road. G/L/819.doc. The four matters on which the United States requests consultations are: (1) the thresholds that must be met in order for certain acts of trademark counterfeiting and copyright piracy to be subject to criminal procedures and penalties; (2) goods that infringe intellectual property rights that are confiscated by Chinese Customs authorities, in particular the disposal of such goods following removal of their infringing features; (3) the scope of coverage of criminal procedures and penalties for unauthorized reproduction or unauthorized distribution of copyrighted works; and (4) the denial of copyright and related rights protection and enforcement to creative works of authorship, sound recordings, and performances that have not been authorized for publication or distribution within China. Current information on this dispute can be accessed at http://www.wto.int/ english/tratop_e/dispu_e/cases_e/ds362_e.htm. Request for Consultations, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/1 (filed by the United States Apr. 10, 2007), available at http://www.worldtradelaw.net/cr/ds363-1(cr).pdf. The United States requested consultations with China concerning: (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g., video cassettes and DVDs), sound recordings and publications (e.g., books, magazines, newspapers, and electronic publications); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products. Current information on this dispute available at http://www.wto.org/ english/tratop_e/dispu_e/cases_e/ds363_e.htm. 47 Orphan Works Act of 2006, H.R. 5439, 109th Cong. (2d Sess. 2006). 48 See MercExchange, LLC v. eBay, Inc., 500 F. Supp. 2d 556 (E.D. Va. 2007), appeal dismissed, 273 Fed. App’x 857 (Fed. Cir. 2008)

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Someone else may think it is appropriate to think about it for some distance education use or something like that. So the question is not really, I think, are countries trying to do it across the board, because it would probably be highly problematic to have a compensation system that was that broad. But it may be that there are certain discrete problems that are really well managed under this provision, as the Copyright Office believes the orphan works problem will be in the United States. PROF. VISSER: I would like to thank the speakers and the panelists for their participation, also the audience for their participation, in this session. Thank you so much.

CHAPTER VII

International Trade & Intellectual Property Part C: China & Intellectual Property – IP Developments in China Moderator DARYL LIM

Research Scholar, Max Planck Institute of Intellectual Property (Munich) Speakers STEVEN TEPP

PROF. PETER K. YU

Policy Planning Advisor, U.S. Copyright Office (Washington, D.C.)

Drake University School of Law (Des Moines, IA)

PROF. DORIS ESTELLE LONG

John Marshall School of Law (San Francisco) Panelists ERIC H. SMITH

PROF. WANG QIAN

Greenberg Traurig LLP (Washington, D.C.)

East China University of Politics and Law (Shanghai)

MR. LIM: Welcome to our final session on IP developments in China. My name is Daryl Lim. I’m presently at the Max Planck Institute in Munich. I am privileged to introduce the three speakers that we have today. Our first speaker is Steven Tepp. Steve is Policy Planning Advisor at the U.S. Copyright Office. He is principally responsible for all international copyright matters in the Asia/Pacific region. Steve will be bringing us up-to-date on recent copyright developments in China. Our second speaker is Professor Peter Yu. Peter is the Kern Family Chair in IP Law and Director of the IP Law Center at Drake. He will consider the interesting question of whether being host to the Olympics will

632 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY cause China to increase its IP protection.1 Our third speaker is Professor Doris Long. Doris is a Professor and Chair of the IP, IT and Privacy Group at John Marshall School of Law. Earlier today, Doris spoke on ambush marketing in the context of the Beijing Olympics [see Chapter VII.D, “Event-Driven Marks and “Ambush” Marketing”, supra this volume]. I look forward to her sequel. We are also privileged to have two well-selected commentators. Mr. Eric Smith, from Greenberg Traurig, led the International IP Alliance to China in November 2006, where he held discussions with top political leaders, including Vice Premier Wu Yi, on IP protection in China. Professor Wang Qian, from East China University of Politics and Law, will give us an intimate view on developments in China. Can I now invite Steve to start us off?

Recent Copyright Developments in China Steven Tepp* Thank you very much. For those of you who were here for the previous panel [Chapter VIII.A.3, International Trade, Asia, Ad Hoc Multilateral Agreements: The Way Forward?, supra this volume], I will entertain no questions regarding the U.S. Trade Representative (USTR)2 or ACTA.3 This year, in particular, it is something of a challenge to discuss IP developments in China.4 Obviously, everything that is going on in intellectual property in China is in the context of the World Trade Organization (WTO) dispute resolution that is currently pending in Geneva.5 1 See National Working Group for IPR Protection, Ministry of Commerce, IPR Special: 2008 Beijing Olympic Games, available at http://www.chinaipr.gov.cn/en/iprspecials/BeijingOlympic/index.html; Regulation on the Protection of Olympic Symbols (July 22, 2005), available at http://www.chinaiprlaw.com/english/laws/laws21.htm. 2 Office of the U.S. Trade Representative (USTR), Special 301 Report China (Apr. 25, 2008), available at http:// www. ustr.gov/Document_Library/Press_Releases/2008/April/USTR_Issues_2008_Special_301_Report.html. * Policy Planning Advisor, U.S. Copyright Office, Washington, D.C. 3 The Anti-Counterfeiting Trade Agreement (ACTA), a plurilateral trade agreement, would impose strict enforcement of IP rights related to Internet activity and trade in information-based goods. The agreement was negotiated by the governments of the United States, the European Commission, Japan, Switzerland, Australia, New Zealand, South Korea, Canada, and Mexico. The treaty would establish an international coalition against copyright infringement, imposing a strong, top-down enforcement regime of copyright laws in developed nations. The agreement would allow border officials to search laptops, MP3 players, and cellular phones for copyright-infringing content. It would also impose new cooperation requirements upon Internet service providers (ISPs), including perfunctory disclosure of customer information, and restrict the use of online privacy tools. The proposal specifies a plan to encourage developing nations to accept the legal regime. See Proposed U.S. ACTA Multi-lateral Intellectual Property Trade Agreement (2007), available at http://wikileaks.org/wiki/Proposed_US_ ACTA_multi-lateral_intellectual_property_trade_agreement_(2007); see also Presentation by Victoria Espinel and discussion in VIII.A.2, United States v. China in the WTO, supra this volume; Chapter VIII.A.3, “Ad Hoc Multilateral Agreements: The Way Forward?”, supra this volume. Note: Subsequent to the Conference, ACTA was adopted at the 34th G8 Summit in July 2008. See Monika Ermet, G8 Governments Want ACTA Finalised This Year, SPLT Talks Accelerated, INTELL. PROP. WATCH, July 9, 2008, available at http://www.ip-watch.org/weblog/index.php?p=1136 (“Despite issues like the current food, energy and climate crises having taken centre stage at this week’s Group of 8 summit in Japan, governments did not lose sight of earlier plans to promote and more strictly protect intellectual property rights. The eight leaders in their document on the ‘World Economy’ called for finalising negotiations of the much-debated Anti-Counterfeiting Trade Agreement (ACTA) by the end of the year and also declared patent harmonisation a topic of high importance, asking for ‘accelerated discussions of the Substantive Patent Law Treaty (SPLT).’”). 4 Legislation relating to IPR rights in China: Copyright Law of the PRC (中华人民共和国著作权法) and the Implementing Rules for the Copyright Law of the PRC (著作权集体管理条例) (adopted and promulgated in 1990, revised 2001), available at http://www.chinaiprlaw.com/...

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As we heard yesterday, bilateral contacts between the United States and China have almost completely ceased since the filing of the case.6 So, for example, I do not have the timely firsthand information that I might have had in previous years. The Joint Commission on Commerce and Trade (JCCT)7 has not met since the dispute was filed. My office, the U.S. Copyright Office, has not had the opportunity to travel to China for an extended period. I think that is unfortunate. But obviously, the possibility of a breakdown in bilateral talks was something that the U.S. government anticipated when it considered whether or not to file the WTO case. And equally obviously, the calculation was made that any progress that was coming out of meetings like the JCCT was insufficient and unsatisfactory, thus compelling the case. Having said all that, I do want to note that the Copyright Office in the United States and the National Copyright Administration of China (NCAC) have had a long, and I think very special, english/laws/laws10.htm. In order to implement the Berne Convention and the Universal Copyright Convention, as well as bilateral copyright treaties signed between the PRC and other foreign countries, the PRC government passed the Regulations on Implementation of International Copyright Treaties (1992). Prior to PRC accession to the Berne Convention, computer software was not treated as a kind of literary work under the Copyright Law. In May 1991 the State Council passed the Computer Software Protection Rules, and the Measures for Computer Software Copyright Registration were formulated by the then Ministry of Engineering Electronics Industries. The Berne Convention and these two domestic computer regulations are co-effective (in the event of any inconsistencies, the Berne Convention prevails). Though the Berne Convention does not require any copyright registration, it is necessary to register copyright for literary works in the PRC, in order to avoid any disputes with regard to ownership. Nevertheless, registration procedures are not compulsory in order to receive copyright protection, though seeking redress for any violations can be difficult without previous registration. The Trademark Law of the People’s Republic of China (中华人民共和国商标法) (passed 1982, revised 1993, 2001), available at http://www.chinaiprlaw.com/english/laws/laws11.htm, sets out general guidelines on administration of trademarks, protection of trademark owners’ exclusive rights, and maintenance of quality of products or services bearing the registered trademarks, “with a view to protecting consumer interests and to promoting the development of the socialist commodity economy.” Adhering to art. 4 of the Paris Convention, the Chinese government passed the Provisional Regulations Governing Application for Priority Registration of Trademarks in China to grant the right of priority to trademark applications submitted in PRC by the nationals of the Paris Convention member countries. The Patent Law of the PRC (中华人民共和国专利法) (passed 1984, amended 1992, 2000), available at http:// www. chinaiprlaw.com/english/laws/laws4.htm. The Law has been further clarified by the Implementing Regulations of the Patent Law of the PRC. China is a part of the WIPO Patent Cooperation Treaty (PCT); thus, a single patent application can be made for multiple countries, including China. In order to receive legal protection, patents must be registered through an authorized Chinese patent agency, appointed by the State Intellectual Property Office (SIPO). 5 See Request for Consultations by the United States, China — Measures Affecting the Protection and Enforcement of IP Rights, WT/DS362/1 (filed Apr. 16, 2007), available at http://docsonline.wto.org/DDFDocuments/t/G/L/819. doc. The four matters on which the United States requests consultations are: (1) the thresholds that must be met in order for certain acts of trademark counterfeiting and copyright piracy to be subject to criminal procedures and penalties; (2) goods that infringe intellectual property rights that are confiscated by Chinese Customs authorities, in particular the disposal of such goods following removal of their infringing features; (3) the scope of coverage of criminal procedures and penalties for unauthorized reproduction or unauthorized distribution of copyrighted works; and (4) the denial of copyright and related rights protection and enforcement to creative works of authorship, sound recordings, and performances that have not been authorized for publication or distribution within China. Current information on this dispute can be accessed at http://www. wto.int/english/tratop_e/dispu_e/cases_e/ds362_e.htm. Request for Consultations by the United States, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/1 (filed Apr. 10, 2007), available at http://www. worldtradelaw.net/cr/ds363-1(cr).pdf. The United States requested consultations with China concerning: (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g., video cassettes and DVDs), sound recordings and publications (e.g., books, magazines, newspapers, and electronic publications); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products. Current information on this dispute can be accessed at http://www.wto.org/english/tratop_e/ dispu_e/cases_e/ds363_e.htm. 6 See Chapter VIII.A.2, “United States v. China in the WTO”, supra this volume. 7 Established in 1983, the U.S.-China Joint Commission on Commerce and Trade (JCCT) is a government-togovernment consultative mechanism that provides a forum to resolve trade concerns and promote bilateral commercial opportunities.

634 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY relationship, and one that does continue. Our two offices have engaged in a series of exchange programs and study tours of each other’s countries for over twenty years. I have had the opportunity to participate in some of those, both in China and in the United States. In fact, presently a member of the NCAC has nearly completed a year-long study visit to the U.S. Copyright Office in Washington. In fact, he took time out from his home leave in Beijing to fly all the way here to New York for this conference. I appreciate that he did that. Another concern that existed when consideration was being given to filing the case was whether IP enforcement in China would be curtailed or halted entirely as a result of the filing, as a form of retribution. That has not happened. In fact, Chinese authorities have reported substantially increased activity in a number of regards in 2007.8 The IPR Court of the Supreme People’s Court of China has announced that it accepted 128 IPR cases in 2007, up 18 percent from 2006.9 Let me note before I go any further on the statistics, because I have a number of them, that many of these statistics refer to “IPR cases” and “IPR violations.” That obviously is an umbrella term, not just copyrights. Since I am from the Copyright Office, my remarks are confined to copyright issues. To a great extent, the case that is pending before the WTO involved copyright claims. The combining of statistics into the umbrella “IPR” can be used to mask relative deficiencies on the copyright side, as at least I have noticed on some instances in the past. 8 See State Intellectual Property Office (SIPO), National Copyright Administration China (NCAC), & Trademark Office under the State Administration for Industry and Commerce, China’s Intellectual Property Protection in 2007 (Apr. 18, 2008) [hereinafter China’s IP Protection in 2007], available at http://english.ipr.gov.cn/ipr/en/info/Article. jsp?a_no= 198450&col_no=102&dir=200804: 2007 was important in the development of intellectual property rights in China. President Hu Jintao brought forward the “Implementation of Intellectual Property Rights Strategy” in his report to the Seventeenth National Congress of the Communist Party of China. The study on 20 special topics related to national IP strategy concluded as planned. Research on the Outline of National Intellectual Property Rights Strategy was substantial, and an overall plan for the future development of intellectual property rights in China was established with the basic direction for the further development of intellectual property rights work in all aspects defined. According to the Party Central Committee and the State Council, the national intellectual property rights strategy has now shifted from “formulation” to “implementation,” which indicates that the intellectual property rights work of China is now entering a new development phase. Id. at I; see also National Working Group for IPR Protection, Ministry of Commerce, IPR Special, China’s IPR Progress in 2007, available at http://www.chinaipr.gov.cn/en/iprspecials/iprprogress2007/index.htm; State Intellectual Property Organization (SIPO), White Papers on China’s Intellectual Property Rights Protection in 2007 (May 6, 2008), available at http://www.sipo.gov.cn/sipo_English/laws/whitepapers/200805/t20080506_395881. htm [hereinafter SIPO White Papers]; National Working Group for IPR Protection, Ministry of Commerce, IPR Special, China’s IPR Progress in 2007, available at http://www.chinaipr.gov.cn/en/iprspecials/iprprogress2007/index. htm; Hu Jintao, Implementation of Intellectual Property Rights Strategy, Speech Before 17th National Congress of the Communist Party of China (Oct. 15, 2007), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_ no=129308&col_no=925&dir=200710 9 See Press Release, State Intellectual Property Office (SIPO), Supreme Court: 18 Percent More IP Cases in 2007 (Jan. 8, 2008), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=165723&col_no=925&dir=200801. Statistics, judgments, and case analyses available at http://www.chinaiprlaw.com/english/default.htm; see also Jiang Zhipei, Deputy Chief Judge of the Intellectual Property Trial Chamber of the Supreme Court of China, Judicial Protection of Copyright and Neighboring Rights in China (May 23, 1998), available at http://www. chinaiprlaw.com/english/forum/forum7.htm. In 2007 local courts heard and concluded, respectively, 17,877 and 17,395 civil first trial IPR cases, an increase of 25.7 percent and 23.8 percent over the previous year. They heard and concluded respectively 2,865 and 2,870 civil second trial IPR cases, an increase of 6.7 percent and 8.2 percent over the previous year. They also accepted thirty-nine IPR cases, three cases less than the previous year, and concluded forty-five cases. Local courts heard and concluded 2,684 criminal IPR cases concerning infringement of intellectual property. Verdicts on 4,328 persons resulted in legal effect and 4,322 people were sentenced guilty. China’s IP Protection in 2007, supra note 8, at IX; see also 4,322 IPR Criminals Sentenced in 2007, IPR in China (Apr. 16, 2008), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=197583& col_no=925&dir=200804.

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Moving ahead, in one instance that was dedicated to copyright, the NCAC had an online crackdown last year that resulted in 1,001 administrative cases — not criminal, but administrative cases — and that number was 60 percent more than the number of online administrative cases in 2005 and 2006 combined.10 Autodesk, a high-end business software manufacturer, won a civil infringement case in Jiangsu Province and was awarded just under 70,000 renminbi, which I believe is a little bit under $9,000.11 The infringer in that case was also administratively fined 800,000 renminbi (about $100,000). While the civil award was not necessarily substantial in the U.S. context, in the Chinese context, particularly for an end-user infringement, both of those were notably high, at least in comparison with the past. I will also note in passing that some of you may be aware that the software industry in the United States is generally not part of the WTO case. Some more statistics: • The General Administration of Customs of PRC (GACC) reported handling just over 3,300 IPR cases — there is that “IPR” again — in 2007, up 34 percent from 2006.12 10 See Press Release, National Working Group for IPR Protection, Ministry of Commerce, “China Intensifies Crackdown on Internet Piracy” (Jan. 18, 2008), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_ no=169292&col_no=925& dir=200801 (“Yan Xiaohong, vice minister of the National Copyright Administration (NCA), said … that the authorities shut down 339 illegal websites, confiscated 123 servers and imposed fines of more than 870,000 yuan (about 120,000 U.S. dollars) on violators.”). 11 See Press Release, NTD Patent & Trademark Agency, Ltd., “Enterprise in Jiangsu Fined 800,000 Yuan for Using Pirated Software” (Jan. 22, 2008), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=170393&col_ no= 128&dir=200801. In 2005 Autodesk sued Viscount Industries (Kunshan) Co. Ltd. for copyright infringement in Suzhou Intermediate People’s Court in Jiangsu Province. The court ruled that Viscount Industries should compensate Autodesk a total of RMB 69,400 for its loss and reasonable expenses and pay the costs of the action. In addition, the Jiangsu Copyright Administration imposed a fine of RMB 800,000 upon Viscount Industries, ordered it to immediately remove the infringing software of Pro-engineer2001, MasterCAM 9.1, AutoCAD2004 and AutoCAD2005 from the computers. The April 2006 complaint to the Jiangsu Copyright Administration (JCA) indicated that several computers owned by Viscount Industries were installed with pirated software. The JCA, in cooperation with local police and the Administration for Industry and Commerce, inspected the company and found four computers in Viscount Industries were installed with unauthorized software of Pro-engineer2001, MasterCAM 9.1, AutoCAD2004 and AutoCAD2005, with a value of RMB 2.7 million. Autodesk was the first foreign software company to sue a domestic user for copyright infringement and win. In 2002 it won a landmark case after proving that a Chinese TV production company was using an unlicensed version of a highly specialized, $200,000 software product. Including that case, Autodesk has since received favorable settlements in about half a dozen cases. The first instance award issued by Beijing No. 1 Intermediate People’s Court ordered the defendant to stop infringement activities, pay Autodesk 445,000 RMB yuan as compensation and a fine of 80,000 RMB yuan. See Jiang Zhipei, Deputy Chief Judge of the Intellectual Property Trial Chamber of the Supreme Court of China, “Judicial Protection of Copyright and Neighboring Rights in China”, China IPR Law, May 23, 1998, http://www.chinaiprlaw. com/english/forum/forum1.htm (password required). In December 2005, the Qingdao Copyright Administration examined the computers in the company and found they installed pirated software of Pro/E, Windows 2000, Office 2002, Office 2003, AutoCAD 2002, AutoCAD 2004, and AutoCAD 2005, the copyrights of which were owned respectively by Parametric Technology Corporation, Microsoft, and Autodesk, which instituted a proceeding. The Qingdao Intermediate People’s Court held that, according to the Berne Convention and the Copyright Law of China, the copyrights of the three foreign companies shall be protected in China and that the defendant should stop the infringement and compensate about RMB 2 million to the plaintiffs. See Press Release, ND Patent & Trademark Agency, Ltd., “Chinese Company Ruled to Compensate for Using Pirated Software” (Apr. 28, 2008), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=201484&col_ no=128&dir= 200804; “Newsletter Regarding IPR”, China Daily, May 6, 2008, available at http://english.ipr.gov.cn/ ipr/en/info/Article.jsp?a_no=211741&col_no=882&dir=200806. See Press Release, ND Patent & Trademark Agency, Ltd., “Chinese Company Ruled to Compensate for Using Pirated Software” (Apr. 28, 2008), available at http:// english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=201484&col_no=128&dir= 200804. 12 Since the State Council issued the Order of Protection of IP in May 1994, Chinese Customs is authorized to protect IPRs relating to articles imported into and exported from China, including patents, trademarks, and copyrights. The Regulations on Customs Protection of Intellectual Property Rights (中华人民共和国知识产权海关保护条例) (June 1995), strengthened border control to stop counter-feited goods from coming into, or leaving, the PRC, available…

636 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY • China reported a 53 percent increase in the number of firms using licensed software in 2007, up from early 2006.13 • Shanghai courts reported accepting over 1,200 IPR cases in 2007, up 10 percent from 2006.14 • Authorities in Zhejiang and Henan raided seven optical disc plants in January of this year and reported seizing over 6,000 masters. Having said all that, you might think: Hey, there’s really some improvement there. I would hasten to add that at the conclusion of the online crackdown the NCAC performed that I mentioned earlier, the Vice Minister of NCAC stated that: “Fines and sentences meted out have not been enough. We must make offenders realize the costs of violation are too high for them to continue.”15 So what is the right conclusion? Hard to say for certain. One could say that China is trying to put on a good face in light of the case that has been filed, to put themselves in the best light in terms of being active in enforcement and raids and that sort of thing. One could say, as perhaps one of the members of the panel will discuss, that it is related to the Olympics and the attention of the world being focused on China. Or one could say that generally enforcement in China has been trending up. I am not going to make any conclusions myself. But I do note that increased activity does not necessarily equate into increased effectiveness. A couple of other things to note about what is going on in China right now. Right holders certainly continue to bring high-profile cases. The Motion Picture Association sued Xunlei Network Technologies’ peer-to-peer system,16 and Chinese right holders have sued them as well.17 The International Federation of the Phonographic Industry (IFPI) reported sending almost 7,000 takedown notices in 2007, up from about 1,500 in 2006.18 U.S. right holders, as you may know, lost the case against Baidu in 2007,19 but on the very same day won at http://www.sccp.org/ sccplibrary/meetings/February2001/intlprop.doc. For updated statistics, see Xie Chuanjiao, “Crackdown on Fakes Sees Gains”, China Daily, Apr. 29, 2008, available at http://www.chinadaily.com.cn/bizchina/2008-04/29/content_6650746.htm. In early November 2007, the GACC issued Opinions on Strengthening the Customs Protection of Intellectual Property Rights, which deployed a strategy for the protection of IPRs by Customs. A National Meeting on the Protection of Intellectual Property Rights at the Customs was held in Kunming in midNovember. In 2007 the GACC approved 2,267 cases of Customs protection on intellectual property rights, an increase of 38.7 percent compared with the previous year; Customs units across the country tracked down 7,467 batches of imported and exported goods suspected of violating intellectual property rights, with a value of 438 million yuan. China’s IP Protection in 2007, supra note 8, at V. In 2007 a total of 4.91 million person/time from cultural administrations and administrative enforcement authorities on cultural market at all levels were dispatched on various campaigns to inspect 850,000 audio and video operation units. They confiscated 110 million illegal audio and video products, uncovered and punished over 20,000 cases of IPR violation, and transferred 399 cases and 646 suspects to the judicial authorities. Id. at VI; see also “GAC Releases 2007 Top 10 IPR Protection Events of Chinese Customs”, China Daily, May 19, 2008, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=207485& col_no=929&dir= 200805. 13 See Liu Baijia, “Firms to Use Licensed Software”, China Daily, Apr. 25, 2007, available at http://www.chinadaily. com. cn/bizchina/2007-04/25/content_859242.htm. 14 See “Judge Guarantees Fair Play in All IPR Cases”, China Daily, Feb. 20, 2008, available a http://english.ipr. gov.cn/ ipr/en/info/Article.jsp?a_no=178011&col_no=929&dir=200802; “Courts See More IPR Cases in Shanghai”, China Daily, Apr. 25, 2007, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=71982&col_no=926 &dir=200704. 15 Zhu Zhe, “Net Piracy Still Poses a Challenge”, China Daily, Jan. 18, 2008, available at http://www.chinadaily. com. cn/china/2008-01/18/content_6402839.htm (quoting Yan Xiaohong). 16 See “US Film Group Sues Xunlei for Piracy”, Shanghai Daily, Feb. 19, 2008, available at http://english.ipr.gov. cn/ ipr/en/info/Article.jsp?a_no=177470&col_no=927&dir=200802. 17 See “Right Fight”, China Daily, Jan. 28, 2008, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_ no=172194 &col_no=927&dir=200801. 18 See IFPI Digital Music Report 2008 (2008), available at http://www.scribd.com/doc/2089477/ IFPI-DigitalMusic-Report-2008; see also Press Release, IFPI, “Recording Industry steps up campaign against internet piracy in China” (Feb. 4, 2008), available at http://www.ifpi.org/content/section_news/20080204.html. 19 Seven companies, including EMI, SONY BMG, Warner Music, and Universal Music, in 2005 accused Baidu....

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an appeal for a very similar sort of activity against Yahoo! China.20 I believe Eric Smith is going to discuss those cases, so I will not get into detail there.21 The Music Copyright Society of China, again domestic right holders, is suing Baidu presently.22 So we see that Chinese right holders are stepping up as well. In fact, Chinese software maker Zhongyi Electronic Ltd. has sued Microsoft for alleged infringing inclusion of its transliteration software in Microsoft operating systems. Microsoft insists that it is properly licensed. That case is pending.23 China has continued to engage in norm setting in intellectual property as well in the executive and judicial side. As many of you probably know, unlike the United States, China’s People’s Court does issue essentially advisory opinions that have binding legal effect, notably judicial interpretations regarding the criminal thresholds for criminal prosecution.24 In April 2007, albeit before the filing of the case by the United States, a new set of judicial interpretations was issued.25 Now, those are still the subject of the case, and the U.S. government com of engaging in illegal downloading and playing 137 pieces of music owned by the record companies online without their permission. They demanded a public apology from Baidu, the suspension of its download service, and compensation of 1.67 million yuan (226,000 U.S.$). In November 2006 the Beijing Intermediate Court ruled that Baidu’s service, which provides web links to the music, does not constitute an infringement as all the music is downloaded from Web servers of third parties. The court found no liability for copyright infringement as the search engine’s deep links “did not constitute an infringement [by Baidu] as all the music was downloaded from web servers of third parties.” See Posting by Grant Robinson to the Digital Music Weblog, “Baidu off the Hook in Copyright Infringement Case”, http://digitalmusic.weblogsinc.com/2006/11/20/Baidu-off-the-hook-in-copyrightinfringement-case (Nov. 20, 2006, 13:11 EST). The record companies voiced their dissatisfaction at the ruling and appealed to the higher court. The People’s High Court of Beijing said in its final rule on Dec. 20, 2007 that Baidu’s service does not constitute an infringement. See “Record Companies Lose Lawsuit Against Chinese Baidu”, Xinhua, Jan. 2, 2008, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=163595&col_no=985&dir=200801. A similar case brought by Hangzhou-headquartered online music service 5fad was likewise unsuccessful. See Gareth Powell, “5fad Loses Copyright Case Against Baidu”, China Econ. Rev., Jan. 13, 2007, available at http://www. chinaeconomicreview.com/ it/2007/01/13/5fad-loses-copyright-case-against-baidu/Baidu. 20 Also on Dec. 20, 2007, the People’s High Court ruled that Yahoo! China’s music delivery service violated Chinese law by facilitating mass copyright infringement; the court ordered an immediate removal of links to all infringing sound recordings and payment of compensation of RMB 212,600. See “Yahoo Loses Music Download Case in Final Ruling”, Xinhua, Dec. 25, 2007, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=161244&col_ no=128&dir=200712; Press Release, IFPI, Statement from John Kennedy, Chairman and Chief Executive of IFPI, on today’s Yahoo! China Ruling (Apr. 24, 2007), available at http://www.ifpi.org/content/section_news/20070424a.html. 21 See Michael Schlesinger, The Right of Making Available and its Implementation in National Law and Case Law, Chapter V.B.3(a), “The Role, Effectiveness and Issues in Infringement Actions Against Individual P2P Downloaders; Recent Legislative Initiatives Aimed at Downloaders”, supra this volume. 22 See “Baidu Sued by Music Rights Organization”, China Daily, Mar. 10, 2008, available at http://english.ipr.gov. cn/ipr/ en/info/Article.jsp?a_no=185134&col_no=927&dir=200803. 23 See “Company Sues Microsoft for IPR Abuse”, Xinhua, Jan. 21, 2008, available at http://english.ipr.gov.cn/ipr/ en/info/ Article.jsp?a_no=169839&col_no=927&dir=200801. 24 The Supreme People’s Court has formulated and implemented many judicial interpretations and judicial explanatory documents since 1993. They include, among others, the Circular on Several Issues on the Implementation of Copyright Law (Dec. 1993), the Circular on Further Strengthening Judicial Protection of IPR (Sept. 1994), the Interpretation on Several Issues on the Applicability of the Decision of the Standing Committee of the National People’s Congress on Punishing the Crime of Copyright Violation (Jan. 1995). These judicial interpretations and relevant documents are intended to provide guidance to China courts throughout the country in their trial of copyrights and neighboring rights cases. For more information on judicial interpretations, see http://english.ipr.gov.cn/ipr/en/ info/infoSearch.jsp. On Apr. 15, 2008, Vice President and Chief Justice Xiong Xuanguo of China’s Supreme People’s Court disclosed that, since 2000, the Supreme People’s Court has constituted and amended over twenty IPR judicial interpretations, referring to patent, trademark, copyright, new varieties of plants, integrated circuit, technical contract, unfair competition, conflict of rights, domain name, IPR crime, and case jurisdiction and hearing. See “Supreme Court Formulates, Corrects 20 IPR Judicial Interpretations in Past 7 Years”, IPR in China, Apr. 16, 2008, available at http:// english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=197630&col_no=925&dir=200804. 25 On Apr. 5, 2007, China’s Supreme People’s Court and Supreme People’s Procuratorate jointly issued Judicial Interpretation on Several Issues in the Concrete Application of the Law in Handling Criminal Cases of IP Infringement, which lowered the threshold of IPR crimes in China from 1000 to 500 copies. See Xinhua News Agency (CEIS)...

638 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY believes they are still too high to meet TRIPs standards.26 But I think it is worth noting that they are continuing to take some action. Notice-and-takedown regulations were finalized in June 2007.27 That may have had something to do with the increased activity by IFPI in that regard. Perhaps most interestingly going forward, China’s National IPR Working Group has announced plans to revise all IPR laws in China,28 although from the copyright perspective the enthusiasm is somewhat dampened simply because copyright appears to be at the back of the line. Very briefly, since I see my time is up, let me note many of the enforcement statistics I provided were from Chinese authorities and not independently verified. I do not say that to disparage Chinese authorities, but to note that they do have an interest in portraying themselves in as positive a light as possible. As I said, increased activity does not necessarily equal increased results in terms of reduction of piracy. I think others may talk more about that, so I will stop right there. MR. LIM: Thanks, Steve. Can we now hear from Peter, who will talk to us about IP protection in China?

Intellectual Property, Foreign Direct Investment and the China Exception Peter K. Yu* I. INTRODUCTION

Policymakers in both the developed and less-developed worlds have increasingly considered intellectual property protection as a major means to attract foreign direct investment.29 However, stronger intellectual property protection is not always needed to attract such investment. In the case of China, foreign investors were not attracted by the strong intellectual property protection the country offers. Rather, they entered the Chinese market because of the drastically lower production costs, the country’s enormous market, its inefficient economic (Apr. 6, 2007), summary available at http://www.Chinatzone.com/news_dls.php?id=285&category=USITO%20 Weekly%20China%20%20Summary. 26 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M.1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm. 27 State Intellectual Property Organization (SIPO), Regulations on the Protection of the Right of Communication through Information Network (Internet Regulations) (June 1, 2006), available at http://www.sipo.gov.cn/sipo_ English/specialtopic/ IPManual/200706/t20070613_174892.htm; see also “Supreme People’s Court Promulgated Revised Judicial Interpretations on Internet Copyright”, IPR in China, Dec. 7, 2006, available at http://english.ipr. gov.cn/ipr/en/info/Article.jsp?a_no=35759 &col_no=934&dir=200612. 28 See State Office of Intellectual Property Protection of the P.R.C., China’s Action Plan on IPR Protection 2008 (Mar. 18, 2008), available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=197210&col_no=925&dir=200804. * Copyright © 2007 Peter K. Yu. This paper was abridged and adapted from Peter K. Yu, “Intellectual Property, Economic Development, and the China Puzzle” in Intellectual Property, Trade and Development: Strategies to Optimize Economic Development in a TRIPs Plus Era 169–216 (Daniel J. Gervais ed., 2007). 29 Peter K. Yu, “The International Enclosure Movement”, 82 Ind. L.J. 892–901 (2007) [hereinafter Yu 2007].

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system, and the preferential treatment of foreign investors. Thus, some commentators consider China a paradigmatic case for showing how rapid economic development can take place despite limited intellectual property protection.30 Although the piracy and counterfeiting problems in China have been widely reported in the media in the past decade, the protection of intellectual property rights was a rather recent institution in the country. Modern copyright, patent, and trademark laws were not introduced until after China reopened its market to foreign trade in the late 1970s.31 Since then, the country revamped its intellectual property system in response to U.S. pressure in the late 1980s and early 1990s and did so again in preparation for its accession to the World Trade Organization (WTO).32 At present, China is a proud member of many multilateral intellectual property agreements, including the Berne Convention, Geneva Convention, Paris Convention, the Patent Cooperation Treaty, and UPOV (International Union for the Protection of New Varieties of Plants). Notwithstanding these developments, the enforcement of intellectual property rights in China remains inadequate. Every year, U.S. industries are estimated to have lost billions of dollars due to piracy and counterfeiting in the country. As the International Intellectual Property Alliance stated in its recent Special 301 Report, copyright piracy in China resulted in $2.2 billion of U.S. trade losses in 2006 alone.33 Of particular concern is the considerable quantity of the infringing products that have been exported to other foreign markets. To protect its industries, the United States has recently requested consultations with China over its failure to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) concerning protection and enforcement of intellectual property rights.34 This paper examines the causal relationship between the strength of intellectual property protection and the amount of foreign direct investment (FDI) — “the act of establishing or acquiring a foreign subsidiary over which the investing firm has substantial management control.”35 The paper begins with a theoretical discussion of the relationship between these two variables and challenges the claim that China is the proverbial exception to this relationship. The paper argues instead that China illustrates rather well the theoretical and empirical ambiguity of the conventional linkage between intellectual property protection and FDI as well as the complex interplay of the different location advantages that affect private investment decisions. It then examines why China expanded its intellectual property protection even though such expansion was unnecessary for attracting FDI. Tracing the growing protection to both external pressure and internal push, I contend that intellectual property reforms were introduced because they promoted economic development in certain parts of the country and resulted in the creation of local stakeholders who benefited from and lobbied for stronger protection. 30 Frederick M. Abbott, “Toward a New Era of Objective Assessment in the Field of TRIPs and Variable Geometry for the Preservation of Multilateralism”, 8 J. Int’l Econ. L. 81 (2005); Daniel C.K. Chow, “The Role of Intellectual Property in Promoting International Trade and Foreign Direct Investment” in Intellectual Property and Information Wealth: Issues and Practices in the Digital Age 199 (Peter K. Yu ed., 2007). 31 Peter K. Yu, “From Pirates to Partners: Protecting Intellectual Property in China in the Twenty-First Century”, 50 Am. U. L. Rev. 131 (2000) [hereinafter Yu 2000]. 32 Id. at 141–51; Peter K. Yu, “From Pirates to Partners (Episode II): Protecting Intellectual Property in Post-WTO China”, 55 Am. U. L. Rev. 906–23 (2006) [hereinafter Yu 2006]. 33 International Intellectual Property Alliance (IIPA), 2007 Special 301: People’s Republic of China — Amended, at 96 (2007). 34 For discussions of the United States’ WTO potential complaint against China before the WTO Dispute Settlement Body concerning a lack of general enforcement of intellectual property rights, see Peter K. Yu, “Still Dissatisfied After All These Years: Intellectual Property, Post-WTO China, and the Avoidable Cycle of Futility”, 34 Ga. J. Int’l & Comp. L. 143–58 (2005) [hereinafter Yu 2005]; Yu 2006, supra note 32.

640 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY II. INTELLECTUAL PROPERTY AND FOREIGN DIRECT INVESTMENT

Conventional wisdom holds that strong intellectual property protection is needed to attract foreign investment in less-developed countries because firms are reluctant to invest in a foreign country unless they are assured of protection of their intellectual assets and financial investment. However, recent empirical research questions this conventional wisdom. As Carsten Fink, Keith Maskus, Carlos Primo Braga, and other economists have shown, intellectual property protection is more likely to attract FDI if two additional conditions are met.36 First, the country needs to have a strong capacity to imitate foreign products and technologies. If local competitors are unable to copy these products and technologies, the business interests of foreign firms are unlikely to be threatened, and intellectual property protection will be unnecessary. Second, the country needs to have a sufficiently large market to enable foreign firms to capture economies of scale or scope.37 In a country that lacks such a market, foreign firms are unlikely to find it advantageous to move their productions abroad. Even if these two conditions are met, policymakers still have to question what form of protection needs to be strengthened in order to promote economic development. Paul Heald and Keith Maskus each suggested that firms that seek to establish manufacturing or researchand-development plants are unlikely to require more protection than what is needed to ensure the non-disclosure of technologies brought by foreign firms.38 While these firms need trade secrets and contractual protection, firms seeking to establish markets for finished products need copyright, patent, and trademark protection instead. Thus, it is important to separate investment decisions that seek to relocate manufacturing or research-and-development facilities from those that seek to market finished products. While strong intellectual property protection is a main concern for marketing decisions, a decision to relocate manufacturing facilities is likely to be determined by such “location advantages” as “market size and growth, local demand patterns, transport costs and distance from markets, low wage costs in relation to labor productivity, abundant natural resources, and trade protection that could encourage “tariff-jumping” investments.”39 Likewise, a decision to relocate research-and-development facilities is likely to be affected by “the level of education and training of the local workforce, the condition of its financial sector, the health of its legal system, and the transparency of governmental procedures.”40 To make things more complicated, firms can resort to many different investment strategies, and FDI is only one of them. Using John Dunning’s ownership–location–internalization framework,41 economists have shown that, even in the presence of favorable location advantages, firms still need to decide whether they want to serve foreign markets through FDI, export finished products to the less developed market, conduct arm’s-length technology licensing, set up joint ventures with local manufacturers or distributors, or ignore the foreign market entirely.42 As Carlos Primo Braga and Carsten Fink explained: 35 Keith E. Maskus, “The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology Transfer”, 9 Duke J. Comp. & Int’l L. 119 [hereinafter Maskus 1998]. 36 Id. at 130–31; see also Keith E. Maskus, Intellectual Property Rights in the Global Economy (2000) [hereinafter Maskus 2000]; Carlos Alberto Primo Braga & Carsten Fink, The Relationship Between Intellectual Property Rights and Foreign Direct Investment, 9 DUKE J. COMP. & INT’L L. 164 (1998). 37 Paul J. Heald, “Mowing the Playing Field: Addressing Information Distortion and Asymmetry in the TRIPs Game”, 88 Minn. L. Rev. 266 (2003). 38 Id. at 258–60; Maskus 1998, supra note 35, at 119–28. 39 Maskus 1998, supra note 35, at 123. 40 Heald, supra note 37, at 259. 41 John H. Dunning, International Production and the Multinational Enterprise 110–12 (1981). 42 Maskus 1998, supra note 35, at 130.

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In order for firms to invest abroad, two further conditions must be met. First, the foreign country must offer location advantages that make it more profitable to locate business abroad. Location advantages are usually associated with factors such as high transportation costs and tariffs, low input prices, access to distribution networks, and local regulatory environments. Second, it must be more profitable for firms to internalize production rather than to sell or license their intellectual assets to independent local firms in the foreign country. Internalization advantages take the form of avoiding transaction costs with potential licensees, controlling inputs, and protecting quality.43

While the strength or weakness of intellectual property protection will “influence a firm’s decision to internalize or externalize its intellectual assets,” it is only one of the many location advantages that influence such a decision.44 As Keith Maskus put it in the FDI context, “IPRs are an important component of the general regulatory system, including taxation, investment regulations, production incentives, trade policies, and competition rules. The joint implementation of an overall pro-competitive business environment matters most for FDI.”45 Paradoxically, the strengthening of intellectual property protection may encourage firms to conduct more arm’s-length technology licensing, which, in turn, will result in a reduction of FDI. As Primo Braga and Fink explained, intellectual property protection can affect foreign investment in two negative ways: “First, stronger IPR protection provides title holders with increased market power and could, at least theoretically, cause firms to actually divest and reduce their service to foreign countries. Second, higher levels of protection may cause [transnational corporations] to switch their preferred mode of delivery from foreign production to licensing.”46 Whether a firm will choose to license will depend on transaction costs — in particular, the robustness of the local regulatory regimes, the existence of a contracting culture and experience, and the availability of information needed to evaluate the transactions. In places where there is limited intellectual property protection, the firm’s need to internalize foreign production to maintain direct control over their proprietary assets may also affect licensing decisions.47 If the firm chooses to externalize its production through, say, licensing, stronger intellectual property protection arguably would have the “cancel out” effect of reducing FDI. Finally, most firms do not need to make the difficult decision between relocating their entire facilities and not relocating at all. They can simply decide which type of operations they want to relocate abroad and whether they want to combine FDI with other investment strategies, such as export, licensing, or establishment of joint ventures. Even if they choose to relocate abroad, they can still decide “where to invest and in what kind of facilities, whether to purchase existing operations or construct new plants (so-called ‘greenfield investments’), which production techniques to pursue, and how large an equity position to take with potential local partners.”48 Economists generally distinguish between “horizontal FDI” and “vertical FDI.”49 While the former refers to the investment made when “firms establish plants abroad to produce the same or similar goods for local or regional markets,” the latter “occurs if plants in different countries produce outputs that serve as inputs in other plants.”50 Although intellectual property Primo Braga & Fink, supra note 36, at 170. Id. at 171. 45 Maskus 1998, supra note 35, at 129. 46 Primo Braga & Fink, supra note 36, at 172. 47 Id. 48 Maskus 1998, supra note 35, at 113. 49 Some commentators have added a third type of FDI, distribution FDI, referring to “investment in local sales offices, distribution networks, and services facilities.” Kevin C. Kennedy, “A WTO Agreement on Investment: A Solution in Search of a Problem?”, 24 U. Pa. J. Int’l Econ. L. 79 n.5 (2003). 50 Primo Braga & Fink, supra note 36, at 172–73. 43 44

642 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY protection affects both horizontal and vertical FDI, the amount and composition of FDI vary according to the impact of such protection on the particular production process. For example, Edwin Mansfield observed in his influential study for the World Bank that, [w]hile U.S. firms may be quite willing to invest considerable amounts in sales and distribution outlets and in rudimentary production and assembly facilities in countries with weak protection, their investments in R and D facilities or in facilities to manufacture components or complete products may be more likely to go to countries with stronger protection systems.51

Because “[v]ertical FDI is more prevalent among [multinational enterprises] that invest in developing (low-wage) economies, while horizontal FDI tends to characterize the investment decisions of MNEs operating across borders within the Industrialized, developed nations,” the amount and proportion of each type of investment may fluctuate with the country’s economic development.52 As the country becomes more developed economically, the amount of horizontal FDI may increase while that of vertical FDI may decrease. In sum, countries that lack a strong imitative capacity and a sufficiently large market are unlikely to benefit from stronger intellectual property protection. However, even if countries meet these two prerequisites, stronger intellectual property protection may be unnecessary for attracting FDI. It depends on the complex interactions between the different location advantages, especially when some of these advantages are significant enough to compensate for the lack or ineffectiveness of strong intellectual property protection. Thus, the relationship between the strength of intellectual property protection and FDI remains theoretically ambiguous. Commentators often consider China as an exception to the causal relationship between the strength of intellectual property protection and the amount of FDI attracted to the country. However, China is not the exception they suggested. Rather, it illustrates well the ambiguity of this relationship and the complex interplay of the different location advantages that can affect private investment decisions. To begin with, China has met the two prerequisites needed for a country to benefit from stronger intellectual property protection. Since the reopening of its market to foreign trade in the late 1970s, China has developed a strong imitative capacity. In fact, such capacity explains China’s ability to produce a large amount of pirated and counterfeit products. Moreover, China has seen tremendous economic growth in the past two decades.53 Today, China boasts a healthy market of hundreds of millions of customers, even though it has yet to offer one billion customers as some would hope. It also has become one of the world’s largest surplus countries, possessing one of the most sizeable foreign exchange reserves in the world.54 Nevertheless, intellectual property protection in the country remains inadequate and ineffective, and it is unlikely that foreign firms were attracted to China because of its intellectual property system. Instead, firms often relocate to China to take advantage of the lower production costs and the emerging market. To many of these firms, the lower costs and the promise of an enormous market would easily make up for the losses incurred by ineffective intellectual property protection.55 While these firms certainly welcome greater intellectual property reforms, they do not find stronger protection a prerequisite for obtaining 51 Edwin Mansfield, Intellectual Property Protection, Foreign Direct Investment and Technology Transfer 17 (1994). 52 Maskus 1998, supra note 35, at 120. 53 China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower 18 (C. Fred Bergsten, Bates Gill, Nicholas R. Lardy & Derek Mitchell eds., 2006); see also Peter K. Yu, Gordon G. Chang, Jerome A. Cohen, Elizabeth C. Economy, Sharon K. Hom & Adam Qi Li, “Symposium, China and the WTO: Progress, Perils, and Prospects”, 17 Colum. J. Asian L. 3 (2003). 54 Bergsten et al., supra note 53, at 4. 55 Paul Tackaberry, “Intellectual Property Risks in China: Their Effect on Foreign Investment and Technology Transfer”, 14 J. Asian Bus. 26 (1998).

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profits in the first place. In fact, many major Western firms — like Coca-Cola, Kodak, Motorola, Procter & Gamble, and Siemens — have already been enjoying substantial profits for years despite serious piracy and counterfeiting problems.56 Thus, instead of seeing strong intellectual property protection as the necessary precursor to profitability, they see it more as a means to “increas[e their] already acceptable profit ratios.”57 Other firms, especially those that are new to China or are unfamiliar with the local conditions, have been less successful. Nevertheless, they consider the emerging Chinese market too large to ignore. While some consider the losses unavoidable as they build up their market share and improve their position in this emerging market, others write off their piracy-related losses as promotional expenses. The latter approach easily reminds one of the remark Microsoft’s founder Bill Gates made a few years ago. When questioned about the widespread piracy of Microsoft software in China, Gates observed: “Although about three million computers get sold every year in China, people don’t pay for the software. Someday they will, though. And as long as they’re going to steal it, we want them to steal ours. They’ll get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.”58 Recent research, however, has revealed a more complicated picture concerning FDI in China. The amount of FDI in a country does not depend only on “pull” factors, but also on “push” factors, such as those that have made the country unappealing for local production. As Huang Yasheng pointed out in his provocative book, Selling China, the inefficiencies of the Chinese economic system and the country’s preferential treatment of foreign investors have led to a large amount of FDI in the country.59 Because commentators tend to focus on the attractions of the Chinese market, they often ignore how “[t]he poor profitability of the state sector, the credit constraints on the part of Chinese private firms, the insecurity of private property rights, and the weaknesses of domestic firms have all driven up China’s demand for FDI.”60 To Professor Huang, the considerable amount of FDI in China may reflect the weakness, rather than the strength, of the Chinese market. As he explained: “China’s low labor — and land — costs do not automatically motivate a Hong Kong firm to invest in China; instead, they motivate a Hong Kong firm (or any other firm) to do more business with China, as opposed to doing more business with, say, Mexico. China’s low labor costs tell us something about the location of a labor-intensive production facility, but not about who owns it.”61 Professor Huang therefore credited the superior regulatory and legal treatments of foreign-invested enterprises as an important motivation for private entrepreneurs in China to seek out FDI from its neighbors.62 His thesis also illuminates why a substantial amount of investment was derived from businesses in Hong Kong and Taiwan as well as those owned by the Chinese diaspora. After all, if local firms have to reach out for FDI, they are more likely to turn to firms in the so-called Greater China. In sum, the drastically lower production costs, the country’s enormous market, its inefficient economic system, and the preferential treatment of foreign investors have all helped to attract FDI in China. Because these factors more than compensate for the country’s weak intellectual property protection, FDI in China increased substantially despite limited intellectual property protection in the country. China therefore is not an exception to the causal relationship between intellectual property protection and FDI, but an ideal case study to illustrate the ambiguity of this relationship and the complex interactions between the many location advantages that affect Catherine Sun, China Intellectual Property for Foreign Business 4–5 (Lexis/Nexis 2004). Id. at 5. 58 Brent Schlender, “Warren Buffett & Bill Gates, ‘The Bill & Warren Show’”, Fortune, July 20, 1998, at 48–52. 59 Yasheng Huang, Selling China: Foreign Direct Investment During the Reform Era (2005). 60 Id. at 81. 61 Id. at 57. 62 Id. at 90. 56 57

644 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY private investment decisions. After all, as Keith Maskus pointed out, if stronger intellectual property protection always led to more FDI, “recent FDI flows to developing economies would have gone largely to sub-Saharan Africa and Eastern Europe … [rather than] China, Brazil, and other high-growth, large-market developing economies with weak IPRs,”63 III. INTELLECTUAL PROPERTY REFORMS IN CHINA

“Since 1983, FDI [in China] has grown from less than $1 billion a year to more than $60 billion, and it is projected to soon reach $100 billion annually.”64 Today, China is one of the world’s largest recipients of FDI with capital inflows of about $50 billion, behind the United States and the United Kingdom.65 Such an influx of FDI not only provides China with the foreign capital needed for economic modernization, but also results in technology transfer, job creation, development of human capital and generation of tax revenues.66 Although economists have pleaded for caution in considering the benefits of FDI to recipient countries,67 there is no denial that the influx of foreign capital has contributed to China’s recent rise to its status as an emerging economic superpower. As pointed out earlier, strong intellectual property protection is not always needed for attracting FDI. In fact, stronger protection may reduce investment by encouraging investors to conduct arm’s-length transactions by licensing their products. Such protection would also reduce the net gains in economic welfare from increased FDI by incurring significant costs, such as administrative and enforcement costs, adjustment costs due to labor displacement, social costs associated with monopoly pricing, higher imitation and innovation costs, and potential costs resulting from the abuse of intellectual property rights.68 Stronger intellectual property protection therefore would drain the country’s scarce governmental resources, render cuttingedge foreign technologies inaccessible and stifle the development of local industries.69 Given the significant costs of strengthening intellectual property protection, Chinese policymakers and commentators understandably were worried that stronger protection would slow down the country’s economic progress and therefore would make it difficult for the country to catch up with its Western developed neighbors. Indeed, as Rod Falvey, Neil Foster, and David Greenaway have shown recently, although intellectual property protection promotes innovation in high-income countries and technology flows in low-income ones, middle-income countries may suffer from offsetting losses due to the reduced scope of imitation.70 Likewise, as the U.K.-based Commission on Intellectual Property Rights cautioned, “rapid [economic] growth is more often associated with weaker IP protection. In technologically advanced developing countries, there is some evidence that IP protection becomes important at a stage of development, but that stage is not until a country is well into the category of upper middle income developing countries.”71 Maskus 1998, supra note 35, at 129. Peter Navarro, The Coming China Wars: Where They Will Be Fought and How They Can Be Won (2007). 65 Chow, supra note 30, at 198. 66 Robert M. Sherwood, Intellectual Property and Economic Development 191–99 (1990). 67 Maskus 1998, supra note 35, at 146. 68 Keith E. Maskus, Sean M. Dougherty & Andrew Mertha, “Intellectual Property Rights and Economic Development in China”, in Intellectual Property and Development: Lessons from Recent Economic Research 302–06 (Carsten Fink & Keith E. Maskus eds., 2005). 69 Tara Kalagher Giunta & Lily H. Shang, “Ownership of Information in a Global Economy”, 2 Geo. Wash. J. Int’l L. & Econ. 331 (1993); Yu 2000, supra note 31, at 189–90. 70 Rod Falvey, Neil Foster & David Greenaway, “Intellectual Property Rights and Economic Growth”, 10 Rev. Dev. Econ. 700–19 (2006). 71 Commission on Intellectual Property Rights, Integrating Intellectual Property Rights and Development Policy: Report of the Commission on Intellectual Property Rights, at 22 (2003) [hereinafter CIPR Report], available at http:// www.ipr commission.org/papers/pdfs/final_report/CIPRfullfinal.pdf. 63 64

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If the costs of strong intellectual property protection are not enough, the costs of introducing an inappropriate intellectual property system can be quite high for less-developed countries. Although overprotection of intellectual property rights harms both developed and lessdeveloped countries, it usually harms less-developed countries more than it would harm their developed counterparts. Many less-developed countries lack the economic strengths and established correction mechanisms to overcome problems created by an unbalanced system.72 As the Commission noted, “if anything, the costs of getting the IP system ‘wrong’ in a developing country are likely to be far higher than in developed countries. Most developed countries have sophisticated systems of competition regulation to ensure that abuses of any monopoly rights cannot unduly affect the public interest.”73 Even if stronger intellectual property protection is beneficial to less-developed countries in the long run, they may lack the needed wealth, infrastructure, and technological base to take advantage of the opportunities created by the system in the short run. In sum, all of these potential negative impacts of stronger intellectual property protection lead one to wonder why China introduced reforms to offer stronger intellectual property protection at all. After all, both theories and actual practice have suggested that China would have limited net economic benefits from stronger intellectual property protection during the first decade of the reopening of the Chinese market to foreign trade. Acknowledging the Chinese leaders’ lack of focus on these net benefits in the early development of the modern Chinese intellectual property system, this chapter traces the intellectual property reforms to both external pressure and internal push. A. External Pressure Shortly after China reopened its market to foreign trade in the late 1970s, China and the United States signed the Agreement on Trade Relations Between the United States of America and the People’s Republic of China, which, among other things, called for reciprocal protection of copyrights, patents and trademarks owned by the nationals of the other party. Pursuant to this agreement, China became a member of the World Intellectual Property Organization (WIPO). It also promulgated a new trademark law in 1982 and a new patent law in 1984 and joined the Paris Convention in 1985. Notwithstanding these new developments, China afforded authors and inventors very limited protection, due to the leaders’ concern about establishing new private property interests in a socialist economic system, their belief that strong intellectual property protection is inappropriate for a less-developed country like China and their inexperience with Western forms of intellectual property protection.74 While the new laws granted individuals rights in their marks and inventions, these statutes included many limits that rendered the original grants largely insignificant. Concerned about the lack of intellectual property protection in China, copyright in particular, U.S. businesses lobbied their government heavily for stronger pressure on China. In the late 1980s and early 1990s, the U.S. government repeatedly threatened China with a series of economic sanctions, trade wars, non-renewal of most-favored-nation status and opposition to China’s entry into the WTO.75 Such threats eventually led to the issuance or signing of two memoranda of understanding in 1989 and 1992, an “agreement” regarding intellectual property rights in 1995 (which appeared in the form of an “exchange of letters” Yu 2006, supra note 32, at 382–83; Yu 2007, supra note 29, at 890. CIPR Report, supra note 71, at 4. 74 William P. Alford, To Steal a Book Is an Elegant Offense: Intellectual Property Law in Chinese Civilization 66, 70 (1995); see also Andrew C. Mertha, The Politics of Piracy: Intellectual Property in Contemporary China 84–86 (2005). 75 Yu 2000, supra note 31, at 140–51. 72 73

646 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY with an attached action plan), and an “accord” reiterating China’s commitment to strengthening intellectual property protection in 1996. Although the seldom-mentioned 1989 memorandum of understanding reassured the United States that China would strengthen its protection for computer software, the 1992 memorandum was the “first full bilateral IPR agreement” between China and the United States.76 In retrospect, the 1992 memorandum was effective in revamping China’s intellectual property system. Pursuant to that document, China acceded to the Berne Convention and ratified the Geneva Convention. China also amended its 1990 Copyright Law, issued new implementing regulations, and adopted a new unfair competition law that provided trade secret protection. Likewise, the 1995 Agreement was effective in helping China create an institutional infrastructure conducive to protecting and enforcing rights created under this new intellectual property regime. The Agreement introduced the State Council Working Conference on Intellectual Property Rights, which was later replaced by the State Intellectual Property Office, as well as the Enforcement Task Forces.77 To protect CDs, laser discs, and CD–ROMs, the agreement established a unique copyright verification system, proposing to punish by administrative and judicial means any manufacturer of audiovisual products that failed to comply with the identifier requirement. The agreement also called for title registration with the National Copyright Administration and local copyright authorities of foreign audiovisual products and computer software in CD–ROM format. In addition, the agreement required customs offices to intensify border protection for all imports and exports of CDs, laser discs, CD–ROMS, and trademarked goods. The agreement further stipulated that relevant authorities would conduct training and education on intellectual property protection throughout China. Finally, the agreement provided that the Working Conference would develop a transparent legal system while compiling and publishing guidelines regarding application and protection in various areas of intellectual property law. Notwithstanding these two agreements, piracy remained rampant in China in the mid1990s, and the United States was estimated to have lost $2 billion of revenues annually due to copyright piracy.78 To make things worse, the ineffectiveness of the coercive tactics used by the United States Trade Representative (USTR) has become apparent to not just Chinese negotiators and seasoned commentators, but also the U.S. industries and the American public. Although the two countries reached another “accord” in 1996, that document clearly revealed the limitation of the coercive approach. The document included neither significant new terms nor terms that improved market access of American products; instead, it merely reaffirmed China’s commitment to protect intellectual property rights made under the intellectual property agreement signed the year before.79 As industry support decreased, the Clinton administration abandoned its strong-arm tactics shortly after the 1996 negotiations.80 Although the United States continued to exert pressure on China during the negotiation of China’s accession to the WTO and undertook frequent consultations with Chinese officials, the United States has yet to revive its coercive approach — partly because of the approach’s limitations and partly because of its impracticality after China’s WTO membership. Under the WTO, countries are prohibited from taking retaliatory measures before they have exhausted all of the actions permissible under the rules.81 Except in 76 Joseph A. Massey, “The Emperor Is Far Away: China’s Enforcement of Intellectual Property Rights Protection, 1986–2006”, 7 Chi. J. Int’l L. 235 (2006). 77 Yu 2000, supra note 31, at 152. 78 Seth Faison, “China Turns Blind Eye to Pirated Disks”, N.Y. Times, Mar. 28, 1998, at D1. 79 Peter K. Yu, “Piracy, Prejudice, and Perspectives: An Attempt to Use Shakespeare to Reconfigure the U.S.–China Intellectual Property Debate”, 19 B.U. Int’l L.J. 14 (2001) [hereinafter Yu 2001]. 80 Peter K. Yu, “The Copyright Divide”, 25 Cardozo L. Rev. 365 (2003) [hereinafter Yu 2003]. 81 Panel Report, United States—Sections 301–310 of the Trade Act of 1974, WT/DS152/R (1999) (WTO).

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areas that are outside the scope of the TRIPs Agreement, China’s WTO membership has greatly constrained the United States’ ability to exert external pressure on China in the intellectual property area. To make up for the lack of external pressure, U.S. businesses now exert pressure from within the country — through persuasion, business pressure, and alliances with local stakeholders and authorities. In February 2005, U.S. policymakers and trade groups again urged the administration to file a formal complaint against China with the WTO Dispute Settlement Body concerning inadequate intellectual property protection.82 A few months later, the United States, in conjunction with Japan and Switzerland, invoked Article 63(3) of the TRIPs Agreement to formally request “clarifications regarding specific cases of IPR enforcement that China has identified for the years 2001 through 2004, and other relevant cases.”83 In April 2007 the United States finally requested consultations with China concerning its failure to protect and enforce intellectual property rights in pursuance to the TRIPs Agreement. As of this writing, the United States, however, has yet to request the establishment of a WTO dispute settlement panel. If the United States did so, and if China were found to have violated the TRIPs Agreement, external pressure again might play an important role in unleashing and accelerating intellectual property reforms in China. B. Internal Push 1. Alignment with the National Modernization Goals While researchers have explored extensively the relationship between intellectual property protection and economic development, they rarely examine the rhetorical effects of the claim that stronger intellectual property protection will promote economic development. The lack of such an examination is understandable considering the difficulty in quantifying and assessing rhetorical effects. Nevertheless, rhetoric is needed to persuade the populace to accept a new government policy, and may also provide the direction and psychological incentives needed for promoting economic development. To some extent, the rhetorical significance of the claim that stronger intellectual property protection will promote economic development is similar to the significance of the claim that intellectual property is property. Despite the uneasy analogy of intellectual property to real property, intellectual property rights holders have widely used the rhetoric of private property to push for stronger protection.84 Meanwhile, foreign rights holders and governments have also used the economic development rationale to entice foreign leaders and policymakers to ratchet up intellectual property protection and, more specifically, to establish the TRIPs Agreement within the WTO. As Daniel Gervais recounted, developed countries and the lobbies that pushed for stronger intellectual property protection believed that “TRIPs was a difficult but essential measure to jumpstart global economic development,” while less-developed countries “were told to overlook the distasteful aspects of introducing or increasing intellectual property protection Yu 2006, supra note 32, at 923. Peter F. Allgeier, Letter to HE Mr. Sun Zhenyu, Ambassador, Permanent Mission of the People’s Republic of China to the World Trade Organization (Oct. 25, 2005), available at http://www.ustr.gov/assets/Document_Library/ Reports_ Publications/2005/asset_upload_file115_8232.pdf. 84 For discussions or critiques of the use of the private property rhetoric to expand intellectual property protection, see Tom W. Bell, “Authors’ Welfare: Copyright as a Statutory Mechanism for Redistributing Rights”, 69 Brook. L. Rev. 273–77 (2003); Neil Weinstock Netanel, “Impose a Noncommercial Use Levy to Allow Free Peer-to-Peer File Sharing”, 17 Harv. J. L. & Tech. 22 (2003); Richard M. Stallman, “Did You Say ‘Intellectual Property’? It’s a Seductive Mirage” (2005), available at http://www.fsf.org/ licensing/essays/not-ipr.xhtml; Stewart E. Sterk, “Intellectualizing Property: The Tenuous Connections Between Land and Copyright”, 83 Wash. U. L.Q. 420 (2005). 82 83

648 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY and enforcement in exchange for longer-term economic health.”85 Similarly, Edmund Kitch argued that less-developed countries agreed to stronger intellectual property protection during the TRIPs negotiations because they found such protection in their self-interests, although the negotiation records and the reactions of less-developed countries offered very limited support for Professor Kitch’s account.86 While the rhetorical linkage of intellectual property to economic development is important to induce less-developed countries to offer stronger protection, it is particularly important to a country like China, which has placed heavy emphasis on symbols and political movements and was emerging from autarky and diplomatic isolation. Since the reopening of the Chinese market to foreign trade in the late 1970s, Deng Xiaoping and other reformist leaders advocated a pragmatic “economics in command” approach to replace Mao Zedong’s “politics in command.” Seeing economic wealth as the foundation of China’s power, the reformist leadership believed “whether China could have a rightful place in the world of nations depended on China’s domestic economic development.”87 These leaders therefore vigorously pushed for the Four Modernizations to develop China’s world-class strengths in agriculture, industry, science and technology, and national defense. They also established Special Economic Zones to transform socio-economic conditions in coastal areas and renewed diplomatic and commercial ties with the United States, Japan, and other Western developed countries. The 1979 U.S.–China Trade Agreement was a product of this urgent push for greater internationalization. While economic development was easily justified by the severe need for reforms following the Cultural Revolution, the death of Mao Zedong and the subsequent arrest of the infamous Gang of Four, the justification for intellectual property reforms remained elusive. Indeed, when China reopened its market to foreign trade in the late 1970s, both the Chinese leaders and the populace considered intellectual property an alien concept transplanted from Western soil. As William Alford pointed out in his seminal work, To Steal a Book Is an Elegant Offense, the notion of intellectual property protection did not take root in China despite earlier attempts to transplant the concept onto the country through bilateral commercial treaties at the turn of the twentieth century and intellectual property reforms during the Republican era.88 Even if those reforms introduced the concept to the Chinese populace, the numerous class struggles, mass movements and the Cultural Revolution that rejected ownership of private property virtually eliminated from public consciousness the concept of intellectual property.89 Thus, when this concept was reintroduced in the 1980s, the justification for such a concept was badly needed. In his well-cited chapter concerning justifications for intellectual property protection, William Fisher identified four possible justifications — utility, labor, personality, and social planning.90 For a society that was making a transition from a command economy, rather than today’s socialist market economy, the first and second justifications were easily deemed unsuitable. Indeed, early Chinese intellectual property laws were filled with compromises that resulted in what commentators called “socialist legality with Chinese characteristics.”91 While the Chinese leadership was anxious to create a stimulus for inventions and to rehabilitate 85 Daniel J. Gervais, “The TRIPs Agreement and the Doha Round: History and Impact on Economic Development” in 4 Intellectual Property and Information Wealth: Issues and Practices in the Digital Age 43 (Peter K. Yu ed. 2007). 86 Edmund W. Kitch, “The Patent Policy of Developing Countries”, 13 UCLA Pac. Basin L.J. 138 (1994); Maskus 1998, supra note 35. For my earlier discussion of this self-interest narrative, see Peter K. Yu, “TRIPs and Its Discontents”, 10 Marq. Intell. Prop. L. Rev. 376–79 (2006) [hereinafter Yu 2006b]. 87 Yongnian Zheng, Discovering Chinese Nationalism in China: Modernization, Identity, and International Relations 17 (1999). 88 Alford, supra note 74, at 36–55. 89 Yu 2001, supra note 79, at 21–22. 90 William Fisher, “Theories of Intellectual Property” in New Essays in the Legal and Political Theory of Property 169–73 (Stephen R. Munzer ed., 2001). 91 Alford, supra note 74, at 70.

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scientists, inventors and academics to make up for the time lost to the Cultural Revolution,92 the leaders remained gravely concerned about the impact of new intellectual property rights on the country’s socialist economic system. The third justification, which was based on personality theories, was attractive to the Chinese, because it sat well with Communist ideology and the Soviet notion of non-propertybased protection of authorship. Recent research by Mira Sundara Rajan, for example, has shown that the Russian Copyright Act of 1928 granted limited recognition to the authors’ property interests by ‘plac[ing] them within the broader context of a nonproperty theory of authorship.”93 As a 1938 commentary on the Russian Law noted, the Soviet author’s right ‘has the objective of protecting to the maximum the personal and property interests of the author, coupled with the assurance of the widest distribution of the product of literature, science and the arts among the broad masses of the toilers.”94 Nevertheless, the personality justification — in particular, its emphasis on moral rights — was inconsistent with foreign demands for stronger intellectual property protection, which reflected the interests of and the more utilitarian approach embraced by Western rights holders. The most suitable justification was therefore what Professor Fisher described as “social planning,” which ranges from the development of the economy to the nurturing of an attractive intellectual culture.95 As he explained, “[t]his approach is similar to utilitarianism in its teleological orientation, but dissimilar in its willingness to deploy visions of a desirable society richer than the conceptions of “social welfare” deployed by utilitarians.”96 This justification therefore fit well with China in the early 1980s, and economic modernization provided the needed “social planning” justification for a new intellectual property system. Since then, intellectual property reforms have been linked to the country’s rapid economic development and have benefited from the push for continuous economic reforms. Politically, backing the newly established intellectual property system with rhetoric that was consistent with the national modernization goals was very important. As David Zweig suggested, directions from the leadership and rhetoric that conveys these directions are critical to a country that is undergoing “a fundamental change in [its] international orientation.”97 Because the Chinese leaders were inexperienced with intellectual property protection and had to constantly struggle with unfamiliar concepts and models introduced during the transitional period, the alignment of intellectual property reforms with the national modernization goals also allowed leaders to defend intellectual property reforms on more familiar terms. In addition, because reformist leaders were constantly challenged by their more conservative counterparts, who were uncomfortable with the country’s rapid socio-economic changes and the social ills brought about by these changes, the rhetoric allowed the reformist leaders to deflate criticisms of their kowtowing to foreign interests, especially in times of considerable external pressure from the United States. Instead, the leaders could highlight the economic benefits of stronger intellectual property protection and justify intellectual property reforms as an important leapfrogging tool to enable China to catch up with its more advanced trading partners. The reformist leadership could also tie the reforms to the growing nationalist sentiments that longed for China’s regaining its rightful place following centuries of humiliation and semi-colonial rule.98 Id. at 65. Mira T. Sundara Rajan, “Copyright and Free Speech in Transition: The Russian Experience” in Copyright and Free Speech: Comparative and International Analyses 333 (Jonathan Griffiths & Uma Suthersanen eds., 2005). 94 Id. at 334. 95 Fisher, supra note 90, at 192–93; Neil Weinstock Netanel, “Copyright and a Democratic Civil Society”, 106 Yale L.J. 288 (1996). 96 Fisher, supra note 90, at 172. 97 David Zweig, Internationalizing China: Domestic Interests and Global Linkages 27 (2002). 98 Immanuel C.Y. Hsü, The Rise of Modern China 600–61 (6th ed. 2000). 92 93

650 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY Moreover, the fact that stronger intellectual property protection is unnecessary for attracting FDI does not mean that an increase in protection would not result in more economic development. In fact, it would, at least in certain parts of the country or in selected industrial sectors. The more profits a firm can obtain, the more likely it is to expand its business, and the greater is its investment in or trade with the country. This is particularly true with respect to a country that has a strong imitative capacity and an enormous growing market. Indeed, stronger intellectual property protection may also provide to foreign investors important signals of a favorable investment climate.99 As Claudio Frischtak noted, a country’s overall investment climate is often more influential on FDI decisions than the strength of intellectual property protection it offers.100 Likewise, Carsten Fink, and Keith Maskus stated that “[a] poor country hoping to attract inward FDI would be better advised to improve its overall investment climate and business infrastructure than to strengthen its patent regime sharply, an action that would have little effect on its own.”101 Thus, stronger intellectual property protection might result in more foreign investment from existing investors as well as those who otherwise would not invest in the country. While serious questions remain concerning whether stronger protection would result in net gains in economic welfare within the country, and whether such protection, on balance, would benefit the country, those questions do not negate the fact that stronger intellectual property protection would induce some economic development in the country. In sum, even though stronger intellectual property protection is unnecessary for promoting economic development, the claim that stronger intellectual property protection would promote economic development provided the needed internal push for intellectual property reforms in the first decade and a half following the reopening of the Chinese market to foreign trade. In retrospect, that claim, to some extent, was similar to what psychologists have termed a “self-fulfilling prophecy.” Although people might not be able to prove conclusively whether stronger intellectual property protection would lead to greater economic development, they would accept a higher level of protection if they believed such a link existed. This higher level of protection, in turn, would result in greater economic development in certain parts of the country and in selected industrial sectors. As more local stakeholders stood to benefit from stronger protection, they would lobby for even stronger protection. Eventually, the belief in the benefits of stronger intellectual property protection would result in more economic development, regardless of whether the link existed in the first place. And the cycle would repeat itself. 2. Development of Local Stakeholders China experienced major economic setbacks after Tiananmen in 1989 and the subsequent turbulent bilateral relationship with the United States and other Western countries. Fortunately, its economy quickly recovered following Deng Xiaoping’s famous “tour” of southern China in 1992. In March 1993, the National People’s Congress incorporated into the Chinese Constitution the concept of the socialist market economy, which contrasted powerfully with a command or centrally-planned economy.102 Four years later, the private sector was designated Alford, supra note 74, at 68; Maskus 1998, supra note 35, at 137–38. Claudio R. Frischtak, “Harmonization Versus Differentiation in Intellectual Property Rights Regime” in Global Dimensions of Intellectual Property Rights in Science and Technology 99–100 (Mitchel B. Wallerstein, Mary Ellen Mogee & Roberta A. Schoen eds., 1993). 101 Carsten Fink & Keith E. Maskus, “Why We Study Intellectual Property Rights and What We Have Learned”, in Intellectual Property and Development: Lessons from Recent Economic Research 7 (Carsten Fink & Keith E. Maskus eds., 2005). 102 The amended Article 15 of the 1982 Chinese Constitution now reads: “The State has put into practice a socialist market economy. The State strengthens formulating economic laws, improves macro adjustment and control and forbids according to law any units or individuals from interfering with the social economic order.” 99

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an important component of the changing economy, and “red capitalists” were invited to join the Chinese Communist Party at the Sixteenth Party Congress in 2001.103 Today, Article 13 of the Constitution stipulates that “[c]itizens’ lawful private property is inviolable,” and booming real estate markets appear in many major Chinese cities. Most recently, the National People’s Congress enacted a much-anticipated, yet controversial law to offer explicit protection to private property.104 Accompanying this rapid economic development and growth was the emergence of local stakeholders who stood to benefit from stronger intellectual property protection. Consider, for example, the software industry, which has experienced tremendous growth since the mid1990s. By 1997, the value of the software market had doubled from RMB 6.8 billion in 1995 to RMB 12.6 billion.105 The Chinese government also has been active in developing the local software industry, establishing bases in Liaoning, Hunan, Shandong, and Sichuan Provinces and in Beijing, Shanghai, and Zhuhai districts.106 Today, the number of private software companies has greatly increased. Although stateowned enterprises once dominated the Chinese economy, a large number of employees of these enterprises are now entering the private sector — or, in the Chinese parlance, “plunging into the sea” (xiàhǎi). As the late Zheng Chengsi and Xue Hong, two leading commentators on Chinese intellectual property law, observed: In recent years … many software engineers resigned from state enterprises or research institutes, taking software products (finished or unfinished) created during the course of employment with them, and joined private software companies or established their own companies. These private companies immediately produced and marketed the software products, and became competitors of state software enterprises.107

In the late 1990s intellectual property reforms were given a further push by the emerging consciousness of the need to develop a knowledge-based economy. As Lester Thurow noted, “[k]nowledge is the new basis for wealth. … In the past, when capitalists talked about their wealth, they were talking about their ownership of plant and equipment or natural resources. In the future when capitalists talk about their wealth, they will be talking about their control of knowledge.”108 Perhaps under the influence of the internet boom in other parts of the world, the phrase “knowledge economy” suddenly began to appear in major Chinese newspapers, such as The People’s Daily and Guangming Daily. Government officials used the phrase frequently in their presentations,109 while Chinese businesses quickly adopted words like “e-commerce” and “e-business” to enhance public image and stock market value.110 Although the Internet bust a few years later slowed online developments throughout the world, the drive for the development of a knowledge-based economy in China continued, and the Chinese Internet population grew exponentially. In October 1997, there were only 299,00 computers connected to the Internet and 620,000 Internet users.111 Based on the most 103 104

Clyde Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East 27 (2005). Joseph Kahn, “China Approves Property Law, Strengthening Its Middle Class”, N.Y. Times, Mar. 16, 2007, at

A1. 105 Xue Hong & Zheng Chengsi, Software Protection in China: A Complete Guide 3 (1999) [hereinafter Xue & Zheng 1999]. 106 Id. at 9. 107 Xue Hong & Zheng Chengsi, Chinese Intellectual Property Law in the 21st Century (2002) [hereinafter Xue & Zheng 2002]. 108 Lester C. Thurow, Building Wealth: The New Rules for the Individuals, Companies, and Nations in a KnowledgeBased Economy xiii (1999). 109 Xue & Zheng 1999, supra note 105, at 7. 110 Xue & Zheng 2002, supra note 107, at xl. 111 Yu 2003, supra note 80, at 371.

652 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY recent survey by the China Internet Network Information Center (CNNIC), there are now 58.4 million computers connected to the Internet and 137 million Internet users, second only to the United States.112 As the use of the Internet and new communications technologies continues to increase, Chinese policymakers have paid greater attention to issues concerning intellectual property rights in the digital environment. For example, the 2001 copyright law amendments addressed for the first time online copyright issues. In May 2006, the State Council promulgated the Regulations on the Protection of the Right of Communication Through Information Network. Most recently, China acceded to the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty. These developments make a lot of sense. Greater certainty over the scope of rights protected on the Internet is important to both local and foreign content providers and will greatly facilitate electronic commerce and broadband deployment. The biggest push for intellectual property reforms in the 1990s was China’s accession to the WTO. As China prepared to join the international trading body, it undertook a complete overhaul of its intellectual property system, amending its copyright, patent, and trademark laws. In addition, it introduced a large number of implementing regulations and administrative measures, such as those concerning the registration of computer software and those on the protection of topographies of integrated circuits. To help courts interpret these new laws and regulations, the Supreme People’s Court also issued a number of judicial interpretations.113 In November 2001, the WTO members finally approved the proposal to admit China to the international trading body during the Fourth Ministerial Conference in Doha, Qatar. After fifteen years of exhaustive negotiations, China formally became the 143rd member of the WTO on December 11, 2001. Although the accession process was complicated and involved many inextricable factors, it would not be far-fetched to argue that China might still remain outside the WTO had it not strengthened its protection of intellectual property rights.114 Indeed, some commentators considered the WTO membership a major impetus for China’s recent improvements in intellectual property protection. As Professors Zheng and Xue explained: In general, China’s entry to the WTO significantly influenced the speed and scope of the development of the Chinese IP law system. It is interesting to note that IP rights reforms kept pace with Chinese WTO negotiations. When the negotiations encountered obstacles, the IP rights reform slowed down; when the negotiations reached agreements to promote the accession process, the IP rights reform accelerated noticeably.115 Since China has become a member of the WTO, Chinese IP law reform has also peaked.116

To some extent, the economic benefits and reputational gains that were associated with China’s accession to the WTO far exceeded the socioeconomic costs incurred by increased intellectual property protection. By linking the two issues together, the Chinese began to understand that the stakes for the lack of intellectual property protection extended beyond the intellectual property arena, covering almost every other area that implicates international trade, including agriculture, banking, electronics, insurance, professional services, securities, telecommunications, and textiles.117 While they might not be excited about introducing stronger intellectual property protection, they certainly were reluctant to give up WTO-related trade benefits that were linked to such protection. China Internet Network Info. Ctr., 19th Statistical Survey Report on the Internet Development in China (2007). Sun, supra note 56, at 66–67. 114 Yu 2003, supra note 80, at 372. 115 Xue & Zheng 2002, supra note 107, at 104–05. 116 Id. at xxxix. 117 Yu 2003, supra note 80, at 371. 112 113

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Moreover, the moderate costs of stronger protection required by the TRIPs Agreement were incomparable to the high costs of other reforms required by the WTO accession. If the leaders and the Chinese public were willing to accept the costs of these other reforms, it was natural for them to accept the costs of TRIPs-related reforms. In fact, one could make a strong claim that China could easily recoup its losses in the intellectual property area by obtaining gains in such other trade areas as agriculture or textiles. Even critics of the overall economic benefits of China’s accession had a tough time responding to the strong nationalistic sentiments that considered the WTO accession an important means for China to regain its past glory, not to mention the general excitement, rejuvenation, and other psychological benefits brought about by the accession. Nevertheless, one needs to be cautious about how much one attributes the recent intellectual property reforms to China’s WTO accession. Although commentators and policymakers have widely credited the recent changes in the Chinese intellectual property system to the WTO accession, it is important not to overlook the many internal developments within the country, including the Chinese leaders’ changing attitude toward the rule of law, the emergence of private property rights and local stakeholders, the increasing concerns about ambiguities over relationships in state-owned enterprises, and the government leaders’ active push for modernization.118 While the WTO accession may be important, China’s guóqíng, or national conditions, continues to play a very important role in shaping intellectual property reforms in China. 3. Increasing Shift toward an Export-Driven Economy Today, China is “the world’s fourth largest economy and the third largest trading nation.”119 Its imports “tripled from $225 billion in 2000 to $600 billion in 2005,” and the country “accounted for about 12 percent of the growth of global trade,” an impressive jump from only 4 per cent in 2000.120 Its factories “make 70 percent of the world’s toys, 60 percent of its bicycles, half its shoes, and one-third of its luggage.”121 China also “builds half of the world’s microwave ovens, one-third of its television sets and air conditioners, a quarter of its washers, and onefifth of its refrigerators.”122 As the Chinese economy becomes increasingly driven by exports to other countries, intellectual property protection will become even more important than it was a decade ago. As Daniel Chow explained: [g]lobal competitiveness in the modern age is directly linked to the level of technology in goods and services. Studies indicate that the higher the level of technology involved in goods and services, the higher the growth rate of exports. … In the 1990s, China began to build a trade surplus with many nations based upon its low manufacturing costs. While China has been able to dominate in lowtechnology/labor-intensive industries, China realizes that to continue its growth in exports, it must move up the ladder into more technology-intensive goods and services. To do so, China must acquire access to advanced technology.123

Indeed, “China, like most nations, encourages exports because export sales contribute to a favorable trade balance and can earn United States dollars or other forms of hard currency.”124 Yu 2006, supra note 32, at 908. Bergsten et al., supra note 53, at 3. 120 Id. at 73. 121 Oded Shenkar, The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job 2 (2005). 122 Id. at 3. 123 Daniel C. K. Chow, “Why China Does Not Take Commercial Piracy Seriously”, 32 Ohio N.U. L. Rev. 206 (2006). 124 Id. at 214. 118 119

654 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY While Chinese companies were content to serve as original equipment manufacturers (OEMs) for foreign firms a decade ago, they have now moved into high-end technology markets, such as those for cars and regional jets, while seeking to maintain their competitive edge over lowcost products.125 Thus, some commentators and pundits suggested that China’s export-driven economic growth is likely to lead to greater future confrontations with the United States. As Peter Navarro observed, “[a]ny complete understanding of the Coming China Wars must begin with this observation: China’s hyper-rate of economic growth is export driven; and the ability of the Chinese to conquer one export market after another, often in blitzkrieg fashion, derives from their ability to set the so-called China Price.”126 Consider, for example, trademark protection, which is particularly important to an exportdriven economy. The usual criticism of strong trademark protection in an emerging economy is that such protection would force local consumers to pay a premium for well-known foreign brands in exchange for no or very limited benefits. This is particularly true when local consumers are brand-conscious or when their purchase decisions are distorted by their obsession with social status, which they seek to gain by buying or owning more expensive foreign products. Because most of the branded products are made in China, local consumers are often asked to pay a higher price even though the quality of the products is no different from that of products made by local brand owners. Moreover, by intentionally not offering trademark protection, countries may be able to take a free ride on the investment of foreign trademark holders, by earning profits as if they were selling genuine goods that bear the infringing marks. As foreign brand owners continue to advertise and promote their products, the local copycats would also benefit from the goodwill of the original products without incurring any advertising expenses. Such a competitive strategy, however, is ill-advised, especially for a country that has now become one of the world’s largest exporters. As Professor Kitch explained, that strategy “will result in a parasitical business that will always be dependent on the willingness of the targeted countries to tolerate the infringing imports … [and that] will never have an established market position that can lay a foundation for the development of an internationally competitive business.”127 To be certain, local firms can ensure the marketability of their products in foreign countries by using non-infringing trademarks in foreign markets. Indeed, global firms have used that strategy to avoid infringement in selected markets. Nevertheless, such a strategy is costly, because it will not allow for the economies of scale commonly found in global production. That strategy also makes it difficult for local firms to learn how to establish market position by experimenting in the local market with brand development and trademark portfolio management. To some extent, one can see the local market as a “playground” for Chinese export businesses to acquire the needed skills to set up internationally competitive businesses. A case in point is the leading Chinese personal computer manufacturer, Lenovo (Liánxiǎng). When the company sought to expand business overseas a few years ago, it found out that its English name “Legend” had already been registered and used as a trademark or trade name in many foreign countries. To avoid potential infringement and to ensure that it could become an official sponsor of the 2008 Beijing Olympics, it had no choice but to develop the new LENOVO mark, which combined the first two letters of the “Legend” mark with the word “novo.”128 Interestingly, the LENOVO mark has now become famous as a result of the worldwide media coverage of its purchase of IBM’s personal computers division. Id. at 207–208; Shenkar, supra note 121, at 161–62. Navarro, supra note 64, at 2. 127 Kitch, supra note 86, at 168. 128 Zhijun Ling (Martha Avery (trans)) The Lenovo Affair: The Growth of China’s Computer Giant and its Takeover of IBM–PC 334–35 (2006). 125 126

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Lenovo, however, is not the only one. Compared to a decade ago, a number of Chinese companies have now achieved prominence in the international market, with their trademarks being recognized as well-known outside China.129 Examples of these famous local brands include Galanz (for microwave ovens), Haier (for household appliances), Huawei Technologies (for telecommunications equipment), Konka (for televisions), and TCL (for televisions). As China increases its exports of goods branded with globally recognized local trademarks, the importance of intellectual property protection to the country’s future economic development cannot be ignored. From the standpoint of internal economic development in China, trademark protection is even more beneficial than the protection afforded by other forms of intellectual property. The development of globally recognized trademarks requires neither considerable technological expertise nor initial heavy capital investment. Although the global market has been dominated by brands developed by major corporations in developed countries, less-developed countries and smaller enterprises have their fair share of famous trademarks that are recognized throughout the world, especially in the fields of beer and liquor production — BACARDI (for Bermuda rum), CORONA (for Mexican beer), and TSINGTAO (for Chinese beer) easily come to mind.130 In fact, according to Interbrand, “Bacardi is the world’s 75th most valuable global brand, and with a valuation in excess of $3 billion, is worth comfortably more than the GDP of the country which produces it.”131 From the standpoint of consumer welfare and economic self-sufficiency, it is also helpful to encourage local companies to catch up and compete with famous Western brands by developing more attractive products and better brand positioning.132 Instead, this brand-building strategy “fits [well] with the government’s strategy of consolidating strategic industries … to create national champions that can hold their own in global markets and … to restore its imperial glory.”133 Compared to foreign firms, local firms thus far have been very successful in the Chinese market. In this dynamic, yet immature market, “consumers are still experimenting, and brands come and go with great speed.”134 As a result, local firms have the opportunity to attain market position and develop the next promising brands. The ability of local firms to improve consumer loyalty and establish market position has been further enhanced by the failure of foreign firms to understand or adjust to the local market conditions. Studies, for example, have “estimated that less than 10 percent of Chinese consumers have the level of disposable income that can afford to buy Western products.”135 Yet many foreign businesses ignore this financial reality and insist on focusing on the highend market, perhaps due to benefits from economies of scope and scale in global production, or to the firms’ reluctance to lower the quality, and often the international reputation, of their products. A case in point is the microwave market, which Galanz has overtaken recently. “[I]n 1993 only 1 per cent of Chinese consumers had microwaves. Consumption grew — but not in the pattern expected. By early 2000, nearly 90 per cent of the market was in cheaper models, 129 Donald N. Sull & Yong Wang, Made in China: What Western Managers Can Learn from Trailblazing Chinese Entrepreneurs (2005). 130 Janet H. MacLaughlin, Timothy J. Richards & Leigh A. Kenny, “The Economic Significance of Piracy” in Intellectual Property Rights: Global Consensus, Global Conflict? 104 (R. Michael Gadbaw & Timothy J. Richards eds., 1988). For a detailed discussion of emerging brands in less-developed countries, see Simon Anholt, Brand New Justice: How Branding Places and Products Can Help the Developing World 43–77 (2d ed. 2005). 131 Anholt, supra note 130, at 60. 132 Yu 2006, supra note 32, at 996. 133 Shenkar, supra note 121, at 158. 134 Harold Chee with Chris West, Myths about Doing Business in China 30 (2004); Rick Yan, “Short-Term Results: The Litmus Test for Success in China” in Harvard Business Review on Doing Business in China 95 (2004). 135 Chee & West, supra note 134, at 31.

656 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY with the Chinese company Galanz dominating.”136 Similarly, although Whirlpool and Kelon were competitors for the manufacture of washing machines, the local manufacturer quickly won the race.137 Today, “[a]fter losing more than $100 million and shutting down most of its factories, Whirlpool … manufactures washing-machines for Guangdong Kelon” — a scenario that Whirlpool certainly did not foresee when it began its investment in China.138 As China continues to increase exports and develop products under globally recognized trademarks, especially after the much-anticipated push around the 2008 Beijing Olympics (and again during the 2010 World Expo in Shanghai), the existence of effective intellectual property protection is likely to be of paramount importance. Significant improvement in trademark protection is therefore likely to be more important to China than similar improvement in the protection of other forms of intellectual property. In fact, the improved ability of Chinese businesses to develop globally famous brands may ultimately hold the key to converting those Chinese who are sceptical of intellectual property protection to global missionaries for greater intellectual property reforms. IV. CONCLUSION

Commentators have considered China the proverbial exception to the causal relationship between the strength of intellectual property protection and the amount of FDI attracted to the country. However, this paper has shown that this causal relationship is more ambiguous than experts have claimed and China illustrates rather well the ambiguity of this relationship. While stronger intellectual property protection may be unnecessary for attracting FDI, this paper has documented an undeniably intertwined relationship between intellectual property protection and economic development in China. Intellectual property protection can therefore be seen broadly as an integral and essential part of a complex innovation system that serves as a catalyst for economic development. If a country is to be further developed economically, the implementation of an effective and robust intellectual property system that is tailored to local needs and conditions is likely to be significant. Today, piracy and counterfeiting problems remain widespread in China, and rights holders continue to be frustrated by the lack of enforcement of intellectual property rights in the country. However, at some point in the near future, China may reach a crossover point at which it will find it in its self-interest to offer stronger intellectual property protection. Indeed, similar transformations occurred in Japan in the 1970s and in Hong Kong, Singapore, South Korea and Taiwan in the 1980s—and even in Germany and the United States many decades ago.139 It is only a matter of time before China joins its more developed neighbors in championing the cause for stronger intellectual property protection. MR. LIM: Thanks for that, Peter. Can I now invite Doris to share with us her thoughts on trademarks and the Chinese Olympics?

136

Id. Huang, supra note 59, at 193–94. 138 Anholt, supra note 130, at 64. 139 Endeshaw Assafa, Intellectual Property Policy for Non-industrial Countries 120 (1996); William Kingston, “An Agenda for Radical Intellectual Property Reform” in International Public Goods and Transfer of Technology Under a Globalized Intellectual Property Regime 658 (Keith E. Maskus & Jerome H. Reichman eds., 2005). 137

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Gold Medal Opportunities at the Beijing Olympics Doris Estelle Long*

ABSTRACT

As a result of Beijing’s being named the host city for the Summer 2008 Olympics, China has already enacted special regulations governing the protection of Olympic symbols and has engaged in an apparently wide-ranging enforcement program which includes involving the public in the efforts to combat illegal uses of the Olympic Symbols. While these actions represent a significant advance over previous efforts to protect trademarks in China, many of the cultural and political issues that impact China’s enforcement activities in other arenas (including counterfeiting and piracy of IP protected goods and services) remain problematic. Unfortunately, although the Olympic Symbols may be the subject of heightened protection, cultural perceptions of the differences between commercial marks and these symbols may make any appreciable “improvement” in IPR protection evanescent. To take full advantage of the opportunities presented by this Olympic moment China and trademark owners must work together to make the advances in enforcement protection for Olympic Symbols, the platform for permanent enhancements to intellectual property protection in general in China. Such a rational approach would assure that the benefits of the Olympics will last far beyond the 2008 Summer Games. I. INTRODUCTION

In 2001, when Beijing was announced as the host city for the 2008 Summer Olympics,140 China joined a special club of countries who have faced the challenge and opportunity of hosting an Olympic event. There is no question that holding the Olympics in Beijing poses a tremendous marketing opportunity. With the influx of foreign travelers, new Olympics-related products, and long term potentially heightened demand for unique Chinese traditional goods, the Olympics provides a rare injection of economic activity tied to a single sporting event similar to the opportunities provided by such other mega events as the World Cup or the Pan Asian Games. But the opportunity to earn gold medals will not be limited the stadia and playing fields of the 2008 Summer Olympics. To the contrary, China itself is faced with the potential for turning the Beijing Olympics into the beginning of a new phase of intellectual property enforcement in China. Whether such potentiality becomes a Gold Medal reality, however, requires aggressive action and a full understanding by both Chinese enforcement officials and trademark owners of the problems ahead. * Professor of Law and Chair, Intellectual Property, Information Technology and Privacy Group, The John Marshall Law School. I would like to thank Professor Hugh Hansen and the participants of the Fordham Annual Conference on Intellectual Property Law and Policy for their suggestions and comments. I would also like to thank the participants of the Conference on The Changing Role of Intellectual Property in Asia: Moving Beyond “Producers” and “Consumers” at the University of Illinois at Champagne–Urbana; of the Temple Law Review Symposium Law Without Borders: Current Legal Challenges Around the Globe; of the Thomas M. Cooley ILS Symposium on China and its Effect on the Global Economy; of the New York City Bar International Law Weekend: Toward a New Vision of International Law; and of the Distinguished Professor Speaker Series at The John Marshall Law School (Chicago), whose comments also helped shape this Article. I would also like to thank Konstantino Muhtaris for his research assistance. As always, any errors belong solely to me. 140 Beijing was selected as the Host City for the 2008 Summer Olympics at the 112th Session of the International Olympic Committee (IOC) in Moscow on July 13, 2001.

658 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY The difficulty of protecting intellectual property in China has been a constant irritant in U.S.– China relations since before China became a member of the WTO in 2001. China’s activities both during the candidature process for hosting an Olympic Games and after successfully attaining host status, however, indicate that at least certain types of enforcement activities are being strengthened. These strengthening activities may form the basis for a new phase in IPR protection in China. II. SPECIAL PROTECTION FOR OLYMPIC SYMBOLS

As part of the candidature process to host an Olympic Games, the IOC requires that organizing committees secure various guarantees regarding the conduct of the Olympics in the country, including “a declaration by the government of your country stipulating that all the necessary legal measures will be taken to facilitate the protection of Olympic marks.”141 This obligation is further enforced by the Host Country Agreement signed by the IOC and the Organizing Committee directly upon the announcement of the successful candidature of the city in question.142 Such a declaration was contained in the candidature file of the Beijing Organizing Committee for the Games of the XXIX Olympiad (BOCOG)143 and in the Host Agreement signed in connection with the Beijing Summer Olympics to be held in 2008.144 By November 2001, the Beijing Municipality had enacted Provisions for the Protection of Olympic Intellectual Property, effective November 1, 2001, which provided for protection for a broadly defined category of protected Olympic Intellectual Property. Article 2 of the Decree defined the covered intellectual property as including “ any trademarks, special symbols, patents, works and other creations related to the Olympics as stipulated in the Olympic Charter and any agreements concluded by the Beijing Municipal People’s Government and the Chinese Olympic Committee (COC) with the International Olympic Committee (IOC).”145 Article 3 defined the “ trademarks, special symbols, patents, works and other creations related to the Olympics mentioned in these Provisions” as “referring to” the following broad array of covered symbols: (1) the Olympic symbol (five Olympic Rings), Flag, Anthem, Motto as well as the terms or designs containing the words OLYMPIC, OLYMPICS, OLYMPIAD, OLYMPIC GAMES, or any type of combination thereof; (2) the emblem and title of the COC; (3) the logos, mascots, names, symbols (including Beijing 2008), anthem and slogans developed by the Beijing 2008 Olympic Games Bid Committee and the BOCOG or others entrusted by them for their use during the period when Beijing bid for or host the Games of the XXIX Olympiad; and (4) other Olympic intellectual property rights objects related to the Olympics.146 This broad definition for covered intellectual property was matched by an equally expansive definition of prohibited unauthorized uses under the Declaration, including: (1) using the same or similar trademarks, special symbols, patents, works and other creations without authorization in production, business operations, advertising, propaganda, performance and other activities; 141 Manual for Candidate Cities for the Games of the XXIX Olympiad 2008, available at http://www.olympic.org/uk/ utilities/report/level2_uk.asp?.HEAD2=47&HEAD1=11. 142 Id. 143 English-Language Version of Candidature File available at http://en.beijing2008.cn/65/68/column 211716865. shtml. 144 Id. 145 Protection of Olympic Intellectual Property Provisions by the Beijing Municipality, art. 2, entered into force Nov. 1, 2001. English-language translation available at http://www.beijing12312.com/newsshow.asp?id=A2007121916535 06083091 [hereinafter Declaration]. 146 Id. art. 3.

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(2) forging or making without authorization representations of the same or similar trademarks or special symbols, or selling representations of the same or similar trademarks or special symbols that are forged or made without authorization; (3) using the same or similar trademarks, special symbols, patents, works and other creations in a disguised form; (4) using the same or similar trademarks, special symbols, patents, works and other creations without authorization in registration of enterprises, social organizations, institutions, private non-profit-making work units, and in the names of websites, domains, toponymy, buildings, structures, places, etc.; (5) assisting in acts of infringement by providing convenient conditions such as venues, storage, transportation, mail service or concealment; or (6) other infringements in violation of relevant laws and regulations of the State.147

The Declaration authorized municipal intellectual property, cultural and enforcement offices, including the Beijing Administration for Industry and Commerce (BAIC), to enforce its provisions148 and cited the “principles of safeguarding the dignity of the Olympic Games” as the basis for such wide-ranging protection.149 The Chinese Government moved quickly as well to provide special legal protection for the intellectual property associated with the Olympic Games. In 2002 it enacted special regulations for the protection of the Olympic Symbols.150 While these Regulations contained many provisions similar to those contained in the Beijing Municipality’s Declaration, the two documents are not identical. In fact, it appears that the Regulations were based primarily upon then existing trademark law in China, which it largely mirrors. Similar to the Declaration by the Beijing Municipality, the Regulations define the protected “Olympic symbols” broadly: (1) The Five Olympic Rings of the International Olympic Committee Flag, Motto, Emblem, and Anthem of the Olympic Games; (2) The special terms of OLYMPIC, OLYMPIAD, OLYMPIC GAMES and their abbreviations; (3) The name, emblem and symbol of the Chinese Olympic Committee (hereinafter referred to as the COC); (4) The name, emblem and symbol of the Beijing 2008 Olympic Games Bid Committee; (5) The name and emblem of the Organizing Committee of Games of the XXIX Olympiad; Id. art. 8. Id. arts. 10, 14. In art. 15, in keeping with the traditional “two paths” of enforcement (through courts and administrative proceedings) which China employs to protect intellectual property rights generally, the Declaration provides that intellectual property owners also have the right to chose to file a lawsuit with the civil courts in lieu of pursuing administrative relief. It should be noted, that unlike the United States, administrative tribunals, such as the State Administration for Industry and Commerce (SAIC), which has primary administrative jurisdiction for trademark enforcement matters, the National Copyright Administration (NCA), which has primary administrative jurisdiction for copyright enforcement matters, and the State Intellectual Property Office (SIPO) which has primary administrative jurisdiction for patent enforcement matters, generally have enforcement powers, including the ability to investigate claims, secure evidence, seize infringing goods and adjudicate liability. They also usually have the power to issue injunctive relief (usually in the form of cease and desist orders) and to impose fines. They do not, however, have the ability to secure compensation for the intellectual property owner. See generally Peter Ganea & Thomas Pattloch, Intellectual Property Law in China 289–341 (2005). 149 Declaration, art. 5 (“The protection of Olympic intellectual property rights shall comply with the principles of safeguarding the dignity of the Olympic Games, prohibiting any infringement of proprietary rights, as well as protecting and using such rights according to law.”) (emphasis added). 150 Regulations on the Protection of Olympic Symbols, Promulgated by Decree No. 345 of the State Council on Feb. 4, 2002, with an effective date of Apr. 1, 2002 [hereinafter Symbol Regulations]. English translation available at http://www. china.org.cn/english/China/208301.htm. The State Council is the Highest Executive Organ of the Chinese Government. These Symbol Regulations and the Beijing Municipal Declaration are not the only special laws and regulations enacted in China in connection with protection of the Olympic Symbols. China also enacted a special registration processes to assure protection of the Olympic Symbols. See Measures for the Recordal and Administration of Olympic Insignia. 147 148

660 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY the mascots, anthem and slogans of the XXIX Olympic Games; the ‘Beijing2008’, the XXIX Olympic Games and their abbreviations; (6) Other symbols related to the XXIX Olympic Games prescribed in Olympic Charter and Host City Contract for the Games of the XXIX Olympiad.151 Under the Regulations, unauthorized uses of the Symbols “for business purposes” (commercial use) is expressly prohibited.152 The enforcement of these Regulations is given to the SAIC (State Administration for Industry and Commerce.)153 The Regulations, however, do not grant the SAIC exclusive jurisdiction over Olympic Symbol violations. Instead, they expressly recognize that Customs shall have jurisdiction over “imported and exported cargoes … suspected of infringing the exclusive rights of the Olympic Symbols.”154 In addition, Article 14 of the Regulations provides that Olympic Symbols “shall also be protected under the provisions of related laws and regulations, such as Copyright Law, Trademark Law and Regulations on the Administration of Special Signs (famous marks).155 Furthermore, Article 10 specifically recognizes the right of the owner to seek relief in the courts if he so chooses.156 Under the Regulations, where a person makes unauthorized use of an Olympic Symbol, such as by manufacturing or selling counterfeit Olympic mascots, an injunction must issue and the infringing goods must be “confiscated and defaced”157 along with the “special tools for producing the infringing commodities.”158 The Regulations further provide that the illegal gains of the infringers “may be confiscated” and the infringers “shall also be fined under [up to] five times of the illegal gains.”159 In the absence of illegal gains, the infringers may still be fined.160

These provisions bear a strong facial similarity to existing Chinese Trademark Law, which similarly provides for confiscation and destruction of infringing goods,161 injunctions,162 and 151 Regulations, art. 2. For images of the special symbols developed for the Beijing Olympics, see Beijing Olympics Web site at http://en.beijing2008.cn. The five special mascots are generally referred to as “fuwa,” Each represents one of the five colors of the Olympic Rings. See generally The Official Mascots of the Beijing 2008 Olympic Games, available at http://en. beijing2008.cn/spirit/beijing 2008/graphic/n214068254.shtml. 152 Symbol Regulations, art. 4. Under the Regulations, “business purposes” is defined as “using the Olympic Symbols to make profits in the following ways: (1) To use the Olympic Symbols on the commodities, the package or the container of the commodities, and the related trade documents; (2) To use the Olympic Symbols in the service items; (3) To use the Olympic Symbols in advertisements, commercial exhibitions, commercial performance and other commercial activities; (4) To sell, import and export the commodities with the Olympic Symbols; (5) To produce or sell the Olympic Symbols; (6) Any other activities may make the third parties believe that there are sponsorship or other support relationships between the users and the right owners of the Olympic Symbols. 153 Id. art. 6. This agency is sometimes referred to as “AIC” for Administration for Industry and Commerce. Like the other administrative agencies referred to in this article, SAIC has diverse offices including those at the local level such as the Beijing Administration for Industry and Commerce (BAIC) which would be on the agencies with primary responsibility for enforcement activities around Olympic sites. 154 Id. art. 12. 155 Id. art. 14. 156 Id. art. 10. 157 Id. art. 10. The term “defaced” is significant. While other translations use the term “destroy” the reality is that under present Chinese trademark law, such items do not have to be destroyed. To the contrary, infringed goods may even be resold at public auction after seizure so long as the trademark has been removed. See Trademark Law, art. 3; Trademark Regulations, art. 44. 158 Trademark Regulations, art. 44. 159 Id. 160 Id. 161 Id. art. 53. It should be noted, however, that Chinese Trademark Law currently establishes a hierarchy of relief, which allows for removal of the trademark as opposed to the destruction of the goods, where such removal is possible. Id. See also id. art. 44 (providing that if it is difficult to detach “the representations” of the trademark, then both the...

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the award of fines for trademark infringement.163 Yet, beyond this facial similarity to thenexisting Chinese trademark law, the Olympic Symbol Regulations provide several benefits to Olympic Symbols that trademarks do not presently enjoy. Under present Chinese Trademark Law, penalties and damage awards are based upon valuations which use the actual sales price (the counterfeiter’s price) or the “labeled” price, which largely amounts to the same thing.164 Any focus on the counterfeiter’s price for establishing harm necessarily undervalues such harm and fails to provide the necessary deterrent effect to provide for effective enforcement.165 The Regulations, however, on their face appear to provide the means for substantially ameliorating this situation. As opposed to relying on the actual value or labeled value for determining the fines to be levied, the Regulations specifically allow such fines to be tied to the license fee for the use of the Olympic Symbol. Under Article 13, compensation for the unauthorized use of the Symbol shall be “according to the loss of the infringed, or the gain of the infringer caused by the infringement.”166 This language mirrors traditional Chinese Trademark Law.167 Significantly, however, it provides that if such loss or gain cannot be determined “the amount of the compensation shall be referred to the fee of license use of the Olympic Symbols.”168 This focus on a tangible valuation based, not on pirate values, but instead based clearly on the value to the trademark owner of the use is a major step forward and could result in significant fines, given the relatively high license fees charged for use of the Olympic Symbols.169 This advance in relief for Olympic Symbol protection is combined with an increase in the amount of fines for engaging in unauthorized use. Current Trademark Law provides that fines for unauthorized use of registered trademarks shall be up to three times the amount of the “illegal business turnover.”170 Where it is impossible to determine the amount, then a fine of up to 100,000 RMB may be imposed.171 By contrast, under the Regulations governing the Protection of the Olympic Symbols, fines are increased to up to five times the amount of the illegally obtained income.172 Where no such illegal income can be ascertained (including presumably where the unauthorized use has been stopped before any sales have occurred), fines up to 50,000 RMB may be imposed.173 On its face, the monetary fines for counterfeiters who fail to keep accurate records (the vast majority, no doubt) are markedly lower under representations and the goods “shall be confiscated and destroyed.” See generally, Ganea & Pattloch, supra note 148, at 312–14. 162 Trademark Law, art. 13; Trademark Regulation, art. 45. 163 See generally Trademark Law, arts. 45 & 48. See also Trademark Regulation, art. 42. 164 Trademark Law, art 56. According to art. 12 of the Judicial Interpretation by the Supreme People’s Court on Several Issues of Concrete Application of Laws in Handling Criminal Cases of Infringing Intellectual Property: “Value of the products produced by infringing on intellectual property shall be computed according to the prices at which such products are actually sold. Value of the products produced by infringing on intellectual property produced, stored, transported, and those not sold shall be computed according to the labeled prices or the actual prices found to be sold at after investigation. Value of the products produced by infringing on intellectual property without labeled prices or whose actual prices are impossible to be ascertained shall be computed according the middle market prices of such products” [hereinafter Judicial Interpretation.]. English text available at http://www.ipr.gov.cn/ipr/en/info. 165 See TRIPs, art. 41 (requiring “effective enforcement” including “remedies which constitute a deterrent to further infringements”). 166 Symbol Regulations, art. 13. 167 Trademark Law, art. 56. 168 Symbol Regulations, art. 13. 169 See, e.g., Clifford Coonan, “Industries Go for Gold at Olympics”, Sun. Bus. Post, Mar. 5, 2006, available at http://archives.tcm.ie/business/post/2006/03/05/story12298.asp). 170 Trademark Law, art. 52. 171 Id. art. 52. 172 Symbol Regulations, art. 10. 173 Id. art. 10.

662 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY the Regulations.174 However, given that the Regulations provide that values will be based on Olympic licensing fees in the absence of other proof, it is likely that, as a practical matter, most infringers will be subjected to significantly higher mandatory multiples. The remedies available for unauthorized use of Olympic Symbols is further strengthened by the Beijing Municipal Declaration which provides that if there are uses which are prohibited under the Declaration that are not covered by present laws, fines from 1000 RMB up to 30,000 RMB may be imposed.175 III. A ROUGH TRAINING PERIOD?

Even with special regulations protecting Olympic Symbols, the counterfeiters have started early.176 Their efforts are not limited to traditional counterfeiting activities in the hard goods arena. To the contrary, counterfeiters have already begun to take advantage of the commercial opportunities of the Olympics, by launching shadow sites purporting to offer tickets, travel and other Olympic-sponsored goods and services.177 The Chinese government has mobilized an impressive array of enforcement measures to combat such actions, including increased training programs for enforcement personnel and the establishment of a “rapid city Olympic intellectual property protection linkage mechanism” to provide fast action on potential infringements.178 These enforcement efforts have not been limited to Beijing. To the contrary, enforcement sweeps have been planned for other major cities in China, including Quingdao, Tianjin, and Shanghai, during the critical period.179 In addition to mobilizing traditional enforcement personnel, the government has also mounted a public relations and education campaign that directly involves the public in protecting the Olympic Symbols.180 Not only have articles appeared stressing the harm that counterfeit products can cause,181 consumers have been drafted into the front lines of the enforcement effort. A hotline has been set up in Beijing and rewards are being offered for truthful information regarding infringing activity.182 Corporations are further being urged to 174 The absence of such record-keeping would presumably result in a lack of evidence concerning the amount of profit the infringer earned through the illegal activity in question. 175 Declaration, art. 14. The Beijing Declaration becomes more significant in light of the fact that most counterfeit Olympic merchandise will most likely be governed by it since it covers the location of the Olympics where most counterfeit merchandise can be expected to be sold. 176 See, e.g., Beijing Seizes Nearly 30,000 Fake Olympic Products, PEOPLE’S DAILY ONLINE, June 19, 2007, http:// english.people.com.cn/200706/18/eng20070618_385151.html. 177 See, e.g., Associated Press, Fake Beijing Olympics Web Site Busted, Oct. 1, 2007, available at http://www.law. com/ jsp/article.jsp?id=1191229382410. 178 China Fun, Protection of the Olympic Symbol: Beijing is Resolute, Sept. 26, 2007, available at http://www. china-fun.net/2008/preparation/200709261/1510291.shtml. 179 Id. 180 Symbol of Protection, available at http://www.bjreview.com.cn/Olympic/text/2007-01/16/content (describing efforts of enforcement personnel to explain to a restaurant owner why it could not use the phrase “Wishing The 2008 Beijing Olympics success” on its napkins); SIPO, Fake Ties, CHINA DAILY, Mar. 17, 2008, at 9, available at http:// www.sipo.gov.cn/sipo_ English/news/iprspecial/200803/t20080317_236971.htm (fireworks manufacturer declared sense of shame once he became aware of the importance of the IPR after being fined for using the phrase “Wishing Success to the Beijing Olympic Games” on his fireworks). 181 In one case, involving the seizure of 12,800 partially finished Fuwa (the five mascots of the Beijing Olympics) and more than 12,700 finished products confiscated in February 2007, a local official was quoted in the Beijing Daily Messenger as warning people against the health hazard posed by the products, which were sometimes filled with industrial waste that could threaten people’s health. Beijing Seizes Nearly 30,000 Fake Olympic Products, supra note 176. 182 Symbol of Protection; see also Declaration, art. 11 (providing “Any organization and individual may report any activity in violation of Olympic intellectual property rights to the administrative departments of industry and commerce, intellectual property rights, copyright, etc.; and shall be rewarded if the case reported proves to be true.”).

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take pledges to avoid infringing the Olympic Symbols.183 Those who violate the Olympic Symbols may also find themselves subject to public criticism in the press.184 While it is too soon to ascertain the final impact of these efforts, there is some evidence that this concerted effort is having a positive impact on counterfeiting activities connected with the Olympics. Reports indicate that counterfeit Olympic merchandise does not appear readily available, at least around major Olympic venues. This fact alone demonstrates a truth we have long known about international enforcement of intellectual property rights. Once the infrastructure for enforcement is in place,185 actual enforcement depends largely on the importance which local governments place on such activities.186 The mobilization of the necessary players in any IP enforcement program — including, significantly, the public as a result of public relations and education campaigns to alert them to the importance of protecting intellectual property — is not an easy undertaking. The apparent existence of this mobilization in China in connection with the Olympic Symbols is a tremendous advance. On the other hand, unless these efforts spill over into the protection of other marks, including those owned by foreign companies, such mobilization may prove unfortunately evanescent. IV. THE LAST TOUGH HURDLE TO THE GOLD

While Olympic symbols may currently be the subject of heightened protection, cultural perceptions of the differences between traditional, commercial marks and these symbols may make any appreciable “improvement” in IPR protection in China temporary at best. The heightened public perception of the importance of protecting the Olympic Symbols from unauthorized uses, and the active role that the public has taken in helping to protect them, may not be readily transferable to other commercial symbols. Although trademark law may perceive the fuwa and other Olympic symbols as merely another set of source designators, there is strong evidence that the Chinese public does not see them as commercial equivalents. To the contrary, the Olympic Symbols have been actively promoted as “important cultural carriers of the Olympic movement, a symbol of the Olympic spirit.”187 The spirit represented by the Olympics has been promoted as more than another athletic contest to be merchandised. To the contrary, five “cultural events” have been held, pre-opening day, promoting the strong connection between the Olympic spirit and Chinese culture and tradition.188 In the Manual for Beijing Olympic Volunteers, the BOCOG stresses the role of the Olympics as a “social movement based upon sports and guided by certain philosophical thoughts, i.e., Olympism.”189 It describes the “central ideal” of Olympism as “the harmonious development of man, and it 183

Id. Fake Ties, supra note 180. 185 This infrastructure necessarily includes the legal infrastructure, including appropriate legal protection for intellectual property and effective and fair procedures for securing such protection, as well as an adequate level of training for judges, lawyers, police, Customs, and other enforcement personnel. The development and maintenance of such infrastructure is undeniably an ongoing process. 186 There are other factors beyond the heightened enforcement efforts that may play a role in the success of Chinese efforts to protect the Olympic Symbols. In particular, strict manufacturing controls, including the requiring of specialized holographic identity tags on authorized goods, and strict distribution channels, including limiting the sales of Olympic merchandise to licensed stores, undoubtedly also play a role and may explain some of the differences in the apparent success of present Olympic Symbol enforcement versus traditional commercial trademark protection. 187 “Protection of the Olympic Symbol: Beijing is Resolute”, China Fun, Sept. 26, 2007, available at http://www. china-fun.net/2008/preparation/200709261/1510291.shtml (quoting Li Yan Jun, Director Beijing Olympic Organizing Committee). 188 “Beijing 2008—5th Beijing 2008 Olympic Cultural Festival Concludes” (updated July 16, 2007), http://en. beijing2008.cn/culture/festivals/ceremony/n214110895.shtml. 189 Beijing Org. Comm. for the Games of the XXIX Olympiad, Manual for Beijing Olympic Volunteers 38 (China Renmin Univ. Press 2007), available at http://www.asiaing.com/manual-for-beijing-olympic-volunteers.html. 184

664 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY tries to reach the goal through sports … Olympism greatly enlarged the spiritual contents of sports.”190 In addition to stressing the philosophical, human dignity goals of the Olympics,191 the Manual places volunteering to assist in the hosting of the Olympics within Confucian goals of social obligation. The Manual states: “China’s ancient educator and thinker, Confucius, believed “benevolence and love” to be the top moral standards of “Jun Zi (a man of honor, a righteous man, or a gentleman) …. Confucius said ‘The man of honor seeks righteousness, while the man of disgrace only cares for profit.’”192 This socio-cultural overlay of human dignity and social benefit with regard to the meaning of the Olympics and its related symbols is reflected in the basis for the pledges of non-infringement businesses are making, which are described as promises to “fulfill their social responsibility.”193 The cultural significance of the Olympic Symbols suggests that the present enforcement efforts for these Symbols may not be readily transferable to marks that lack similar cultural attributes. There is no question that, to a certain extent, all trademarks undoubtedly carry messages beyond source designation and quality characteristics.194 What may be required, however, for trademark owners to gain the advantages of current enhanced appreciation among Chinese enforcement personnel and the general public for the protection of these symbolic messengers is to invest their brands with cultural meanings for China. More importantly, they may need to align protection for their marks with socialist goals, including the need to protect the public from the harm counterfeit goods may pose.195 This harm may include potential threats to health and safety, or even threats to the well-being of society through the sale of false goods. Beyond the efforts of trademark owners, the Chinese Government itself must also recognize that all trademarks, regardless of their affiliation with the Olympics or other cultural events, are deserving of the same strong enforcement efforts undertaken to protect the Olympic Symbols. By transforming the experience and regulations developed for these symbols into a permanent advance in IPR protection generally, China could establish a new phase in enforcement that would have long-term positive benefits for all trademark owners — both foreign and domestic. V. CONCLUSION

China’s efforts to protect Olympic Symbols demonstrates a potential maturing of China’s intellectual property enforcement efforts. Valuable lessons in enforcement techniques are being learned, including the need to involve the public in such efforts. This opportunity for increasing the platform for IPR enforcement generally should not be lost. While cultural perceptions of the differences between traditional, commercial marks and the Olympic Symbols may make any appreciable “improvement” in IPR protection uncertain, it is in everyone’s interest to turn the temporary benefits of Olympic Symbol protection into positive long lasting advances. To take full advantage of the opportunities presented by this Olympic moment, China and trademark owners must work together to make the Olympic advances in enforcement protection for Olympic Symbols, the platform for permanent enhancements to intellectual property protection in general in China. Such a rational approach assures that the benefits of the Olympics will last far beyond the 2008 Summer Games. 190

Id. Id. 192 Id. 193 Symbol of Protection, available at http://www.bjreview.com.cn/olympic/text. 194 See generally Doris Estelle Long, “Is Fame All There Is?: Beating Global Monopolists at Their Own Marketing Game”, 40 Geo. Wash. Int’l L. Rev. (2007). 195 Doris Estelle Long, “Trademarks and the Beijing Olympics: Gold Medal Challenges”, 7 J. Marshall Rev. Intell. Prop. L. 433 (2008). 191

PART C: CHINA & INTELLECTUAL PROPERTY 665 MR. LIM: Thanks very much indeed for that, Doris.

Can I now invite Eric to share his reactions? MR. SMITH: Doris, that was a great talk about what China is trying to do with the Olympics.

It reminded me — and I had forgotten this — that I believe GE Healthcare and NBC Universal are either the exclusive licensees or non-exclusive licensees for the Olympics Symbol in China. I recall that NBC Universal is going to put the Olympics Symbol at the beginning of all its DVDs, in the hope that the Olympics Symbol would create the incentive for the Chinese to begin seizing and doing some real enforcement in the area of video piracy. I am glad to see that that is moving forward in the trademark area. I’m afraid the scorecard isn’t quite as good in the copyright area. I’ve come here before and given this report. This year I put in the materials IIPA’s Special 301 submission, which is about a twenty-five-page detailed look at the state of piracy and law reform and enforcement in China.196 I would encourage you to take a look at it if you are interested because it has a lot of detailed information about what is going on there. Let me just give you a sense for what has happened over the last year in 2007. Piracy from the standpoint of the copyright industries has basically stayed the same, or perhaps even gotten worse, now that China has over 500 million mobile phone users and 210 million Internet subscribers.197 It is now to the point where things are in a difficult place, certainly for our companies, but also for China. For example, the record industry estimates that 99 percent of the music online is illegal. That’s a huge number. You can’t very well develop a legal local industry with that kind of situation. The piracy rates continue over 90 percent for audio, video, and games, 80 percent for business software. These estimates are done every year.198 I think Steve is absolutely right: the Chinese from the end of 2006 and during 2007 increased their raiding-and-seizure activity significantly. They had special campaigns.199 They have these campaigns on a regular basis, where they undertake, with a rather significant use of resources, to raid and seize product in the marketplace. 196 IIPA, 2008 Special 301: People’s Republic of China — Amended (2008), at 64–87, available at http://www.iipa. com/ rbc/2008/2008SPEC301PRC.pdf. 197 Id. at 86. 198 Id. 199 See China’s IP Protection in 2007, supra note 8: VI. Rigorous crackdown on piracy and vigorous efforts to overhaul and regulate the cultural market — In 2007, the Ministry of Culture earnestly fought against piracy, through daily operations against piracy, market inspections, punishments for businesses without certificates and ground sellers, as well as other special punishments in line with the target of establishing a stable and harmonious cultural market. The efforts to overhaul and regulate the order of the cultural market resulted in substantial progress. In 2007, a total of 4.91 million person/time from cultural administrations and administrative enforcement authorities on cultural market at all levels were dispatched on various campaigns to inspect 850,000 audio and video operation units. They confiscated 110 million illegal audio and video products, uncovered and punished over 20,000 cases of intellectual property rights violation, and transferred 399 cases and 646 suspects to the judicial authorities. VII. Noticeable influence of the public security departments shown from the effective measures against infringement — In 2007, public security departments across the country increased their efforts against criminal actions violating various trademarks, patents and copyright, through Day to Day Operations against Piracy, Special Campaign Against Illegal Publications, Special Campaign against Internet Piracy and the Eagle Action. Remarkable results were achieved from those actions. Public security departments registered 2,283 cases concerning intellectual property rights infringements, 2008 of which were solved and captured 2,967 suspects. The cases involved property to a value of 1.49 billion yuan. Security departments cooperated with related departments and settled more than 10,870 cases related to infringements of various intellectual property rights including copyright and confiscated more than 41.18 million illegal publications. Id. at VI–VII; see also “China’s IPR Protection”, People’s Daily Online, June 24, 2007, http://english.peopledaily. com.cn/zhuanti/Zhuanti_487.html. The “100-day Campaign Against Piracy” occurred July 15–Oct. 25, 2006. See id.

666 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY This time a couple of our members did consumer surveys before the campaign, in the middle of the campaign, and after the campaign, looking at retail shops and what was offered for sale at those various points. The conclusion of those studies was that there was almost no impact in the marketplace from all that raiding activity.200 The fines, of course, are very low. They are administrative fines. I was in China last year. I said to ex-Vice Premier Wu Yi again and again that until they move their enforcement system into the criminal area and begin some real deterrent penalties — that kind of non-effect is going to continue within China. You just can’t take people who are making that kind of money out of the marketplace with a 5,000-renminbi fine. It’s just not going to work. And it doesn’t work in fact. To give you an example — and I’ll stop because I could go on and on — there were 15,000 audiovisual raids in 2007 and 104 million units of pirated product were seized.201 Our members tried to bring criminal cases against twenty optical disc factories that had historically been producing pirated product. We developed these cases. We went to the Public Security Bureau (PSB). We sought to get them to investigate. We believed that we had met the thresholds — as you know, that’s part of the WTO case. We were first asked, even though this is inconsistent with Chinese law, to take those cases to the NCAC, to the administrative authorities. They didn’t want to deal with it on a criminal basis. As far as we know, none of those twenty cases has actually been prosecuted.202 To date, over all the time we have spent in China — and again, China is quite non-transparent, and as Steve mentioned, they never break out cases between different IP areas — and every year we go through the Chinese press, English-language and Chinese-language press, to try to find criminal cases decided — we have still only found six cases involving U.S. works since China joined the WTO. Now, that could be a bad number, but we worked very hard to find those cases.203 Steve mentioned the Jun Lai case. That was $20,000 in damages. The civil system works pretty well in China. The damages aren’t high enough, and usually the cases cost more than what you recover. The evidentiary process is very cumbersome in China. But it is a working and improving system. What isn’t working in China is deterrence and criminal enforcement against pirates that are making a lot of money. Thank you. PROF. LONG: Thank you, Eric. Wang Qian, how are things at the ground level? PROF. WANG: I would like to make some comments. First, I would like to talk about the relations between Olympic games and IP development in China. China has improved its IP protection in the past few years, especially in the field of copyright, but I don’t think it has anything to do with the Olympic Games. An outstanding example is the ISPs’ secondary liability. A new regulation was adopted in 2006, which says that when an ISP knows or should know of a primary infringement and fails to take steps to remove infringing materials or disable access to them, it should be held liable for secondary liability.204 In recent cases involving ISP secondary liability, a Beijing court and 200 See Hearings Before the Subcomm. on Courts, the Internet, and Intellectual Property, U.S. House of Representatives Executive Summary (Oct. 18, 2007), Testimony of Eric H. Smith, International Intellectual Property Alliance (IIPA), B, International Piracy: The Challenges of Protecting Intellectual Property in the 21st Century, at 8, available at http://www.iipa. com/pdf/IIPAEricSmithtestimonyOctober182007Testimony10172007.pdf. 201 Id. 202 Id. at 8–9. 203 Id. at 9. 204 See “Intellectual Property Protection in China—ISPs’ Copyright Liability”, http://english.ipr.gov.cn/ipr/en/info/ Article. jsp?a_no=9273&col_no=265&dir=200608 (updated Aug. 1, 2006).

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a Shanghai court held ISPs liable for taking an ostrich approach and turning a blind eye to obvious infringing materials.205 The Chinese courts have been clear that when the material is hosted or linked by an ISP obviously infringing, there is no need for the copyright owners to send a notice asking for taking down those infringing materials because the ISP should know they are infringing. The recent cases make it much easier for copyright owners to sue ISPs for secondary infringement. I think it is a huge step forward, for copyright protection. Steven just asked the difference between the Baidu case and the Yahoo! case, why they have different outcomes based on nearly the same facts. Both Baidu and Yahoo! not only provide highly specialized MP3 search engines, but also create all types of lists, like “top 500 pop songs,” “the most hot artists,” which contain a huge number of links to unauthorized sounds. But the two cases are very different.206 First of all, Baidu and Yahoo! were sued for different reasons. In the Baidu case, the record companies sued Baidu for primary infringement. This cause of action was wrong, since Baidu only provided hyperlinks; it did not post any sounds on its Web site. So there was no primary infringement by Baidu. Second, even if the Baidu court broadly interpreted the cause of action to cover the secondary infringement, the Internet Regulation I just mentioned had not taken effect when Baidu was sued. So the applicable law at that time was a judicial interpretation issued by the Supreme Court, which basically said that the only way for copyright owners to hold the linking service provider liable for secondary infringement is to send a notice with specific URL addresses of each infringing material; that is to say “no notice, no liability.” I just mentioned that the Internet Regulation adopted in 2006 changed that rule by providing that when an ISP should know the material it is hosting or linking is infringing, it should remove the infringing materials or disable access to them immediately, or else it should bear the secondary liability. This is the law applied in the Yahoo! and Baidu case. Therefore, both decisions have sound legal basis. I also want to say that it is especially worthy of note that in these landmark cases most copyright owners are Chinese copyright owners. Only the Yahoo! case involved foreign copyright owners; i.e., the record companies under the Inter-national Federation of Phonographic Industries (IFPI).207 I think the Chinese courts recognize that the major beneficiary of sound IP protection in China in the long term is China’s own creative industry. China is working hard to amend its patent, trademark, and copyright law. The driving force is not the Special 301 Report or other allegations from abroad, but rather it is the demand from its own domestic content producers and stakeholders to improve the effectiveness of the IP regime. The Olympic Games are but a footnote in this process. 205 See cases discussed supra notes 19, 20 and infra note 219; see also Liu Jing Sheng v. Sohu.com Ltd. (Beijing Second Intermediate People’s Court, Dec. 19, 2000) (Gaz. of the Supreme Court Vol. 73 No. 5, 2001); Publisher of Univ. Students v. Beijing Jing Xun Public Tech. Info Ltd. & Xi Liang (Beijing Second Intermediate People’s Court, Nov. 28, 2000 (student fined RMB 5000 ($732)); Wang Meng v. Century Interconnecting Telecom Co. (Sept. 1, 1999) (first case in China finding that defendant violated copyrights of several authors by placing their works on its Web site); Chinese Government Official Portal, “Major Cases of Recent Action Against Internet Infringement and Piracy”, Feb. 17, 2006, http://english.gov.cn/2006-02/17/content_202231.htm; China Piracy Reports, http:// chinapiracyreports.com/categories/1.%20Copyright%20Cases.aspx. 206 See supra notes 19 & 20. 207 See supra note 20. In January 2007 IFPI filed eleven separate claims for an injunction and damages against the Chinese Internet search engine Yahoo! China on behalf of local and international record companies after the service walked away from talks regarding its alleged infringement of the record companies’ rights. On Apr. 24, 2007, Beijing’s No. 2 Intermediate Court ruled that the search engine was responsible for the copyright violations since it enabled Web surfers to find the illegal music.

668 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY I also want to say that China can and will do better in the future and fulfill its commitment to the international community. But some people are asking more from China. I don’t think those demands are reasonable. If you read the IIPA Report included in these materials, at page 70 it urges China to change its law to require that “ISPs that fail to immediately take down sites following compliant notices from right holders are infringers and have violated the Copyright Law [and the Internet Regulations]. As such, they should be subject to the same administrative fines as any other infringer.”208 I think it amounts to saying that an ISP in China has an affirmative duty to remove the materials that are allegedly infringing in accordance with a notice sent by the copyright owner. But I think the IIPA proposal is more burdensome than the Digital Millennium Copyright Act (DMCA)209 because even ISPs in the United States have no affirmative duty to remove materials on demand of the notice sent by copyright owners. Under the DMCA, an ISP that fails to immediately take down allegedly infringing materials does not automatically become an infringer subject to legal liability. Under the Chinese law, the ISP only takes the risk that if the statement contained in the notice from the copyright owner is proved to be true, it has to bear a secondary infringer’s liability. So there is no reason to demand more of a Chinese ISP than the U.S. regime currently requires. MR. LIM: Thank you. Any reactions from the audience? Questions? QUESTION [Naiwei Chen, Fudan University, Shanghai]: I have a question for Steven. You mentioned the pending WTO case in Geneva on IP enforcement.210 Also, you particularly indicated from the U.S. perspective that the threshold for the criminal procedures is still too high. I think that is a topic for the panel to decide whether it is a violation. But I am wondering, assuming the panel, or maybe finally the Appeal Body, finds that the threshold is a violation of the TRIPs Agreement Article 61,211 and the Chinese government changes the judicial interpretation again, like in 2007, when it halved the threshold from 1000 to 500 illegal copies,212 I am wondering if you, from the U.S. government, would say, if China changed the threshold, how many copies it would take to satisfy the U.S. government. Finally, these are bilateral issues. The WTO would now indicate how many copies would satisfy the TRIPs Agreement. So it depends on the United States, like any implementation. So would you say how many copies you would be satisfied with? MR. TEPP: You say it is a question for the United States. I think it is a question for China. China has chosen thus far to limit by law the cases that are eligible for criminal prosecution by numbers of copies and monetary thresholds. See IIPA, 2008 Special 301: People’s Republic of China — Amended, supra note 196, at 70. Digital Millennium Copyright Act of 1998 (DMCA), Pub. L. No. 105-314, 112 Stat. 2974 (Oct. 28, 1998) (codified at 17 U.S.C. § 512), available at http://www.copyright.gov/legislation/dmca.pdf. 210 See Dispute DS362, supra note 5. 211 TRIPs Agreement, supra note 26, art. 61: Members shall provide for criminal procedures and penalties to be applied at least in cases of willful trademark counterfeiting or copyright piracy on a commercial scale. Remedies available shall include imprisonment and/ or monetary fines sufficient to provide a deterrent, consistently with the level of penalties applied for crimes of a corresponding gravity. In appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offence. Members may provide for criminal procedures and penalties to be applied in other cases of infringement of intellectual property rights, in particular where they are committed willfully and on a commercial scale. 212 On Apr. 5, 2007, China’s Supreme People’s Court and the Supreme People’s Procuratorate jointly issued rules, named Judicial Interpretation, on Several Issues in the Concrete Application of the Law in Handling Criminal Cases of IP Infringement, which lowered the threshold of IPR crimes in China from 1,000 to 500 copies. See Xinhua News Agency (CEIS) Summary (Apr. 6, 2007), available at http://www.chinatzone.com/news_dls. php?id=285&category=USITO%20 Weekly%20China%20%20Summary. 208 209

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It is my view that China would be better off with a different approach entirely. But if — and I expect, when — the WTO rules that China’s current law is not consistent with Article 61, I think it will be up to China to decide how it will change its law to comply. I’m sure the United States would be happy to work with China, as it has always been, to try and work constructively. But I am not in a position either to endorse the approach that China has currently taken or to suggest particular numbers, if that approach were maintained, that might be TRIPs-consistent. MR. LIM: Another question? QUESTION: This goes in a totally different direction. Where are we with patent law reform? We have been told that there is a new Patent Law coming in China now for three years. Are we going to get one soon? PROF. WANG: I don’t know for sure. The draft of the new Patent Law has already been published for comment.213 I can’t predict, but I think probably the new amendment of the Patent Law will be passed in a year or two. QUESTIONER: I think I heard that three years ago, “in a year or two.” PROF. WANG: I don’t think so. Our first Patent Law was adopted in 1984 and we amended it in 2001.214 So it takes time for us to amend it. MR. LIM: One more question? QUESTION [Prof. Sir Hugh Laddie]: It’s a comment actually. I must say I found this afternoon’s session thoroughly depressing. Peter Yu said that he appreciated Steven Tepp’s diplomatic presentation. I find it so depressing. Having listened to Mr. Tepp’s presentation, I just wonder whether Americans understand how their language is appreciated outside the United States. Mr. Tepp engaged in what I would call insult by innuendo. He talked about the statistics of the Chinese government not being independently verified. I suspect most American government statistics are not independently verified. But there was an innuendo behind that that the Chinese are really faking it. He says that because they use “IPR” as an umbrella term, this can be used to mask a failure to act on copyright. I’m not actually saying it, but it’s a “nudge, nudge, wink, wink” approach. This is not the way to treat a significant and important trading partner. I am not at all surprised that China has cut off discussions with America following the complaint to the WTO. If you are prepared to look at the statistics, when you look at the litigation in China, most of the litigation in China is Chinese against Chinese. Are you suggesting that the Chinese government has cajoled Chinese businessmen to sue each other just to massage the figures up? Not at all. The truth is China, at least it appears to most outsiders, is trying to change its system to make its system much more compliant and much more IP-responsive. America has had an IP system for 250 years. It has no IP-trained judges — China does.215 It has jury trials for patent actions — China does not. It has an International Trade Commission, which is regarded by the outside as a method of keeping out foreign goods. There are lots of 213 See State Intellectual Property Organization, SIPO’s Proposals on the Third Revision of Chinese Patent Law, submitted to State Council on Jan. 9, 2007, available at http://www.sipo.gov.cn/sipo_ English/. 214 Patent Law, supra note 5. 215 Special IP courts have been established in some cities and provinces. At the level of the Higher People’s Court in Beijing, Shanghai, Tianjin, Guangdong, Fujian, Jiangsu, Hainan, Sichuan, and Chongqin, and the intermediate courts in the capital cities of these provinces, municipalities directly under the Central Government, and the special economic zones have established IPR trial divisions. Beijing, Shanghai, and Tianjin have also established intellectual property courts within the Intermediate People’s Court. In 1992 the Supreme People’s Court established an intellectual property division. In 1996 the Supreme Court of China set up the IPR Trial Chamber, which has five Justices and assistant judges, to strengthen guidance to and supervision on trial of IPR cases throughout the country. The higher courts in China courts have made great efforts in the training of copyright specialized judges through workshops, seminars, case analyses, and study visits to other countries.

670 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY things that America has done over a period of 250 years to get where it is at the moment. China has had to try to change in a very short time. Last year I said this, and I’ll say it again. I think that it would be much better if China were encouraged along the path that it is going down rather than being perpetually criticized by the United States and the European Union. If I may say so, Eric Smith’s presentation I thought was much more the sort of balanced approach which I hoped would get into this debate now. Eric asks for a participant who is really affected by IP infringement. But at least he is prepared to accept that some things have changed for the better — not enough. I understand exactly why Eric is concerned for his clients. But if you go on denigrating the Chinese, either expressly or by not-terribly-subtle innuendo, you will get nowhere. I think the Chinese are trying very hard. But it takes time to turn an economy with 1,000 million people. It is not surprising. My view is that they are trying to do it. MR. LIM: Do we have a response from the panel? MR. TEPP: It is unfortunate that you see it that way. I am being realistic about what the situation is in China. Yes, China has immense challenges, and yes, China is trying to come a very long way in a much shorter time than the United States, granted. Granted also that China voluntarily took onboard all the commitments that exist in the context of the WTO and is enjoying many of the benefits of WTO membership. I happened to have the opportunity to travel to China with a U.S. government delegation in January 2001, within a month of China’s accession to the WTO.216 The question on everyone’s lips was, “Is the United States going to bring a case?” The answer was: “Good heavens, no. They have only been in for a month. We are not trying to be unreasonable here.” I believe that the U.S. government is trying, and continues to try, to work productively for progress. The intent and the goal here are not to cast aspersions, but to achieve real progress in the protection of intellectual property consistent with the agreements that both the United States and China have taken onboard. QUESTIONER [Prof. Laddie]: Can you just tell me one thing? Why, if that is so, did you say that the Chinese government’s statistics have not been independently verified? Would you say that about British government statistics? Would you say that about American government statistics? Just tell me why you used the expression “Chinese government statistics have not been independently verified,” if it was not to convey the not-very-subliminal message that they are faked? MR. TEPP: It was a statement of fact, nothing more. China’s system is much less transparent than many other countries’ in the world, certainly than the United States. My office publishes statistics about how many registration applications we receive and how many registrations we grant, in a particular year. You can use the Freedom of Information Act217 to uncover all the details related to those and almost anything we are working on. MR. SMITH: Why don’t we leave this particular topic? Judge Laddie, I am rarely accused of being balanced or diplomatic on this topic. But I really appreciate it. Professor Wang has said some very important things, and I wanted to comment on what he said. The Internet Regulations that were passed in 2006 were one of the most transparent processes that I have ever seen in China.218 They did three or four drafts. We all had a chance to comment. 216 China joined the WTO Nov. 11, 2001. See also “China Ratifies Protocol Amending WTO TRIPs Agreement”, Xinhua, Nov. 29, 2007, available at http://english.ipr.gov.cn/ipr/en/info/Article.jsp?a_no=150085&col_no=925 &dir=200711. 217 The Freedom of Information Act (FOIA), Pub. L. No. 104-231, 110 Stat. 3048 (1996, revised 2002) (codified as amended at 5 U.S.C. § 552). 218 See Internet Regulations, supra note 27; see also Supreme People’s Court Promulgated Revised Judicial Interpretations on Internet Copyright, IPR IN CHINA, Dec. 7, 2006, available at http://english.ipr.gov.cn/ipr/en/info/...

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They came here. I went there. We all went there. The U.S. government went there. It was a great process. They came out very, very well on those regulations — not perfectly, but better than most other countries in the world. What he said about what is happening in terms of some of these Internet cases is really encouraging. The Shanghai court has said that if you are deep linking into infringing sites and you have “top hit tunes,” there is a reason to know that they are infringing, you’re liable.219 That is pretty advanced. China is to be commended for being that sophisticated on these issues. That is a very, very positive sign. I just wish that in the legal area, where there has been such advance, we could do the same thing in the area of enforcement. Let me just say one more thing. I just want to give an example. It is going to be an example that I hope will not offend my Chinese colleagues. In Taiwan, which is China, the law was passed in 1985.220 There was 100 percent piracy in Taiwan in 1985. Today, in the audio and video area it is down to 15 percent. If you look at our Report and what our industries are saying about what they are doing in China, they have taken piracy from 100 percent to 15 percent in the same time, or a little more time, than China has had in copyright law.221 Why? It is very clear to us. Because they had criminal enforcement, lots of public awareness, deterrent penalties. They probably used less resources than China does right now, but they used them wisely. That is what we keep telling China: You need to be wiser with how you use your scarce resources and impose penalties that will take the profit out of this business. I hope that was balanced, because I think that this is a really key issue here. It has been the same thing we have talked about every year that we have been in this forum or any forum. But I do want to say to Professor Wang one more thing. He read from the 301 Report about immediate notice-and-takedown. I think U.S. law is the same as China’s law. You lose the safe harbor if upon receiving notice you don’t take down. Now, what is or is not “immediate” the courts are going to decide. But China’s law is basically the same as U.S. law. We think you have a good law. We think we have a good law too. We think you have done the right thing. Article. jsp?a_no=35759&col_no=934&dir=200612. In 2007, a special campaign against Internet piracy was waged by the NCAC. See “China’s IP Protection in 2007”, supra note 8, at IV. On Sept. 28, the Reporting Center for Antipiracy of the National Copyright Administration was set up to handle complaints about piracy and to encourage people to report on piracy. See China Internet Network Info. Ctr., 19th Statistical Survey Report on the Internet Development in China (2007). In order to deal with the increasingly severe problems like IPR infringement crimes through Internet, the Ministry of Public Security (MPS) drafted the “Scheme on Nationwide Special Campaign against IPR Infringement Illegal and Criminal Actions through Internet” and held a special-topic lecture of the “Investigation on Internet IPR Infringement Crimes” through the picture-telephone meeting system. In October 2007, the public security organs of Beijing Municipality successfully solved the case of copying and releasing others’ film and video works through Internet by Beijing Golden Interactive Co., Ltd. 219 Baidu lost a deep linking case brought by Shanghai Busheng Music Culture Media Co., an affiliate of UK-based EMI Group plc, in September 2005 and was ordered to pay ¥68,000 ($8,781) in damages. See “Shanghai Court Announces Copy-right Infringement Verdicts”, June 26, 2008, available at http://www.marbridgeconsulting.com/ marbridgedaily/2008-06-26/ article/17357/shanghai_court_announces_copyright_infringement_verdicts; “Baidu Ordered to Pay 50,000 Yuan for Web Violation”, Shanghai Daily (June 27, 2008), available at http://english.ipr. gov.cn/ipr/en/info/Article.jsp?a_no=218910& col_no=927&dir=200806 (Baidu.com was ordered to pay 50,000 yuan (US$7,278) in compensation to Dazhong Transportation and Dazhong Moving for allowing links of Web sites that promoted business in the name of Dazhong Moving illegally to be available on search pages. The Shanghai No. 2 Intermediate People’s Court also announced verdicts in another two intellectual property cases involving the Internet.). 220 Laws and Regulations available at the Taiwan Intellectual Property Office (TIPO) Web site, http://www.tipo. gov.tw/ eng/laws/laws.asp#6. 221 See IIPA, 2008 Special 301 Report—Taiwan, available at http://www.iipa.com/rbc/2008/2008SPEC301TAIWAN. pdf 2008. For more details on Taiwan’s Special 301 history, see IIPA’s “History” appendix at http://www.iipa.com/ pdf/ 2008SPEC301HISTORICALSUMMARY.pdf. Previous years’ reports available at http://www.iipa.com/ countryreports. html.

672 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY QUESTIONER [Prof. Laddie]: Can I just add one thing? I don’t know whether you have spoken to Chinese judges. I have been very lucky; I have spoken to a number of Chinese judges. Most Chinese judges appreciate the limitations on enforcement. They make orders, and it is sometimes very difficult to have those orders enforced, particularly in rural areas or in areas away from the great metropolises. Peter Yu was talking about how the big cities’ enforcement is better than out in what we in the United Kingdom would call “the sticks,” far from the major cities. The Chinese are aware of it. As I see it, it is not a cynical plan to push all the piracy out to the outer areas so they can get away with it. It is a problem with trying to bring their legal system up to what we would regard as normal. The Chinese professionals, including the judges, are very aware of that. I’ll make my complaint quite clear. My complaint is that the language is the wrong language. It must be frustrating, no doubt, talking over and over again and getting practically nowhere, as you think. But the view that some outsiders have is that actually China is trying very, very hard. But it is a massive country being asked to do in twenty years what you have taken 250 years to do and what we in the United Kingdom have taken 400 years to do. You are expecting them to respond faster than actually is physically possible. That’s a problem. MR. LIM: Do we have a reaction? QUESTION [George Kung, Fordham University School of Law, New York]: I have just two quick things to say. One is that about forty years ago, Gunnar Myrdal and his wife published a three-volume work, called Asian Drama, which discussed the problem of what they called the “Asian soft state” and the challenge that these soft states faced.222 I think what we have been seeing in the last forty years is this dramatic improvement, especially in China, in overcoming those problems, and it is important for us on this side of the ocean to recognize the enormity of the task of developing the kind of thoroughness of administration and deployment of resources and training of people that we are accustomed to. The second is that it is 6:30. I welcome you back to New York and to Fordham. We can all go get a drink now. MR. LIM: Thank you. Any other reactions from the panel? PROF. YU: Since we are heading down for drinks, let me say something that might help end on a happy note. I think it is very important for us to understand how the WTO case will turn out and what it means by a victory. I think that the WTO panels can go in either direction. Probably China will win on something and the United States will win on something, and each of them will call this a victory. I think that is going to be very interesting. I have been arguing against bringing the WTO case for probably more than two years.223 But the more I look at the complaint, the more I look at the arguments and the briefs that are on the Web site, I can actually see some benefits of the WTO case for China. The three benefits I can see are: First, China eventually needs to learn to play the WTO game. If China is going to go ahead and wants to make sure that they can compete effectively against others, they need to understand how to play the WTO game in order to shape the negotiations they are going to get into. Ultimately, how the WTO rules is going to decide what type of negotiations China Gunnar & Alva Myrdal, Asian Drama: An Inquiry into the Poverty of Nations (1968). See, e.g., Peter K. Yu, “Intellectual Property, Economic Development, and the China Puzzle” in 10 Fordham Intellectual Property Law Inst., Intellectual Property Law & Policy 59 (Hugh C. Hansen ed., 2008) (Fifteenth Annual Fordham International Intellectual Property Law & Policy Conference, Apr. 12–13, 2007). 222 223

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needs to engage in in the future. The later they get into the WTO game, the less likely that they will be able to argue effectively both within the WTO process and in the shadow of the WTO process. The second thing I think is also very important is how we are going to give meaning to the enforcement provisions. I think a strength of the TRIPs Agreement is that there are enforcement provisions there. But that is also a weakness, because it is the first time where you have enforcement provisions, and obviously a lot of the Member States when they negotiated it included the provisions, but they included a lot of vague terms within the enforcement provisions. You have constructive ambiguities. You have terms that are very vague. It requires a lot of implementation and interpretation from the WTO panels. Now we need to deal with this problem, and I think the WTO case will actually help us in handling that. The final thing I think is important, not just for China but also for a lot of developing countries, is that the case is going to lay out the limits of the provisions within the WTO framework. I think that is very important, especially in light of the potential introduction of the ACTA or the continuing negotiations on all the free trade agreements and the EPAs initiated by the European Union. I think that once they have a decision, they can actually use that decision in some of the continuing negotiations. Now, whether the United States, whether the European Union, whether other parties will be willing to say, “Well, but that’s just WTO,” is a separate issue. But I think it is important for a lot of countries, not just China but also other developing countries, to actually have a decision that they can use to say: “Look, this is what is in the TRIPs Agreement. If you don’t like it, let’s open the process. But don’t try to say, ‘This is how the TRIPs Agreement should be interpreted.’” MR. LIM: I think that is a good note to end on. Please join me in thanking the panel. Thank you all.

CHAPTER VII

International Trade & Intellectual Property Part D: Parallel Imports Section 1: Patent Exhaustion: A Comparative Analysis Moderator JOHN WHITE

Cooper & Dunham LLP (New York) Speakers LEWIS CLAYTON

JENNIFER REDA

Paul Weiss Rifkind Wharton & Garrison, LLP (New York)

Fitzpatrick, Cella, Harper & Scinto (New York)

DR. JOHANN PITZ

CHRISTOPHER STOTHERS

Vossius & Partner (Munich)

Milbank Tweed Hadley & McCloy LLP (London)

Commentators HON. ROGER HUGHES

SHIMAKO KATO

Judge, Federal Court of Canada (Ottawa)

Abe, Ikubo and Katayama, Japan

MR. WHITE: Ladies and gentlemen, my name is John White. I’m from the firm Cooper & Dunham here in New York. I am going to act as the moderator for this session. To my right, we have as the speakers: Jennifer Reda from Fitzpatrick, Cella in New York; Lewis Clayton from Paul Weiss in New York; Johann Pitz from Vossius & Partner in Munich; and Christopher Stothers from Milbank Tweed in London. As commentators, we have: Justice Roger Hughes from the Federal Court of Canada in Ottawa, and Shimako Kato from Abe, Ikubo and Katayama in Japan. Without further ado, I will ask Ms. Reda to bring make her presentation.

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The Doctrine of Patent Exhaustion in the United States: Potential Impact of Quanta v. LG Electronics Jennifer Reda* Good afternoon. I’m Jennifer Reda. I’m with Fitzpatrick, Cella, Harper & Scinto here in New York. My talk today is on the state of the law of the doctrine of patent exhaustion in the United States and the potential impact that the Supreme Court’s forthcoming ruling in Quanta v. LG Electronics, may have on that doctrine.1 I. THE DOCTRINE OF PATENT EXHAUSTION

The exhaustion doctrine is intended to prevent a patentee from receiving a double royalty on a single patented invention. Under U.S. law, an authorized sale of an article manufactured under a patent exhausts the patent monopoly as to that article.2 The Federal Circuit has held, however, that patent exhaustion does not apply to expressly conditional sales or licenses and that it does not apply to method claims.3 Conditions on sales, however, have to be valid. So what is a valid condition? According to the Federal Circuit’s decision in Mallinckrodt v. Medipart,4 the appropriate criterion for determining whether a condition is valid is whether the patentee’s restriction is reasonably within the patent grant or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect that is not justified under the rule of reason. In particular, the Federal Circuit has specified that unless a condition violates some other area of law or policy — namely, the misuse or antitrust laws — then private parties retain the right to contract regarding the conditions of sales.5 Examples of restrictions that have been held valid include single-use-only restrictions, field-of-use restrictions, and customer restrictions.6 II. QUANTA V. LG ELECTRONICS

The patent dispute in Quanta v. LG Electronics, which is currently awaiting decision by the Supreme Court, calls into question the Federal Circuit’s Mallinckrodt criteria and has the potential to significantly impact the application of the exhaustion doctrine. The facts of that case are as follows. LG is the owner of various patents relating to personal computers. The defendants, including Quanta, purchased chipsets from Intel Corporation and installed them in their computers, * Fitzpatrick, Cella, Harper & Scinto, New York. 1 Subsequent to the Conference, in Quanta Computer Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (June 9, 2008), a unanimous Supreme Court strongly reaffirmed the patent exhaustion doctrine, reversing the U.S. Court of Appeals for the Federal Circuit (citing United States v. Univis Lens Co., 316 U.S. 241 (1942)), available at http://www. supremecourtus. gov/opinions/07pdf/06-937.pdf; see also Lewis R. Clayton, “‘Quanta’: Supreme Court Endorses Exhaustion Doctrine”, 239 N.Y. L.J. (June 12, 2008), available at http://paulweiss.com/files/Publication/2e73fd2c79ba-4e1d-b0d5-39e29dae4094/Presentation/PublicationAttachment/009ca6a1-fcce-4071-8904-a7ddd8804a5/ NYLJ12Jun08IPL.pdf. 2 Adams v. Burke, 84 U.S. 453 (1873). 3 LG Elecs. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1426 (Fed. Cir. 2006). 4 976 F.2d 700, 708–09 (Fed. Cir. 1992). 5 Id. 6 Id. at 708–09 (single-use restrictions); General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175 (1938) (field-of-use restrictions); LG Elecs., 453 F.3d at 1370 (restrictions on customers).

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which also include non-Intel components. Intel was authorized to sell those products to the defendants under a patent license agreement with LG. However, the license agreement required Intel to notify its customers that the license did not authorize them to combine Intel’s chips with non-Intel products. LG did have patents directed specifically to the chipsets, but those were not at issue in this case. Rather, LG brought suit against the defendants asserting that the combination of the chipsets with other components infringed LG’s patents relating to methods and systems that cover that combination. LG argued that, since the chipsets did not embody the inventions of the patented systems, the sale of the chipsets did not exhaust LG’s rights in the separately patented systems. The district court in this case held that the system claims at issue were exhausted, but that the method claims were not.7 In deciding that the method claims were not, it relied on Federal Circuit precedent. On appeal, the Federal Circuit held that there was no exhaustion with respect to either the method claims or the system claims, because there were express conditions on LG’s license — namely, that Intel’s chip could not be combined with non-Intel products.8 Accordingly, the Federal Circuit held that defendants purchased those chips subject to that restriction and that exhaustion did not apply.9 The Supreme Court of the United States granted certiorari in September 2007, and oral arguments were heard in January 2008. At the Supreme Court, Quanta first argued that while patentees may impose conditions on manufacturing licensees, restrictions on purchasers after an authorized sale are not enforceable through infringement suits.10 It argued that Intel’s sales to the defendants were authorized sales with no conditions.11 At oral argument, Quanta essentially tried to make the distinction between a licensor actually conditioning the licensee’s authority to sell the product only for a limited use, on the one hand, and a situation where the licensor merely requires that the licensee notify purchasers that the patent owner does not agree to them using the product, except for the limited use, as in this case.12 The latter, Quanta argued, is not a condition.13 Therefore, Intel’s sales to the defendants, according to Quanta, were authorized sales, and the exhaustion doctrine should apply. Second, Quanta argued that the exhaustion doctrine should not depend on whether the patentee’s condition violates antitrust laws or patent misuse.14 Specifically, Quanta argued that the Federal Circuit’s decision in Mallinckrodt, which set forth that criterion, is incorrect and not in accordance with Supreme Court precedent. With regard to the lower court’s refusal to apply the exhaustion doctrine to method claims, Quanta also argued that that was inconsistent with Supreme Court precedent and, in particular, not consistent with the Supreme Court’s decision in Univis v. the United States,15 where the Supreme Court actually applied the exhaustion doctrine to method claims.16 Quanta also LG Elecs., Inc. v. Asustek Computer, Inc., 248 F. Supp. 2d 912, 918 (N.D. Cal. 2003). LG Elecs., 453 F.3d at 1370. The Federal Circuit rejected Quanta’s exhaustion defense on two independent grounds. First, it found that the exhaustion doctrine does not apply at all to method claims (as opposed to patents covering an apparatus). In the alternative, the Court of Appeals held that exhaustion did not apply because Quanta’s combination of licensed products with non-Intel products exceeded the scope of the license. 9 Id. 10 Transcript of Oral Argument at 55–56, Quanta Computer, Inc. v. LG Elecs., Inc., 2008 WL 143658 (Jan. 16, 2008) (No. 06-937), available at http://www.supreme courtus.gov/oral_arguments/argument_transcripts/06-937.pdf . 11 Id. at 5–6; Brief for the Petitioners at 38–39, 2007 WL 3276505 (Nov. 5, 2007) (No. 06-937). 12 Transcript of Oral Argument at 5, 2008 WL 143658 (No. 06-937). 13 Id; see also Brief for the Petitioners at 41, 2007 WL 3276505 (No. 06-937). 14 Brief for the Petitioners at 12–13, 30–33, 2007 WL 3276505; Reply Brief for the Petitioners at 26, 2007 WL 844909 (Mar. 20, 2007) (No. 06-937). 15 316 U.S. 241 (1942). 16 Brief for the Petitioners at 35–38 2007 WL 3276505 (No. 06-937); Transcript of Oral Argument at 9–11, 2008 WL 143658 (No. 06-937). 7 8

678 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY argued that if the exhaustion doctrine doesn’t apply to method claims, then patentees could easily avoid the doctrine simply by including method claims in all of their patents.17 Finally, with regard to the fact that the patents in suit were not specifically directed to the chipsets but rather to systems that included the chipsets, Quanta again relied on the Supreme Court’s Univis decision, which states that the exhaustion doctrine extends not only to authorized sale of the patented product but also may be extended to authorized sales of essential components of the patented product.18 In this respect, Quanta argued that the chipsets were essential components of the patented system because there was nothing else you could do with the chipsets other than use them in the patented system. In reply to that argument, LG countered that the effect of sales of articles on separate system patents not embodied by the article should be addressed not by the patent exhaustion doctrine, but rather by the principles of implied license.19 The implied license principle presumes that when the holder of a patent on a system unconditionally conveys an article that can be used only in the patented system, the holder has granted the purchaser an implied license to practice that patent.20 Finally, at the Supreme Court, LG maintained its argument from below that the license agreement with Intel expressly prohibited the defendants from practicing its patent with nonIntel components, and that this restriction was reasonable, and therefore exhaustion should not apply.21 III. CONCLUSION

So that is where we stand today in the United States. We should see shortly where the Supreme Court comes out on these issues. It seems likely that the Court will at least provide some clarification as to whether the exhaustion doctrine applies to method claims and whether the exhaustion doctrine can be limited by private agreement. Thank you very much. MR. WHITE: Now we are going to hear from Mr. Lewis Clayton.

Quanta Computers, Inc. v. LG Electronics, Inc. Lewis R. Clayton* Since Jennifer did such a good job explaining what is happening up in the Supreme Court and setting the table, I get to speculate a little. So I will do something very hazardous and I will speculate.

Brief for the Petitioners at 38, 51, 2007 WL 3276505 (No. 06-937). Id. at 33–35, 39–40; Reply Brief for the Petitioners at 7–12, 2007 WL 4613423 (Dec. 28, 2007) (No. 06-937); Transcript of Oral Argument at 12–16, 56–57, Quanta Computer, 2008 WL 143658 (No. 06-937). 19 Brief of the Respondent at 22, 2007 WL 4244683 (Dec. 3, 2007) (No. 06-937); Transcript of Oral Argument at 28, 31–32, 2008 WL 143658 (No. 06-937). 20 Brief of the Respondent at 22, 2007 WL 4244683 (No. 06-937). 21 Id. at 35–37, 42–46; Transcript of Oral Argument at 54–55, 2008 WL 143658 (No. 06-937). * Paul Weiss Rifkind Wharton & Garrison, LLP, New York. 17 18

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I. SUPREME COURT DECISION

If you had to guess, I would guess that the Supreme Court is going to reverse in this case and is going to find that there was exhaustion.22 The reason I make that guess is that, as all of you know, the Supreme Court has for the past several years been taking cases from the Federal Circuit and often finding additional limits on the substantive and procedural rights of patent holders — in the KSR case,23 in the eBay case.24 If you read the transcript of the oral argument, they were not, let us say, overly deferential to the position of the Federal Circuit in this case.25 There is a trend, I think, in the Supreme Court to look at how patent rights, like other IP rights, are evaluated — meaning to say that, in the eBay case, we are not going to have a special rule for injunctions; we are going to have a general rule for injunctions and apply it to patents as we apply it to other forms of intellectual property. Usually that is bad news for the patent holder. Sometimes it is good news. In Illinois Tool Works26 the Court said that in the antitrust context they are no longer going to have a presumption that if you have a patent you have market power. There is no presumption that if you have a copyright or a trademark you have market power. The Supreme Court has done away with this. So they are in a mode where they do not like some of the restrictions that they see on patent rights. One reason is that they have expressed some skepticism about the nature of patents that come out of the Patent Office. Again, if you read the oral argument in this case, there is a remark by Chief Justice Roberts about the fact that they have sometimes seen patents they do not like coming out of the Patent Office.27 So if you are going to make a bet, that is the bet I would make. We were saying that one nightmare for all of us speakers would be to learn that at 11:00 this morning they issued the opinion. I actually said to Jennifer, “I didn’t check. Did you check?” Hopefully, with all the patent lawyers in this room, someone would have told us. But right now we can speculate. Although I am speculating they are going to reverse and they are going to say there was exhaustion, it may be a disappointing ruling for all of us, because it could be a very narrow ruling. This is a very unusual case. This is not the usual situation where someone has a license to go manufacture chips. There were fights between LG and Intel. They cross-licensed one another and they came up with a very strange cross-licensing agreement, which says that all Intel has to do is notify other people that it’s not granting them some license. Then there is a very bizarre term — at least bizarre to me — that says, nothing that we say in this license has anything to do with patent exhaustion. At oral argument, Chief Justice Roberts held up that portion of the license agreement and said, “What in the world does this possibly mean?”28 He is the Chief Justice of the United States, so he is supposed to be able to figure these things out. So we may have an opinion that is very strange or very limited to the facts. Some of the many, many, many amici who have appeared in this case have come in and said, “Please. We have been doing business for a long time under some rules. This is a very strange case. Whatever you do, by all means decide the case, but stay right there and don’t do something that will change my settled expectations.” 22 See supra note 1; see also Lewis R. Clayton, “‘Quanta’: Supreme Court Endorses Exhaustion Doctrine”, 239 N.Y. L.J. (June 12, 2008), available at http://www.paulweiss.com/files/Publication/2e73fd2c-79ba-4e1d-b0d5-39 e29dae4094/Presentation/PublicationAttachment/009ca6a1-fcce-4071-8904-3a7ddd8804a5/NYLJ12Jun08IPL.pdf. 23 KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007). 24 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 25 See Transcript of Oral Argument, Quanta Computer, 2008 WL 143658 (Jan. 16, 2008) (No. 06-937). 26 Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006). 27 Transcript of Oral Argument at 49, 2008 WL 143658 (No. 06-937 ). 28 Id. at 32.

680 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY All that said about how the Supreme Court is knocking down some of these restrictions, there is a very well established series of cases and remarks of commentators that say, “There ain’t nothing wrong with lots of restrictions on how you can use a patented product.” It happens to be very procompetitive. That is not just a matter of dogma or dictum. You can look at a lot of the amicus briefs that were filed here.29 Particularly in biotech and in the electronics industries, there is a very persuasive argument that as one figures out how valuable certain patents are and how they are going to be used, and as one wishes to have people use them for R&D, it makes a lot of sense — it is procompetitive, it is good for the economy, it is good for innovation — to have restrictions. Although the Supreme Court appears hostile to some of what the Federal Circuit has to say, it is hard to believe that they will wipe away this system of restrictions that allow patent holders to do things that are procompetitive. II. IMPACT OF SUPREME COURT REVERSAL

Now, if they reverse, what is going to happen? You have to remember, what the patent team wants to do is take this item that is patented and keep it in the patent corral. Once it gets out of the patent corral, you do not have a patent infringement case. You are now in the world of contract, which is scary. You have to go to state court. They are all over the place. You do not get treble damages and injunctions. The easiest way to keep something in the patent corral is to say, “I am selling it, but there is a condition on it: you can only use it on Sunday. I know there is a condition because I told you so.” Then that condition, they say, travels with the item throughout commerce. That is probably going to go. It is very ethereal. It is hard to figure out. What will happen is, those patentees who are focused on a system of licensing agreements will be able to maintain that system and will be able to keep those restrictions in place. Read Qualcomm’s amicus brief,30 which explains its whole system, very worked out, very clear as to making sure that everyone who touches its chips that go into cell phones, down to you, who have the cell phone in your pocket — everyone until it gets to you — is tied up in a license agreement. If you do not do the right thing and keep your item in the patent corral, these are some of the bad things that happen to you, if you simply have a contract action. These are some of the issues that occur when you have to meet up between patent law and antitrust law. If you keep your item within that patent corral, you have some significant protection against antitrust, unless you do bad things like misuse your patent — whatever that means — which means you go beyond the limited monopoly that the patent has given to you — a very interesting topic for the courts. If you are in this realm outside patent protection, you also face issues, because lots of other people who usually would not be looking at your contractual arrangements, like state attorneys general and district attorneys all over the United States, can start saying that you are “restraining trade,” whatever that may mean to them under their state laws. III. UNSETTLED ISSUES

Finally, even if we do get a sweeping opinion from the Supreme Court, we are going to have some very interesting unsettled issues: • If you can restrict through a license, when do you have a sale and when do you have a license? 29 See Docket for Quanta Computer, Inc. v. LG Elecs., Inc., http://www.supremecourtus.gov/docket/06-937.htm. Links to amicus briefs are available at http://www.eff.org/cases/quanta-v-lg.

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• What patents are going to be exhausted? • How close is the connection between the item and a method patent? I do not think the Supreme Court is going to say you cannot exhaust a method patent. They are going to look for a tight fit between the item and the method patent. Is this item uniquely referable to that method patent? We will have lots of litigation about that, and we may have to do claim construction before we can figure out how close that fit will be. A. Contract Issues If any of you use Microsoft software, you have to license it; you have to click. Clickwraps and shrink wraps — there is a whole set of litigation about that in the copyright field. You can look at the ProCD case,31 which tells you the line between first sale in a copyright (first sale is statutory in copyright) and license. We will have those issues there. Finally, when you read these cases, they go back to the 1870s. They deal with hat-felting machines32 and coffin lids.33 This is an area of the law that really is in need of some real renovation. Thank you very much. MR. WHITE: Now we are going to hear from Dr. Johann Pitz.

Patent Exhaustion: The Quanta Case from the European Perspective Dr. Johann Pitz* In my presentation, I will try to comment on the Quanta case from the perspective of a German lawyer, from the European perspective. I have to admit that it is certainly hard to forecast how courts in Germany or in Europe would decide this case. This is especially true because the main crucial questions have not yet been decided by case law in Germany. The first crucial question is whether and to what extent a patentee can limit the effects of patent exhaustion on a contractual basis. The second question is whether and to what extent the exhaustion doctrine is applicable to method and system claims. Nevertheless, I will try to make a guess. My personal opinion is that the Federal Supreme Court in Germany would reverse the Federal Circuit’s decision.

30 Amicus Brief of Qualcomm, Inc. Supporting LG Electronics, 2007 WL 4340879 (Dec. 10, 2007) (No. 06-937), available at http://www.eff.org/files/filenode/quanta_v_lg/06-0937bsacQualcommIncorporated.pdf. 31 ProCD, Inc. v. Zeidenberg,. 86 F.3d 1447 (7th Cir. 1996). 32 See Mitchell v. Hawley, 83 U.S. 544 (1873) (conveyances made by the licensee before the expiration of the license purporting to grant the right to use after the expiration of the license were not valid. No notice to the purchaser was required “as the law imposes the risk upon the purchaser, as against the real owner, whether the title of the seller is such that he can make a valid conveyance.”). 33 See Adams v. Burke, 84 U.S. 453 (1873) (the owner of a patent on coffin lids exhausted its rights when it sold the lids and could not restrict when and where the lids were later used). * Vossius & Partner, Munich.

682 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY I. PRINCIPLE AND PURPOSE OF EXHAUSTION

The case raises questions and discussions about purpose, principles, and scope of the exhaustion doctrine. Quanta pleads, so far in accordance with the prevailing view in Europe, in favor of a broad scope of exhaustion, where the right in a patent is limited by the public interest in free marketability of goods as soon as a product is placed on the market. LGE pleads in favor of strong patent rights, allowing the control of distribution channels even after market placement. • The first authorized sale of a patented device terminates patentee’s control over subsequent uses or sales. • The exhaustion mechanism serves the purpose to moderate the conflict between the exercise of IP rights and the freedom of trade. • According to established case law, it cannot be the function of IP rights to control the distribution channels of products placed on the market by the right holder himself or with his consent. A solution for this dispute cannot be found in provisions of the IP law. Patent exhaustion rules in Europe have been developed by case law. II. LEGAL BASIS AND NATURE OF EXHAUSTION

As to the legal nature of exhaustion, it is LGE’s position that the patent holder should have the right to negotiate around patent exhaustion and to impose conditions on patented articles which have to be respected by third parties. In contrast to that, it is Quanta’s position — and this is close to the European perspective — that exhaustion is not a contract issue but an inherent boundary of IP rights itself . • The exhaustion principle regarding patent rights within the Community was developed in the European Court of Justice case law.34 • The exhaustion is not a contract issue but is an inherent boundary of the IP right itself. • Exhaustion is not an implied license that can be repudiated by the patentee. A. Market Placement As to the requirements of exhaustion: • Market placement is the essential premise of exhaustion of patent rights in Europe under existing ECJ case law.35 • The decisive criterion here for market placement is — and this has been fulfilled, in my view, by LGE in this case — whether the right holder willfully gave up its right of disposal within the relevant market. • Every action resulting in third parties gaining effective ability to dispose of certain products results I market placement. • There is principally no exhaustion by internal concern-circulation. 1. Placement with Consent The marketing by the patent owner is not different from the marketing by third parties with the patent owner’s consent. Such a consent is generally granted on the basis of license agreements. 34 See, e.g., Case 19/84, Pharmon BV v. Hoechst AG, 1985 E.C.R. 2281; Case 15/74, Centrapharm v. Sterling Drug, 1974 E.C.R. 1147; Case 119/75, Terrapin (Overseas) Ltd. v. Terranova Industrie C.A. Kapferer & Co., 1976 E.C.R. 1039. 35 See, e.g., BGH GUR 2006, 863 — ex woks; BGH GRUR 2007, 882 — Parfümtester.

PART D: PARALLEL IMPORTS 683

According to Federal Supreme Court case law, a general agreement for the unlimited utilization of the patented object does not exist yet with the signing of a licensing agreement.36 It is up to the patent holder to grant and limit licenses within the framework of antitrust and competition law. From this backdrop, the legal limitations of licenses define the limits of exhaustion. B. Effect of Exhaustion After the product has been placed on the market with consent, distribution and sale of the products are allowed without limitations based on the patent37. The use of the product is patentfree. Use includes maintenance and repair, not remaking of products. Replacement of spare parts and/or operating material is principally patent-free. C. Territorial Scope of Exhaustion Market placement anywhere in the European Union leads to a European-wide exhaustion. By placing the patented product on the market outside of the European Union, no exhaustion takes place. According to the Federal Supreme Court and the European Court of Justice case law, there is at present no worldwide or international exhaustion of German/European industrial property rights.38 D. Contractual Conditions Now back to the question of contract conditions. The patent owner can restrict licenses territorially, temporally, quantitatively, and personally, and can stipulate that the licensee is only permitted to exercise the patent within the contractual restrictions on the licensing. In case of overstepping such legal limitations, no exhaustion arises. From this backdrop, LGE’s allegation is correct that the patentee can define conditions under which exhaustion of patent rights takes place. E. Trade Restrictions The free-movement rules of Articles 28 and 30 of the EC Treaty prohibit any limitations on patent exhaustion that extend beyond the scope of patent rights. Within the framework of the antitrust and competition law, IP owners may enforce trade restrictions based on contractual agreements. Trade restrictions beyond the scope of patents, such as competition clauses, price restrictions, and trade limitations for downstream customers, are only enforceable on a contractual basis.39 Overstepping of such trade restrictions, however, does not hinder the effect of exhaustion. Therefore, I would say, from the European perspective, Intel’s obligation to notify its customers would be considered as a mere contractual obligation, which cannot hinder the effect of exhaustion. See BGH GRUR 1967, 766 — gymnastics scandal. See Flügelradzähler, BGH GRUR 2004, 758; Laufkranz, BGH GUR 006, 837; Pipettensystem, BGH GRUR 2007, 769. 38 See BGH GRR Int. 2000, 635—Karate; BGH GRUR 2006, 863 — ex works; BGH GRUR 2007, 882 — Parfümtester. 39 See Rudolf Krasser, Patentrecht 961 (5th ed. 2004). 40 See BGH GRUR 2006, 863 — ex works. 36 37

684 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY What is also important in this case is that Intel has respected the obligation to notify the customers. Therefore, it is, in my view, an authorized market placement. Under these circumstances, patent exhaustion may not be precluded by notice restriction, even if they have been disregarded by the final customers. Contractual agreements or disclaimer do not overrule the effect of exhaustion in cases where the right holder already willfully transferred its right of disposal to the purchaser.40 III. METHOD AND SYSTEM CLAIMS

As to the extent of exhaustion of method and system claims, it is the Federal Circuit’s view that exhaustion does not apply to method claims. I think this situation is different in the European Union. However, the market placement of a device that performs a patented process does not automatically exhaust the patent, even if the device is intended to implement the process. The same is true with system claims. The sale of a patented component does principally not exhaust rights in the system to which the components belong. In this context there is no reliable case law in Germany. According to the Federal Supreme Court’s decision in Fullplastverfahren,41 there is no exhaustion of a process claim if only the process is patent protected and not the device that has been placed on the market. If both method and component are protected, exhaustion of the method patent may occur.42 IV. HOW WOULD QUANTA BE DECIDED IN EUROPE?

The courts may come to the result that there is exhaustion of component patent claims but not of the system/methods patent claims because the sale involved not the methods and the entire system. Exhaustion might, however, be appropriate, if the use of the compounds is limited to the patent-protected implementation of the process and the methods. But if, under these circumstances, the exhaustion doctrine would apply to method and system patent claims in this case, it would, in my view, result in exhaustion here, because Intel respected the contractual obligation to notify its customers, and therefore it was an authorized sale. The fact that Quanta disregarded the notice restriction does not influence the exhaustion mechanism because LGE had already transferred its right of disposal to the purchaser Intel. Thank you very much. MR. WHITE: Our final speaker is Mr. Christopher Stothers.

Patent Exhaustion: The UK Perspective Christopher Stothers* In most jurisdictions, patent rights cannot be used to prevent genuine products that were put on the domestic market from being resold within that jurisdiction. In effect, the rights are Fullplastverfahren, BGH GRUR 1980, 38. See Bodenwaschanlage, BGH GRUR, 2001, 223; Handhabungsgerät, BGH GRUR 1998, 130. * Milbank, Tweed, Hadley & McCloy LLP, London ([email protected]). Some of the material in this paper was published in Christopher Stothers, Parallel Trade in Europe: Intellectual Property, Competition and Regulatory... 41 42

PART D: PARALLEL IMPORTS 685

exhausted once the products have been sold by or with the consent of the patent owner, and they cannot be used to control the secondary market for those products in that jurisdiction. Since the nineteenth century, this approach has been taken in the United Kingdom43 and the United States,44 where it is also known as the “first sale” doctrine.45 It has also been taken in Denmark, Germany, Ireland, Italy and the Netherlands.46 Patent exhaustion is relatively straightforward to apply to resale of unaltered goods within the same jurisdiction. However, more difficult questions arise where the goods were sold outside the jurisdiction (parallel imports) or have been modified or repaired. This paper is concerned with the approach taken in the United Kingdom. I. BACKGROUND

The term “exhaustion” itself is said to come from Germany, where the Reichsgericht held in 1902: The effect of a patent (for a process) is that no one, except the proprietor (or the persons whom he has authorized) may manufacture a product by the said process and put it on the domestic market. By this act, however, the effect of the protection conferred by the patent is exhausted. The proprietor who has manufactured the product and has put it on the market under this protection which excludes competition from other parties, has enjoyed advantages which the patent confers upon him and has thus exhausted his right.47

Some jurisdictions, such as Belgium and France, have applied a “right of destination,” which allows manufacturers a certain degree of flexibility to limit the supply of their goods to specific markets (for instance, to distribute sound recordings which are to be used by consumers but not by broadcasters or discothèques).48 However, this right of destination is limited and cannot be used to oppose resale within the ‘destination’ market (in the previous example, from one consumer to another). In terms of territorial limits, there are three main systems of exhaustion which are applied, as follow: (1) Some jurisdictions apply a system of “international exhaustion,” under which the rights will be exhausted regardless of where the product was put on the market. In such jurisdictions the intellectual property owner has no right to block parallel imports. (2) Some jurisdictions apply a system of “regional exhaustion,” under which the rights will be exhausted only if the product was put on the market within that region. In such Law 40–41, 114–15, 378–84 (2007). See also the response to AIPPI Question Q205 by the UK Group, of which the author was a member. 43 Betts v. Willmott, (1870–71) LR 6 Ch App 239. 44 See, e.g., Adams v. Burke, 84 U.S. 453 (1873); Apollinaris Co. v. Scherer, 27 Fed. 18 (Circ. Ct., S.D.N.Y. 1886). 45 For patent cases involving the first-sale doctrine, see, for example, Jazz Photo Corp v. International Trade Comm’n, 59 U.S.P.Q.2d 1907 (Fed. Cir. Aug. 21, 2001) (labeling not an enforceable restriction on the use of the camera, that “no license limitations may be implied from the circumstances of sale” (59 U.S.P.Q.2d at 1917), and that the challenged activities merely repaired the camera and extended its useful life); Bauer & Cie. v. O’Donnell, 229 U.S. 1 (1913) (patents could not be used to control resale prices); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) (the doctrine of exhaustion was only a unilaterally disclaimable “implied license”); Arizona Cartridge Remanufacturers Ass’n, Inc. v. Lexmark Int’l, Inc., 421 F.3d 981 (9th Cir. 2005) (the contract terms on the packaging of a printer cartridge are sufficiently clear to act as a “box-wrap” license, such that when the user opens the box he or she is accepting the terms and forming a contract). 46 Adolf Dietz, Copyright Law in the European Community 91–92 (1978). 47 Guajakol-Karbonat (Reichsgericht, 26 Mar. 1902) 51 RGZ 139, referred to in European Council, Records of the Luxembourg Conference on the Community Patent 1975, at 40–41 (OPOCE, Luxembourg, 1982); see also David Keeling, 1 Intellectual Property Rights in EU Law: Free Movement and Competition Law 75 (2003). 48 See Dietz, supra note 46, at 92–93; Frank Gotzen, “Distribution and Exhaustion in the EC”, Eur. Intell. Prop. Rev. 299, 300–01 (1990).

686 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY jurisdictions the intellectual property owner only has the right to block parallel imports from outside the region. Such a system is applied in the European Union and European Economic Area. (3) Some jurisdictions apply a system of “national exhaustion” only, under which the rights will not be exhausted if the product was put on the market outside the jurisdiction. In such jurisdictions the intellectual property owner has the right to block all parallel imports. II. PATENT EXHAUSTION IN THE EUROPEAN UNION/EUROPEAN ECONOMIC AREA (EEA)

In the European Union, the free movement rules of Articles 28 and 30 of the EC Treaty mean that patent exhaustion cannot be limited to individual jurisdictions in which a patent is granted but must extend to the whole of the European Union (regional exhaustion).49 Similarly, the free movement rules of Articles 11 and 13 of the EEA Agreement mean that patent exhaustion must extend to the whole of the European Economic Area.50 However, these free movement provisions are necessarily limited to questions that impact on free movement. They will prohibit any limitations on patent exhaustion that are regarded as discriminatory or extending beyond the scope (“specific subject matter”) of patent rights, but beyond that Member States retain a margin of discretion in determining the extent to which they wish to apply a doctrine of exhaustion. For instance, in Generics v. Smith Kline & French51 the ECJ considered a U.K. rule that allowed patent owners to object to imports where the patent owner manufactured the products in the United Kingdom but granted compulsory licenses under such patents for imports if the patent owner only manufactured the products elsewhere (even elsewhere in the European Union). This amounted to a limited form of international exhaustion. The ECJ held that was not justified under Article 30 because it favored production in the United Kingdom. However, it was up to the United Kingdom to decide whether to grant compulsory licenses in all such cases or to refuse them where there was manufacture in the United Kingdom or elsewhere in the European Union. The Court noted that “it is national law which, in the present state of Community law and in the absence of approximation of national legislation, defines the extent of the protection conferred by a patent or in respect of each type of patent,” subject to Articles 28 and 30.52 Moreover, these free movement provisions only apply to goods put on the market within the region in question. They do not require Member States to apply (or prohibit) international exhaustion but, rather, in the absence of harmonizing legislation, leave this question to the individual Member State.53 The proposals for harmonizing patents at a European Union level have always prohibited international exhaustion but have not yet been adopted.54 Again, 49 Case 15/74, Centrafarm v. Sterling Drug, 1974 E.C.R. 1147 (following for patents Case 78/70, Deutsche Grammophon v. Metro, 1971 E.C.R. 487). 50 Agreement on the European Economic Area arts. 11 & 13, [1992] 1 C.M.L.R. 921. 51 Case C-191/90, Generics (UK) Ltd. & Harris Pharms. Ltd. v. Smith Kline & French Labs. Ltd., 1992 E.C.R. I-5335. 52 Id. ¶ 39. 53 Id. ¶ 17 (following for patents Case 51/75, EMI Records v. CBS United Kingdom, 1976 E.C.R. 811). But see also Jessica Jones, “Does an Opportunity Still Exist for the Development of a Doctrine of International Exhaustion at a Community Level under Articles 28 and 30?”, Eur. Intell. Prop. Rev. 171 (2000). The position is different in relation to trademarks, designs and copyright, where the exhaustion provisions have been harmonized. 54 Patents Working Group, Proposals of the Benelux Delegations on Article 21 of the Preliminary Draft of the Convention relating to a European Patent Right, Doc IV/6365/61-F, at 2, 5–6; Convention for the European Patent for the Common Market, Luxembourg arts. 32 & 81(1), 15 I.L.M. 5 (1976), 1976 O.J. (L 17) 1; Agreement Relating to Community Patents arts. 28 & 76(1), 1989 O.J. (L 401) 9; Proposal for a Community Patent Regulation COM (2000) 412, art 10.

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therefore, it is up to individual Member States to decide to what extent they wish to apply a rule of international exhaustion. III. PATENT EXHAUSTION IN THE UK

In the United Kingdom, patent infringement is principally dealt with in Section 60(1) of the Patents Act 1977, which reads as follows: (1) Subject to the provisions of this section, a person infringes a patent for an invention if, but only if, while the patent is in force, he does any of the following things in the United Kingdom in relation to the invention without the consent of the proprietor of the patent, that is to say – (a) where the invention is a product, he makes, disposes of, offers to dispose of, uses or imports the product or keeps it whether for disposal or otherwise; (b) where the invention is a process, he uses the process or he offers it for use in the United Kingdom when he knows, or it is obvious to the reasonable person in the circumstances, that its use there without the consent of the proprietor would be an infringement of the patent; (c) where the invention is a process, he disposes of, offers to dispose of, uses or imports any product obtained directly by means of that process or keeps any such product whether for disposal or otherwise.55

Section 60(4) of the Patents Act 1977 was intended to implement the exhaustion provisions of the Community Patent Convention 1975, stating that the infringement provisions “shall not apply to any act which, under any provision of the Community Patent Convention relating to the exhaustion of the rights of the proprietor of a patent, as that provision applies by virtue of that section, cannot be prevented by the proprietor of the patent.”56 However, in line with the Convention itself, Section 60(4) was never brought into force and was deleted as of January 2005 by the Patents Act 2004.57 In addition, some commentary suggested that it would have done no more than require Community exhaustion and would not have prohibited international exhaustion.58 As a consequence there is no provision in the U.K. Patents Act 1977 that provides for exhaustion (although Community exhaustion will apply by virtue of the EC Treaty59 and the European Communities Act 197260). However, the silence in the legislation does not mean that there is no patent exhaustion in the United Kingdom. Instead, the courts have long recognized a limited form of exhaustion based on an implied license being granted when the patentee sells the article in question.61 This covers both sales outside the jurisdiction (parallel imports) and modification or repair of patented products.

Patents Act 1977 § 60(1), reprinted in 3 WIPO, Industrial Property Laws and Treaties, 2-001 (1993). Id. § 60(4). 57 Patents Act 2004 (Commencement No. 2 and Consequential, etc. and Transitional Provisions) Order 2004 (entered into force Jan. 1, 2005), § 16 & Sched 2, ¶ 13, (brought into force by SI 2004/320 ¶ 2), available at http:// www.opsi.gov.uk/ ACTS/acts2004/en/ukpgaen_20040016_en_1. 58 Chartered Institute of Patent Attorneys, CIPA Guide to the Patents Act ¶ 60.11 (5th ed. 2004). 59 Treaty on European Union, Feb. 7, 1992, 1992 O.J. (C 224) 1, [1992] 1 C.M.L.R. 719, 31 I.L.M. 247 (amending Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II)), as amended by Single European Act, 1987 O.J. (L 169) 1, [1987] 2 C.M.L.R. 741, in Treaties Establishing the European Communities (EC Off’l Pub. Off. 1987). 60 European Communities Act 1972, Ch. 68, available at http://www.opsi.gov.uk/Acts/acts1972/ukpga_19720068_ en_1. 61 See Simon Thorley, Richard Miller, Guy Burkill & Colin Birss, Terrell on the Law of Patents ¶¶ 8-66 to 8-67, 10-44 to 10-49 (16th ed. 2005). 55 56

688 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY IV. SALES OUTSIDE THE JURISDICTION (PARALLEL IMPORTS)

Where a patentee sells a product anywhere in the world he will be treated as granting an implied license allowing its resale in the United Kingdom. The basis for this approach was laid down in Betts v. Wilmott.62 Betts owned an English patent for making metallic capsules of tin and lead compressed together for covering the corks and necks of bottles. He had also owned a French patent for the same invention, which had expired. He brought a case for infringement of the English patent against Willmott, a retail chemist that had sold a bottle of Rimmel’s Toilet Vinegar, which used a similar capsule. Willmott argued that the capsule had in fact been manufactured by Betts in France. Betts responded that, even if the capsule had been manufactured by his agents in France, this was no defense to infringement of the U.K. patent. The Court of Appeal in Chancery disagreed with Betts as follows: The point is this: Supposing a man to have a patent in France and a patent in England, and he establishes manufactories in each country, it is contended that if he sells the patented article in France it is for the French market, and it does not justify a person buying the article in France, and bringing it over to England, and using it here … where a man carries on the two manufactories himself, and himself disposes of the article abroad, unless it can be shown, not that there is some clear injunction to his agents, but that there is some clear communication to the party to whom the article is sold, I apprehend that, inasmuch as he has the right of vending the goods in France or Belgium or England, or in any other quarter of the globe, he transfers with the goods necessarily the license to use them wherever the purchaser pleases. When a man has purchased an article he expects to have the control of it, and there must be some clear and explicit agreement to the contrary to justify the vendor in saying that he has not given the purchaser his license to sell the article, or to use it wherever he pleases as against himself.

The court also indicated that, had the French or English patent been assigned to a third party, the situation would be different and that the owner of the English patent would be entitled to enforce that patent against an article that had been sold by the owner of the French patent. That was in line with an earlier decision in Walton v. Lavater,63 where the assignee of an English patent successfully asserted that patent against the original inventor, who had imported the patented products from France where he had retained his patent. However, the judgment in Betts v. Wilmott was distinguished in Société Anonyme des Manufactures de Glaces v. Tilghman’s Patent Sand Blast Company,64 where the sale abroad had been by a licensee rather than by the patentee. Tilghman owned patents in England and Belgium for a process for cutting and grinding hard substances, which was used for frosting and ornamenting glass lamp globes and similar articles. Tilghman had granted Manufactures de Glaces a license to manufacture glassware using the patented process at its factory in Belgium. Manufactures de Glaces began to sell the glassware not only in Belgium but also in England. Tilghman responded by issuing two circulars to persons involved in the trade, warning that the importation or sale of such glassware infringed the English patent and threatening legal proceedings. Manufactures de Glace sought an interim injunction to prevent further circulars while it sought to take the matter to arbitration under the license agreement. In the High Court, Pearson J indicated that he was bound by Betts v. Wilmott. However, there was some evidence that the Belgian and English patents were in fact owned by different entities, and on that basis he distinguished the case from Betts v. Wilmott and refused the injunction. By contrast, although the Court of Appeal upheld his refusal of the injunction, it did so on a different basis, namely that a license under a Belgian patent was not a license under the English patent, and so would not prevent the patentee from exercising its right under the Betts v. Willmott, (1870–71) L.R. 6 Ch. App. 239. Walton v. Lavater, (1860) 8 CB (NS) 164. 64 Société Anonyme des Manufactures de Glaces v. Tilghman’s Patent Sand Blast Co., (1884) L.R. 5 Ch. D. 1. 62 63

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English patent to prevent import and sale into England. Cotton LJ explicitly confirmed Betts v. Wilmott, holding that, where a product is sold abroad without restriction by the patentee, the patentee cannot then use the English patent to prevent resale of that product in England. However, in the case before him the product was sold abroad by a licensee, not the patentee, and the licensee only had a license to manufacture under the Belgian patent, which could put the licensee “in no better position than if they were grantees of the Belgian patent.” The importation in Tilghman was being carried out by the licensee, which clearly knew the terms of its licence, and so, strictly speaking, the case was concerned with the geographical scope of a patent license rather than parallel trade of products sold by the licensee. Therefore, a question remained whether the purchaser from a licensee would also be bound by any restriction in the patent license (on the basis that the licensee could not give better title to the goods than he had himself) or whether the purchaser would be bound only if he had notice of the restriction (in line with the insistence on the purchaser’s agreement in Betts v. Wilmott). Notably, in Thomas v. Hunt65 the purchaser from a licensee had been held to have the right to resell the products without infringing the patent. A number of cases followed that considered whether third parties would be bound by restrictive terms.66 Although these cases were not concerned with parallel trade, Tilghman and, particularly, Betts v. Wilmott were discussed in several of them. In most of the cases, the product had originally been sold by the patentee and the purchaser had notice of the restrictive terms. However, purchase from a licensee without notice of restrictions was considered in Badische Anilin und Soda Fabrik v. Isler, where the patent license for manufacture and sale of certain dyes included a condition that allowed only sale to consumers but did not allow sale to dealers for resale. The patentee brought an action for patent infringement against a dealer that was acquiring the dyes and reselling them. Buckley J in the Chancery Division held that “nothing … can turn on the question whether the purchaser from the licensee knew of the condition or not.” However, he also found that, notwithstanding the patent license, there was an implied term that the dealer could resell and that the patentee was estopped by its conduct from arguing otherwise. Buckley J’s comments were, therefore, technically obiter dicta, and as such were not commented upon by the Court of Appeal, but they indicated that purchasers from patent licensees might in general be bound by the terms of the license. Buckley J’s approach was followed in a parallel trade case before the High Court of Kenya in 1968, Beecham Group v. International Products.67 The patentee, Beecham, had granted a license to Bristol-Myers extending to the whole world except the British Commonwealth. The license therefore excluded Kenya. The defendants, International Products, bought penicillin covered by the patents from Bristol-Myers in the United States and imported it into Kenya. Beecham brought an action for infringement of its Kenyan patents. The only English cases considered were Betts v. Wilmott and Tilghman, and International Products sought to distinguish Tilghman on the basis that the product was being imported by a third party and not by the licensee. Rudd J rejected that distinction and held that the question whether patent rights can be exercised against someone who buys from a licensee “must depend on the extent of the authority conferred on the licensee by the licensor under the licence or other agreements between them.” He clearly distinguished this from cases where there was “sale by Thomas v. Hunt, (1864) 17 CB (NS) 183. Heap v. Hartley, (1889) L.R. 42 Ch. D. 461; Incandescent Gas Light v. Cantelo, (1895) 12 R.P.C. 262; Incandescent Gas Light v. Brogden, (1899) 16 RPC 179; British Mutoscope and Biograph Co. v. Homer, [1901] 1 Ch 671; Badische Anilin und Soda Fabrik v. Isler, [1906] 1 Ch 605 (High Court), [1906] 2 Ch 443 (Ct. Ap.); National Phonograph Co. of Austl. v. Menck, [1911] AC 336; The Scottish Vacuum Cleaner Co. v. The Provincial Cinematograph Theatres, 1915 1 SLT 389; Gillette Indus. v. Bernstein, [1942] Ch 45; Dunlop Rubber v. Longlife Battery Depot, [1958] 1 WLR 1033. 67 Beecham Group v. Int’l Prods., [1968] FSR 162. 65 66

690 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY the patentee or his agent or assignee.” Given that the license was clear, he therefore granted an interim injunction. He did not mention whether or not International Products was aware of the restrictive scope of the license, although, based on his reasoning, the implication would appear to be that this is irrelevant. The cases, therefore, suggested that there was a distinction between sales by the patentee (where any restrictions would have to have been brought to the attention of the alleged infringer to prove infringement) and sales by a licensee (where the alleged infringer’s knowledge was irrelevant). A few years later, this distinction was followed in two interim injunction judgments in the English High Court: Sterling Drug v. CH Beck68 and Minnesota Mining & Manufacturing v. Geerpres Europe.69 In Sterling Drug v. CH Beck the patentee had sold the products in question to a wholesale chemist, with terms prohibiting export, and the defendant had acquired the products from the chemist. Graham J held that whether there was a prima facie case of patent infringement must “depend on my being satisfied that adequate notice of such a restriction has been brought to the defendants’ attention.” Given that the patentee had sent a letter to the defendant outlining the terms, and the chemist’s invoice had made it clear that the manufacturer’s terms would apply, he found that the restrictions had indeed been brought to their attention. In Minnesota Mining & Manufacturing v. Geerpres Europe a licensee in the United States had sold the products in question to a third party, which had resold them to the defendants, who imported them into the United Kingdom. The patent licence was restricted to the United States patent and did not cover the English patent. This time there was no discussion of the defendant’s knowledge. Instead Graham J held that the licensee had no right to grant a licence under the English patent and that the licensee “cannot pass on to [the third party] any rights which they have not got, and [the third party] equally cannot pass on any such rights to the defendants.” A different approach was taken in Scotland by the Outer House of the Court of Session in Christian Salvesen (Oil Services) v. Odfjell Drilling and Consulting Co (UK).70 The patentee had granted an exclusive license to a company that he owned. Subsequently, he and his company granted an exclusive sub-license covering a geographical area that included the United Kingdom and the North Sea to the petitioner (claimant). The respondents (defendants) had purchased products from the company and proposed to use them in the North Sea, saying that they had no notice of the exclusive sub-license or any restrictions on their use of the products. The petitioner sought an interim interdict (injunction) to prevent such use, referring to Minnesota Mining & Manufacturing v. Geerpres Europe for the proposition that notice was irrelevant. However, this was rejected by Lord Mayfield, who distinguished the present case on the basis that the patentee was the owner of the exclusive licensee and so “in effect … the devices were sold to the respondents by the owner of the patents.” He therefore refused the interim interdict, suggesting that the petitioners’ remedy might instead be against the patentee’s company. Nevertheless, the English Patents County Court stuck to the distinction in The Wellcome Foundation v. Discpharm.71 Prior to the end of the transitional period that applied when Spain joined the Community, the defendants had imported SEPTRIN tablets from Spain, where they had been manufactured and sold by a wholly-owned subsidiary of the patentee, into the United Kingdom. The patentee brought an action for patent infringement. The defendants raised a Sterling Drug v. CH Beck, [1972] FSR 529. Minnesota Mining & Mfg. v. Geerpres Eur., [1973] FSR 133. 70 Christian Salvesen (Oil Servs.) v. Odfjell Drilling & Consulting Co (UK), 1985 SLT 397. 71 Wellcome Found. v. Discpharm, [1993] FSR 433. See supportive comment in Jessica Jones, “Exhaustion of Rights: Pharmaceuticals Marketed in Spain — A Wellcome Exception”, Eur. Intell. Prop. Rev. 107 (1993). 68 69

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number of possible defenses, including arguing that they had an implied license under Betts v. Wilmott. Judge Ford held that that the initial sales of the tablets would have been made under Spanish law, where there was no implied license. However, he also held that, even if English law was applicable, the defendants could not rely on Betts v. Wilmott because the sale in Spain had not been by the patentee but by its wholly-owned subsidiary, which had a license limited to Spain. The judge referred to Tilghman, National Phonographic Company of Australia v. Menck, Beecham Group v. International Products, and Minnesota Mining & Manufacturing v. Geerpres Europe, and held that the facts of this case were closer to that line of cases than to Betts v. Wilmott. He refused to take the view that the corporate group should be treated as an economic entity, as was done in Revlon v. Cripps & Lee72 in relation to trade marks, noting that a different approach had been taken in Polydor v. Harlequin73 in relation to copyright and that it did “not seem to be appropriate here, in view of the very limited commercial scope permitted to the operations of [the wholly-owned subsidiary].” In addition, even if Betts v. Wilmott did apply, the defendants did not claim that they had no notice of the objection to parallel trade, given that “official warnings had been issued through the Medicines Control Agency of the Department of Health, the [patentee] had caused warning notices to be published in the trade press and the matter had been the subject of much attention by the Association of Pharmaceutical Importers, of which the defendant companies are members.” The English High Court returned to consider original sale by the patentee in Roussel Uclaf v. Hockley International.74 In this case, Roussel had manufactured an insecticide, called deltamethrin in France, and had supplied it to the Chinese market through a Chinese jointventure company owned by Roussel and a Chinese company. Roussel claimed that the drums of insecticide supplied in China had borne labels which read “for use in PRC only, re-export forbidden.” Hockley had acquired some drums and was selling them in the United Kingdom. Roussel brought an action for patent infringement, seeking summary judgment. Jacob J held that Roussel had to show that they had “brought home” the restriction to the relevant party. Based on evidence from Hockley that it had acquired a drum without a label, Jacob J held that it had not been established that the restrictions had been brought home to the Chinese jointventure company by labels. He then considered whether there was sufficient evidence that the restrictions had been brought home to the Chinese joint venture company in some other way, and held that there had not. Similarly, he held that there was no evidence that the restrictions had been brought home to the defendants, nor to the intermediate companies in the supply chain. Summary judgment was, therefore, refused. In Zino Davidoff v. A&G Imports75 the High Court had another chance to consider the scope of Betts v. Wilmott and sale by the right holder. Zino Davidoff was applying for summary judgment for trade mark infringement in relation to perfumes that had been parallel imported from Singapore. Davidoff had prohibited its distributor in Singapore from selling outside its territory, and required its distributor to prohibit its sub-distributors, sub-agents, and retailers from doing the same. However, it was argued that there was no contractual requirement to ensure that such sub-distributors, sub-agents, or retailers impose the same prohibition on their own buyers or further down the supply chain. It was also argued that there was no evidence that any such restriction was imposed on the defendants, either by marking or notice on the goods or by contract. On this basis, Laddie J held that it was arguable that Davidoff should be taken to have consented to the import on the basis of the earlier patent cases (even though the case in question related to trade mark infringement). Although the ECJ effectively found that Revlon, Inc. v. Cripps & Lee, Ltd., [1982] F.S.R. 16. Case 270/80, Polydor v. Harlequin Record Shops, 1982 E.C.R. 329. 74 Roussel Uclaf v. Hockley Int’l, [1996] RPC 441. See criticism in David J. Wilkinson, “Breaking the Chain: Parallel Imports and the Missing Link”, Eur. Intell. Prop. Rev. 319 (1997). 75 Zino Davidoff v. A&G Imports, [2000] Ch 127. 72 73

692 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY Laddie J’s approach conflicted with the Trade Mark Directive Article 7,76 the decision remains relevant in terms of patents, where there is no such harmonizing Community provision. V. PATENTED PRODUCTS WHICH HAVE BEEN MODIFIED OR REPAIRED

The purchaser of a patented product also has an implied licence to modify or repair it. However, when such a change amounts to remaking the product this will infringe the patent and the purchaser cannot rely on implied licence as a defense. In addition, implied licenses will not apply where there are express contractual provisions prohibiting repair or modification. However, this is only the case where the express terms are themselves valid. In the past, provisions in the Patents Acts provided some limitations on such contractual terms,77 although the matter is now a question for competition law (under Articles 81 and 82 of the EC Treaty and the Competition Act 1998) and domestic policy rules, such as restraint of trade. Where express terms would not be valid, the implied license will amount to exhaustion. In Dunlop Pneumatic Tyre v. Neal78 Dunlop had a patent for pneumatic tyres for bicycles, which claimed “a rubber or elastic tyre having the form of a saddle or arch in section lined in canvas in combination with two wires or sufficiently inelastic cores for securing the same to the rims or tyres substantially as herein described.” Neal had repaired a worn-down tyre that had been originally made by Dunlop by repairing a broken wire and constructing a new canvas cover and rubber cover. Neal argued that the patent covered a combination and, thus, because part of the combination (the wires) had been licensed by Dunlop, there could be no infringement. This was rejected by North J, who held: I do not think the defendant is justified in saying that the mere fact that the wires had been used in an article made by the plaintiffs is a licence to him to use them for any article of the same kind with which they could be used. In my opinion the only licence or authority given by the sale by the plaintiffs was that the tyre, including the wires, might be used till it should be worn out. Any simple repairs might be done by any person without licence from the manufacturer. But when a person takes the whole thing and makes and sells that which is really a new tyre, having merely the old wires in it, there is no licence from the plaintiffs to use the old wires for the purpose of putting them into a new article making up precisely the combination which is the subject of the letters patent.79

This approach was followed by the Court of Appeal in Solar Thomson Engineering v. Barton.80 The patent in this case claimed “A pulley having side cheeks, at least one of which is removable, holding a plurality of annular members of rubber or other elastomeric material in compression against one another, said annular elastomeric members co-operating to form a ring with a peripheral recess or groove for receiving a rope or cable” and the specification noted “It is an object of the present invention to provide a pulley having an elastomeric ring in its peripheral recess or groove, which pulley is readily constructed and which is such that the elastomeric ring can be readily replaced.” There was no claim for the rubber rings per se. The defendant was replacing the rubber rings on pulleys originally supplied by the patentee by stripping any remaining rubber from the steel rims and molding new rubber rings onto them. The patentee brought an action for infringement of its patent. Buckley LJ, with whom the other members of the Court of Appeal agreed, rejected that action holding that the patentee: Case C-415/99, Zino Davidoff SA & A&G Imports Ltd. v. Tesco, 2001 E.C.R. I-8691 Patents Act 1949, § 57; Patents Act 1977, § 44. 78 Dunlop Pneumatic Tyre v. Neal, [1899] 1 Ch 807, (1899) 16 RPC 247. 79 Id. 80 Solar Thomson Eng’g v. Barton, [1977] EPC 537. 76 77

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can only succeed on the ground of infringement by showing that each and all of the essential requirements of a claim of the patent in suit have been taken by the defendant in his operation … The answer to the question must depend upon whether the defendant’s operation ought to be regarded as the repair of old Polyrim pulley cheeks or as the manufacture of new Polyrim pulley cheeks making use of parts, i.e. steel rings, recovered from old cheeks. The retention of the steel rims cannot be regarded as a colorable device. In my judgment the right conclusion upon the evidence is that what the defendant has done has been to repair worn parts, i.e. the rubber rings, of existing Polyrim pulley cheeks. The operations which the defendant has carried out are, in my judgment, operations which he is entitled to carry out under contract for a purchaser of Polyrim pulleys from Cable Belt Ltd. as sublicensee under an implied licence by Cable Belt Ltd. to such purchaser. Graham, J. refused to grant an interlocutor injunction because in his opinion what had been done by the defendant was quite clearly a repair and not the creation of a new infringing article, and because it was clear that the users were licensed by the plaintiffs impliedly, if not expressly, to retread their rims. For reasons which I have indicated I do not think the defendant can establish an express licence, but I think he can and does succeed on the basis of an implied licence.81

The same approach was taken to modifications of patented articles in Dellareed v. Delkim Developments.82 This case concerned a patent for a bite indicator for use when fishing with a fishing rod which included the following claim: A bite indicator comprising a support means including a fishing rod support means arranged for locating a fishing rod relative to the support means, in use, a pulley wheel freely rotatably mounted to the support means adjacent the fishing rod support means such that the fishing line of a rod located in the fishing rod support means will pass at least partially around said pulley wheel, and a member mounted so as to be moved by movement of the pulley wheel and forming part of a photoelectric, magnetic or electro magnetic sensor for providing a signal indicative of any such movement and the rate thereof.83

The patentee’s products gave visual and audible signals when there was movement (i.e., when those fishing got a bite). The defendant was modifying the patentee’s products to add a volume and tone control for the audible signal, which involved, among other things, replacing the circuit board inside the device (using two of the original components) and changing the method of movement detection. The patentee brought an action for patent infringement. The defendant argued that the patent rights had been exhausted by the sale of the patentee’s product. Falconer J held that the same fundamental principle should apply to modification of a patented article as to repair — namely, that the purchaser must not make what is essentially a new product falling within the claim or claims of the patent. He held that the modification in this case amounted to making a new product and, therefore, patent infringement. Finally, in United Wire v. Screen Repair Services (Scotland)84 the House of Lords confirmed that the question should focus on whether there is “making” rather than whether there is “repair.” It held that the reconditioning of a sifting screen, used to recycle drilling fluid in the offshore oil-drilling industry, constituted making the patented product and so this was a patent infringement. VI. CONCLUSION

The United Kingdom recognizes exhaustion of patent rights in products sold by or with the patentee’s consent in the European Economic Area (EEA). The patentee will also have 81

Id. Dellareed v. Delkim Devs., [1988] FSR 329. 83 Id. 84 United Wire v. Screen Repair Servs. (Scotland), [2000] UKHL 42. 82

694 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY granted an implied license to resell products sold outside the EEA, unless resale in the EEA is prohibited and the alleged infringer is made aware of that prohibition. If the extra-EEA sale is by a licensee, there is no requirement that the alleged infringer be aware of the prohibition on resale in the EEA, although in Scotland such knowledge may be necessary where the licensee is part of the patentee’s group of companies. Modification or repair, or sale of a modified or repaired product, will be an infringement where the change amounts to “making” a new product or, if not, where the implied license to do so is excluded by a valid prohibition on such conduct. However, there is relatively little case law so far on modification or repair.

MR. WHITE: I would like to first ask Justice Hughes if he would like to provide some comments on any of the presentations that were just made. JUSTICE HUGHES: I am interested to hear that in all jurisdictions — and I put Canada in there as well — the law is far from clear or far from settled. The second thing I want to do is pick up on a point that Lewis made. Judges, I think instinctively, do not like limitations; they don’t like what smells like double-dipping. I think that the judges, by and large, will do an instinctive job on this, rather than look at strict patent or other IP law strictures on this, and they will open it up and say things like, as three-and-ahalf judges of our Supreme Court did recently, “There are economic limitations on intellectual property rights.”85 That’s a bias, or a trend, that I see emerging. It is too hard to think about all these special rules and conditions that intellectual property lawyers present, because they are paid far too much money to think far too much about far too many important problems. It’s got to get back to real life. They are going to say: “Stop. We are going to put limitations on this. We’re not going to allow you to double-dip. We are not going to allow you to put fancy conditions and things on that. We are just going to get on with life.” I think that is the attitude that the courts will come at. MR. WHITE: Thank you very much. Ms. Kato, would you like to make some comments, please? MS. KATO: Before going into the topic, I will briefly introduce a current situation about the exhaustion defense. This is one of the hot topics in the IP field in Japan. Recently, we have some lower court decisions about recycled products, for example, disposable cameras and ink cartridges.86 Last year we had a significant Supreme Court decision about exhaustion regarding such products.87 The main issue of the Supreme Court decision is different from the Quanta case. I will not go into details here. The day before yesterday I mentioned the case.88 If you can access the Web site of IP Asia Day, which is connected to the IP Conference of Fordham, then please look at that page, if you have interest.89 In terms of the Quanta case, we had no relevant Supreme Court decision, something like that. But I would like to introduce our very important case law. It is the BBS decision, which was See Euro-Excellence Inc. v. Kraft Can., Inc., 2007 SCC 37. For a discussion of the patent exhaustion doctrine in Japan and the Canon Inc. v. Recycle Assist Co. Ltd. and Fuji Photo Film cases, see Yoshinari Kishimoto, Canon Tests Patent Exhaustion Doctrine, MANAGING INTELL. PROP. (Supp. Japan Focus 2006 3d ed.), available at http://www.managingip.com/Article.aspx?ArticleID=1321336. 87 Recycle Assist Co., Ltd. v. Canon, Inc., Case No. Heisei 18(jyu)826, Supreme Court, First Petty Bench, Nov. 8, 2007. Japanese decision available at http://www.courts.go.jp/hanrei/pdf/20080111155502.pdf. 88 Shimako Kato, Patent Exhaustion Doctrine in Japan: In light of recent Supreme Court Decision, Presented at IP Academy (Singapore) and Fordham University School of Law Asia IP Law & Policy Day: The Developing Ecosystem for IP in Asia (Mar. 26, 2008). 89 See 5th Annual Asian IP Law and Policy Day, http://www.ipacademy.com.sg/site/ipa_cws/resource/ Conferences%20or%20Roundtables/fordham08_130308a.pdf. 85 86

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rendered in 1997.90 This is a case with regard to parallel imports, but the doctrine of domestic exhaustion is also stated in the district court decision, also the Supreme Court decision. The court also showed the reason why the patent rights should be deemed to be exhausted in a case of authorized use and said: “Protection of invention by the Patent Act should be realized by striking balance with the public interest.” Also, the court stated that “if the patentee’s consent is required for its transfer, the sound transaction of goods in the market would be seriously impeded.” So in this regard, we can say the fundamental principle with regard to exhaustion in Japan is to keep sound transaction and business activity. In the light of such a principle, a famous processor in the IP field in Japan said that “even if a patent imposes numerical restrictions or a prohibition of subsequent sales on the contract, the effect of exhaustion shouldn’t be embedded.” In other words, a patentee can change the effects of exhaustion based on the patentee’s own will. In light of such comments, it is just my view, but I can say if the Quanta case is examined in Japan, it is likely that the act of Quanta will be deemed as non-infringement of patent, at least with regard to the system patent and the components patent, because the exhaustion doctrine should be applied in this case. Those are all my comments. MR. WHITE: Thank you very much. Before I turn to the audience for questions, I would like to see if any of the speakers would like to make any comments on any of the presentations by one of the other speakers. Any comments? No. They seem ready to take your questions. Do we have some questions out in the audience? Incredible quietness. QUESTION [Christian Harmsen, Bird & Bird, Düsseldorf]: Just to make a start, what about the teaching of the patent, particularly a question to the U.S. panelists here. Does it play a role, what the patent really says, and what proportion of the features of the claims can be found in the product license and how many features can be found outside the product that has been licensed, in the final product? I would be interested to hear particularly what the U.S. people here think. MR. CLAYTON: I think that is a very good point. That is one of the issues that the lower courts are going to be grappling with, whatever the outcome is. I suppose if the Supreme Court says, for example — which I don’t think it will — “Exhaustion does not apply to method claims,” then what will happen is everyone will be asserting their method claims. I think that is the reason why the Supreme Court is not going to come out that way. But if they do say exhaustion extends to method claims, you are going to have the development of essentially federal common law in the district courts and the Federal Circuit about how tight a connection there has to be between the item and the patented features that the item has and the patents that you are claiming are exhausted. I think the courts are likely to look at it from the economic perspective, as Justice Hughes said, because it makes sense to say that “this patent ought to be exhausted because when you sold the item the purchase price of the item had to reflect this particular use, so you’ve been rewarded”; or, instead, “Are you trying to do nasty things, like, as they say in patent misuse, extend the scope of the monopoly beyond where it’s supposed to go?” People are going to look at that tightness of fit. That’s one reason why the Quanta case is a very strange case, because these chips, according to the record at least developed, are almost uniquely referable to these patents. If, for example, 90 BBS AG v. Racimex Japan K.K. and Jap-Auto Prods. K.K., Case No. Heisei 7(o)1988, Supreme Court Third Petty Bench, July 1, 1997, 51 Collected Civil Cases § 6, 2299. An English translation of the BBS case is available at http://www.okuyama.com/c3v01ok.htm.

696 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY you read some of the amicus briefs, they say in biotech and also in electronics there are a lot of patents that can be used in lots of different ways. That is why they are segmenting out the market and are so concerned with exhaustion. It is just not the same issue here. You are going to find economics, I think, controlling those kinds of questions. Certainly, the courts are going to be very skeptical where you have, as you often have, a system claim or a method claim that just mirrors the claim on the item. You can see how the drafter has put them together. JUSTICE HUGHES: Where our courts are facing some of these issues is in the drug patent situation, where you have an old drug that is used for an old purpose and we have a compulsory license, for instance, to a generic to make that drug. All of a sudden, somebody discovers a new use for that drug. To what extent can people buy the material and use it for the new use? That becomes a very stressed and strained issue, for which we have not gotten an answer yet. People keep looking for slivers of inducement for pushing people into the new use and so on. But it is quite a huge debate when you talk about that kind of a claiming issue. MR. WHITE: Other questions? QUESTION [Jeremy Brown, Howrey LLP, London]: You talk about the compulsory license situation. But surely there can’t be any exhaustion where there has been a compulsory license. It hasn’t been put on the market by the patentee. JUSTICE HUGHES: But when the patent expires, then you can. QUESTIONER [Mr. Brown]: Yes. But then, if you have another patent, good luck to you. JUSTICE HUGHES: Yes. But if you sell it for the “old” use, to what extent can they be nonetheless purchased by somebody freely at a pharmacy and used for the new use? QUESTIONER [Mr. Brown]: That is another issue. I was going to say — Christopher can correct me — that I am not aware of any cases in Europe where there have been multiple patents. Basically, it is usually that it is the product and the question is the exhaustion in Europe. It is not so much that your patent rights are exhausted; it is just in respect of that product you can’t stop it moving around. That does not mean you cannot stop it being used in other ways. I do not think there have been any decisions on that. If you have a standard pharmaceutical, then you have a whole lot of other use patents and formulation patents and everything else. I don’t believe anybody has suggested that by selling that active ingredient you are exhausting all possible uses for that product. But that is clearly an area in which there is scope for argument. MR. WHITE: Paul? QUESTION [Paul Tauchner, Vossius & Partner, Munich]: In answer to Justice Hughes, if the patent for the drug has expired and there is a use patent for a new utility, if the patients buy it in the pharmacy and use it for themselves, they are not acting in the commercial field themselves. But if a doctor prescribes this drug to the patient, off-label so to say, telling him, “You buy this cheap drug and you avoid buying the expensive second medical use drug,” then I think, at least in Germany, this would be an infringement, inducement of infringement, contributory infringement, whatever you like. I think this is the situation in Europe. JUSTICE HUGHES: But the problem is that the generic drug companies know that and they know that the innovative drug companies will not sue doctors. So what they are trying to do is simply say, by putting it on there and knowing there is a new use for it, have you in effect infringed nonetheless. MR. WHITE: Jay Thomas. QUESTION [Prof. John R. Thomas, Georgetown University School of Law, Washington, D.C.]: I have some observations for Christopher, and perhaps you can get back to me. You come off as very suspicious of attempts to contractually modify the scope of intellectual property exchanges. But surely they are efficiency-enhancing at times. These exchanges allow

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patentees to sell to customers who may not be able to afford their products otherwise, or allow metering of the patented goods so that they can better adjust prices depending on the competitors’ use. I think your concerns about exhaustion may not account for that. I am curious why you came out the way you did, because you are always a very thoughtful commentator. You seem to agree with everyone else that the product/process distinction is of significance. That is simply a matter of claims drafting that really any first-year law student can do, simply converting a machine into a “process in a box.” So I am wondering if you think that formalist distinction is one that is worth maintaining. MR. STOTHERS: Fine. I am not sure how thoughtful I am, but there we go. Answering your second point first, I do not think that the formalist distinction makes that much sense. If I am selling a product that would necessarily infringe a method claim, then I should not be able to sue people for infringing that method claim by using the product, and I should not be able to extend my right to do that by virtue of contractual limitations all the way down the chain. Turning to the first point, of course there can be efficiency reasons in why you might want to have distribution to different channels at different prices. There may be good efficiency reasons for that. The question is whether that necessitates having property rights to go all the way down the chain if people start selling outside that chain, or whether that should be dealt with by contracts and by licenses. I think that is a different point. I think you need to go one more step to say why you need property rights to do that. That is possibly something that has been dealt with, so maybe the other panelists would like to take that up. MR. WHITE: Mr. Pitz, did you want to make a comment? MR. PITZ: Maybe one comment. I think the question of patentability is also very important in the context of exhaustion of method claims. According to the Federal Supreme Court’s case law, there is no exhaustion of a method claim if only the method is patent protected and not the device that has been placed on the market. If, however, both method and device are protected, exhaustion of the method patent may appear. It seems to me rather doubtful whether this distinction is really appropriate. In cases where the use of the device necessarily leads to an implementation of the method there is principally a lack of patentability of the method claim. It is in my view not the purpose of exhaustion to heal this lack of patentability. In cases where the use of the device necessarily makes use of the method principles of explicit and/or implied license may apply. MR. CLAYTON: I am very sympathetic to the idea that there are a lot of economic efficiencies, particularly in particular fields, with allowing patent holders to segment out the rights and put a lot of restrictions on use of an invention. In a sense, the counter-argument is to say: “Well, you know, there are lots of areas of the economy where someone who has a position in a market — it could simply be a monopoly position; it could be holding a trademark or a copyright — where one can argue there are efficiencies in being able to take that item that embodies that intellectual property and place restrictions upon it.” There is pushback in some areas of the economy. In the copyright field, you can, under cases like Pro CD,91 form a contract with someone that may not be preemptive under the copyright law. So you can write a contract that eliminates fair use, theoretically. There is a lot of pushback on that. People even believe that college students have a right to download songs for free from Napster, and Congress debates these weighty issues. So you could say that if you are going to allow patent holders to segment out these rights in this exquisite way, maybe that ought to pertain to some other areas of intellectual property. 91

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).

698 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY MR. WHITE: Anyone else?

QUESTION [Wolfgang von Meibom, Bird & Bird, Düsseldorf]: Just coming back to this conflict between compulsory license and exhaustion, what you were saying is that they are excluding each other. Why? If we look into cases like Sun/Microsoft92 or others, if we establish a compulsory license, why should that exclude an exhaustion? I would say it is the logical consequence that this kind of license includes some kind of exhaustion of the product. MR. WHITE: Anyone else have anything they want to bring up? If not, we are getting close to the time. Let me thank all the speakers for their excellent presentations.

APPENDIX A Patents and Drug Importation John R. Thomas*

SUMMARY

Prescription drugs often cost far more in the United States than in other countries. Some consumers have attempted to import medications from abroad in order to realize cost savings. The practice of importing prescription drugs outside the distribution channels established by the brand-name drug company is commonly termed “parallel importation.” Parallel imports are authentic products that are legitimately distributed abroad and then sold to consumers in the United States, without the permission of the authorized U.S. dealer. Parallel importation may raise significant intellectual property issues. Many prescription drugs are subject to patent rights in the United States. In the Jazz Photo decision, the U.S. Court of Appeals for the Federal Circuit confirmed that the owner of a U.S. patent may prevent imports of patented goods, even in circumstances where the patent holder itself sold those goods outside the United States. The Jazz Photo opinion squarely declined to extend the “exhaustion” doctrine — under which patent rights in a product are spent upon the patent owner’s first sale of the patented product — to sales that occurred in foreign countries. The court’s ruling will in some cases allow brand-name pharmaceutical firms to block the unauthorized parallel importation of prescription drugs through use of their patent rights. Several state and local governments are either themselves importing, or encouraging others to import, patented medications from foreign jurisdictions. The Eleventh Amendment of the U.S. Constitution provides that a federal court may not adjudicate a lawsuit by a private person against a state, except under certain limited circumstances. The ability of a private party to obtain a remedy for patent infringement against a state government is therefore uncertain. Eleventh Amendment immunity may in some cases extend to political subdivisions of a state as well. In addition to any patent rights they possess, brand-name drug companies may place label licenses on their medications. It is possible to draft a label license restricting use of a drug to the jurisdiction in which it was sold. As a result, in addition to a charge of patent infringement, an unauthorized parallel importer may potentially face liability for breach of contract. 92 See Case T-201/104, Microsoft Corp. v. Commission, [2007] 5 C.M.L.R. 846, 2007 WL 2693858 (Sept. 17, 2007).

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Several bills have been introduced in the 108th Congress addressing the importation of prescription drugs. One of them, S. 2328, the Pharmaceutical Market Access and Drug Safety Act of 2004, would amend the Patent Act of 1952 to provide that importation into the United States of a regulated pharmaceutical sold abroad by a patent proprietor or its representative is not a patent infringement. Introduction of an “international exhaustion” rule restricted to pharmaceuticals does not appear to be restricted by the provisions of the so-called TRIPs Agreement, which is the component of the World Trade Organization (WTO) agreements concerning intellectual property. Another possible legislative response is the immunization of specific individuals, such as pharmacies or importers, from patent infringement liability. Alternatively, no legislative action need be taken if the current possibility of an infringement action against unauthorized importers of patented pharmaceuticals is deemed satisfactory. I. PATENTS AND DRUG IMPORTATION

The pricing of prescription drugs has become a significant concern for many U.S. consumers.93As spending on health care has risen in recent years,94 so too has consumer interest in purchasing more affordable medications. Overseas markets provide one possible source of less costly prescription drugs. Some comparative studies of prescription drug prices in the United States and foreign nations have concluded that prices for specific drugs may be significantly lower abroad.95 These price disparities in some instances have encouraged individuals and firms, as well as state and local governments, to attempt to import comparable medications from abroad in order to realize cost savings.96 The practice of importing patented prescription drugs outside the distribution channels established by the brand-name drug company is commonly termed “parallel importation.”97Parallel imports are authentic products that are legitimately distributed abroad and then sold to consumers in the United States, without the permission of the authorized U.S. dealer. These goods are legitimate in that they are produced by the brand-name drug company or its authorized representative. In particular, parallel imports are not generic versions of a brand-name drug distributed by a different manufacturer, nor are they pirated copies that form part of the “black market.” Because parallel imports disrupt the marketing arrangements established by the brand-name drug company, however, they are sometimes called “grey market goods.”98Current debate surrounding the parallel importation of prescription pharmaceuticals has largely addressed the safety and efficacy of the imported medications.99 This practice may also raise significant intellectual property concerns, however. Many prescription drugs are subject to patent rights in the United States. Indeed, because patented drugs usually have no exact generic equivalent available in the marketplace,100 economic incentives for parallel See Paulette C. Morgan, Medicare: Prescription Drug Expenditures, CRS Report RS20612 (1997). * Visiting Scholar, Resources, Science & Industry Division. Published by the Congressional Research Service, The Library of Congress, CRS Report for Congress, Order Code RL32400 (May 25, 2004), available at http://www. ipmall.info/hosted_ resources/crs/RL32400_040525.pdf. 94 See Paulette C. Morgan, “Health Care Spending: Past Trends and Projections”, CRS Report RL31094 (2004),. 95 See, e.g., Farin Khosravi, “Price Discrimination in the United States: Why Are Pharmaceuticals Cheaper in Canada and Are Americans Seizing the Opportunities Across the Border?”, 9 L. & Bus. Rev. of Ams. 427 (2003). 96 See, e.g., Shubha Ghosh, “Pills, Patents and Power: State Creation of Gray Markets as a Limit on Patent Rights”, 14 Fla. J. Int’l L. 217 (2002). 97 See, e.g., Warwick A. Rothnie, Parallel Imports (1993); Simon Horner, Parallel Imports (1987). 98 See, e.g., Seth E. Lipner, The Legal and Economic Aspects of Gray Market Goods (1990). 99 See Susan Thaul & Donna U. Vogt, “Importation of Prescription Drugs Provisions in P.L. 108-173, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003”, CRS Report RL32271 (2004). 100 See, e.g., Melissa K. Davis, “Monopolistic Tendencies of Brand-Name Drug Companies in the Pharmaceutical Industry”, 15 J.L. & Com. 357 (1995). 93

700 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY importation may be strongest for patented medications. Among the rights granted by an issued patent is the ability to exclude others from importing the patented product into the United States.101 As a result, even if a foreign drug is judged safe and effective for domestic use, brandname firms may nonetheless be able to block the unauthorized importation of prescription drugs through use of their patent rights. In the 108th Congress, several bills have been introduced that concern the importation of prescription drugs but most do not address intellectual property issues.102 However, one of these bills, S. 2328, the Pharmaceutical Market Access and Drug Safety Act of 2004, accounts for the patent implications of the parallel importation of pharmaceuticals. In particular, section 4(f) of S. 2328 amends the Patent Act of 1952 to provide that it is not an act of patent infringement to import into the United States a drug that was first sold abroad by or under authority of the owner or licensee of such patent. The effect of S. 2328 would be to introduce a doctrine known as “international exhaustion” into the U.S. patent law.103 The parallel trade of patented pharmaceuticals involves a fundamental trade-off within the intellectual property law: encouraging the labors that led to technological innovation, on one hand, and promoting access to the fruits of those labors, on the other. The patent system is built upon the premise that patents provide individuals with an incentive to innovate by awarding inventors exclusive rights in their inventions for a limited period of time.104 Some observers believe that a diminishment of patent rights will decrease incentives to develop new pharmaceuticals in the future.105 Yet there is growing concern that drug prices are too high in the United States as compared to other nations. Some commentators believe that the patent system should not be used to regulate the movement of legitimate, lawfully purchased products through the global marketplace.106 This report explores the intellectual property laws and policies concerning the parallel importation of patented pharmaceuticals into the United States.107 It begins with a review of patent policy and procedures. The report then discusses the current legal framework for analyzing the permissibility of the parallel importation of patented pharmaceuticals, including both the domestic and international exhaustion doctrines. Special consideration is given to state and local governments that have either themselves imported, or have encouraged others to import, patented medications from foreign jurisdictions; the potential use of label licenses on patented drugs; and the implications of international trade rules established by World Trade Organization. This report closes with a review of legislative issues and alternatives as they relate to intellectual property issues and parallel importation.

101 See 35 U.S.C. § 271(a) (2006) (providing patent proprietors with the right to exclude others from importing patented inventions into the United States). 102 S. 2137; S. 1781; H.R. 2427 (each titled the “Pharmaceutical Market Access Act of 2003”). 103 See Rebecca S. Eisenberg, “Patents, Product Exclusivity, and Information Dissemination: How Law Directs Biopharmaceutical Research and Development”, 72 Fordham L. Rev. 477 (2003). 104 Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989). 105 Claude E. Barfield & Mark A. Groombridge, “Parallel Trade in the Pharmaceutical Industry: Implications for Innovation, Consumer Welfare, and Health Policy”, 10 Fordham Intell. Prop. Media & Ent. L.J. 185 (1999). 106 William Davis, “The Medicine Equity and Drug Safety Act of 2000: Releasing Grey Market Pharmaceuticals”, 9 Tul. J. Int’l Comp. L. 483 (2001). 107 This report does not address other mechanisms to lower the prices of pharmaceuticals. For one view on whether allowing the parallel importation of pharmaceuticals would in fact lower prices, see Colin Baker, Would Prescription Drug Importation Reduce U.S. Drug Spending?, Congressional Budget Office, Economic and Budget Issue Brief (Apr. 29, 2004).

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II FUNDAMENTALS OF PHARMACEUTICAL PATENTS

A. Patent Policy The patent system is animated by a number of policy objectives designed to promote the production and dissemination of technological information. Many commentators have argued that the patent system is necessary to encourage individuals to engage in inventive activity.108 Proponents of this view reason that, absent a patent system, inventions could easily be duplicated by free riders, who would have incurred no cost to develop and perfect the technology involved, and who could thus undersell the original inventor. The resulting inability of inventors to capitalize on their inventions would lead to an environment where too few inventions are made. By providing individuals with exclusive rights in their inventions for a limited time, the patent system allows inventors to realize the profits from their inventions. Further, these rights are grounded in the U.S. Constitution, which authorizes Congress to delineate them.109 The courts have also suggested that absent a patent law, individuals would favor maintaining their inventions as trade secrets so that competitors could not exploit them. Trade secrets do not enrich the collective knowledge of society, however, nor do they discourage others from engaging in duplicative research. The patent system attempts to avoid these inefficiencies by requiring inventors to consent to the disclosure of their inventions in issued patent instruments.110 There are still other explanations for the patent laws. For instance, the Patent Act of 1952111 is thought by supporters to stimulate technological advancement by inducing individuals to “invent around” patented technology. Issued patent instruments may point the way for others to develop improvements, exploit new markets or discover new applications for the patented technology.112 The patent system may encourage patentees to exploit their proprietary technologies during the term of the patent. Proponents believe the protection provided by a patent’s proprietary rights increases the likelihood a firm will continue to refine, produce and market the patented technology.113 Finally, the patent law has been identified as a facilitator of markets. Absent patent rights, an inventor may have scant tangible assets to sell or license, and even less ability to police the conduct of a contracting party. By reducing a licensee’s opportunistic possibilities, the patent system lowers transaction costs and makes technologybased transactions more feasible.114 The current patent system has a great number of critics. Some assert that the patent system is unnecessary due to market forces that already suffice to create an optimal level of invention. The desire to gain a lead time advantage over competitors, as well as the recognition that technologically backward firms lose out to their rivals, may well provide sufficient inducement to invent without the need for further incentives.115 Some commentators observe that successful inventors are sometimes transformed into complacent, established enterprises that use patents E.g., Dan L. Burk & Mark A. Lemley, “Policy Levers in Patent Law”, 89 Va. L. Rev. 1575 (2003). U.S. Const. art. I, § 8, cl. 8. 110 See, e.g., Grant v. Raymond, 31 U.S. 218, 247 (1832). 111 Pub. L. No. 82-593, 66 Stat. 792 (codified at Title 35 United States Code). 112 R. Polk Wagner, “Information Wants to Be Free: Intellectual Property and the Mythology of Control”, 103 Colum. L. Rev. 995 (2003). 113 F. Scott Kieff, “Property Rights and Property Rules for Commercializing Inventions”, 85 Minn. L. Rev. 697 (2000). 114 See Robert P. Merges, “Intellectual Property and the Costs of Commercial Exchange: A Review Essay”, 93 Mich. L. Rev. 1570 (1995). 115 See Frederic M. Scherer & David Ross, Industrial Market Structure and Economic Performance (3d ed. 1990). 108 109

702 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY to suppress the innovations of others.116 Others assert that the inventions that have fueled some of our most dynamic industries, such as early biotechnologies and computer software, arose at a time when patent rights were unavailable or uncertain.117 While these various justifications and criticisms have differing degrees of intuitive appeal, none of them has been empirically validated. No conclusive study broadly demonstrates that we get more useful inventive activity with patents than we would without them. The justifications and criticisms of the patent system therefore remain open to challenge by those who are unpersuaded by their internal logic.118 B. U.S. Patent Acquisition and Enforcement As mandated by the Patent Act of 1952,119 U.S. patent rights do not arise automatically. Inventors must prepare and submit applications to the U.S. Patent and Trademark Office (USPTO) if they wish to obtain patent protection.120 USPTO officials, known as examiners, then assess whether the application merits the award of a patent.121 The patent acquisition process is commonly known as “prosecution.”122 In deciding whether to approve a patent application, an USPTO examiner will consider whether the submitted application fully discloses and distinctly claims the invention.123 In addition, the application must disclose the “best mode,” or preferred way, that the applicant knows to practice the invention.124 The examiner will also determine whether the invention itself fulfills certain substantive standards set by the patent statute. To be patentable, an invention must be useful, novel and nonobvious. The requirement of usefulness, or utility, is satisfied if the invention is operable and provides a tangible benefit.125 To be judged novel, the invention must not be fully anticipated by a prior patent, publication or other knowledge within the public domain.126 A nonobvious invention must not have been readily within the ordinary skills of a competent artisan at the time the invention was made.127 If the USPTO allows the patent to issue, the patent proprietor obtains the right to exclude others from making, using, selling, offering to sell or importing into the United States the patented invention.128 The term of the patent is ordinarily set at twenty years from the date the patent application was filed.129 Patent title therefore provides inventors with limited periods of exclusivity in which they may practice their inventions, or license others to do so. The grant of a patent permits the inventor to receive a return on the expenditure of resources leading to the discovery, often by charging a higher price than would prevail in a competitive market. Patent rights are not self-enforcing. A patentee bears responsibility for monitoring its competitors to determine whether they are using the patented invention or not. Patent owners 116 See Robert P. Merges & Richard R. Nelson, “On the Complex Economics of Patent Scope”, 90 Colum. L. Rev. 839 (1990). 117 See, e.g., Pamela Samuelson, “Benson Revisited: The Case Against Patent Protection for Algorithms and Other Computer Program — Related Inventions”, 39 Emory L.J. 1025 (1990). 118 See John R. Thomas, Innovation, Intellectual Property, and Industry Standards, CRS Report RL31951 (2005). 119 Pub. L. No. 82-593, 66 Stat. 792 (codified at Title 35 United States Code). 120 35 U.S.C. § 111 (2006). 121 35 U.S.C. § 131 (2006). 122 John R. Thomas, “On Preparatory Texts and Proprietary Technologies: The Place of Prosecution Histories in Patent Claim Interpretation”, 47 UCLA L. Rev. 183 (1999). 123 35 U.S.C. § 112 (2006). 124 Id. 125 35 U.S.C. § 101 (2006). 126 35 U.S.C. § 102 (2006). 127 35 U.S.C. § 103 (2006). 128 35 U.S.C. § 271(a) (2006) 129 35 U.S.C. § 154(a)(2) (2006).

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who wish to compel others to observe their intellectual property rights must usually commence litigation in the federal district courts. The U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) possesses exclusive national jurisdiction over all patent appeals from the district courts,130 while the U.S. Supreme Court possesses discretionary authority to review cases decided by the Federal Circuit.131 Pharmaceutical patents are subject to special provisions created by the Drug Price Competition and Patent Restoration Act of 1984.132 This legislation, which was subject to significant legislative revisions in 2003,133 is commonly known as the Hatch-Waxman Act.134 This statute establishes special rules for enforcement of certain patents on certain drugs and medical devices by brand-name firms against generic competitors. The Hatch-Waxman Act includes provisions extending the term of a patent to reflect regulatory delays encountered in obtaining marketing approval by the Food and Drug Administration (FDA);135 exempting from patent infringement certain activities associated with regulatory marketing approval;136 establishing mechanisms to challenge the validity of a pharmaceutical patent;137 and creating a reward for disputing the validity, enforceability, or infringement of a patented and approved drug.138 The 1984 Act also provides the FDA with certain authorities to offer periods of marketing exclusivity for a pharmaceutical independent of the rights conferred by patents.139 C. The Exhaustion Doctrine Patent rights are subject to a significant restriction that is termed the “exhaustion” doctrine. Under the exhaustion doctrine, an authorized, unrestricted sale of a patented product depletes the patent right with respect to that physical object.140 As a result of this doctrine, the purchaser of a patented good ordinarily may use, charge others to use, or resell the good without further regard to the patentee. The courts have reasoned that when a patentee sells a product without restriction, it impliedly promises its customer that it will not interfere with the full enjoyment of that product.141 The result is that the lawful purchasers of patented goods may use or resell these goods free of the patent.142 Because it is the first sale of a patented product that extinguishes patent rights with respect to the item that is sold, some authorities refer to the exhaustion doctrine as the “first sale rule.”143 For example, suppose that a consumer purchases an appliance at a hardware store. The appliance is subject to a patent that is owned by the manufacturer. Later, the consumer sells the appliance to a neighbor at a garage sale. Ordinarily, the patent laws provide 28 U.S.C. § 1295(a)(1) (2006). 28 U.S.C. §1254(1) (2006). 132 Pub. L. No. 98-417, 98 Stat. 1585 (1984). 133 The Medicare Prescription Drug and Modernization Act of 2003, Pub. L. No. 108-173, Title XI (Dec. 8, 2003); see Wendy H. Schacht & John R. Thomas, “The Hatch-Waxman Act: Legislative Changes in the 108th Congress Affecting Pharmaceutical Patents”, CRS Report RL32377 (2004). 134 See Wendy H. Schacht & John R. Thomas, “Patent Law and Its Application to the Pharmaceutical Industry: An Examination of the Drug Price Competition and Patent Term Restoration Act of 1984 (‘The Hatch-Waxman Act’)”, CRS Report RL30756 (2002). 135 35 U.S.C. § 156 (2006). 136 35 U.S.C. § 271(e)(1) (2006). 137 21 U.S.C. § 355(j) (2000). 138 21 U.S.C. § 355(j)(5)(B)(iv) (2006). 139 21 U.S.C. § 355(j)(4)(D) (2006). 140 See Intel Corp. v. ULSI Sys. Tech., 995 F.2d 1566, 1568 (Fed. Cir. 1993). 141 See B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997). 142 See Intel Corp. v. ULSI Sys. Tech., 995 F.2d 1566 (Fed. Cir. 1993). 143 See, e.g., Alan O. Sykes, “TRIPs, Pharmaceuticals, Developing Countries, and the Doha ‘Solution’” 3 Chi. J. Int’l L. 47 (2002). 130 131

704 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY the manufacturer with the ability to prevent others from selling an appliance that uses its patented design.144 In this case, however, the patent right in that particular appliance was exhausted when the manufacturer made its first sale to the consumer. That consumer, as well as any subsequent purchasers of that individual appliance, may freely sell it without concern for the manufacturer’s patent.145 D. International Aspects U.S. patents provide their owners with rights only within the United States.146 The grant of a U.S. patent provides its owner with no legal rights in any foreign nation. If inventors desire intellectual property protection in another country, they must specifically procure a patent in that jurisdiction. Ordinarily the foreign patent acquisition process begins with the submission of a patent application to a foreign patent office.147 As a practical matter, multinational corporations often obtain a set of corresponding national patents for each of their significant inventions. Although these patents concern the same invention — for example, the same chemical compound that possesses pharmacological properties — they often do not have precisely the same legal effect in each jurisdiction. Divergent wordings of the patents’ claims, translations into various languages, and distinctions between national patent laws and practice are among the factors that lead to these differences.148 Under an important international agreement concerning patents, the Convention of Paris for the Protection of Industrial Property (“Paris Convention”),149 each issued national patent is an independent legal instrument. One significant consequence of the independence of national patents is that they must be enforced individually.150 For example, suppose that an inventor owns patents directed towards the same invention in both the United States and Canada. Following litigation in Canada, a court rules that the Canadian patent is invalid. Even though the Canadian patent may be similar or identical to the U.S. patent, the U.S. patent may still be freely enforced. Although a U.S. court may find the reasoning of the Canadian court persuasive as it reaches its own judgment regarding the validity of the U.S. patent, the Canadian court decision has no direct effect upon the validity or enforceability of the U.S. patent.151 III. THE PARALLEL IMPORTATION OF PATENTED PHARMACEUTICALS

In some circumstances, widely divergent drug prices between the United States and other nations have encouraged parallel importation. Price disparities between the United States and other nations create incentives for individuals to purchase medications from abroad, and import them into the United States, in order to lower health care costs or undercut the U.S. distributor.152 In this context, the term “parallel imports” refers to patented products that are 35 U.S.C. § 271(a) (2006). See Roger E. Schechter & John R. Thomas, Intellectual Property: The Law of Copyrights, Patents and Trademarks § 1.2.3 (2003). 146 Quality Tubing, Inc. v. Precision Tube Holdings Co., 75 F. Supp. 2d 613, 619 (S.D. Tex. 1999). 147 See John R. Thomas, “Multinational Patent Acquisition and Enforcement: Public Policy Challenges and Opportunities for Innovative Firms”, CRS Report RL31132 (2002). 148 See Margaret A. Boulware et al., “An Overview of Intellectual Property Rights Abroad”, 16 Hous. J. Int’l L. 441 (1994). 149 13 U.S.T. 25 (1962). 150 See John R. Thomas, “Litigation Beyond the Technological Frontier: Comparative Approaches to Multinational Patent Enforcement”, 27 Law & Pol’y Int’l Bus. 277 (1996). 151 Id. 152 See, e.g., Shubha Ghosh, “Pills, Patents and Power: State Creation of Gray Markets as a Limit on Patent Rights”, 14 Fla. J. Int’l L. 217 (2002). 144 145

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legitimately distributed abroad, and then sold to consumers in the United States without the permission of the authorized U.S. dealer. Although these “grey market goods” are authentic products that were sold under the authorization of the brand-name drug company, they entered the U.S. market outside the usual distribution channels for that drug. The legal situation regarding the parallel importation of patented pharmaceuticals remains somewhat clouded. In such circumstances, the U.S. patent proprietor may be able to use its patent rights to block the importation of grey market pharmaceuticals. Because this scenario involves the distribution of a patented product that initially sold under the authorization of the patent proprietor, it raises issues concerning the exhaustion doctrine.153 One position, favorable to the patent proprietor, is that the U.S. patent is fully enforceable against imports despite the exhaustion doctrine. Under this line of reasoning, the fact that the sale by the patent proprietor or its representative took place outside the United States is significant. This line of reasoning relies on the fact that U.S. patents exist independently of foreign patents,154 and that U.S. patents are effective only within the United States.155 As a result, this reasoning continues, a foreign sale cannot result in exhaustion of a U.S. patent. This legal doctrine — which restricts the exhaustion doctrine to domestic sales only — allows the U.S. patent to be used to block unauthorized imports of a patented pharmaceutical.156 A competing view is that the exhaustion doctrine is not limited to domestic sales by the patentee or its representative, but to all sales regardless of their location. This position is commonly referred to as “international exhaustion.”157 Under this view, because the importer lawfully purchased authentic goods from the patent holder or its representative, the U.S. patent right is subject to “international exhaustion” due to the sale, despite the fact that the sale technically took place under a foreign patent.158 In its 2001 decision in Jazz Photo Corp. v. United States International Trade Commission,159 the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) rejected the “international exhaustion” position and instead limited the exhaustion doctrine to sales that occur within the United States. There the Federal Circuit issued a succinct statement explaining: United States patent rights are not exhausted by patent rights of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent. See Boesch v. Graff, 133 U.S. 697, 10 S.Ct. 378, 33 L.Ed. 787 (1890).160

Some commentators have criticized the Federal Circuit’s reasoning in the Jazz Photo case, and in particular the court’s reliance on the Boesch v. Graff decision.161 In Boesch v. Graff, the plaintiff owned a U.S. patent for a lamp burner. An individual named Hecht, who was not a party to the litigation, enjoyed a “prior user right” pertaining to the lamp burners under German law. The German patent statute allowed individuals who had used an invention prior to the date of another’s patent application the privilege of continuing to exploit the invention commercially, without regard to the patent. Hecht had met the conditions for this prior user right to apply, and as a result could sell the burners in Germany. Hecht eventually sold some Nanao Naoko et al., “Decisions on Parallel Imports of Patented Goods” 36 IDEA: J. L. & Tech. 567 (1996). See supra notes 149-151 and accompanying text. 155 See supra note 146 and accompanying text. 156 35 U.S.C. § 271(a) (2000). 157 See Bruce A. Lehman, “Intellectual Property Rights as a Trade, Health, and Economic Development Issue”, 17 St. John’s J. Legal Comment. 417 (Spring 2003). 158 See Jamie S. Gorelick & Rory K. Little, “The Case for Parallel Importation”, 11 N.C. J. Int’l L. & Com. Reg. 205 (1986). 159 264 F.3d 1094 (Fed. Cir. 2001). 160 264 F.3d at 1105. 161 Daniel Erlikhman, “Jazz Photo and the Doctrine of Patent Exhaustion: Implications to TRIPs and the International Harmonization of Patent Protection”, 25 Hastings Comm. & Ent. L.J. 307 (2003). 153 154

706 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY burners to the defendants, who in turn imported them into the United States and commenced sales. The plaintiff brought suit to enjoin the sale of the imported burners in the United States. In opposing the injunction, the defendants argued that they had lawfully purchased the burners and that the U.S. patent should be subject to the exhaustion doctrine. The Supreme Court rejected the defendant’s arguments, holding: The right which Hecht had to make and sell the burners in Germany was allowed him under the laws of that country, and purchasers from him could not be thereby authorized to sell the articles in the United States in defiance of rights of patentees under a United States patent… . The sale of articles in the United States under a United States patent cannot be controlled by foreign laws.162

The facts and holding of Boesch have suggested to some commentators that its precedential reach is quite limited. In Boesch, it was a prior user, rather than the patentee or its licensee, which made the foreign sale. The patentee neither consented to the sale of the invention nor received compensation for that sale. According to some observers, this is a much different state of affairs than the typical parallel importation case, where either the patentee or an authorized overseas distributor makes a sale as part of an arm’s-length commercial transaction.163 Given this precedential foundation, as well as the limited consideration of the issue in Jazz Photo, some legal commentators have questioned whether this apparent absolute ban on parallel importation will survive further judicial scrutiny.164 At the moment, however, the Federal Circuit’s statement in the Jazz Photo case remains the controlling patent law precedent. In particular, the federal district courts are bound by the Jazz Photo decision unless the Federal Circuit or Supreme Court alters the rule.165 To summarize current law, the Federal Circuit has taken the position that patent exhaustion applies only to sales that occurred in the United States. This rule squarely rejects the principle of “international exhaustion.” As a result, brand-name drug companies may potentially block imports of patented medications into the United States even if the imported good is the patent owner’s own product, legitimately sold to a customer in a foreign jurisdiction.166 A. Related Issues In addition to the issue of patent infringement, the parallel importation of patented pharmaceuticals potentially raises a number of other complex issues. This report next considers three of these issues: the status of state and local governments that have either themselves imported, or have encouraged others to import, patented medications from foreign jurisdictions; the potential use of label licenses on patented drugs; and the implications of international trade rules established by World Trade Organization (WTO). 1. State and Local Governments Several state governments are currently considering plans to import or facilitate the importation of prescription drugs. California, Illinois, Iowa, Minnesota, New Hampshire, North Dakota, Vermont and Wisconsin are among those that have considered importation programs.167 If a 133 U.S. at 703. Erlikhman, supra note 161. 164 Id. 165 See Matthew F. Weil & William C. Rooklidge, “State Un-Decisis: The Sometimes Rough Treatment of Precedent in Federal Circuit Decision-Making”, 80 J. Pat. & Trademark Off. Soc’y 791 (1998). 166 See Catalin Cosovanu, “Piracy, Price Discrimination, and Development: The Software Sector in Eastern Europe and Other Emerging Markets”, 31 Am. Intell. Prop. L. Ass’n Q.J. 165 (2003). 167 See Jody Feder, “Prescription Drug Importation and Internet Sales: A Legal Overview”, CRS Report RL32191 (2004). 162 163

PART D: PARALLEL IMPORTS 707

state government or agency of a state encourages the importation of a patented medication in a manner that would infringe a patent, then the patentee’s ability to obtain relief is at present time uncertain. Observers have questioned whether the states should be subject to the patent rights of private parties.168 The U.S. Constitution places a significant jurisdictional hurdle before a patentee seeking to vindicate its rights against a state. The Eleventh Amendment provides that a federal court is without power to entertain a suit by a private person against a state, except under certain limited circumstances.169 Because the federal courts possess exclusive jurisdiction over patent infringement litigation,170 this situation creates a dilemma for patentees — the only statutorily authorized forum is constitutionally unavailable, and the only constitutional forum is statutorily unavailable, at least for the assertion of a conventional patent infringement claim. This means that a patentee’s only option would be a state court suit charging the state government with a taking, or asserting general unfair competition principles, in order to vindicate its patent rights.171 The Supreme Court established one notable exception to the Eleventh Amendment prohibition against federal court litigation against a state. In Ex parte Young,172 the Court allowed private citizens to petition a federal court to enjoin state officials acting in their official capacity from engaging in future conduct that would violate the Constitution or a federal statute. The doctrine is based on a premise that state officers who violate federal law in the course of discharging the duties of their positions are acting outside the authority of their office, and therefore do not qualify as the state or its agent for Eleventh Amendment purposes.173 The only remedy available under the Ex parte Young ruling is prospective injunctive relief, however, rather than a monetary judgment that would compensate for past harms.174 Further, some uncertainty exists over the application of the Young exception to patents. Although the federal patent statute establishes the conditions under which inventors may obtain patents, an individual patent is effectively the grant of a private right, not a federal law. Congress attempted to abrogate the Eleventh Amendment immunity of states to patent infringement suits in 1992. The Patent and Plant Variety Protection Remedy Clarification Act introduced section 271(h) into the Patent Act of 1952.175 That provision specified not only that the states were subject to patent infringement suits in the federal courts, but that they were liable for any remedies that could be had against a private party.176 However, the 1999 opinion of the Supreme Court in Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank found that Congress had not properly abrogated state immunity to patent infringement litigation in the federal courts in keeping with the requirements of the Eleventh Amendment.177 168 See, e.g., Jennifer Polse, “Holding the Sovereign’s Universities Accountable for Patent Infringement After Florida Pre-paid and College Savings Bank”, 89 Cal. L. Rev. 507 (2001); Kenneth S. Weitzman, “Copyright and Patent... Clause of the Constitution: Does Congress Have the Authority to Abrogate State Eleventh Amendment Sovereign Immunity After Pennsylvania v. Union Gas Co.?” 2 Seton Hall Const. L.J. 297 (1991). 169 The Eleventh Amendment to the U.S Constitution stipulates: “The judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by citizens of another state, or by citizens or subjects of any foreign state.” 170 28 U.S.C.A. § 1338(a) (2000) (“The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents … Such jurisdiction shall be exclusive of the courts of the states in patent … cases.”). 171 See, e.g., Jacobs Wind Elec. Co. v. Fla. Dep’t of Transp., 919 F.2d 726 (Fed. Cir. 1990). 172 209 U.S. 123 (1908). 173 Cardenas v. Anzai, 311 F.2d 929, 935 (9th Cir. 2002). 174 See Edelman v. Jordan, 415 U.S. 651, 667–69 (1974) 175 Pub. L. No. 102-560, 106 Stat. 4230 (Oct. 28, 1992). 176 35 U.S.C.A. § 271(h) (2000). 177 527 U.S. 627 (1999).

708 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY In Florida Prepaid and other opinions, the Supreme Court did leave open the possibility that a state could waive its Eleventh Amendment immunity by submitting to federal jurisdiction.178 In addition, Congress may in some cases overcome state Eleventh Amendment immunity through legislation pursuant to another constitutional authority, such as the Fourteenth Amendment.179 Several bills have been introduced before Congress since the Supreme Court issued the Florida Prepaid decision that would take this approach, but none has been enacted.180 The immunity to federal suit provided by the Eleventh Amendment is restricted to state governments, and does not ordinarily apply to local governments.181 As a result, a city or county government is generally not entitled to claim Eleventh Amendment immunity and avoid a suit for patent infringement in a federal court. However, some judicial opinions have reasoned that a political subdivision of a state can qualify for Eleventh Amendment immunity where the locality is only nominally the actor, and the state itself is the real party in interest in the litigation.182 This determination depends on the precise relationship between the state and its political subdivision under the circumstances of a particular case.183 2. Label Licenses As noted previously, the theory behind the exhaustion doctrine is that when a patent proprietor makes an unrestricted sale of a product to a consumer, the proprietor impliedly promises its customer that it will not use its patent rights to interfere with the full enjoyment of that product.184 As a result, lawful purchasers of patented goods should be able to use or resell these goods free of the patent.185 In some circumstances, however, the patent owner may attempt to restrict a customer’s use of a good. Sales contracts are the typical mechanism for imposing such limitations. Contractual provisions that are placed on the product or its packaging are sometimes termed “label licenses” or “bag tags.”186 A commonly observed label license is “Single Use Only,” as applied to printer cartridges or other goods that the manufacturer does not intend for consumers to reuse.187 Other patent proprietors have attempted to impose geographical limitations upon the use of their products. A label stating “For Use in Canada Only” is representative of such a restriction. Whether such label licenses are enforceable, or are instead nullified by the exhaustion principle, is a complex legal issue. However, the prevailing view of the Court of Appeals for the Federal Circuit is that absent exceptional circumstances — such as an antitrust violation or misuse of the patent by its proprietor — these restrictions will be upheld.188 The legal theory Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 238 (1985). Welch v. Dep’t of Highways & Pub. Transp., 483 U.S. 468, 477 (1987). 180 Jeffrey W. Childers, “State Sovereign Immunity and the Protection of Intellectual Property: Do Recent Congressional Attempts to ‘Level the Playing Field’ Run Afoul of Current Eleventh Amendment Jurisprudence and Other Constitutional Doctrines?”, 82 N.C. L. Rev. 1067 (2004). 181 See, e.g., Mount Healthy School Dist. v. Doyle, 429 U.S. 274 (1977); see also Melvyn R. Durschlag, “Should Political Subdivisions Be Accorded Eleventh Amendment Immunity?”, 43 DePaul L. Rev. 577 (1994); Anthony J. Harwood, “A Narrow Eleventh Amendment Immunity for Political Subdivisions: Reconciling the Arm of State Doctrine with Federalism Principles”, 55 Fordham L. Rev. 101 (1986). 182 See, e.g., Belanger v. Madera Unified School Dist., 963 F.2d 248, 254 (9th Cir. 1992). 183 Donald L. Boren, “Congressional Power to Grant Federal Courts Jurisdiction Over States: The Impact of Pennsylvania v. Union Gas”, 24 Akron L. Rev. 13 (1990). 184 See B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997). 185 See Intel Corp. v. ULSI Sys. Tech., 995 F.2d 1566 (Fed. Cir. 1993). 186 See, e.g., Daniel R. Cahoy, “Oasis or Mirage? Efficient Breach as a Relief to the Burden of Contractual Recapture of Patent and Copyright Limitations” 17 Harv. J.L. & Tech. 135 (2003); Michael J. Madison, “Reconstructing the Software License”, 35 Loyola U. Chi. L.J. 275 (2003). 187 See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). 188 See Monsanto Co. v. McFarling, 363 F.3d 1336 (Fed. Cir. 2004); Bowers v. Baystate Techs., Inc., 320 F.3d 1317 (Fed. Cir. 2003). 178 179

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is that the patent right gives proprietors the ability to exclude others from using the patented product, they may also impose lesser restrictions when they choose to sell the patented product.189 In addition, customers are presumed to have entered into binding sales contracts that are presumptively valid.190 As the law currently stands, then, a customer who violates a label license could be liable both for breach of contract and for patent infringement.191 3. The TRIPs Agreement As a member of the World Trade Organization (WTO), the United States is a signatory to the so-called TRIPs Agreement, or Agreement on Trade-Related Aspects of Intellectual Property Rights.192 Under Part III of the TRIPs Agreement, all member countries agreed to enact patent statutes that include certain substantive provisions. In particular, Article 27 stipulates that “patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally prevented.”193Article 27 ordinarily requires that all classes of invention receive the same treatment under the patent laws, subject to certain minor exceptions. It would generally be impermissible under Article 27, for example, for a country to accord patents on pharmaceuticals a lesser set of proprietary rights than is available for patents on automobile engines, computers, or other kinds of inventions.194 The TRIPs Agreement places lesser obligations upon signatory states with regard to the exhaustion doctrine, however.195 Article 6 of the TRIPs Agreement states: “For the purposes of dispute settlement under this Agreement, subject to the provisions of Articles 3 and 4 above nothing in this Agreement shall be used to address the issue of the exhaustion of intellectual property rights.”196 The referenced Articles 3 and 4 of the TRIPs Agreement impose obligations of national treatment and most-favored-nation status respectively. As a result, a TRIPs Agreement signatory may not permissibly establish more favorable exhaustion rules for its own citizens than for citizens of other WTO countries.197 In addition, if a TRIPs Agreement signatory provides for favorable treatment with respect to the exhaustion doctrine to one WTO member state, then the same treatment must be extended to all WTO member states.198 Other than these basic national treatment and most-favored-nation obligations, the TRIPs Agreement does not impose other restrictions regarding the exhaustion doctrine. In particular, the TRIPs Agreement does not appear to require that all types of inventions be treated equally with regard to the exhaustion doctrine. 189 See Richard Stern, “Post-Sale Restrictions After Mallinckrodt — An Idea in Search of a Definition”, 5 Alb. L.J. Sci. & Tech. 1 (1994). 190 See Merritt A. Gardiner, “Bowers v. Baystate Technologies: Using the Shrinkwrap License to Circumvent the Copyright Act and Escape Federal Preemption”, 11 U. Miami Bus. L. Rev. 105 (Winter/Spring 2003). 191 See Raymond Nimmer, “Issues in Software Licensing”, 576 Practising L. Inst./Pat. 399 (1999). 192 See Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1125, 1197 (1994), available at http://www.wto.org/english/ tratop_e/trips_e/t_agm0_e.htm [hereinafter TRIPs Agreement]. 193 Id. art. 27(1). 194 See Jerome H. Reichman, “Universal Minimum Standards of Protection Under the TRIPs Component of the WTO Agreement”, 29 Int’l Law. 345 (1995). 195 See Lana Kraus, “Medication Misadventures: The Interaction of International Reference Pricing and Parallel Trade in the Pharmaceutical Industry”, 37 Vand. J. Transnat’l L. 527 (2004). 196 TRIPs Agreement, art. 6. 197 See, e.g., Shubha Ghosh, “Pills, Patents and Power: State Creation of Gray Markets as a Limit on Patent Rights”, 14 Fla. J. Int’l L. 217 (2002). 198 Id.

710 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY IV. LEGISLATIVE ISSUES AND ALTERNATIVES

Should congressional interest continue in this area, a variety of options are available. If the possibility of an infringement action against unauthorized importers of patented pharmaceuticals is deemed sound, then no action need be taken. Alternatively, Congress could confirm the Federal Circuit’s decision in Jazz Photo, which rejects the doctrine of international exhaustion and confines the exhaustion principle to sales that occurred within the United States.199 If legislative activity is deemed appropriate, however, another possibility is the introduction of some form of international exhaustion doctrine into U.S. patent law. The TRIPs Agreement does not seem to require that a country adopt the international exhaustion doctrine as an allor-nothing proposition, applying either to all patented products or to none.200 As a result, if Congress chose to limit application of the international exhaustion doctrine to patented pharmaceuticals, or some other specific type of invention, then no ramifications appear to arise with respect to the TRIPs Agreement obligations of the United States. It should be noted, however, that there appears to be no precedent, either domestically or abroad, for establishing an international exhaustion doctrine that is specific to pharmaceuticals. At least two statutory mechanisms exist for implementing the international exhaustion doctrine into U.S. patent law. One possible approach would be to declare that importation into the United States of goods sold abroad by a patent proprietor or its representative is not a patent infringement. S. 2328, the Pharmaceutical Market Access and Drug Safety Act of 2004, takes this approach with respect to patented pharmaceuticals, specifying that: It shall not be an act of infringement to use, offer to sell, or sell within the United States or to import into the United States any patented invention under section 804 of the Federal Food, Drug, and Cosmetic Act that was first sold abroad by or under authority of the owner or licensee of such patent.201

S. 2328 further stipulates that this amendment shall not be construed “to affect the ability of a patent owner or licensee to enforce their patent, subject to such amendment.”202 This language suggests a congressional intention to leave intact other rights established by the Patent Act of 1952. In addition to codifying the international exhaustion doctrine with respect to pharmaceuticals, the amendment proposed in S. 2328 may conversely lead to the implication that the international exhaustion doctrine does not apply to patented inventions other than pharmaceuticals. This provision could potentially fortify the ruling in the Jazz Photo case for inventions outside of the pharmaceutical field. Another statutory mechanism for promoting the importation of patented drugs is to immunize specific individuals from infringement liability. The Patent Act takes this approach in the area of patented medical methods, exempting licensed medical practitioners and certain health care entities from patent infringement in certain circumstances.203 In the case of drug importation, potential patent infringers include importers, distributors, wholesalers, pharmacies, and individual consumers. Should Congress wish to promote parallel trade in patented pharmaceuticals, an explicit statutory infringement exemption could encourage individuals to engage in drug importation. In considering these or other legal changes to the patent laws, the possibility of label licenses should be kept in mind. Even if Congress exempted drug importation practices or practitioners from patent infringement liability, firms may still be able to stipulate through the contract law See supra notes 159-166 and accompanying text. See supra notes 182-188 and accompanying text. 201 S. 2328, § 4(f)(1)(B). 202 S. 2328, § 4(f)(2). 203 35 U.S.C. § 287(c) (2006). 199 200

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that a drug sold in a foreign jurisdiction is for use exclusively within that jurisdiction.204 If a purchaser instead imported that medication into the United States, then the seller may have a cause of action for breach of contract. As a result, any legal changes may need to account for the ability of firms to use contractual provisions as something of a substitute for patent protection in the area of prescription drug importation. In addition, the issue of drug importation may provide an impetus for clarification of the patent infringement liability of state governments.205 Some states, as well as political subdivisions of the states, have either seriously considered or commenced the practice of drug importation. To the extent that these authorities continue this trend, their potential Eleventh Amendment immunity to a patent infringement case in federal court may present another significant issue concerning patents and drug importation. Controlling the costs of prescription drug spending, on one hand, and encouraging the development of new drugs, on the other, are both significant goals. These aspirations may potentially conflict, however. Although introducing international exhaustion into U.S. patent law may initially lower the price of patented drugs, it might also decrease the incentive of firms to engage in the research and development of new pharmaceuticals, as well as to shepherd new drugs through time-consuming and costly marketing approval procedures. Consideration of patent law reforms would likely be put into the larger context of drug costs, which may be influenced by the pricing policies of foreign nations, profits earned by wholesalers and other intermediaries, the physical costs of shipment into the United States, and other diverse factors.206 Striking a balance between increasing access to medications and ensuring the continued development of new drugs by our nation’s pharmaceutical firms is a central concern of the current drug importation debate.

See supra notes 183-191 and accompanying text. See supra notes 167-183 and accompanying text. 206 See Colin Baker, “Would Prescription Drug Importation Reduce U.S. Drug Spending?”, Congressional Budget Office, Economic and Budget Issue Brief (Apr. 29, 2004). 204 205

CHAPTER VII

International Trade & Intellectual Property Part D: Parallel Imports Section 2: European Union and Parallel Imports Moderator HOWARD KNOPF

Counsel, Macera & Jarzyna LLP (Ottawa) Speaker PROF. VALENTINE KORAH

University College London (Emeritus) Panelists CHRISTOPHER STOTHERS

JOHN TEMPLE LANG

Milbank Tweed Hadley & McCloy LLP (London)

Cleary Gottlieb Steen & Hamilton (Brussels)

MR. KNOPF: I expressed to Hugh Hansen an interest in parallel imports because we have had a major case in the Canadian Supreme Court on copyright and parallel imports, which I will say more about later. The main focus of attention on this panel is going to be Val Korah, with her great expertise in competition law. She is going to talk about a European patent case in competition law. Our commentators will be: Chris Stothers, who has written a book on parallel imports in Europe; and John Temple Lang, who knows a great deal about antitrust and competition; then, if there is time left after they talk, I am going to say a bit about the Canadian copyright case and what it has to do with competition law. Let’s get started with Val.

714 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY

Judgment of the Court of First Instance in Glaxosmithkline Valentine Korah* I. INTRODUCTION

The judgment of the Court of First Instance (CFI) in GlaxoSmithKline Services Unlimited v. European Commission1 (GSK) may not apply to many, or even any, products other than prescription medicines, but it is very important to those supplying medicines to wholesalers. More generally, if followed by the European Court of Justice (ECJ), it may take some contracts outside Article 81(1) of the EC Treaty so that it is not necessary to establish the application of Article 81(3) EC. The pharmaceutical industry is closely regulated in each Member State. Each government controls at a different level the maximum price to be charged directly or indirectly to the National Health Service, and once a medicine is supplied in some Member States, it is illegal to withdraw it without ministerial consent. Consequently, wholesalers in the Member States where the maximum prices were lowest, bought additional quantities in order to sell them in those Member States where the maximum price was higher. GW, a subsidiary of GSK operating in Spain, notified the European Commission of the conditions of sale to its wholesalers in Spain, relating to eighty-two medicines of which, according to GSK, eight were prime candidates for parallel trade (para 11).These conditions were countersigned by seventy-nine out of eighty-five wholesalers that bought from GW and clause 4 imposed dual pricing for all eighty-two medicines. If purchase from the wholesalers was to be reimbursed by the national health insurance scheme, i.e., if made by pharmacies or hospitals, the maximum price allowed by Spanish law would be charged. In other cases a much higher price would be charged, set on objective grounds, without discrimination and irrespective of the destination. GW’s main justification was that parallel trade prevented it from charging a higher price in countries where it was legal and, thereby, reduced the incentive to research and development (R&D) for a pharmaceutical company that had been a successful innovator. A second argument was that it would be impossible to ensure supply to each part of the common market with the amount needed there, as every part would be supplied from those Member States where the maximum price was lowest. The Commission adopted a decision under Article 81(1) EC2 condemning the agreement for having the object and effect of imposing higher pricing on medicines that were exported than on those to be consumed domestically (para 18). GSK appealed to the CFI. II. AGREEMENT WITHIN ARTICLE 81 EC

The first ground of appeal was hardly controversial. In Bundesverband der ArzneimittelImporteure eV and European Commission v. Bayer AG3 Bayer had not asked the wholesalers * Professor Emeritus of Competition Law, University College London. I am indebted to the Editors for permission to republish this article, first published in [2007] Competition Law Journal 331, with minor amendments. 1 Case T-168/01, [2006] 5 C.M.L.R. 1623, appeal pending C-513/06 P, available at http://eur-lex.europa.eu/ LexUriServ/ LexUriServ.do?uri=CELEX:62001A0168:EN:HTML. The numbers in round brackets are to the judgment of the CFI. In the quotations I have shortened the references to the cases cited by the CFI. 2 Commission Decision of 8 May 2001 relating to a proceeding pursuant to Article 81 of the EC Treaty Cases: IV/36.957/F3, Glaxo Wellcome (notification); IV/36.997/F3, Aseprofar and Fedifar (complaint); IV/37.121/F3, Spain Pharma (complaint); IV/37.138/F3 BAI (complaint); IV/37.380/F3 EAEPC (complaint), 2001 O.J. (L 302) 1. 3 Joined Cases C-2/01 P & 3/01 P, [2004] E.C.R. I-23.

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not to export and, despite the continuing relationship between Bayer and the wholesalers, the ECJ accepted that there had been no meeting of minds within the meaning of Article 81(1) EC. On the other hand, GSK had obtained signatures to the conditions of sale. Clearly there had been an agreement between GSK and the wholesalers, even a contract. So, the CFI accepted that the failure of the Commission to refer to Bayer when finding that an agreement had been made did not amount to inadequate reasoning (paras 65–90). The Commission was not wrong to conclude that there was an agreement. A. Not Act of State The CFI decided that the regulation by Member States did not amount to an Act of State — the national regulation did not require GSK to charge different prices (para 105). The pharmaceutical companies continued to compete in R&D and service (para 106). The regulation did not exclude all competition. It did not exclude Article 81 EC. III. OBJECT OF RESTRICTING COMPETITION

The Commission’s decision alleged that by clause 4, which imposed higher prices for medicines not paid for by the Spanish health insurance scheme, GSK sought to limit parallel trade and that it had that effect. GSK did not deny that its dual pricing was intended to deter parallel trade. It objected, rather, to the consequences for competition found by the Commission. The Commission said that the condition of sale restricted competition by object because it had an effect similar to an export ban, and the ECJ habitually treated export bans as infringing Article 81(1) EC. GSK claimed that the Commission had not taken proper account of the relevant legal and economic context when examining the alleged restriction of competition. The CFI agreed: 110. Consequently, the characterization of a restriction of competition within the meaning of Article 81(1) EC must take account of the actual framework and, therefore, of the legal and economic context on which the agreement to which that restriction is imputed is deployed. Such an obligation is imposed for the purpose of ascertaining both the object and the effect of the agreement (Société La Technique Minière …pp. 249 and 250; …Consten and Grundig v. Commission …at p. 343 …and Oude Luttikhuis and Others …(para 20). (Emphasis added.)

Only when an examination of the clauses of an agreement, carried out in their legal and economic context, does not reveal an anticompetitive object is it necessary to examine the effect of the agreement and to prove to the requisite legal standard that it actually or potentially prevents, restricts, or distorts competition. The CFI went on to consider both tests. It said that, in principle, dual pricing intended to discourage parallel trade must be regarded as having the object of restricting competition (paras 115–116). Nevertheless, as GSK had argued, having regard to the legal and economic context that was not enough to establish an anticompetitive object (para 117). At para 118, the CFI stated that Article 81(1) EC “constitutes a fundamental provision indispensable for the achievement of the missions entrusted to the Community, in particular for the functioning of the internal market, … and restricting competition between themselves or with third parties, from reducing the welfare of the final consumer of the products in question.” Consequently, an intention to limit parallel trade in medicines or to partition the common market does not necessarily have the object or effect of restricting competition to the detriment of the final consumer. The analysis may be abridged when the clauses of the agreement reveal in themselves an effect on competition, but analysis is required when they do not.

716 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY It cited Société Technique Minière v. Maschinenbau Ulm GmbH4 (pp 248–251) and Etablissements Consten SARL and Grundig-Verkaufs-GmbH v. EC Commission5 (pp 342 and 343) and said that: 120 … The Court of Justice [in Consten and Grundig], contrary to the Commission’s contention … , did not hold that an agreement intended to limit parallel trade must be considered by its nature, that is to say, independently of any competitive analysis, to have as its object the restriction of competition. On the contrary, the Court of Justice merely held, first, that an agreement between a producer and a distributor which might tend to restore the national divisions in trade between Member States might be of such a kind as to frustrate the most fundamental objectives of the Community (p 340), a consideration which led it to reject the plea alleging that Article 81(1) was not applicable to vertical agreements… . The Court of Justice then carried out a competitive analysis abridged but real, during the course of which it held, that the agreement in question sought to eliminate any possibility of competition at the wholesale level in order to charge prices which were sheltered from all effective competition, considerations which led it to reject a plea alleging that there was no restriction of competition (pp 342–43) . . . 121 … while it is accepted that an agreement intended to limit parallel trade must in principle be considered to have as its object the restriction of competition, that applies in so far as the agreement may be presumed to deprive final consumers of those advantages. 122. However, if account is taken of the legal and economic context in which GSK’s General Sales conditions are applied, it cannot be presumed that those conditions deprive the final consumers of medicines of such advantages.

The CFI went on to consider the context of the dual pricing: and its main characteristics: (1) the national regulation of prices; (2) on different bases; (3) that the structural cause of the price differentials was the national regulation; (4) fluctuations in exchange rates were a cyclical cause of the price differentials; (5) the price differentials were the cause of parallel trade; (6) some Member States, for example the United Kingdom, pay the manufacturer’s list price subject to a standard discount of 4 or 5 percent supposed to compensate for buying elsewhere at a lower price; (7) patients rarely pay much for medicines. At no point had the Commission considered national price control (para 133). So, it cannot be presumed that parallel trade helped final consumers. It benefited mainly the parallel traders and caused inefficiencies. The Commission should not follow analogies from its previous practice. For these and other reasons, in carrying out its judicial review, the Commission was wrong to state that the dual pricing had the object of restricting parallel trade. This reasoning amounts to a radical change of view. In Consten the ECJ did, indeed, carry out an abridged market analysis, but it did not mention consumer welfare. That concept became popular in the Community institutions only with the modernization of competition law starting with the group exemption for vertical distribution agreements.6 The judgment of the CFI is an important reinterpretation of the ECJ’s judgment in 1966, which I welcome. Forty years on it should be possible to reconsider competition policy, and the Commission, which now frequently considers consumer welfare, is the institution responsible for competition policy. It is not only the judgment in Consten that has been challenged. In many decisions, the Commission relied on the ECJ’s judgment in Miller International Schallplatten GmbH v. EC Commission7 and stated that any attempts to restrict parallel trade had the object of restricting competition. The decisions spawned by Consten on the concept of “object” were purely formal Case 56/65, [1966] E.C.R. 235. Joined Cases 56/64 & 58/64, [1966] E.C.R. 299. 6 Reg. 2790/99; see also Commission Notice, Guidelines on Vertical Restraints, 2000 O.J. (C 291) 1. 7 Case 19/77, [1978] E.C.R. 131. 4 5

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and did not establish any effect on competition.8 It is not surprising that the Commission and several parallel traders have lodged an appeal. The recognition that analysis may be abridged when the Common Market is divided is also welcome. Can that view also be extended to cartels to raise price by restricting supply? It may reduce the concern of some of the judges about the application of a rule of reason. The analysis of hard core restraints may be also be truncated in the absence of an unusual legal and economic context.9 A. Effect of Restricting Competition The CFI started analyzing the effect on competition by considering the definition of the market. The Commission had not expressly defined the relevant market, but implicitly relied on the third level of the anatomical therapeutic classification frequently used in merger decisions. It is based on the malady to be remedied. Nevertheless, at para 159, the CFI stated that it was not manifestly wrong to consider that Spanish wholesalers that engaged in parallel trade might have been less interested in the therapeutic indication of each medicine than in whether there was a sufficient price differential between medicines that were reimbursed by the Spanish health insurance scheme and the market prices in the country of destination to render parallel trade lucrative. Consequently, it was not manifestly wrong to accept that all the medicines reimbursed by the Spanish health insurance scheme which are capable of being sold at a profit owing to the price differential constituted a product market. The court was not saying that this is the only correct way to define the product market. Its jurisdiction is limited to judicial review. The Commission enjoys a margin of appreciation over complex economic matters such as market definition. Nevertheless, it may be worth considering the implications of such a definition. Few pharmaceutical companies would be dominant over all the patented medicines that can be the subject of profitable parallel trade. The issue might arise before a national court, rather than a competition authority and it might accept the sensible criterion of the CFI. Then any form of dual pricing could be considered only under Article 81 EC, not under Article 82 EC. The CFI proceeded to consider that the appropriate counterfactual was the situation that would exist without the agreement (para 162). It was for the Commission to establish the effect on competition (para 169). Clause 4 restricted the freedom of action of participating undertakings, but not every restriction of freedom of action restricts competition — Wouters v. Algemene Raad van de Nederlandse Orde van Advocaten (Raad van de Balies van de Europese Gemeenschap intervening10 and Métropole télévision (M6) v. European Commission, supported by CanalSatellite.11 Any vertical agreement restricts freedom of action. Since the objective of the competition rules is to prevent harm to consumers of the products in question, the Commission has to establish consumer harm. The judgment does not consider whether M6 can stand with Wouters –– it merely cites both cases. The Commission had considered that the dual pricing was discriminatory, contrary to Article 81(1)(d) EC and referred to the case-law under Article 82(c) EC (para 174). The CFI, 8 For example, Commission Decision of 16 May 1984 relating to a proceeding under Article 85 of the EEC Treaty (IV/30.658 — Polistil/Arbois (84/282/EEC), 1984 O.J. (L 136) 9. 9 For instance, fees to the Confederation of British Industries are based on annual turnover. This is how many careless in the 1030s were organized. The fees, however, were a tiny percentage. They were a method of ensuring that the larger members paid more for administration than smaller members. In form, but not in substance, the fee structure was a cartel. 10 Case C-309/99, J.C.J. Wouters, J.W. Savelbergh, Price Waterhouse Belastingadviseurs BV v. Algemene Raad van de Nederlandse Orde van Advocaten, [2002] E.C.R. I-1577, at ¶ 97 (often called “Metropole”). 11 Case T-112/99, [2002] E.C.R. II-2459, at ¶ 171.

718 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY however, considered that it had not been shown that the transactions were equivalent, especially important when the price difference was justified by variations in the conditions of marketing and the intensity of competition (paras 176–80). Dual pricing might indicate discrimination if conditions in the markets were sufficiently homogenous, but not where the parties agreed that the geographic markets were separate and characterized by different conditions, especially different national regulation. GSK argued that the Commission had not shown in any other way that clause 4 had the effect of restricting competition. The CFI, having gone so far along with GSK’s arguments, considered that the welfare of final consumers was in fact reduced. To the extent that patients paid for their medicines, they were final consumers, and to the extent that they were reimbursed, the health insurance scheme was a consumer. Parallel trade applied marginal pressure on prices in the countries of destination, and the Commission was entitled to infer that clause 4 contributed to the rigidity on the market (para 186). Some national health insurance schemes claw back some of the benefits of parallel trade, although the amount was marginal (para 188). So the Commission was entitled to find consumer harm (para 190). The CFI confirmed the decision that the dual pricing had the effect of restricting competition to the detriment of consumers (para 194). The court did not consider the “bagatelle notice,”12 but referred to the minor harm to consumers, without considering whether it was outweighed by other detriments to consumers — the reduction in the incentive to R&D and the difficulty of ensuring that every Member State was sufficiently supplied, when the Member States where high prices were permitted were supplied from those with a tighter cap. Perhaps the CFI thought that any balancing should come under Article 81(3) EC, which leaves a heavy burden of proof on the parties to the agreement. B. Exemption Under Article 81(3) EC After dismissing pleas based on misuse of powers, the CFI turned from paras 233–315 to the Commission’s refusal to grant an individual exemption under Regulation 17.13 Any kind of agreement may be exempted (Consten (paras 342, 343 and 347) and Matra Hachette SA v. Commission,14 para 234). IV. JUDICIAL REVIEW

The party relying on Article 81(3) EC must demonstrate that all the conditions of Article 81(3) EC are satisfied by means of “convincing arguments and evidence,” and the Commission must examine those arguments and evidence (para 236). The Commission relied mainly on the first condition, “contributing to improving production or distribution or promoting technical or economic progress.” GSK had argued that restricting parallel trade increased its incentive to innovate. The CFI referred to its limited jurisdiction when faced with complex economic assessments. Its review is confined, as regards the merits, to verifying whether the facts have been accurately stated, whether there has been any manifest error of appraisal and whether the legal consequences deduced from those facts were accurate. It must consider 12 Commission Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community, 2001 O.J. (C 368) 13. Its application was excluded by G 11. 13 Council Regulation 17/62 (EEC), First Regulation Implementing Articles [85] and [86] of the Treaty, 1962 O.J. (L 13) 204. 14 Case T-17/93, [1994] E.C.R. II-595.

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also whether the decision contains all the information which must be taken into account for the purpose of assessing a complex situation, and whether it is capable of substantiating the conclusions drawn from it. The CFI referred also to the margin of discretion normally left to the Commission. It is subject to a restricted judicial review which takes the form of a balancing exercise carried out in the light of the general interest appraised at Community level. The CFI added that it should consider only facts that existed at the time of the decision. Consequently, reports prepared subsequently otherwise than for the purpose of the Commission’s proceedings must be rejected.15 The Commission should have examined GSK’s argument and evidence more carefully. It admitted much of it. V. LOSS OF EFFICIENCY

The CFI objected that the Commission had not considered all the factual arguments and evidence that GSK had pertinently submitted. Nor was the decision supported by convincing evidence. The Commission carried out no serious examination of GSK’s factual arguments and its evidence relating, not to the disadvantages of parallel trade, but to the advantages of clause 4 of the General Sales Conditions. This is especially important under Article 81(3) EC. It should have examined whether parallel trade led to a loss in efficiency for the pharmaceutical industry in general, and GSK in particular. Only in the absence of any dispute in that regard could the Commission validly dispense with such an examination. The CFI went on to stress the importance of interbrand competition: 296. However, a comparison of the evidence provided by GSK with the other evidence invoked by the Commission in the Decision clearly reveals that in the medicines sector the effect of parallel trade on competition is ambiguous, since the gain in efficiency to which it is likely to give rise for intrabrand competition, the role of which is limited by the applicable regulatory framework, must be compared with the loss in efficiency to which it is likely to give rise for interbrand competition, the role of which is crucial. In those circumstances the Commission should not have refrained from examining whether clause 4 could enable GSK’s capacity for innovation to be reinstated.

The CFI therefore concluded that the failure to carry out a proper examination of all the factual arguments and evidence vitiated the decision to refuse an exemption. The court quashed the operative part of the decision relating to Article 81(3) EC and ordered the Commission to take the necessary steps that were relevant at the time of its decision. The Commission is, therefore, examining the merits of an exemption under Regulation 17, although the Regulation has been abrogated. The CFI’s stress on the importance of interbrand competition is contrary to the view of the Commission in many of its cases in the twentieth century. Many agreements imposing restrictions on a dealer competing in the territory of another dealer were condemned for restricting its freedom of action. The need to avoid free riding was stressed in the Guidelines on Vertical Restraints in 2000.16 I am delighted that in GSK the CFI should have made such a clear affirmation of the importance of interbrand competition. In the United States, Continental T.V., Inc. v. GTE Sylvania Inc.,17 where dealers that invested were protected from free riders, is often cited as the judgment when the Supreme Court moved from formalistic analysis of restrictions of conduct to an analysis of the likely effects of conduct. 15 I hope this does not include the excellent article by Patrick Rey & James S. Venit, “Parallel Trade and Pharmaceuticals: A Policy in Search of Itself”, 29 Eur. L. Rev. 153 (2004). Its value lies in its analysis, rather than in its statement of facts. 16 Commission Notice, Guidelines on Vertical Restraints, 2000 O.J. (C 291) 1. 17 433 U.S. 36 (1977).

720 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY Recently, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., dba Kay’s Kloset U Kays Shoes, the Supreme Court was prepared to overturn precedents extending over a century in order to apply a rule of reason to minimum resale price maintenance.18 It considered the circumstances in which the practice might avoid a free- riding problem, and those in which it might support a price fixing cartel at dealer or producer level and concluded that, in the absence of a collusion at either level, the practice could be either pro- or anti-competitive. Consequently a per se rule was not appropriate and a court should examine the pro- and anti-competitive effects in each case. VI. CONCLUSION

This judgment will have to be included in every cases and materials book on EC competition, so many important points were made. The distinction from Bayer demonstrates how narrow is the path that was opened up to avoid making an agreement or concerted practice. The conclusion that the parties were not excused by an Act of State follows old law.19 Only if the law requires conduct that infringes the competition rules is it excusable. The most surprising point is that a realistic counterfactual must be considered when deciding whether in its the economic context the object of the agreement is anticompetitive, but in Consten the ECJ did make an abridged analysis. This part of the judgment delights me. I am also delighted that it is only if consumer harm is caused that an agreement limiting freedom of action infringes Article 81(1) EC.20 At first I found it surprising that an agreement intended to limit parallel trade should be found to have the effect of restricting competition because of the loss to the U.K. national health scheme of the small discount on the payment to pharmacists made possible by parallel trade. The CFI described it as being minor. Was this a compromise within a divided court, or is the CFI still convinced that any balancing between positive and negative effects on competition must be done under Article 81(3) EC. Is it possible to reconcile Wouters with M6 and O2,21 all of which were cited in the judgment? The issue may be less important now that national courts and competition authorities can apply Article 81(3) EC, but it affects the burden of a high standard of proof. Other points to note are that the consumers who should not be harmed include the health insurance scheme. It is important that it is only when transactions are equivalent that Article 81(1)(d) EC is infringed by price differentials. If an agreement requires different prices to be charged in different markets, there is no discrimination (para 177). This had already been decided in relation to Article 82(c) EC and I hope it applies also to Article 81(1)(d) EC. I welcome the view that the market relevant to an agreement between a producer and wholesalers may be to products for which parallel trade is profitable and not only to substitutes at the consumers’ level, especially when maximum prices or profits are capped by national legislation. I also welcome the stress on the importance of interbrand competition. The views of the CFI about judicial review under Articles 81(1), (3), and 82 EC and the Merger Regulation22 are congruent. Whoever bears the burden of proof must provide 127 S. Ct. 2705 (2007). Case 40/73, Suiker Unie UA v. Commission, [1975] E.C.R. 1663. 20 I would prefer the institutions to look to total rather than consumer welfare, but the difference is important mainly when dealing with buying power. The interests of the foreclosed buyer should be relevant. In Consten the court did not refer consumer harm under Art. 81(1) EC. 21 Case T-328/03, O2 (Germany) GmbH & Co. v. European Comm’n, [2006] E.C.R. II-1231. 22 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings, 2004 O.J. (L 24) 1 (EC Merger Regulation). 18 19

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convincing arguments and evidence to support its views. It must get simple facts right, but the Commission has a margin of appreciation over complex economic matters. Airtours plc v. European Commission23 has had important implications outside the context of mergers.

MR. KNOPF: Thank you, Professor Korah. Although Hugh has me down as next, I think I am going to use my prerogative to ask Chris and John to speak first, and then I will follow up with a little bit about the Canadian case. MR. STOTHERS: Thank you, Val, and thank you, Howard. I actually want to hear what Howard has to say, so I am going to try to keep it relatively short. I have three points that I want to talk about, which I would say are the really hot points on parallel trade in Europe: the first is in relation to competition, of which you have already heard quite a bit; the second is in relation to repackaging; and the third is in relation to international exhaustion. First, looking at competition, this really is where things seem to be developing in Europe at the moment — much more than in IP or other fields. You’ve heard quite a bit now about the Glaxo case.24 I have to say that Article 81(1) and all the discussion about object and effect for me is entirely a red herring in practice. It is very interesting academically and for the structure of competition law. But as far as parallel trade goes, it does not really matter. Why do I say that? Because in the case, after spending pages and pages analyzing why we cannot have an object-based test, why we need an effect-based test, and saying, “Look, the parallel traders are keeping virtually all the profit here,” the court still found that there was an anticompetitive effect. So they have gone through an awfully long analysis to say, “Well yes, we still find a breach of Article 81(1).” We talked in the previous session about fuzzy analysis and hard-and-fast rules. This is a move from a hard-and-fast rule to fuzzy analysis, which is going to give the same result in virtually every single case. That is great news for lawyers. That means lots more time to argue about whether in any particular case there can be a difference. But I do not see that it is actually going to have much of an impact. What is interesting is Article 81(3) and what the Commission is going to do under that. The Commission was criticized for saying, “Well, so what, Glaxo, if you lose money because of parallel trade. You would never have spent it on R&D. You would have put it into your profits or you would have spent it on marketing.” That approach of the Commission was clearly nonsense, I would say. The Commission has been told it has to look at a balance: What is the damage to competition/ what is the benefit to R&D, of allowing you to take these steps to restrict parallel trade? But that, in itself, is a bit odd, because then you start saying: “Well, there might be a different outcome of that analysis depending how much the parallel traders suck out of the system. If the parallel traders suck a lot out of the system, then you might say that these restrictions are okay. But if the parallel traders pass an awful lot more on to the consumers, then you say they are not okay. That really has nothing to do with what Glaxo is up to. That has more to do with competition between parallel traders. So I think that is the issue to watch. Val also talked about Syfait II.25 This is the case under Article 82. It came up from the Greek Competition Commission. We had a very interesting opinion from Advocate General Jacobs in Case T-342/99, [2002] E.C.R. II-2585. Case T-168/01, GlaxoSmithKline Servs. Unlimited v. Commission, [2006] E.C.R. II-2969 (under appeal). 25 Joined Cases C-468/06 & C-478/06, Sot. Lelos kai Sia [Syfait II] (pending). 23 24

722 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY Syfait I.26 The ECJ then said: “The Greek Competition Commission is not a court or tribunal. We are not going to decide it.” It has come back, I think, eleven times from the Greek Court of Appeal in exactly the same words. This time the ECJ has to decide. On Tuesday next week we have Advocate General Ruiz-Jarabo Colomer’s opinion due.27 So that is interesting. Repackaging: just a couple of cases really. We finally have the ECJ’s judgment in the Glaxo/Dowelhurst case.28 In case this seems like you have heard it before, that’s because this is the second ECJ judgment in that case. It went back to the Court of Appeal in England and Wales.29 The Court of Appeal was essentially considering whether repackaging damages the reputation of the brand owner or the brand. The particular issues they were looking at were: • First, whether co-branding, where the parallel trader changed the packaging and added his own brand or livery, damaged the reputation of the brand owner or the brand. The Court of Appeal said “No.” • Second, de-branding, where the parallel trader repackages the product into plain boxes, so removing many traces of the brand. In these cases, the brand was still on the internal packaging, so there wasn’t complete de-branding. Again, the Court of Appeal said: “Does that damage the reputation of the brand owner or the brand? No.” The Court of Appeal then decided that it could not actually decide the case finally because there is another case pending before the ECJ.30 So again we have to wait in this case. That is all relatively interesting and gives you a good feel for what the Court of Appeal thinks of restrictions in parallel trade at the moment. The other interesting point on repackaging is that recently there were various counterfeit pharmaceuticals found in the parallel supply chain. That was relatively widely reported.31 Obviously, this is important, because this is an argument that is always raised by manufacturers in all industries: “If you allow parallel trade, you start getting counterfeits in.” Parallel traders always say: “Oh no, you don’t.” You have a debate back and forth. There had not been very much evidence before. These recent discoveries have, in part, resulted in a Commission services proposal — not a full Commission proposal yet — to try to combat counterfeit in medicines.32 It is a proposal of 11 March, so it is pretty recent. Among other things, they are talking about banning repackaging of pharmaceuticals. That is quite interesting. If it goes forward, it will completely change the market and the possibility of parallel trade in pharmaceuticals in Europe. I have my doubts whether it will go all the way forward, but it is the proposal at the moment. There is a footnote saying: “Yes, we realize there may be some problems for parallel trade. That will be considered later.” But that is one to watch. Third point, international exhaustion. You all know the history of this — Silhouette33 and Davidoff.34 The ECJ says: “The United Kingdom and other Member States cannot apply 26 Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias and Others v. GlaxoSmith-kline, [2005] E.C.R. I-4609 (Syfait I) Opinion of Advocate General Francis Jacobs, Oct. 28, 2004, available at http://curia/europa. eu/en/actu/ communiques/cp04/aff/cp040087.en.pdf. 27 Syfait II Opinion of Advocate General Ruiz-Jarabo Colomer, Apr. 1, 2008, available at http://eur-lex.europa.eu/ LexUri Serv/LexUriServ.do?uri=CELEX:62006C0468:EN:NOT 28 Case C-348/04, Boehringer Ingelheim v. Swingward, [2007] E.C.R. I-3391. 29 Boehringer Ingelheim v. Swingward, [2008] EWCA Civ 83. 30 Case C-276/05, The Wellcome Found. v. Paranova Pharmazeutika, 2005 O.J. (C 217) 29. 31 Christopher Stothers, Counterfeit Pharmaceuticals Enter the Parallel Supply Chain, J. INTELL. L. & PRAC. 797– 98 (2007). 32 The proposal was open for consultation between 11 March and 9 May 2008. 33 Case C-355/96, Silhouette Internationale Schmied GmbH & Co. KC v. Hartlauer Handellshaft GmbH, [1998] E.C.R. I-4799. 34 Joined Cases C-414/99 to C-416/99, Davidoff & Levi Strauss v. A&G, Tesco & Costco, [2001] E.C.R. I-8691.

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international exhaustion. If LEVI jeans are sold in the United States and Tesco or someone else imports them to the United Kingdom; Levi’s can assert its U.K. and Community trade mark rights to block the resale of those jeans.” That is a policy choice. It is not obvious from the justifications for IP whether you should or should not have that right. It is a policy choice that was taken in the harmonizing legislation. The English courts generally hate that policy choice. Hugh Laddie tried to get around it in the Davidoff case by relying on implied consent and sent it off to the ECJ. The ECJ slapped him down and said: “No, no, no, no, no. You can’t have implied consent as a matter of course. You must have unequivocal consent to marketing. It can be implied, but if it is to be implied it must be unequivocal.” Most people thought that effectively you are not ever going to see implied consent. But now have two judgments of the English courts that found implied consent. The first was the Mastercigars case.35 In that case, consent was implied from the fact that in Cuba cigars were sold in very large quantities and customers were provided with a label that included German-language instructions for Customs. That was held to be enough to constitute unequivocal consent. That was quite controversial. It has now been followed up in the Honda v. Neesam case.36 In this case, Honda’s Australian subsidiary was selling motorcycles. There was a long discussion of the evidence as to what was said to whom, what was known by Honda about where those motorbikes were ending up, and so on. The High Court ultimately found unequivocal implied consent. It will be interesting to see whether that one goes up on appeal. Those are the two key cases. They are also a good sign of how the U.K. courts view things. MR. TEMPLE LANG: I would like to look at the Glaxo/SmithKline case in a much simpler, more economic way. Suppose that the company had been dominant. I think it is fairly clear that it could have been a discriminating monopolist and it could have charged lower prices in the Member States where, not due to any conduct of GlaxoSmithKline, prices were lower. That, if it had happened, as it did in fact, would have promoted consumer welfare because the consumers in the lower-priced states would have gotten products at prices that they could have afforded. Therefore, it seems to me to follow that the company was entitled to prevent the benefits to consumers in the lower-priced Member States being taken away by arbitrage by limiting supplies there and directing its distributors there to concentrate on its customers there, and I think also by dual pricing and, if necessary, export bans. Now, it is obvious that if the company had done the opposite and tried to charge a uniform price everywhere in Europe, then consumers in the higher-priced Member States would have benefited, of course, and the consumers in the lower-priced states would have suffered. There is no reason that I have been able to think of why the net balance would have been favorable to the consumers. On this view of the matter, the key feature of the case is that the different price levels were in no way due to the conduct of either this company in particular or pharmaceutical companies in general. If you follow all that logic, then, if it would have been legitimate for a company in a dominant position to do this, assuming for the purposes of argument that GlaxoSmithKline was dominant, then it cannot be a violation of Article 81 for the company by unilaterally regulating quantities or by contract to have achieved the same result. The other way of looking at the case is to say this was price discrimination. But price discrimination is illegal under Article 82 only where a competitive disadvantage results. That 35 36

Mastercigars v. Hunters & Frankau, [2007] EWCA (civ) 176. Honda v. Neesam, [2008] EWHC 338 (ch).

724 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY must mean a disadvantage in the market where the higher-priced purchaser is operating. It cannot mean a disadvantage if that distributor in the higher-priced market chose, for some reason best known to himself, to go and sell in the lower-priced market. So even if you look at this case as a possible discrimination case, it is quite clear, I think, that what the company was doing is and was legal. That is a much simpler and clearer and more economic way of looking at the facts of the case than the way the Court went through the logic. I do not know to what extent it is likely that the Commission will adopt that simple approach, but I know that the argument is going to be made by other pharmaceutical companies in rather similar situations, and we will see what will happen. There are a couple of other points that I should make just briefly. A pharmaceutical company is entitled to say that it should be able to regulate its price levels in different Member States so that it makes some profit everywhere, because it is entitled to make some profit overall. It does not have to make it on the basis of a single price. So the research-and-development argument about how much the parallel traders are taking out of the system I think doesn’t alter the fact that the pharmaceutical company is entitled to make a profit in each of the markets where it is selling. Obviously, if it is prevented from making a profit at all in a particular market, it is not likely to sell there for very much longer. The other point that I should perhaps make is, of course, harm to consumers has been mentioned explicitly in Article 81 and in Article 82 ever since the Treaty was enacted. So it wouldn’t be right for you to get the impression that harm to consumers had only been thought of in recent years. The requirements are quite clear. It happens that the harm-to-consumers requirement is more frequently applied under Article 81 than under Article 82, but that is for other reasons that are not directly related to the subject we are talking about this evening. MR. KNOPF: I am going to talk briefly about a Canadian case, Euro-Excellence Inc. v. Kraft Canada Inc.,37 which actually arose as a copyright case. It involved TOBLERONE chocolate bars. Kraft owns the companies that make TOBLERONE and COTE D’ÔR chocolate bars in Switzerland and Belgium. Kraft has a subsidiary in Canada. The Canadian subsidiary of Kraft wanted to segment the Canadian market and keep out parallel imports that were being brought in by a little company called Euro-Excellence, with which it had had a previous contractual relationship that went bad for reasons that don’t much matter, and were not on the record in any event to any extent. For reasons which I will not bore you with, Canadian trademark law will not work to block parallel imports. We have had cases in the Supreme Court and the Federal Court of Appeal that make that abundantly clear. So trademark law was not even attempted to be used. Instead, the plaintiffs went to court on the basis of copyright in certain aspects of the labeling of the package. There’s a little bear within a mountain on a TOBLERONE chocolate bar package. They said, “We own copyright in that.” Well, that was pretty much undisputed. They said, “By importing that work there is secondary copyright infringement going on in Canada.” So when you import the chocolate bar you’re importing a copy of the work, which they say is contrary to the secondary infringement provisions of our Copyright Act. All common-law countries have something along those lines, that you can have secondary infringement by selling something that would infringe if it were primary infringement. The Section says that there will be infringement if the product had been made in Canada by the person who actually made it, which in this case is Kraft Europe. 37

2007 SCC 37 (July 26, 2007), available at http://csc.lexum.umontreal.ca/en/2007/2007scc37/2007scc37.html.

PART D: PARALLEL IMPORTS 725

The “hypothetical maker” issue, as some of you who know your Australian and U.K. case law know, is a fiendishly difficult area.38 Hugh Laddie in his book calls the question of the identity of the “hypothetical maker” perhaps the most difficult aspect of all of copyright law. I was involved with the case at the final appeal stage in the Supreme Court of Canada on behalf of an intervener. We argued the law based on the hypothetical maker issue, which had not been argued below by anybody. That was the argument that carried the day, sort of. I say “sort of” because only four of the nine judges agreed with me.39 But because three other judges also agreed that our side should win the case — but for different reasons that nobody even raised with the Court, which I will come to — we ended up winning with, in effect, four out of nine judges. It is a very interesting case, and it has caused a lot of consternation since then. Three of the judges basically took a very black-letter strict constructionist approach, if you like, and looked at the hypothetical maker doctrine40 — actually four of them, because there was a concurrence. We carried the day on that point. The fourth judge wrote a concurrence saying that he had — and this where it gets interesting — grave doubts that the Copyright Act was meant to be an instrument of international trade control.41 We may hear more about that in the future.Three of the judges came up with a new doctrine, called “legitimate economic interest.”42 They say basically that it is not in the legitimate economic interest of a chocolate bar maker to enforce copyright in a little part of the package to keep out parallel imports of legitimate chocolate bars and that that was an incidental use. This is not in the statute. They, in effect, adopted the regime that Australia has adopted, but it took twelve years of revision for Australia to get there. There have been two new cases brought since then, one against Euro-Excellence by Kraft, another against a Cuban cigar parallel importer, where the plaintiffs have simply fiddled with their paperwork and called it an “assignment,” rather than an “exclusive license,” and they are hoping to prevail. Now here is where it all comes together. You probably thought I would never get here. The three judges who came up with the incidental use argument also were very interested in copyright misuse. Actually, a couple of the other judges were too during the oral hearing, but it is not reflected in their judgments. Copyright misuse, as some of you may know, is a quintessentially American doctrine. There are a number of cases, but most recently and most importantly coming from Judge Posner of the Seventh Circuit in a case called Wiredata.43 In Wiredata he basically liberates the doctrine of copyright misuse from antitrust law and says that there could be copyright misuse, which disentitles the owner to enforce its copyright, even if there is not a proven antitrust violation, if the copyright owner is trying to lever its stuff into another market or achieve rights that don’t flow from copyright law. A very important decision by him. There is a very important article about copyright misuse by a brilliant lawyer, Kathryn Judge, who clerked for him and Justice Breyer.44 38 The hypothetical maker requirement that arises in commonwealth copyright regimes (such as Canada’s) is derived from the 1911 U.K. copyright statute. The 1911 U.K. Copyright Act and its descendants, such as Canada’s, created the possibility of secondary infringement for importation of copies legitimately made abroad that would have infringed copyright if, hypothetically, they had been made in the country into which they are imported, i.e., if they had been made in Canada in this instance. See Hugh Laddie, The Modern Law of Copyright and Designs, Vol. 1 (3d ed. 2000). 39 See opinions of Justices Binnie, Bastarache, Binnie, LeBel, Deschamps, Fish, Charron, and Rothstein JJ, concurring; McLachlin C.J and Abella J., dissenting, available at http://scc.lexum.umontreal.ca/en/2007/2007scc37/2007scc37. html. 40 Or “hypothetical infringer,” in the court’s words. Id. ¶ 15 41 Id. ¶ 56, per Fish, J. 42 Id. ¶ 8. 43 Assessment Techs. v. Wiredata, Inc., 350 F.3d 640 (7th Cir. 2003) (Posner, J.). 44 Kathryn Judge, “Rethinking Copyright Misuse”, 57 Stan. L. Rev. 901 (2004).

726 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY The Kraft case below, unfortunately, had a very inadequate record in terms of antitrust and misuse and all that stuff.45 So the judges quite properly said, “We are going to leave this for another day.” But that “other day” could be coming sooner rather than later because of these new cases that are moving along rather quickly right now, as we speak. So in Canada we have misuse on the horizon. We have an attempt to use copyright law as an end-run around trademarks law — and, no doubt, around patent law at some point as well — and we have the prospect, I think, of some good misuse litigation coming up in Canada. There was a case in Canada,46 as well as England,47 but I don’t have the cite in front of me, because this is all kind of last-minute, involving parallel importation based on food products made with a patented process. I think there is a recent case in England and in Canada as well. I think what we are going to see is desperate attempts by rights owners to try to use whatever they can get their hands on to restrict parallel imports, which is an old game that goes back to 1871, Betts v. Willmott.48 Any comments from my colleagues here before we turn it over to the floor? Lionel, you have been smiling and nodding your head. QUESTION [Prof. Lionel Bently, University of Cambridge, England]: Would you tell us what you think will happen in Syfait II?49 PROF. KORAH: It is on its way. In Syfait I, as Chris said, the ECJ said it did not have jurisdiction. But Syfait I was extremely interesting because of the opinion of the Advocate General.50 The ECJ denied that it had jurisdiction and didn’t go into the merits and this case looked dead. Meanwhile, the case went back to the Greek Competition Authority, which very largely followed Advocate General Jacobs’s opinion, and said “Yes, they were dominant over some of the medicines.” It went through two appeals, up to the Athens Court of Appeal. The Athens Court of Appeal has asked the ECJ whether it amounts to the abuse of a dominant position to ration medicines going to the cheap countries. We are still waiting for the ECJ. It is a terrible waste of resources. Francis Jacobs, the Advocate General, has retired and has gone back to other fields. Presumably, at least, people can still read it, and I hope it will still be influential. It was a famous opinion. Many of the judges retired last September. They are appointed for six years, and half of them lose their jobs at the end of each three years. They may be reappointed, but not all were. So many of the judges in this are gone. All the work is going to have to be done again. How influential Advocate General Jacobs’s opinion is — well, it is likely to be very influential. He was the longest-serving Advocate General at the time he retired. He is generally famous for having sorted out a lot of messes in EC and EU law. It is back on the books. QUESTIONER [Prof. Bently]: Do you have a prediction what the result will be? PROF. KORAH: I find it very difficult to know. You see, our courts change. When half the judges lose their job automatically, subject to being reappointed, it is very difficult to know. We don’t have a sense. We don’t know what individual judges think. The ECJ has never published Kraft Can., Inc. v. Euro-Excellence, Inc., (F.C.A.), 2005 FCA 427, (2005), [2006] 3 F.C.R. 91. Pfizer Can., Inc. v. Canada (Health), 2007 FC 898, T-507-05, Oct. 5, 2007, available at http://decisions.fct-cf. gc.ca/ en/2007/2007fc898/2007fc898.html. 47 Monsanto Tech. LLC c. Cargill Int’l SA, 2007 EWHC 2257 (pat), Case No. HC06C00585 (Oct. 10, 2007), available at http://www.bailii.org/ew/cases/EWHC/Patents/2007/2257.html. 48 Betts v. Wilmott, LR 6 Ch. App. 239 (1871). 49 Joined Cases C-468/06 & C-478/06, Sot. Lelos kai Sia [Syfait II] (pending). 50 Case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias and Others v. GlaxoSmith-kline, [2005] E.C.R. I-4609 [Syfait I] Opinion of Advocate General Francis Jacobs, Oct. 28, 2004, available at http://curia/europa. eu/en/actu/com muniques/cp04/aff/cp040087.en.pdf. 45 46

PART D: PARALLEL IMPORTS 727

a dissent, although I believe there is no law to prevent it from doing so. I have not yet met anyone who has been prepared to predict. Have you, Chris? MR. STOTHERS: No. One particularly interesting area, as Valentine says, is that the Greek Competition Commission has followed what Advocate General Jacobs said, as have the Spanish and French competition authorities. But the difficulty is that these are domestic competition authorities being asked to give a ruling on competition law that will hurt domestic consumers for the benefit of consumers in higher-priced countries. That is a very difficult position in which to put a domestic competition authority. This may be coming back to something that has been raised in other panels about decentralizing enforcement of EC competition law. That comes across, certainly in the Greek decision. The concerns they are worried about are the damage to Greek consumers, when the whole point of this case is that the damage is to consumers outside of Greece, if there is any damage. In terms of prediction, given that we will have an Advocate General’s opinion on Tuesday,51 it is really asking to be a hostage to fortune. It is an opportunity for the ECJ to say whether it agrees with the CFI trying to make some kind of exception for pharmaceuticals. Advocate General Jacobs tried to do that with a very careful “this is specific to the facts” decision in his original opinion. However, it is quite difficult to get to that policy outcome. The possibility of a fudge from the ECJ must be quite high, with a judgment that tries to make no enemies anywhere and leaves us with a Syfait III down the line. QUESTIONER [Prof. Bently]: May I ask a follow-up? Do you think that the expansion of the European Union in the meantime to the twenty-seven Member States, and therefore the extension of the number of judges and the nationality of the judges, will have a material effect on the likely outcome? I don’t know enough about price regulation in all the new Member States. PROF. KORAH: It is very difficult to know. I visited the CFI just after a whole lot of new judges had come in from Eastern Europe and I saw five of them. Some of them seemed to be very competent indeed. Daniel Šváby, from Slovakia, said he didn’t know any competition, but he had been a commercial judge and he had listened to economic arguments and been very interested in them and produced a référendaire who had worked for Allen & Overy in Bratislava. He had worked in London. The judge had made a big effort. The most helpful one was the Polish judge, Irena Wiszniewska-Bialecka, who had written a book on competition in distribution and produced a copy of my yellow book. It surprised me that she would know that. She is clearly very competent. I saw three others. Two of the others struck me as being very competent. They were chosen by Rafael Garcia-Valdecasas, and he may have given me an odd sample. But four out of the five seemed to me to be very competent in the CFI. But this will go to the ECJ, and I know much less about the ECJ. QUESTIONER [Prof. Bently]: It is not the competence of the judges that I was questioning. It was their nationality, and therefore the cultural influences of their particular markets. When the Community was fifteen states, it might be that there would be more judges who were sympathetic to parallel importation from low-value states into high-value States, whereas with twenty-seven Member States, the changed constitution of the court, subject to me knowing absolutely nothing about drug price regulation in all those Member States, it might be that there is much less sympathy to that, so they would support Advocate General Jacobs’s approach. 51

See supra note 27.

728 CHAPTER VII: INTERNATIONAL TRADE & INTELLECTUAL PROPERTY PROF. KORAH: I can’t tell you. Can you, Chris? MR. STOTHERS: On that point, the interesting thing is that the pharmaceutical parallel trade

from the new Member States has been limited so far because of the specific mechanism.52 So to some extent the new Member States, to the extent that prices are lower, haven’t borne the brunt of seeing massive outflows of pharmaceuticals. Where they have seen it, though, is in consumer products and other products that are not subject to a specific mechanism. For instance, some car companies have started saying: “We are not interested in selling new cars in these markets. We cannot set a price that is low enough to sell in that market and yet is high enough to avoid big parallel trade problems. So let’s just service cars in that market. We will not sell new cars there.” Similarly, CDs are generally sold in those markets at the same price as in Western European markets. Everything else is a quarter of the price, and yet CDs are sold at the same price. That can’t be a realistic price for consumers in those markets. So you do see issues, but they do not really arise with pharmaceuticals. PROF. KORAH: The other thing is you said that the low prices in Greece help the Greeks. But there was a time when pharmaceutical companies were required to sell the full quantities of any order that came in, and their supplies disappeared within less than twenty-four hours. That’s not good for a Greek who needs a regular supply of a particular medicine. Prices can be too low for consumers. MR. KNOPF: Let me ask a question. Has the quintessential American doctrine of copyright misuse shown up yet in the European Union, even in England? Is it likely to? I am not aware of it. MR. TEMPLE LANG: If it showed up, it would probably be in the form of unfair competition law. MR. KNOPF: But not necessarily competition or antitrust? MR. TEMPLE LANG: No. Unfair competition as distinct from antitrust. MR. KNOPF: The nice thing about it, if you are a free trader, is you do not have to prove what the market is. In the chocolate bar case, what would the market be? If the market is chocolate as a whole, I imagine, even as successful as TOBLERONE is, they are probably not anywhere near in a dominant position. I doubt you could define the market as being as narrow as TOBLERONE chocolate bars. So it is always going to very tricky if you have to prove an antitrust violation. MR. STOTHERS: The one case where it has arisen on the antitrust side in Europe is in AstraZeneca.53 That really feels to me like a case of patent misuse, which in the United States or in Canada might be dealt with in a very broad way but in Europe is dependent on a finding of dominant position under competition law. So you end up with all these issues of proving the market size, who is the market, what are the competitive pressures, which are not an issue in Canada. QUESTIONER [Prof. Bently]: I would say that you should add into the European formulation the doctrine of l’abus de droit in different Member States. A general doctrine of abuse of right does not exist in the United Kingdom or in the Republic of Ireland, but many of the civilian countries say that you cannot use copyright in certain ways. MR. KNOPF: If I’m not mistaken, that very term was mentioned in a Supreme Court of Canada decision. QUESTIONER [Prof. Bently]: The French would know it very well. MR. KNOPF: It was one of the civil judges who mentioned it. Are there any other questions? Since the cocktail hour seems to be taking dominance here, I thank the panel. 52 Act of Accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovenia and Slovakia, 2003 O.J. (L 236) 1, Art. 22 and Annex IV.2; Act of Accession of Bulgaria and Romania, 2005 O.J. (L 157) 11, Art .1 and Annex V.1. 53 Decision 2006/857, Re: AstraZeneca plc, 2006 O.J. (L 332) 24, under appeal as Case T-321/05, AstraZeneca v. Commission, 2005 O.J. (C 271) 24.

CHAPTER VIII

Competition Law Interplay with IP Law Part A: Microsoft, the CFI, and the Aftermath in the European Union and United States Moderator CHRISTOPHER STOTHERS

Cleary Gottlieb Steen & Hamilton (Brussels) Speakers MAURITS DOLMANS

JAMES KILLICK

Research Scholar, Max Planck Institute of Intellectual Property (Munich)

White & Case (Brussels)

CAREY RAMOS

Paul, Weiss, Rifkind Wharton & Garrison (New York) Commentator PROF. VALENTINE KORAH

University College, London (Emeritus) MR. STOTHERS: Good afternoon. My name is Chris Stothers. I’m an associate at Milbank Tweed in London. I am moderating this session. I am sure I do not have to explain the facts of the Microsoft case1 to you, and I am equally sure that that would be a good way of putting everyone to sleep straight after lunch. So instead, if it’s all right with everyone, I propose to tell you a fairy tale. Once upon a time, not so long ago, there was a company. Let’s call it Microsoft. I’ll leave it up to you to decide whether Microsoft is the “Cinderella” of the piece or the ugly sister. Maybe we can vote on it at the end. 1 Commission Decision relating to a Proceeding Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004), aff’d, Case T-201/04 (C.F.I.), Microsoft Corp. v. Commission, 2007 ECJ EUR-Lex LEXIS 2620 (Ct. First Instance Sept. 17, 2007).

730 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW This company did a couple of things. It used to provide interoperability details of its Windows product to third-party competitors that were making their own server operating systems. It stopped doing that. It also started bundling Media Player with its Windows system. Microsoft had a very large market share, up in the nineties, on the market for operating systems for Windows. Then along came another character. Let’s call it the Commission. Again, I will leave it to you to decide whether the Commission is the fairy godmother or the wicked stepmother. The Commission came along and told Microsoft that it must stop doing those two things. That is where we leave the fairy tale and turn to reality, which is almost as strange. One of the most entertaining parts of the case, for those who were not involved in it (which is about three people, I believe), was the escalation of the debate in the press releases. I just want to quote from a couple of them. First of all, in a press release on February 15, 2006, Microsoft complained that the Commission had ignored critical evidence in its haste to attack the company’s compliance.2 It said: “Hundreds of Microsoft employees and contractors worked for more than 30,000 hours to create over 12,000 pages of detailed technical documents that are available for license,” and complained that the Commission had not even bothered to read those documents when it issued its Statement of Objections. The Commission fought back a couple of weeks later. It issued a press release on March 10, in which it described Microsoft’s document as “entirely inadequate, devoted to obsolete functionality,” and said that it was written “primarily to maximize volume and page count while minimizing useful information.”3 So that’s 12,000 pages of minimized useful information. So it all looked like it was great and we were going to have lots of exciting fights. We got a CFI judgment that left a lot of room for an appeal. But then they took the toy away and they settled the case. I realize we have got a mix in the audience. Like either Aesop’s Fables or He-Man, depending on your particular upbringing, every fairy tale has to have a moral at the end. We have some very good panelists and speakers here today who are going to tell you a bit more about the judgment, a bit more about the case, and what the moral is both for Microsoft and, more broadly, for competition within the Community. I will ask each of the speakers to introduce, or at least explain, which characters they think Microsoft and the Commission represent. We will begin with Maurits Dolmans from Cleary Gottlieb in Brussels. Maurits will be followed by James Killick of White & Case, also in Brussels. Then to give us more of a U.S. angle, Carey Ramos, from Paul, Weiss, Rifkind Wharton & Garrison here in New York, will be giving his thoughts. That will be followed up by comments from Val Korah. Then we will open to the floor for questions.

2 Press Release, Microsoft Corp., Microsoft Refutes European Commission Case (Feb. 15, 2006), available at http://www. microsoft.com/presspass/press/2006/feb06/02-15EUStatement.mspx. 3 Press Release, European Comm’n, Competition: Commission Sends New letter to Microsoft on Compliance With Decision (Mar. 10, 2006), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/298.

PART A: MICROSOFT, THE CFI, AND THE AFTERMATH IN THE EU AND THE US 731

IP and Competition: EC CFI Judgment in the Microsoft Interoperability Case Maurits Dolmans* I have been asked to give my view of the judgment of the European Court of First Instance (CFI) in the Microsoft case,4 having been involved in the proceedings on behalf of intervenors on the side of the Commission. The IPR aspects all relate to “interoperability” issues. To illustrate these issues, I would first like to tell you a story. In 1942 my father graduated from secondary school. He lived in German-occupied territory in The Netherlands. The universities were closed, except for two universities to which you could go if you swore an oath not to act against the German army, which he did not wish to do. The alternative was slave labor in the German munitions factories, which was not an attractive option either. So he hid in the attic for two years, until the Battle of Arnhem, when he had to evacuate. During that period, he read my grandfather’s library from one end to the other and back again. While doing this, he found a little copy of the Divina Comedia by Dante, each righthand page in Italian and the left-hand page in Dutch. So he decided to teach himself Italian, reverse engineering the text. After the war, he went to Italy, opened his mouth, and realized he spoke medieval Italian. Now, what does this have to do with the Microsoft interoperability case, you might ask? Well, this is comparable to what happened with a number of server products that had to communicate with Microsoft’s Windows client operating systems. Because Microsoft cut off the supply of an updated grammar and vocabulary, non-Microsoft servers had to speak a Microsoft language that was about a decade out of date, which in Internet and IT terms is about as far behind as my father’s Italian in Italy in 1946. In essence, that is what the case was about: What language are rival servers allowed to speak? Will Microsoft provide the interoperability information that rival server makers need to communicate with Microsoft clients and servers in a comprehensible manner? The case is not about obtaining access to clever innovative Microsoft technology. This slide [see next page] shows an example of a simplified network. The client in the upperleft-hand corner communicates with the Active Directory (AD) in the Windows server, which communicates with another Windows server, which in turn communicates with a printer or with a file storage system. There are communications rules that a server must follow in order to communicate with the client and other servers. These include security protocols, protocols for file/print tasks, and protocols for directory management or user and group administration. The non-Microsoft server — and you see one lonely one in the lower-left-hand corner — cannot communicate adequately with the Windows client and with the Windows server. In 1999 Sun complained about Microsoft’s decision to deny updated interoperability information to Sun and others.5 A number of other server manufacturers joined Sun or, in response to Article 18 letters from the Commission, expressed similar concerns. * Cleary Gottlieb Steen & Hamilton, Brussels. Counsel to ECIS/SNA, Intervenors on EC side. 4 Case T-201/104, Microsoft Corp. v. Commission, [2007] 5 C.M.L.R. 846, 2007 WL 2693858 (Sept. 17, 2007) [hereinafter Microsoft 2007], available at http://curia.europa.eu/jurisp/cgi-bin/gettext.pl?lang=en&num=7992908 2T19040201 &doc=T&ouvert=T&seance=ARRET. The Decision on appeal was Commission Decision of March 24, 2004, Case COMP C-3/37.792, Commission v. Microsoft Corp., 2007 O.J. (L 32) 23–28. 5 The case originated with a December 1998 complaint from Sun Microsystems alleging that Microsoft was refusing to supply it with interoperability information necessary to interoperate with Microsoft’s dominant PC...

732 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW Microsoft Client/Server Network Need to Understand each other

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The European Commission analyzed Microsoft’s conduct on the basis of the Magill6 and the IMS Health criteria7 for the imposition of compulsory licenses under Article 82 EC. Under that case law, a company in a dominant position can be required to share intellectual property with its rivals in “exceptional circumstances” if four conditions are met: (1) The information or the intellectual property must be “indispensable,” in that the refusal to license results in elimination of all competition. (2) The refusal must stifle the emergence of a “new product.” A compulsory license can only be justified where the “undertaking which requested the licence … [does not] intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the copyright, but intends to produce new operating system. In February 2000, following information obtained from the market, the Commission broadened the scope of its investigation to examine Microsoft’s conduct with regard to its Windows Media Player product. See Press Release, European Comm’n, Commission Examines the Impact of Windows 2000 on Competition (Feb. 10, 2000), available at http://europa.eu/rapid/ pressReleasesAction.do?reference=IP/00/141&format=HTML&aged =0&language=EN&guiLanguage=en. On Aug. 1, 2000, on the basis of an initial investigation, the Commission sent Microsoft a Statement of Objections alleging that Microsoft was denying to disclose interface information which rival work group server operating system vendors needed to interoperate with Microsoft’s dominant Windows PC operating system. See Press Release, European Comm’n, Commission Opens Proceedings Against Microsoft’s Alleged Discriminatory Licensing and Refusal to Supply Software Information (Aug. 3, 2001), available at http:// europa.eu/rapid/pressReleasesAction.do?reference=IP/00/906. On Aug. 30, 2001 the Commission sent Microsoft a second Statement of Objections, which (i) confirmed and expanded the interoperability objections of the first Statement of Objections, in particular by taking into account Microsoft’s recently released Windows 2000 generation of PC and server operating systems; and (ii) alleged that Microsoft had engaged in anticompetitive tying of its Windows Media Player product with its Windows PC operating system. See Press Release, European Comm’n, Commission Initiates Additional Proceedings Against Microsoft (Aug. 30, 2001), available at http://europa.eu/ rapid/pressReleasesAction.do?reference=IP/01/1232. On Aug. 6, 2003, on the basis of additional evidence that the Commission had gathered, a third Statement of Objections confirming both the interoperability and tying objections of the second Statement of Objections was sent to Microsoft. See Press Release, European Comm’n, Commission Gives Microsoft Last Opportunity to Comment Before Concluding Its Antitrust Probe, available at http://europa.eu/ rapid/pressReleasesAction.do?reference=IP/03/1150. Microsoft provided responses to each Statement of Objections. In addition, following the third Statement of Objections, Microsoft requested an Oral Hearing, which was held on Nov. 12–14, 2003. Following an extensive analysis of the evidence on the file, the Commission concluded its investigation on Mar. 24, 2004 by way of a Decision. See Press Release, European Comm’n, Commission Concludes on Microsoft Investigation, Imposes Conduct Remedies and a Fine (Mar. 24, 2004), available at http://europa.eu/ rapid/pressReleasesAction.do?reference=IP/04/382; European Comm’n, Microsoft — Questions and Answers on Commission Decision, MEMO/04/70, available at http://europa.eu/rapid/pressReleasesAction.do?reference= MEMO/04/70. 6 See Joined Cases C-241/91 & C-242/91, Independent Television Publ’ns Ltd. v. Commission, 1995 E.C.R. I-743 [hereinafter Magill]; Case 70/89, British Broad. Corp. & BBC Enters. Ltd. (BBC) v. Commission, 1991 E.C.R. II535; Case T-76/89, Independent Television Publ’ns Ltd. (ITP) v. Commission, 1991 E.C.R. II-575, affirmed in ECJ Judgment of Apr. 6, 1995. 7 Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, 2004 E.C.R. I-5039 [hereinafter IMS Health].

PART A: MICROSOFT, THE CFI, AND THE AFTERMATH IN THE EU AND THE US 733

goods or services not offered by the owner of the right and for which there is a potential consumer demand.”8 (3) The effect must be felt in a market that is different than the one to which the IP applies — there must, in other words, be two markets. (4) There must be no objective justification for the refusal to license. Since this is an introductory presentation, I will limit myself to a few key issues. The first question is whether the interoperability information qualified as intellectual property. Microsoft argued that the information was a trade secret, that a compulsory license would reduce Microsoft’s innovation incentive, and that the information should be protected on the same basis as intellectual property. There was some argument, on the other hand, that patents, trademarks, and copyright deserve greater deference than mere trade secrets, because with respect to patents, trademarks, and copyrights the legislature has already balanced the public interest in competition against the interest in innovation. In so doing, the legislator imposed limitation in time and restrictions on the scope and exercise of intellectual property. No such legislative balancing act applies to trade secrets in Europe. Trade secret law in most EEA Member States is just an amalgam of contract law, tort law, the law of confidence, corporate law, unfair competition law, and principles of unfair enrichment. This raised the question whether competition authorities should be allowed to interfere in a greater degree with trade secrets than intellectual property rights? The court declined. It applied a “presumption that the protocols in question, or the specifications of those protocols, are covered by intellectual property rights or constitute trade secrets and that those secrets must be treated as equivalent to intellectual property rights.”9 This is an important statement, because it meant that the IMS Health and the Magill criteria had to be fulfilled for the Commission to impose an obligation to disclose interoperability information. Having established what criteria apply, the Court addressed the question whether the information was “indispensable,” in the sense that the refusal to license excludes all competition. The complainants argued that denial of full interoperability would in fact in due course exclude all competition. Microsoft attempted to distinguish the Magill case by pointing out that whereas in Magill the rival was unable to enter the market, Microsoft’s rivals had been and were still active. Indeed, Novell and Microsoft had comparable market shares at the time that the complaint was originally brought, although it was already foreseeable that Novell’s share would decrease. After a detailed review of evidence of exclusion, the Court concluded that “non-Microsoft workgroup server operating systems must be capable of interoperating with the Windows domain architecture on an equal footing with Windows workgroup server operating systems if they were to be marketed viably.”10 Broadly applying the previous case law,11 the Court found that “If the Commission were … to wait until competitors were eliminated … that would clearly run counter to the objective of that provision, which is to maintain undistorted competition in the common market and, in particular, to safeguard the competition that still exists on the relevant market.” In fact, “the market is characterised by significant network effects and … the elimination of competition would … be difficult to reverse… . What matters Id. ¶ 49. Microsoft 2007, ¶ 289. 10 Id. ¶¶ 374–421 (emphasis added). 11 Prior case law had required exclusion of “all competition.” See Magill, 1995 E.C.R. I-743; Case T-504/93, Tiercé Ladbroke v. Commission, 1997 E.C.R. II-923; Case C-7/97, Oscar Bronner GmbH v. Mediaprint Zeitungs-und. Zeitschriftenverlag GmbH, 1998 E.C.R. I-7791; Microsoft 2007, ¶¶ 585–692. 8 9

734 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW … is that the refusal at issue is liable to, or is likely to, eliminate all effective competition on the market… . the fact that the competitors of the dominant undertaking retain a marginal presence in certain niches on the market cannot suffice to substantiate the existence of such competition.”12 Server Operating Systems Unit Shipments 6 5

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This slide shows why the court concluded that Microsoft’s conduct was “liable to, or likely to, eliminate all effective competition on the market.” This table shows the share of sales (by unit) of various rival server products, including Linux, Unix, Novell, and All Others. Some of them increased and then decreased, like Linux. Only one, Windows, shows a very clear upwards trend. The court also to some extent stretched the “new product” test. In the Magill case the newproduct test had been relatively strictly applied. Magill created a new product, an integrated program guide, where previously each broadcaster sold its own guide, describing only its own programs. In the Microsoft case competing server manufacturers argued that they could — and, in fact, supplied evidence that they did — supply technically superior servers that better met consumer demand, but could not communicate with the Microsoft servers on the same footing as other Microsoft servers. But it was questionable whether these truly qualified as entirely “new products.” The Commission had taken the position that it was not necessary to prove a “new product”: “A refusal to licence an IPR … which is indispensable as a basis for follow-on innovation by competitors may be abusive even if the licence is not sought to directly incorporate the technology in clearly identifiable new goods and services. The refusal … should not impair consumers’ ability to benefit from innovation brought about by … competitors.”13 The Court agreed. It held that “the fact that the applicant’s conduct prevents the appearance of a new product on the market falls to be considered under Article 82(b) EC, which prohibits abusive practices which consist in ‘limiting production, markets or technical developments to the … prejudice of consumers.’”14 The “new product, as envisaged in Magill and IMS Health, … cannot be the only parameter which determines whether a refusal to license an intellectual property right is capable of causing prejudice to consumers within the meaning of Article 82(b) EC… . such prejudice may arise where there is a limitation not only of production or Microsoft 2007, ¶¶ 561, 562 (emphasis added). See European Comm’n, Discussion Paper on the Application of Article 82 EC (2004) ¶ 240, available at http://ec. europa.eu/comm/competition/antitrust/art82/004.pdf; see also European Comm’n, DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (Brussels, 2005), available at http://ec.europa. eu/comm/ competition/antitrust/art82/discpaper2005.pdf. 14 Microsoft 2007, ¶ 643. 12 13

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markets, but also of technical development.”15 This suggests that the “new product” test is merely one (amongst several possible) manifestations of consumer harm. A violation of Article 82(b) can be found in any case where a refusal “limited technical development.” This of course makes eminent sense, because intellectual property rights are created in order to foster innovation and should therefore not be used to restrict it. This analysis must be seen in the factual circumstances of the case. There was evidence of exclusionary intent, or at least that protecting innovation incentive was not the objective of Microsoft’s refusal to supply interoperability information. The Court of First Instance judgment found, for instance: • that the foreclosed product had superior qualities;16 • that the rival server manufacturers had a history of significant innovation, driven by competition;17 and • more importantly, there was direct evidence that Microsoft’s purpose was “to use our server control to do new protocols and lock out Sun and Oracle specifically.”18 It is important to keep in mind that the Court of Justice did not apply a per se illegality test to refusals to license. The court applied, just like the Court of Appeals in the United States,19 a rule of reason test: although the burden of proof of the existence of the circumstances that constitute an infringement of Article 82 EC is borne by the Commission, it is for the dominant undertaking concerned, and not for the Commission, before the end of the administrative procedure, to raise any plea of objective justification and to support it with arguments and evidence. It then falls to the Commission, where it proposes to make a finding of an abuse of a dominant position, to show that the arguments and evidence relied on by the undertaking cannot prevail and, accordingly, that the justification put forward cannot be accepted.20

I would summarize the “rule of reason” test as follows. In order to defeat a finding of illegality, the defendant must show that: • It had a legitimate objective. In the words of the court: “it is for the dominant undertaking concerned, and not for the Commission, before the end of the administrative procedure, to raise any plea of objective justification and to support it with arguments and evidence.”21 • It actually pursued that objective and could reasonably consider that the refusal would achieve the goal (hence, the importance of the reference to the email from Bill Gates saying that Microsoft’s objective was exclusionary22). • If the defendant shows that it pursued a legitimate objective, it is for the plaintiff to show that there was a less restrictive alternative, or that the objective pursued is disproportional — in other words, could not outweigh the public interest in fostering innovation driven by competition. In the words of the court: “It … falls to the Commission … to show that the [justification] relied on by the undertaking cannot prevail”23 and that the “benefits on which Microsoft relies could just as easily be obtained in the absence of the impugned conduct.”24 The Court of First Instance did not delve further into these issues, because Microsoft did not provide sufficient evidence of procompetitive justification of its 15

Id. ¶ 647 (emphasis added). Id. ¶¶ 652, 661. 17 Id. ¶ 654. 18 Id. ¶ 771. 19 United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001). 20 Microsoft 2007, ¶ 688. 21 Id., ¶¶ 688, 1144. 22 Id., ¶¶ 911. 23 Id. 24 Id., ¶ 1154. 16

736 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW refusals.25 It will be interesting to see how the Commission and the courts will apply this balancing test in future cases. MR. STOTHERS: Thank you, Maurits. I want to also thank you for introducing a bolting pantomime horse to the proceedings. James, can you continue?

Microsoft, the CFI, and the Aftermath in the European Union James Killick* Thank you. I’m James Killick from White & Case in Brussels. In contrast to Maurits, I represented Microsoft for the last three and a half years, so, as you may imagine, my views on some of what he covered would differ from what he has said. But I am not going to rehearse all the arguments, which have already been dealt with in the court’s judgment, today. What I am going to do is look forward, taking the judgment and seeing what it means not just for Microsoft, but for any other IT/IP company in terms of compulsory licensing. I am going to start by exploring the background to Article 82.26 Article 82 is the law that we apply in Brussels. It is the Treaty provision preventing abuses of dominant position. 25 “The Commission came to a negative conclusion but not by balancing the negative impact which the imposition of a requirement to supply the information at issue might have on Microsoft’s incentives to innovate against the positive impact of that obligation on innovation in the industry as a whole, but after refuting Microsoft’s arguments relating to the fear that its products might be cloned … establishing that the disclosure of interoperability was widespread in the industry concerned.” Id. ¶¶ 704, 710. * White & Case, Brussels. Mr. Killick represented Microsoft in this case. 26 Art. 82 of the EC Treaty (ex Art. 86 Maastricht Consolidated version): Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. Treaty Establishing the European Community, Feb. 7, 1992, 1992 O.J. (C 224) 1, [1992] 1 C.M.L.R. 573, 626 [hereinafter EC Treaty], incorporating changes made by Treaty on European Union, Feb. 7, 1992, 1992 O.J. (C224) 1, [1992] 1 C.M.L.R. 719, 331 I.L.M. 247 [hereinafter TEU]. The TEU amended the Treaty Establishing the European Economic Community, Mar. 25, 1957, 298 U.N.T.S. 11, 1973 Gr. Brit. T.S. No. 1 (Cmd. 5179-II) [hereinafter EEC Treaty], as amended by Single European Act, 1987 O.J. (L 169) 1, [1987] 2 C.M.L.R. 741 [hereinafter SEA], in Treaties Establishing the European Communities (EC Off’l Pub. Off. 1987). See Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, 2003 O.J. (L 1) 1, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do? uri=OJ:L:2003:001:0001:0025:EN:PDF; European Comm’n, DG Competition, Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses (Dec. 2005), available at http://europa.eu.int/ comm/competition/speeches/ text/sp2005_011_en.pdf; Philip Lowe, Director General, and other DG Competition officials, The Modernisation of Article 82, Remarks Before the Second Annual Conference of the Global Competition Law Centre, Brussels (June 16–17, 2005); Neelie Kroes, EU Competition Commissioner, Preliminary Thoughts on Policy Review of Article 82 (Sept. 23, 2005), available at http://europa.eu.int/rapid/pressReleasesAction. do?reference=SPEECH/05/537.

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I think one thing that the judgment did clarify to a significant extent is the philosophy underlying Article 82. The philosophy is what is often referred to as Ordoliberalism, the idea that we do not want an economic operator to have too much power.27 The corollary of that is dominant companies have an obligation to preserve an effective competitive structure. You can see that from the judgment, which says: “Microsoft impaired the effective competitive structure on the workgroup server operating systems market by acquiring a significant market share on that market.”28 The whole idea is if you are a dominant company, you have an active duty to aid your competitors, to license your IP to ensure that your competitor can continue to viably compete. If you understand that philosophical goal behind the judgment, some of what I am going to say later becomes more evident. Let me go back to the four criteria that were applied in the judgment that Maurits has already helpfully gone through: • The first criterion for when a dominant company has to license its IP is the license must be indispensable. Well, what does “indispensable” mean? It means that the IP is needed to viably compete. That does not just mean that the IP is needed to carry on business in the market. That was the old test. Now it goes further: you have to be able to compete viably. In essence, the rival must be able to compete at your level. Now, just to give you an idea of how that was applied in the Microsoft case, the technology was found to be indispensable despite a new entrant coming in and gaining 10 percent market share. It was also found to be indispensable despite the fact that at the start of the case, as Maurits mentioned, both Microsoft and Novell had more or less equal market shares. And it did not matter that Microsoft’s product was better than the product of Sun, the complainant, the original requesting party. What was needed was viability. Viability is the test, viable competition. • The second part of the four-part test is the elimination of this viable competition in the absence of a license. Now, 30 percent market share as of the date of the decision was found to be not effective/not viable. If you look at the start of the abuse, where the two major parties had something approaching 40 percent each, that was also found not to be viable (by definition; otherwise the abuse couldn’t have started in 1998). So it is very much a forward-looking test. You are looking quite a long way into the future with this test. There is a big contrast to the previous cases, Magill case29 and IMS Health.30 In Magill and IMS Health, if the competitors did not have an IP license they were straight off the market; they were here today, gone tomorrow; if they didn’t have an IP license, they were out. In Microsoft you are looking much, much further off. The decision looks from 1998, where you had two players each with 40 percent of the market, to a situation that may happen tenfifteen years later, where there is a risk that one eliminates the other. So it is very much a forward-looking process. 27 Ordoliberal theory holds that the state must create a proper legal environment for the economy and maintain a healthy level of competition through measures that adhere to market principles. They believed in freedom from power, both the power of big firms and the power of government; those with market power should behave as if they had no market power. The theory was developed by German economists and legal scholars (Freiburg School), such as Wilhelm Röpke, Walter Eucken, Franz Böhm, and Hans Grossman-Doerth from about 1930–1950. The Freiburg school combined law and economics to get a unique perspective on economics. They were most famous for publishing a journal entitled Ordo and defined what was called Ordoliberalismus (Ordered Liberalism). See generally Ian Rose & Cynthia Ngwe, “The Ordoliberal Tradition in the European Union, Its Influence on Article 82 EC and the IBA’s Comments on the Article 82 EC Discussion Paper”, 3 Competition L. Int’l 8, 8–9 (2007). 28 Microsoft 2007, ¶ 664. 29 Magill, 1995 E.C.R. I-743l. 30 IMS Health, 2004 E.C.R. I-5039.

738 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW • The third criterion — and this is probably the biggest difference to the old case law — is that a compulsory IP license will lead to the emergence of a new product or to technical development. Now, it is this last little bit which to my mind is the most troubling, because there is no guidance as to what counts as “technical development.” It appears to cover a rival seeking a license to produce exactly the same product as long as there are some additional features. I do not think it covers a complete clone, but as long as there are some additional features, that is enough. The irony of this case is that neither the Commission nor Sun really ever identified any concrete new feature in the new product that was going to be produced. The additional features were presumed to exist based on products that were brought out in the mid-1990s. So there is quite a lot of presumption going on here. • The fourth criterion is absence of objective justification. To my mind, it is unclear what, if anything, could succeed as an objective justification. Given the time constraints, I am not going to go into that in detail now. Suffice it to say that it is unclear what exactly you have to show to successfully invoke that criterion. As Maurits said, the criteria for compulsory licensing have been relaxed. In parallel to that, what also happened is the court has decided that the Commission’s findings in complex competition cases should be granted increased deference. I quote the judgment: “In so far as the Commission’s decision is the result of complex technical appraisals, those appraisals are in principle subject to only limited review by the Court, which means that the Community Courts cannot substitute their own assessment of matters of fact for the Commission’s.”31 So what you have is you have a combination between a lot more nuanced standards than you had before — viable competition, technical development. More unclear criteria mean many more complex appraisals will have to be carried out. Plus you have increased deference to the Commission in carrying out such complex appraisals. So, in essence, what you are left with is a more uncertain world. Just quickly, to put to bed one thing that I think William Robinson said this morning, “Nobody else is like Microsoft; it really only affects them” [see Chapter XII.A.2, supra this volume]. Well, I’m afraid that is not what the judgment says. It is not based on interoperability specifically. It is not based on some specific feature of the computing industry. It is not based on superdominance — despite what William said this morning. I had a bet with somebody sitting in the courtroom how many times the Commission and the people supporting the Commission would say “superdominance” at the hearing. I lost. I said it would be twenty. It was actually somewhere nearer thirty — and that was in one fourhour session, if memory serves me well. Anyway, superdominance was mentioned an awful lot of times in Court. But the judgment doesn’t limit itself to superdominance. It basically sets criteria of general application, building on and expanding the existing IMS Health and Magill case law that Maurits was speaking about. I think probably one point we can agree on is that the Microsoft judgment is the standard by which any future compulsory license will be judged for years to come. It is a judgment of the full thirteen-judge court, the first time for an awful long time that has happened. It is an important precedent. It is the law that is going to stand for some time to come.32 In the last four and a half minutes that are left, let’s consider the following scenario: imagine you are in the situation where your company or your client receives a badly drafted one-page letter basically saying: “I’ve read the Microsoft judgment. I want your IP.” Microsoft 2007, ¶ 88. See Bo Vesterdorf [former President of the Court of First Instance], Article 82 EC: Where do we stand after the Microsoft Judgement?, available at http://www.icc.qmul.ac.uk/GAR/Vesterdorf.pdf (adaptation of speech delivered at the ICC Annual Competition Law and Policy Lecture 2008 on Mar. 12, 2008). 31 32

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The first thing to note is liability can be based on very short requests. The letter from Sun to Microsoft was a one-page, vice-president-to-vice-president letter, eight or ten lines long (you can read the letter right at the start of the judgment).33 That was ultimately the foundation for liability. So just because you get a short, quite high-level letter does not mean you can ignore it. Second point: It will not be obvious when the four criteria I have just gone through are going to be fulfilled. How are you supposed to judge your competitor’s possible technical development? How are you supposed to judge if effective competition may at some point in the future be eliminated? You have to remember that when Sun made its request to Microsoft it was not even really in this market. It only had 1 percent market share, if that. It was not particularly active in this workgroup server market. Microsoft and Novell were roughly on even footing. If you keep these facts in mind, it becomes clear that it may not be easy to decide whether you might fulfill that limb of the test. The question of what you have to give to somebody so they can viably compete is again, not an easy kind of standard to decide, if you as the in-house counsel or as the external counsel are faced with a short letter saying, “We want your IP.” A further problem: Suppose you come to the conclusion that maybe you do need to license your IP to comply with EC antitrust law. The question you are then going to have to ask yourself is: How much are you going to have to license and — even more difficult potentially — at what price? Now, the interesting thing about Microsoft which may get forgotten is that what Sun asked for in its vice-president-to-vice-president letter, what Sun asked for in its complaint, and what the Commission suggested Microsoft had to hand over in the Third Statement of Objections — that is after four years of the case — were all significantly broader than what Microsoft was held to be obliged to license. So if the Commission and Sun didn’t really know what Microsoft was obliged to hand over, it is not going to be an easy task if you have to advise your company or your client what to hand over in a hypothetical future case. And then there is something I don’t think is a very good part of the decision, the idea that Sun was wise to ask for too much and it was Microsoft’s job to narrow down the request to what was reasonable. So you get a one-page letter, vice president-to-vice president, and you have to narrow down this broad, perhaps badly formulated, request into something that is sufficient to dispense with your obligations under competition law. Not obvious how you do that. In practice, one of the outcomes of the case is significant uncertainty. Then the next issue is: How do you fix the licensing terms? How do you fix the royalty? I think if you were to ask a number of people back in 2004 whether Microsoft was obliged 33 Letter from Mr. Green, a Vice-President of Sun Microsystems, Inc., to Mr. Maritz, a Vice President of Microsoft, Sept. 15, 1998: We are writing to you to request that Microsoft provide [Sun] with the complete information required to allow Sun to provide native support for COM objects on Solaris. We also request that Microsoft provide [Sun] with the complete information required to allow [Sun] to provide native support for the complete set of Active Directory technologies on Solaris. We believe it is in the industry’s best interest that applications written to execute on Solaris be able to seamlessly communicate via COM and/or Active Directory with the Windows operating systems and/or with Windows-based software. We believe that Microsoft should include a reference implementation and such other information as is necessary to insure, without reverse engineering, that COM objects and the complete set of Active Directory technologies will run in full compatible fashion on Solaris. We think it necessary that such information be provided for the full range of COM objects as well as for the full set of Active Directory technologies currently on the market. We also think it necessary that such information be provided in a timely manner and on a continuing basis for COM objects and Active Directory technologies which are to be released to the market in the future. Microsoft 2007, ¶ 2.

740 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW to license its technology essentially royalty-free to those who did not want a patent license, despite the fifty or so patents that were necessary to practice that technology, they would have had difficulty predicting that back in 2004. Yet, by 2008 there was a $1.4 billion fine because Microsoft had not done that. Again, the Microsoft example shows it is not going to be obvious what you must do in a hypothetical future case. Remember that Microsoft should by definition have licensed the technology essentially royalty free back in 1998, when the abuse started. So it is not going to be obvious what you do if you receive a request from a competitor and you do decide you have to license. How much do you license, at what price? The answer is not going to be easy to find. For a dominant company the problem is going to be uncertainty, how to respond. With one minute left, some conclusions. I think it is too early to see what the full ramifications of the judgment are. Clearly, it does change the environment. It does relax the test for compulsory licenses. But how far and what its implications are, it is still too early to tell. I think the lack of clarity about certain parts of the judgment, notably this idea of technical development, will prove problematic in practice. I think companies will find it very difficult to judge how to react to a request for IP from a rival. I think that the implications are going to be people are going to tend to license too much rather than too little, just to be on the safe side. And one final concluding thought: this is not just an issue for Microsoft. I have had two clients, much smaller companies, that have received similar short letters to the one that Microsoft got. They had had to decide: “Do I say ‘no’ or do I say ‘yes’? And if I say yes, what do I give?” It is not easy for them or for me to advise them on it. MR. STOTHERS: Thanks, James. Now, it probably is my fault for starting the pantomime, but before we descend into Maurits and James saying “Oh yes, it is/oh no, it isn’t” or “the judgment says this/oh no, it doesn’t,” can we move to wiser heads from across the Atlantic and have Carey give us the U.S. perspective on this?

The Microsoft Judgment and its Implications and Aftermath in the United States Carey Ramos* I have all these papers because I have studiously endeavored to be completely neutral in this matter, which means that I have not used PowerPoint, Word, or any competing software products in preparing my talk today. On the other hand, it means I have all these papers. You can understand the efficiency of the laptop versus all the papers I have to carry here today. Immediately following the Court of First Instance’s decision, Assistant Attorney General Tom Barnett issued a statement regarding that decision in which he said: “We are, however, concerned that the standard applied to unilateral conduct by the CFI, rather than helping * Paul, Weiss, Rifkind Wharton & Garrison.

PART A: MICROSOFT, THE CFI, AND THE AFTERMATH IN THE EU AND THE US 741

consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition.”34 He went on to say, “In the United States, the antitrust laws are enforced to protect consumers by protecting competition, not competitors,” and expressed concern that on the other side of the Atlantic there might be a greater emphasis on protecting competitors. Since I don’t have a dog in this fight, I don’t have a competitor to speak for on one side or the other, I would like to talk about the differences in approach between the United States and Europe with respect to the Microsoft situation. In the United States the case began with a lawsuit brought by the Antitrust Division and several states in the District of Washington, D.C.35 It resulted in 2000 in a judgment that found that Microsoft had unlawfully maintained its monopoly in PC operating systems, that it had unlawfully attempted to monopolize the browser market, and that it had unlawfully tied its operating system to its Internet Explorer browser. Microsoft appealed that determination to the D.C. Circuit, which ruled in June 2001.36 The D.C. Circuit took a very cautious approach. It is an interesting decision to read alongside the CFI’s decision.37 The D.C. Circuit was very careful to point out that they were dealing with potentially a moving target, because in the software field technology changed so quickly that it would be difficult to determine, first of all, whether there had been a violation as of a particular time as compared to the present; and second, to formulate a remedy appropriate to that problem that would suit whatever the market conditions might be today as opposed to when the case was brought and the evidence was developed. Second, they noted that there was a debate among economists about the application of what they called “old economy Section 2 monopolization” doctrines to firms competing in “dynamic technology markets characterized by network effects.” They went on to discuss at great length concerns regarding whether or not, in finding that there were antitrust violations, they might be suppressing innovation, as opposed to encouraging innovation, and that they might be in such a determination reducing efficiency, as opposed to improving efficiency for the purposes of consumers. I think of this as a sort of variant on the Heisenberg uncertainty principle. Stepping in and interfering with the market through their determination, they were concerned they might actually have an adverse anticompetitive or anti-consumer impact. The court, as a result, although it affirmed the determination by the district court that Microsoft had unlawfully maintained its monopoly in PC operating systems, reversed on the determination that there had been an attempted monopolization of the browser market, and it reversed and remanded the tying determination, sending the case back to the district court. The parties then had negotiations, which led to a consent decree in 2002.38 There are a number of significant differences between that consent decree under which Microsoft is operating in the United States and the determination in Europe, but I just want to focus on two. 34 Press Release, U.S. Dep’t of Justice, Ass’t Att’y Gen. for Antitrust, Thomas O. Barnett, Issues Statement on European Microsoft Decision (Sept. 17, 2007), available at http://www.usdoj.gov/atr/public/press_releases/2007/226070.htm. 35 United States v. Microsoft, 87 F. Supp. 2d 30 (D.D.C. 2000). 36 United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2000). 37 For a commentary on the U.S. remedy in Microsoft, see Deborah Majoras, Deputy Ass’t Att’y Gen., DOJ, Antitrust Remedies in the United States: Adhering to Sound Principles in a Multi-faceted Scheme, Address Before the Canadian Bar Ass’n Nat’l Law Section Annual Fall conference on Competition Law (Oct. 4, 2002), available at http:// www.secinfo.com/ d14D5a.22eFe.htm; see also Donald I. Baker, “Differing Antitrust Concerns in U.S. and Europe Exposed by Record €497m Fine for Microsoft”, Fin. Times, Mar. 26, 2004. 38 See United States v. Microsoft Corp., 231 F. Supp. 2d 144 (D.D.C. 2002); Final Consent Decree, available at http://www.usdoj.gov/atr/cases/f200400/200457.htm.

742 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW The first relates to requiring the disclosure of interoperability information. The CFI decision is quite interesting. It says, in effect, that Microsoft must provide sufficient information to enable competitors that produce server operating systems to operate on the same footing as Microsoft. By contrast, the U.S. consent decree required Microsoft to disclose APIs, protocols, and associated documentation that would allow producers of middleware to produce products that would interoperate with Windows operating systems. Very, very different standards — one requiring disclosure of information for narrow purposes focusing on middleware; the other requiring that the competitor be put on the same footing as Microsoft. A substantial difference. The second difference that I would like to focus on is compulsory licensing. James touched upon it, I thought quite helpfully, in his presentation. I would like to spend a little of my time remaining considering that. The CFI framed a standard very different from the U.S. rule. In the United States, a unilateral refusal to license a patent is generally lawful, and there are very few exceptions. If you regard the U.S. consent decree in Microsoft as an exception, I think that is really a very narrow exception. The rule embraced by the CFI is a three-part test: (1) There must be refusal by a dominant firm that is related to a product or service indispensable to the exercise of a particular activity on a neighboring market; (2) it has to exclude any effective competition on that neighboring market; and (3) it must prevent the appearance of a new product for which there was potential consumer demand. In its decision, the court went on to develop this idea of new product and suggested that it would be sufficient if it was an innovation or an improvement of a product, and that it did not necessarily have to prevent the appearance of a new product; it would be sufficient if it suppressed innovation with regard to a new product. With that standard in mind and the difference between the U.S. rule and the European rule, I want to consider some possible hypotheticals. The first is a company called Banana Corp., which makes a portable music player. It has a Web site from which it offers music for download. We will assume that it is dominant in its market; it has a high market share. It is unclear whether that requires 60 percent or 90 percent, but certainly more than 50 percent. Split Company wants to make a competing product that would have the ability to access the music downloaded from Banana Corp.’s Web site. But Banana Corp. encrypts the protocols necessary in order for those songs to play on any competing player. Split Company wants to make a product that will be able to play Banana Corp.’s music. If this sounds familiar, I disclaim any opinion on any actual companies that may be involved in similar businesses. Now you have a dominant business, you have a related business, you have a potential for excluding competition because if they cannot get access to the songs they will not be able to sell their players, and you have a significant innovation. Is this a situation in which Banana Corp., if Split Company or its vice president, to use James’s hypothetical, sends a letter to the vice president of Banana Corp., has an obligation to issue a compulsory license? Unclear. Clear under the U.S. law. Under European law, I am not sure. Consider a second hypothetical. Macro Drugs makes an antihistamine that it has patented. So it has, by definition, dominance, a monopoly on that particular product. It is an extremely successful product. Moon Micro Drug Company has discovered that by adding a certain ingredient to Macro Drug’s patented product that it is able to increase the efficacy of the drug by 50 percent. But it has to work with the patented drug. It claims that it needs a license to the patented product in order to sell its innovation.

PART A: MICROSOFT, THE CFI, AND THE AFTERMATH IN THE EU AND THE US 743

Is Macro Drugs obligated to grant a compulsory license to Moon? In the United States, clearly no. In Europe, I don’t know. I have run out of time. Maybe we can talk about these and some other possibilities that would arise under the European approach versus the U.S. approach. MR. STOTHERS: Thank you very much. Now, you will be very relieved to hear that you do not have to answer those questions. Valentine Korah is going to give us her comments on what she has heard so far before we throw it open to the floor. PROF. KORAH: Thank you very much indeed. I do want to thank Hugh for giving me five minutes. One of the things that concerns me about the Microsoft case is how far the court is going to be controlling the Commission in the future. We have very limited judicial control in Europe because, as James was saying, this is a system of judicial review, which is much less than deciding whether the Commission came to the right answer. We have to add to that that the courts, both the CFI and the ECJ, have granted the Commission a very broad margin of appreciation on complex economic issues. In the 1990s and the beginning of this millennium, the CFI acquired considerable jurisdiction by stressing the requirement that institutions of the Community, including the Commission, should state the reasons on which their decision was based. In that way they got considerable control over the substance. You may remember cases like Airtours39 from reading the newspapers. Now the court seems to me to have lost a great deal of that jurisdiction because it assumes that it is sufficient for the Commission when stating reasons to refer to the unknowable factors, James was talking about. It refers to the amount of information that the other server manufacturers needed to compete viably in the market. That is, I think, unknowable. It is an “India rubber” definition. Then, it says it has got to be on fair and nondiscriminatory terms. Well, nondiscriminatory is easy to avoid, at any rate discrimination in favor of your own subsidiary, by the transfer price, and you just make your profit at a different level of the organization. But what are “fair terms?” That is the one that really worries me. I know that Maurits has a splendid article to cite by an economist as to what are the criteria for fair terms.40 This is a case where, I suppose, billions were paid for making the software for Microsoft’s PC. I don’t know. I’m not in the case. I know nothing about the facts other than what I have read. The capital cost of developing the software for Microsoft’s PC is high. The marginal cost is going to be minimal, the cost of drawing up a license. So allowing the charge to be based on marginal or avoidable costs will not enable the firms to stay in business. What other test is available? Can Microsoft use the opportunity cost, the cost of what it had lost by granting the license, which is virtually the monopoly price? Everything in between is open, as far as I can see. I believe Maurits is going to tell us more when he discusses standards tomorrow [see Chapter VIII.D, infra this volume]. Should the Commission be allowed to make an order that is so indeterminate? The Commission could not decide the test for a fair charge, reasonably viable rivals, or information that was reasonably necessary. That is one of the reasons for not requiring interface information 39 Commission Decision 2000/276/EC, 2000 O.J. (L 93) 1, [2000] 5 C.M.L.R. 494, [2000] C.E.C. 2,203 (Case IV/M.1524, Airtours/First Choice); on appeal, T-342/99, 2002 E.C.R. II-2585, [2002] 5 C.M.L.R. 317. 40 See Daniel G. Swanson & William J. Baumol, “Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power”, 73 Antitrust L.J. 1 (2005).

744 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW often. Yet the CFI did not stress the huge degree of market power Microsoft enjoyed with over 90 percent of a narrowly defined market,41 protected by network effects and other entry barriers. It is the reasoning of the CFI that most concerns me. I do not know whether the result was right. MR. STOTHERS: Thank you very much, Val. Now I know you all want me to just let Maurits and James continue their earlier debate, but I think it is only fair before we do that to open up the debate. Are there any questions, thoughts, or comments from the audience? QUESTION [Timo Ruikka, Nokia Corp., Helsinki]: Regarding the question of judging what kind of information one is required to disclose, if you are a dominant company and if you are requested to provide interoperability information, I would suggest that you can look to the practice that is used in open standards in two ways. First, you can look at the level of information that is disclosed in standardization, which gives you a good handle on what kind of information and what level of specificity is required. Second, better yet, you can implement those standards in your dominant products, and then you are interoperable and you don’t have that difficulty. MR. STOTHERS: Who wants to go first on that? MR. KILLICK: I think the problem with the idea that this was just implementing a standard is that it ignores the innovation and effort that Microsoft had to put in to get its product to work better than that of the complainant, Sun. The evidence put before the court was that Sun could manage four servers working together and Microsoft could manage 10,000. Now having spoken to the people who made this happen, it did not happen just by implementing a standard. It happened due to the efforts of many people and many years of engineers’ time was needed to make it work. So the idea that this is just like a standard is slightly misleading. It is not a case of just implementing a standard. There was actually a lot of innovation and R&D behind it. I have one further response to the suggestion that, because this was just like a standard, Microsoft should make this information available. Microsoft’s competitors did not actually make this information available. There was no comparable standard relating to multi-master replication information, which is the core of the innovation here at stake. MR. STOTHERS: I think we’ve got a demand for a response. MR. DOLMANS: I can address that in my overall response to you because I have three people coming to me. I would like to integrate my response. MR. STOTHERS: We will take some more questions from the audience before we get to that. QUESTION [James Love, Knowledge Ecology International, Washington, D.C.]: Some of the presentations were sobering. You know, you get the short letter and you kind of wonder what your obligations are. Maybe you find out eight or ten years later ultimately what the price tag is. I was just wondering, looking forward, whether it is in society’s interests in some areas to have licensing in different areas. Would it be interesting to think about institutions that could offload from the business in some area that would protect the firm in a liability sense, having looked at the issue, and make a decision on their behalf? They could accept or reject it. The Commonwealth countries have a license-right system where you can let the patent commissioner, as a third party, decide what the terms would be if you cannot negotiate between the two of you. I know standards organizations are struggling with this a lot. But maybe we need to be thinking about moving toward third parties arbitrating these issues about whether or not the license should be issued. And governments should think about sanctioning the decisions of those third parties, if they are trusted third parties, so the firm can know where it stands and just move on and deal with the new environment. 41

Microsoft had a far smaller share of the top end of the server market.

PART A: MICROSOFT, THE CFI, AND THE AFTERMATH IN THE EU AND THE US 745 MR. KILLICK: The problem about having a third party involved is that the aspect of the case

that Microsoft won was on the principle that a third party could not legally be brought in to be the Commission’s eyes and ears and actively act as a sort of independent sheriff on behalf of the Commission. The court rejected that notion. So I just don’t think that your suggestion would get past the court without legislation or some kind of broader solution. QUESTIONER [Mr. Love]: I am actually thinking about changes in legal regimes that would provide a more predictable and sustainable way of going forward that accommodates both the society’s need in some cases to insist on licensing, on the one hand; on the other hand, for the company to not have an unlimited liability for not moving forward in those areas. I say this having been a lead consultant in a case in South Africa on refusal to license patents in AIDS drugs against Glaxo and Boehringer.42 I worked on the West Publishing case,43 where they had to license. I was also involved in another Microsoft case.44 I understand that these are difficult issues. But pretending like it is not an issue and there are no societal demands to move toward these obligations for licensing is, I think, almost unrealistic about where technology is heading. MR. DOLMANS: I have three comments on that. The first is this is the Microsoft case, and the Microsoft case concerns competition policy. The competition policy says that one should not interfere with intellectual property except in “exceptional circumstances.” I am coming back to that because I do not think the situation is as dire as James thinks it is. That does not mean that there might not be other circumstances which have nothing to do with competition law, like public health, public security, and so forth, where a compulsory license can be required. That is provided for in TRIPs.45 TRIPs does contain provisions that allow you to impose a compulsory license in circumstances where the public interest requires it. Third, there is going to be a presentation in the patent session tomorrow on what is called “soft” patents [see Chapter V.B.1, supra this volume]. This is an option the European Patent Office (EPO) is considering, which is a patent that has the same scope but where the patent holder would voluntarily give up the right to obtain injunctive relief in exchange for some advantages in not having to pay registration, not having to translate, and various other things. Instead, you get something akin to a license of rights that you were talking about. That is, I believe, an EPO proposal, which would be voluntary, rather than something imposed by the government. So I would say that given the fact that the Microsoft case has been decided, one should be very careful to extrapolate into other policy areas. It is not impossible, but one should be very careful. MR. STOTHERS: Thanks. Other questions? QUESTION [Kathleen Paisley, White & Case LLP, London]: I have a quick question for Maurits and James. As a litigator, you usually know what your bad fact was or you have a feeling what really got you or what really won the case for you. I think a lot of these things, 42 See Treatment Access Campaign Competition Lawsuit Against GlaxoSmithKline and Boehringer Ingleheim (2003), available at http://www.cptech.org/ip/health/sa/tac-competition-complaint.html. 43 United States v. Thomson Corp., No. 96-1415, 1997-1 Trade Cas. (CCH) ¶71,754 (D.D.C. Mar. 7, 1997). 44 See James Love & Ralph Nader, “What to Do About Microsoft?”, Le Monde Diplomatique, Nov. 1997 , available at http://mondediplo.com/1997/11/nader; Letter from Ralph Nader and James Love to DOJ on Microsoft, Jan. 28, 2002, available at http://www.cptech.org/ms/nader-doj01282002.html. 45 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M.1197 (1994), Art. 31 [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

746 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW although theoretically fascinating, really sometimes come down to a bad fact or two, or one or more of the decision makers that just wasn’t going with your story. I would be interested hearing each of your perspectives of what you thought was the deciding factor for the court. MR. DOLMANS: That will enter into my integrated response. MR. KILLICK: If you want to see where Microsoft’s bad facts are, you should do what we always tell you in law school about a judgment, start at the back. Read the section on the fine. If you read that, you will see where the bad facts are. It is only three pages long. That tells you all you need to know. In refusing to reduce the fine, all the bad facts are set out in that section. MR. STOTHERS: Any more questions from the audience? All your questions on Microsoft have already been answered? QUESTION [Mr. Love]: Could you contrast this body of law with the decisions that are coming out of the eBay case46 as it relates to remedies and compulsory licenses and injunction cases? MR. DOLMANS: You will hear about the eBay cases in the session on soft patents. The soft patents were, in part, inspired by the eBay case. MR. STOTHERS: One last question from the audience. QUESTION: My question is a bit more technical. The subject matter that was being licensed was information basically. Maurits described it as a dictionary, a decoder of language. But James is talking in terms of a lot of innovation and something that took a lot of time and effort to prepare, suggesting that it is more than just a translation decoder. How much of that information was actually necessary for the interoperability to take place? In other words, could you sever the bits that were innovative and valuable and just leave something that was barely usable that the competitors could have had access to? MR. STOTHERS: Maurits, your much-anticipated consolidated response? It’s all yours. MR. DOLMANS: On this particular question — and this is very important — it is protocol information and state information. So it is not the code, it is not the implementation; it is truly the dictionary and the grammar book. That is very, very important, because that information is effectively the sweat of the brow. The innovation is in how you implement it, what poetry you speak with the dictionary and the grammar book. You can have a refugee, who may be a doctor or a lawyer or an economist in his or her country of origin, but who speaks 80 percent English, probably sweeping the streets. In order to operate perfectly, especially in an IT environment, you have to speak exactly the language that the server or the computer wants, and if you make one error you get the scream of death or you get an error code. So you have to be precise. Ninety-nine percent interoperability is not adequate, and there was plenty of evidence for that. MR. KILLICK: I would disagree with Maurits on that, obviously. The key feature about active directory is difficult to describe. It works basically by all servers running the software thinking exactly the same, so they will take the same decision under the same circumstances in response to the same stimuli without having to speak to each other. They jump right without needing to tell each other “I’m jumping right.” That means that if you have ten servers dotted all around the world, if the communication link between Moscow and Beijing goes down, each of these ten knows the way the route will be re-established, without there being any need to communicate with the others. The servers have to think exactly the same for the system to work. Without that kind of identical thought process, you cannot scale up to tens of thousands of servers in your grid of servers. Now, that is the innovation. That is ultimately what Microsoft has been handing over. There are dozens of patents at stake. People who do not want to license them now have the option of paying 10,000 euros and having the information over which Microsoft claims the patents without having to pay for the patent licenses. 46

eBay Inc v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006).

PART A: MICROSOFT, THE CFI, AND THE AFTERMATH IN THE EU AND THE US 747 MR. DOLMANS: I spoke with the lady engineer at Sun who invented that particular part of

the innovation, which was not a Microsoft innovation. James, your thesis was that you cannot predict what is going to happen. Now I think that is not so. The law is always to some extent difficult. If it were not, it would be easy; and if it were easy, we would be bored. First of all, the law says “only in exceptional circumstances.” Now what were the exceptional circumstances in this case? You said it could be any dominance. No. It is really what you can call super-dominance. Although the court does not use it, it says in paragraphs 387 and 317 that Microsoft had a 90 percent market share, that there were network effects, that there were significant barriers to entry, that Microsoft’s protocol was a de facto standard, and that Microsoft had “extraordinary power.” That in my book means the same as super-dominance. That is the first point. MR. KILLICK: Let me respond on that point quickly. You can draw that interpretation, but when you look at when they summarize the legal test that is applicable, the paragraph that you and I are going to cite whenever we are arguing the opposite from what we are arguing today in future cases, it does not say “this is the test for super-dominant companies.” It says “if you are dominant, this is the test.” That’s the problem. MR. DOLMANS: The reason why the court went into so much technical and specific factual detail was because they wanted to limit this particular case to its specific facts. You cannot just extrapolate from an extraordinary circumstances case a rule for every dominant company. Now if I may go to the second point, apart from the super-dominance, there is another bad fact. One of the bad facts is that, as paragraph 661 says, the rival products were deemed better by the consumers, as testified by a study that was conducted, even by Microsoft itself. MR. KILLICK: I can give you the whole study. MR. DOLMANS: That was the finding of the court, and I can read it to you if you wish. MR. KILLICK: And I can give you the findings of the whole study. In ten out of thirteen parameters, the Microsoft product was better than Novell’s Netware or Linux, but for three it was not. If you looked at the study in the whole, the other products were better in a few things, but Microsoft was better in a number of others. The judgment confirms that there only need to be certain features where the putative rival product is (or may be) better to satisfy the new test. That’s the key point. MR. STOTHERS: The court was wrong in its finding? MR. DOLMANS: The court was wrong. “The result of the third Mercer Study showed that, contrary to Microsoft’s contention, consumers consider non-Microsoft workgroup servers operating systems to be better than the Windows workgroup operating systems on a number of features to which they attach great importance.” I think that is a fact that has been found by the court. You may disagree, but that is a fact found by the court. MR. KILLICK: It is not inconsistent with what I was saying. MR. DOLMANS: I think it is a very important bad fact, because that goes to the question of consumer prejudice. You say this is an Ordoliberal case. In fact, if you look at the court’s judgment, the court refers very specifically and explicitly to Article 82(b) in paragraph 647, where it talks about prejudice to consumers. For the court in this particular case, the key point is prejudice to consumers “may arise where there is a limitation not only of production on markets but also of technical developments.” So what we have here is a limitation of innovation, which is contrary to the purpose for which intellectual property rights are given, in a situation where there is evidence that Microsoft’s products were not as good as its rivals’ products. I think that is an important bad fact.

748 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW MR. KILLICK: I think if you look at the judgment carefully in terms of what it says about consumers in paragraphs 662–664, what is strange is that not one single consumer complaint was received, despite four years of Article 11 surveys. Then in the conclusion about consumers, where the judgment notes the absence of consumer complaints, it says in paragraph 664: Well, it doesn’t matter that there are no complainants. Article 82 covers things that prejudice consumers indirectly by impairing an effective competitive structure. Microsoft gained too much market share, and thereby impaired an effective competitive structure. If you read the section of the judgment on consumer harm carefully, you will realize why I am worried rather than reassured. MR. DOLMANS: So we have to read this bit about consumers out of the case? The key point is: Who protects the consumers? It should not be the Commission. It should not be Microsoft. It should be the structure of competition. It is the structure of competition that should safeguard the interests of consumers. Normally, a refusal to supply, and maybe even excessive pricing and so forth, invites new entry. This particular case was a case characterized by huge barriers to entry and network effects. I have one last point on fair and reasonable and nondiscriminatory (FRAND) royalties. The key point is that in the competitive environment, and until Microsoft cut off the supply of this information, this information was widely disseminated for free. Why was it disseminated for free and why is that the proper comparator? Because Microsoft was making money on the desktop. This is where Microsoft gets paid for including and developing this interoperability information, because the more interoperable a desktop is, normally the more attractive it is in the situation of a competitive environment. So the comparators show that the royalty should be zero. MR. STOTHERS: On that note, I think Maurits and James need to go outside and continue this debate. Anyone who wants to watch them can go there. Thank you very much for your patience.

CHAPTER VIII

Competition Law Interplay with IP Law Part B: Antitrust/Competition Laws and Agencies: Global Cooperation? Convergence or Divergence? Moderator PROF. HUGH C. HANSEN

Fordham University School of Law (New York) Speaker DARYL LIM

Research Scholar, Max Planck Institute of Intellectual Property (Munich) Panelists JAMES B. KOBAK, JR.

CHRISTOF SWAAK

Hughes Hubbard (New York)

Stibbe, N.V. (Amsterdam)

PROF. CHRISTOPHER LESLIE

JOHN TEMPLE LANG

New York University School of Law (visiting) (New York)

Cleary Gottlieb Steen and Hamilton (Brussels)

PROF. HANSEN: Welcome to this session on the competition/antitrust area. One of the obvious issues is: To what extent are the competition and antitrust laws converging or diverging around the world, and so to what extent is there cooperation among the various competition authorities? In addition, what can we look to for the future? We had a good beginning with the first session, and I’m sure we will continue. Our speaker is Daryl Lim, who is now a research scholar at Max Planck. He used to be in practice in Singapore. He is moving on to an academic career. First he is going to spend a little time at Queen Mary, and then he is going to Stanford. He is going to discuss “Global Trends in Convergence and Divergence at the IP-Competition Interface.”

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Global Trends in Convergence and Divergence at the IP/Competition Interface Daryl Lim* I. INTRODUCTION A warm good afternoon to you. Good afternoon, everyone. Market economics have diffused rapidly into many parts of Europe and Asia. We now have more than a hundred countries with competition laws, many introduced in the last ten years. At the same time, more knowledge industries drive the engines of economies around the world, and these are underpinned by a surge of stronger IP protection. So it’s not surprising that we see antitrust issues arising more frequently when talking about IP. But what did surprise me was how some of these cases are decided today. You see, I came across the Editorial in last December’s European Competition Journal.1 It said that to understand convergence and divergence, it was essential to be able to see things from a legal and economic point of view. And as if that were not already hard enough, they said we should keep in mind political science perspectives when discussing the other two. To support this view, they then quoted Judge Cooke, the Judge Rapporteur in the European Microsoft case2 as saying, “I tell my clerks that these (Section 81 and 82) cases are 20 percent fact, 20 percent law, and 60 percent policy.” I looked at that statement and was horrified. Because it meant that most of us would be able to understand and reliably predict less than half of what was going on. The rest was a hit or miss depending on how well we understood policy trends. So I thought I had better look beyond what the law says, understand what the law means, and see where it’s going. According to the Chinese, true understanding is found in a state of enlightenment referred to as 悟 悟 is represented by the Roman characters “W” and “U.” I think we can also find guidance at the Interface today through 悟 . II. WHERE WE ARE

“W” stands for “where we are.” The first step to understanding global trends is to take our bearings. Once we have a good idea of where we are, we are in a better position to understand the prospects and perils on the road ahead. A. The Rise of Asia Recent years have seen Asian countries converging toward having competition laws. In terms of the impact on the global economy, the most significant ones are China, India, and Russia. Their laws are based broadly on European competition rules. Multinationals are anxious to see where these laws and international best practices converge — and even more anxious to see * Research Scholar, Max Planck Institute of Intellectual Property, Munich. 1 Philip Marsden & Simon Bishop, “Editorial, Intellectual Leaders Still Need Ground to Stand on”, Eur. Competition J., Dec. 2007, at 315, available at http://www.biicl.org/files/3297_editorial_(marsden_&_bishop).pdf. 2 Case T-201/04, Microsoft v. Commission, 2007 ECJ EUR-Lex LEXIS 2620 (Ct. First Instance Sept. 17, 2007), available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Rechercher&alldocs=alldocs&docj=do cj&docop=docop&docor=docor&docjo=docjo&numaff=T-201/04&datefs=&datefe=&nomusuel=&domaine=&m ots=&resmax=100.

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where they diverge. They are concerned that local laws will target foreign investors because, given the importance of acquiring foreign technology, local authorities may be more inclined to require access to IP. But I think that, at least at the beginning, it will make more business sense for them to reassure foreign businesses and embrace internationally accepted norms in form, if not in substance. At the same time, I would be careful in taking for granted that the laws will be applied in the same way you as have understood them. They will learn from your experiences at the beginning, but local needs will cause creases and inconsistencies as new concerns come up and attitudes change. So, harmonisation can only go so far. For example, the United States introduced competition law into Japan after the Second World War. Last September the Japanese competition authorities issued guidelines on the use of IP.3 It’s quite extraordinary that the guidelines expressly state that the use of technology is synonymous with the use of IP. I think this is by far the clearest indication from a regulator that it will focus on very specific portions of the IP family. And you don’t find this in the European Union or in the United States, so Japan is developing its own brand of regulation. B. Europe and America Even between Europe and America there are significant differences. These have led some American companies to turn to Europe to fight their antitrust battles. You see NDC against IMS.4 Sun Microsystems against Microsoft.5 Advanced Micro Devices (AMD) against Intel.6 And Diane Wood, U.S. Appeals Judge for the Seventh Circuit, has called this divergence between your interpretation of “monopolization” and “abuse of dominance” in Europe the single most problematic area that exists in transnational antitrust today.7 The Europeans have taken the view that visible competition is the best way. To them there is no point talking about competitive pressure if you can’t see the competition. It starts from the presumption that the dominant firm has a special responsibility not to distort competition by 3 On Sept. 28, 2007, the Japan Fair Trade Commission (JFTC) published new Guidelines Concerning the Use of Intellectual Property (Chiteki Zaisan no Riyo ni Kansuru Dokusenkinshiho Jo no Shishin) (IP Guidelines), available at http://www.mofo.com/news/updates/files/12424.html. 4 Case C-418/01, IMS Health GmbH v. NDC Health GmbH, 2004 E.C.R. I-5039. 5 See Commission Decision relating to a Proceeding Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004), aff’d, Case T-201/04 (C.F.I.), Microsoft Corp. v. Commission, 2007 ECJ EUR-Lex LEXIS 2620 (Ct. First Instance Sept. 17, 2007); see also Press Release, European Comm’n, Antitrust: Commission Imposes €899 Million Penalty on Microsoft for Non-compliance with March 2004 Decision (Feb. 27, 2008), available at http:// europa.eu/rapid/pressReleases Action.do?reference=IP/08/318. 6 Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004); see Andy Reinhardt, “The EU’s Assalt on Intel”, Bus. Week, July 14, 2005. The European Commission started an investigation several years ago but did not issue a Statement of objections until June 2007; see also AMD’s complaint filed with the European Commission DG Competition against Intel. Press Release, European Comm’n, Commission Confirms Sending of Statement of Objections to Intel (July 27, 2007), available at http://europa.eu/rapid/pressReleasesAction. do?reference=MEMO/07/314; European Commission Directorate-General for Competition, XXXIst Report on Competition Policy 11, 53 fig. 1 (2001), available at http://ec.europa.eu/comm/ competition/annual_reports/2001. The EC’s decision not to seek discovery of Intel’s documents in the U.S. case, Advanced Micro Devices v. Intel Corp., 452 F. Supp. 2d 555 (D. Del. 2006), which AMD had urged, demonstrates the tension that differences in national admissibility of evidence laws can create in cross-border investigations. See generally Cedric Ryngaert, “Assessing International Discovery After Intel v. AMD (U.S. Supreme Court, 2004): Expanded U.S. Discovery Opportunities for European Litigants?” (Institute for International Law Working Paper No. 70, Aug. 2005), available at http://www.law.kuleuven.ac.be/iir/nl/wp/WP/WP70epdf. See Thomas M. McCoy, Executive Vice President, Advanced Micro Devices, “State of New York Launches Investigation of Intel: The Global Drumbeat Continues”, Global Competition Pol’y, Mar. 17, 2008; Robert E. Cooper, “AMD v. Intel: An Assault on Price Competition”, Global Competition Pol’y, Mar. 17, 2008. 7 Diane P. Wood, “Antitrust at the Global Level”, 72 U. Chi. L. Rev. 309, 316 (2005).

752 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW hampering its competitors’ freedom of action. You see this in the EU Microsoft case. And you also see this in the South Korean case.8 And I think the strength of this approach is that more people will have access to the means to innovate. The risk is that people may not want to try in the first place, if they realized that when they succeeded, as Microsoft had, they would be subject to a heavy and unpredictable set of responsibilities, including an obligation to share what it had legitimately earned to featherbed its competitors. So you’ll have more innovation in terms of quantity, but not necessarily in terms of quality. Your law is less interventionist. You believe more in preserving the integrity of IP so that owners have the confidence that if they succeed, they can keep their expected rewards. It embodies a strong presumption that a firm’s freedom to determine market conduct achieves a better result for the market. In many ways this reflects your history as a frontier society. So the individual has freedom to go out to the wide world and find his fortune. If he succeeds, he deserves to keep his lot. That gives a fair amount of certainty, but it places too much faith in an over-stretched IP system. The point I want to stress here is that just because terms seem familiar, we should not presume that the outcomes will be predictably similar. Rules could have exactly the same wordings and there would still be differences. I think the differences comes not from different formulations of the principles but from the different meanings given to words like “anticompetitive” and “abuse,” as well as different methods for defining markets and assessing market power. In the next few years, whether we can converge onto international best practices depends to a large extent on how we choose to adapt to changing market conditions. This is what we are going to look at next. III. U-TURNS, CROSSROADS AND SUPERHIGHWAYS

“U” stands for U-turns, cross-roads and superhighways. From about the 1900s till the 1980s, we lived in the world of Interface 1.0. We were beginning to understand how IP, like monopolistic structures over railways, could dampen market competition. You developed economic theories to provide guidelines and goals for intervention — Harvard,9 Chicago,10 Post-Chicago.11 Europe had a different starting goal — 8 In December 2005, the South Korean Fair Trade Commission (KFTC) ruled that Microsoft Corp. abused its market dominance, fined it $32 million, and ordered it to offer alternative versions of Windows. KFTC, The Findings of the Microsoft case (Dec. 7, 2005), available at http://ftc.go.kr/data/hwp/micorsoft_case.pdf. The KFTC’s order requires Microsoft to sell in Korea a version of its Windows operating system that includes neither Windows Media Player nor Windows Messenger functionality, requires Microsoft to facilitate consumer downloads of third-party media player and messenger products selected by the KFTC, and prohibits Microsoft from selling in Korea a version of its server software that includes Windows Media Services. Microsoft’s application to have the case reconsidered was turned down by the KFTC and an appeal to the Seoul High Court was withdrawn. Microsoft Corp., Annual Report 2006, Note 17, Notes to Financial Statements: Contingencies (reconsideration ruling), available at http://www.microsoft.com/msft/reports/ar06/staticversion/ 10k_fr_not_16.html; Microsoft Corp., Quarterly Report (Form 10Q), Note 9 (Notes to Financial Statements) (Quarter ending Sept. 30, 2007) (Seoul High Court appeal), available at https://www. microsoft.com/msft/download/fy07/2Q 2007_10Q.doc; see also Warren S. Grimes, Korea Fair Trade Commission’s Microsoft Decision, FTC WATCH (Jan. 30, 2006, available at http://www.antitrustinstitute.org/archives/files/481.pdf. 9 See, e.g., Phillip E. Areeda & Donald F. Turner, Antitrust Law: An Analysis of Antitrust Principles and Their Application (1978); 2 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (2d ed. 2000); IIA Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law: An Analysis of Antitrust Principles and Their Application (3d ed. 2006); Phillip Areeda & Donald F. Turner, “Predatory Pricing and Related Practices Under Section 2 of the Sherman Act”, 88 Harv. L. Rev. 697 (1975); Herbert Hovenkamp, The Antitrust Enterprise: Principle and Execution (2005). 10 See, e.g., Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (1978); Frank H. Easterbrook, “Predatory Strategies and Counterstrategies”, 48 U. Chi. L. Rev. 263 (1981); Richard A. Posner, Antitrust Law (2d ed. 2001); Richard A. Posner, “The Chicago School of Antitrust Analysis”, 127 U. Pa. L. Rev. 925 (1979).

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to end market segregation caused by national IP rights. Then they tried to define their own competition policy based on Freiburg economics.12 From the 1990s toward the turn of the twentieth-first century, we moved from Interface 1.0 into Interface 2.0. A. Interface 2.0+ In Interface 2.0, we had to really grapple for the first time with the economics of the information age — standards, compatibility, and switching costs. And in Interface 2.0, the one name that dominated global headlines in bright neon letters was Microsoft. But when Microsoft mounted a hostile bid for Yahoo! in February, this was not merely the largest technology merger ever.13 The bigger question is this: Why is a PC software company concerned about an Internet search engine? Now related to this, Microsoft recently announced its plans to open up its proprietary interface.14 The European Commission is skeptical. I am more optimistic. You see, Microsoft’s fortunes are built on software that runs on PCs. Ten years ago, the possibility of Netscape’s middleware threat was terrifying enough. Today, technology makes it a reality for anyone wanting to run a program, play media, or surf the Net to do so without Windows, and even a PC. In other words, the Internet has displaced the PC as the center of the technology universe! And we have moved from Interface 2.0 into Interface 2.0+. Why do I say 2.0+ and not 3.0? Because I believe that the world has just gone into a chrysalis. Like a caterpillar, new business models are still evolving, and it’s not yet clear what form it will take when it emerges. How will this change the way innovation is regulated? I think fundamentally. What we see today is a convergence of products and services through the Internet into a single global marketplace. In the past, we spoke of the American market or the European market, the Asian market or the Middle-Eastern market. Today, with the digitization of so many IP products, anyone can access the Internet and get songs, music, software — many for free. So many more people can choose not to be stuck at the bottom of 11 See, e.g., Jonathan B. Baker, “A Preface to Post-Chicago Antitrust” (2002), available at http://ssrn.com/ abstract=296119; William E. Kovacic, “The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix”, 2007 Colum. Bus. L. Rev. 1 (2007) (providing extensive catalogue of recent relevant economic and legal literature in addition to the U.S. case law); Herbert J. Hovenkamp, “The Harvard and Chicago Schools and the Dominant Firm” (U. Iowa Legal Studies Research Paper No. 0-19, Sept. 1, 2007), available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1014153. 12 The Freiburg school combined law and economics to get a unique perspective on economics. The theory was developed by German economists and legal scholars (Freiburg School), such as Wilhelm Röpke, Walter Eucken, Franz Böhm, and Hans Grossman-Doerth from about 1930–1950. They were most famous for publishing a journal entitled Ordo and defined what was called Ordoliberalismus (Ordered Liberalism). The defining notion of Ordoliberalism was that liberty and competition are great things, but only within a certain context.The Ordoliberals believed in freedom from power, both the power of big firms and the power of government; those with market power should behave as if they had no market power. See generally Ian Rose & Cynthia Ngwe, “The Ordoliberal Tradition in the European Union, Its Influence on Article 82 EC and the IBA’s Comments on the Article 82 EC Discussion Paper”, 3 Competition L. Int’l 8, 8–9 (2007). 13 Press Release, Microsoft Corp., Microsoft Proposes Acquisition of Yahoo! for $31 per Share (Feb. 1, 2008), available at http://www.microsoft.com/presspass/press/2008/feb08/02-01corpnewspr.mspx. Note: Subsequent to the Conference, Microsoft withdrew its offer. Press Release, Microsoft Corp., Microsoft Withdraws Proposal to Acquire Yahoo! (May 3, 2008), available at http://www.microsoft.com/presspass/press/2008/may08/05-03letter.mspx. In the weeks since Microsoft withdrew its offer to acquire Yahoo!, the two companies have continued to discuss an alternative transaction. Press Release, Microsoft Corp., Microsoft Issues Statement Regarding Yahoo! (June 12, 2008), available at http://www.microsoft.com/ presspass/press/2008/jun08/06-12statement.mspx. 14 Press Release, Microsoft Corp., Microsoft Announces New Accessibility Tools and Resources for Developers (Mar. 13, 2008), available at http://www.microsoft.com/presspass/press/2008/mar08/03-13AccessibilityToolsPR. mspx.

754 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW a vertical distribution chain without access to alternatives because of segregated geographical markets. But this convergence has another important effect. Fewer players are needed to meet the exploding global market demand. It is very tempting, and therefore very easy, for these firms to be penalized for merely being so big. The EU approach to regulating abuse of dominance raises some concern. It’s not just because of its economic heft. More importantly, it’s because many countries with EU-type rules are looking to it for guidance. And I think we must realize that today, as our businesses continue to exploit innovation across the world, the rules of the road in one country may set the tone for an entire global industry. The problem with their approach that it is very difficult to identify exactly what duties attach to “special responsibility” by a “super-dominant firm.” It sets higher standards based on size, not on behavior. I think it’s better to see it this way: either a firm is dominant or it is not. The other thing is that structural analysis makes it more difficult to accept that competitors may self-destruct when they fail to come to grips with market changes. You will have always have technologies that win and technologies that lose. The people who made horse carriages were not the ones who started car companies. Mainframe computers were not displaced by other mainframe computers, but by a new disruptive technology in the form of the PC. So innovation will not be driven by those who complain that competitors are not buying into their products because they’ve been locked in. Instead, it’s increasingly clear that innovation will be driven by those who see opportunity in adversity. So for example, Apple saw in Napster, Kazaa, and Grokster consumer demand for online, unbundled music and offered iTunes. They bypassed OEM and PC channels, which regulators were convinced had been tied up. Sergey Brin and Larry Page saw in a market dominated by Yahoo!, Alta Vista, and AOL, Internet surfers who wanted quick, unbiased, and comprehensive search results. They won the market and changed “Google” into a verb we use everyday. So while the clobbering by regulators around the world may have hastened Microsoft’s decision to open up, I think that Microsoft itself has recognized that the old world is disappearing. And in this new world, Microsoft just like anybody else, has a business model that either works or it doesn’t. By making its software more accessible, Microsoft is hoping to become a more integral part of those programs and services. Shutting its windows will mean irrelevance in an interconnected world. And Microsoft is not alone. To win market share from BlackBerry, Apple unveiled it’s iPhone software development kit earlier this month,15 together with a $100 million “iFund”16 to finance budding entrepreneurs who want to develop programs for it. The point is this: what is unthinkable today may be tomorrow’s convention, and it will be dangerous if the world converges onto the most restrictive norms. Because if you help competitors too readily, you may be holding back the market by making vigorous innovation and competition more risky. So if you want innovation — you need to inspire market confidence in your governance of IP. I believe in legislating rules, an important starting point is to give up our obsession with theories of efficiency, and focus on effectiveness instead. This means clear goals, clear boundaries, and clear evidence of consumer harm. And you will need talent, if possible from all over the world, and into the private and public sectors, so that you have enough intellectual capital to come up with the best options. 15 See Press Release, Apple, Inc., Apple Announces iPhone 2.0 Software Beta (Mar. 6, 2008), available at http:// www.apple.com/pr/library/2008/03/06iphone.html. 16 See Kleiner Perkins Caufield & Byers Initiatives, http://www.kpcb.com/initiatives/ifund/index.html.

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It is a mobile world today in which the attractiveness of your laws will determine your investments, technological progress and economic growth. It’s worth remembering that India and China have reached the same point on the competition map today by completely opposite means. One is a fully democratized market economy. The other is a radical experiment in socialism. Yet both recognized the need to tap into the explosion of globally contestable output. What this means is that as the global economy integrates, firms like Microsoft and Siemens will not only be able to choose their customers, they will be more selective in doing business with countries that offer them the most balanced rules of competition. IV. CONCLUDING THOUGHTS

Allow me to conclude by saying that the global economic playing field is evolving. We are in the game, whether as regulators pushing national interests or lawyers pushing private interests. The question we all need to ask ourselves is: are we ready? The IP/competition interface gets to the very edges of what we know. Few problems lend themselves to simple solutions. And many emerging challenges cannot be resolved by existing policies and rules. We will need to be organically tuned into innovative industries and be able to say —“This will work/This will not.” The world governed by IP is changing rapidly, developing tremendously. Enormous opportunities. And Asia is moving with it. Today, many more Asian countries have embraced functioning competition laws, in form, if not also in substance. As Asian economies rise to the forefront of global markets, the challenges of regulating innovation through competition rules can only grow in significance. The United States took nearly more than a hundred years to get to where it is today. The European Union took fifty. China, India, and the other rising economies will do it in thirty years or less, because the foundations have been laid. Should America and Europe be worried about the rise of Asia? I think worry would be the wrong reaction. It would be helpful if Europe and America accepts a bigger role from Asia in developing the Interface. But I don’t think it will be a contest to see who the boss is. There will be broad and deep dialogues. Cooperative informal networks like the International Competition Network (ICN). We will eventually work towards a global framework to regulate innovation. And it will be a framework with American, European, and Asian characteristics. In the meantime, I hope the Fordham Conference will continue its important role in providing a forum to discuss common problems, resolve differences, and bring us there sooner rather than later. Thank you very much. PROF. HANSEN: Thank you very much.

Where is Asia today in terms of its rules? I imagine they are closer to the European competition model than the U.S. model, because of their heritage. MR. LIM: It is a very interesting question. Although America has a longer heritage, in terms of being the first antitrust jurisdiction in the world, many more jurisdictions, like China,17 Russia,18 and India,19 are adopting European-style competition rules. 17 Antimonopoly Law of the People’s Republic of China (promulgated by the Standing Committee of the National People’s Congress on Aug. 30, 2007, effective Aug. 1, 2008) [hereinafter AML], available at http:// www.npc.gov.cn/zgrdw/common/ zw.jsp?label=WXZLK&id=371229&pdmc=11006. For commentary regarding provisions in the proposed AML that raised concerns internationally, see, for example, Int’l Bar Ass’n Antitrust...

756 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW I read a report recently that was commissioned by the European Union and China.20 The conclusion of that report was that, because of your rule of reason, the United States prides itself on having a very sophisticated mechanism of analysis. But the practical reality for many emerging economies is that they simply lack the expertise to be involved in a detailed economic analysis every time a competition case comes before a court. What they really want is a set of rules with built-in considerations, where they can just basically tick off a box that says, “Conditions A, B, and C are fulfilled; therefore a firm is dominant” and “Conditions D, E, and F; therefore there is abuse.” So it may be more the practical reality of applying the laws with a limited set of resources that has led to the European laws being more readily accepted. PROF. HANSEN: So how can the United States accept a bigger role for Asia? What do you mean by that in your conclusion? Bigger role in what? Should we adapt our laws to theirs, or try to influence them more? What do you mean exactly? MR. LIM: I think the United States is really very much engaged with those countries where they have stronger economic interests, countries like China, Russia, India. They have been very much involved in the consultation leading up to the drafting of various antimonopoly laws.21 But going forward, I think it will be more engagement as equals as they implement their own brand of laws, rather than one of being a tutor and a pupil, where you tell them, “This is what you should do; this is how a capitalist economy should work.” Fundamentally, Russia and China, especially, are very different economic and political structures from the United States. In that sense, that puts a limit and a certain resistance to the way that you think that your antitrust laws should be implemented in the context of a freemarket economy. PROF. HANSEN: Now let’s turn to our panelists: Jim Kobak, Hughes Hubbard; Professor Christopher Leslie, New York University School of Law (visiting); Christof Swaak, Stibbe, a law firm in Amsterdam and Brussels; and a newcomer to the block; John Temple Lang at Cleary Gottlieb Steen and Hamilton in Brussels. Comm., Working Group on the Development of Competition Law in the People’s Republic of China, Comments on the Draft Anti-monopoly Law of the People’s Republic of China (PRC) (Draft of July 27, 2005), available at http://www.ibanet.org/images/downloads/IBA%20Submission.pdf; ABA Sections of Antitrust Law, Intellectual Property Law, and International Law, Joint Submission on the Proposed Anti-Monopoly Law of the People’s Republic of China (May 2005), available at http://www.abanet.org/intlawcommittees/business_regulation/antitrust/ chinacommentsantimonopoly.pdf; Int’l Bar Ass’n Antitrust Comm., Working Group on the Development of Competition Law in the People’s Republic of China, Aug. 20, 2007, Comments on the Draft Anti-Monopoly Law (AML) of The People’s Republic of China (PRC), available at http://www.ibanet.org/images/downloads/lpd/ Document_Englis_version.pdf. For a summary of the Law for Countering Unfair Competition (P.R.C., Sept. 2, 1993), the Price Law (P.R.C., Dec. 29, 1997), the Provisional Measures for the Prohibition Against Monopolistic Pricing (P.R.C., Nov. 1, 2003), and how they would interface with the June 22, 2006 draft of the AML, see Douglas C. Markel & Michael Han, “China - Getting the Deal Through Dominance” in The Regulation of Dominant Firm Conduct in 38 Jurisdictions Worldwide (Thomas Wessely ed., 2007) [hereinafter Dominance 2007]. 18 The new Russian Federal Law No. 135-FZ “On the Protection of Competition” (Competition Law), which came into force on Oct. 26, covers merger control, antitrust, state aid, and public procurement matters, and includes broad definitions of both dominance and abusive conduct. The Federal Antimonopoly Service (FAS) has by far the highest level of unilateral conduct investigations and remedies (1,166 open cases in 2006) of any jurisdiction for which the Global Competition Review reports enforcement statistics. James Clasper, Julius Cavendish & David Vascott, “Rating Enforcement 2006”, 10 Global Competition Rev., June 2007, at 14, tbl.20; see also Jacky Baudon, Yulia Solovykh & Alexander Viktorov, “Russia”, in Dominance 2007, supra note 17, ch. 28. 19 See The Competition Act, 2002, No. 12 of 2003, India Code (2003), as amended by The Competition (Amendment) Act, 2007, available at http://www.competitioncommission-india.nic.in/Act/Competition%20Act_Website_9_10_ 07.pdf; see also the two overviews provided by Sorabjee et al. and Chakravarthy, Farhad Sorabjee, Manas Chaudhuri & Anirudh Goyal, “India”, in Dominance, supra note 17, ch. 14; S. Chakravarthy, “India’s New Competition Act 2002 — A Work Still in Progress”, 5 Bus. L. Int’l 240, 248 (2004). 20 EU-China Trade Project, “Competition Policy and Intellectual Property Rights: EU Experience and Prospects for China” (Jan. 2008), available at http://www.euchinawto.org/index.php?option=com_content&task=view& id=192&Itemid=54.

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Gentlemen, comments, thoughts? MR. KOBAK: On the one hand, I think, as a U.S. lawyer, we are very opposed to the idea that you have a bunch of boxes for what can be very complicated situations, particularly when you are talking about new technology, and therefore if you check boxes A, B, C, you’ve got dominance, and D, E, and F you’ve got illegal behavior, because it may not be a nuanced enough approach. On the other hand, as somebody who has clients in the United States and advises them, one of the defects of our rule of reason, I think, as was talked about in the last panel, is if somebody comes to you and requests a license for something, there is no clear answer as to whether you are violating the law or what exactly you have to do to not have a problem. So I guess I am not really saying very much, except that there should be some kind of happy medium between a kind of unrestricted “anything goes” rule of reason, which is often what you sometimes get in the United States, and a “check the box” type system. PROF. HANSEN: But in the United States the answer would be easy, right? The way the United States would apply the rule of reason it would normally be a fairly easy answer. The problem would be: What’s going to happen if you take that law somewhere else? But isn’t the rule of reason now pretty clear, with a thumb down on the side of allowing things? MR. KOBAK: I don’t want to be political, but given our current Supreme Court, yes. But we have seen many pendulums. You can take the same words and the same test, and twenty years from now it might be applied in quite a different fashion. And certainly, if you took it to some other jurisdiction, I think those concepts could be applied in quite a different way.22 PROF. HANSEN: Christof? MR. SWAAK: I very much agree with what I hear you saying, Daryl. Cooperation is fine, but needs to be a two-way street. Some years ago, during a conference, someone from the U.S. Department of Justice was talking about the need for international cooperation. At the end I was allowed to ask the question: “How do you define ‘cooperation’?” I have the impression that the United States interprets “cooperation” as other jurisdictions adapting to the U.S. system. Such an approach 21 See, e.g., Intergovernmental Group of Experts on Competition Law and Policy, Geneva, 16–18 July 2008, Submission on Capacity Building and Technical Assistance by the Department of UNCTAD Technical Assistance and Capacity Building in the Area of Competition Law and Consumer Protection by the United States of America Justice and the Federal Trade Commission, available at http://www.unctad.org/TEMPLATES/Download.asp?docid=10121&lang=1& intItemID=4531. In 2007 the FTC and the DOJ Antitrust Division continued to provide technical assistance on competition law-policy matters to new competition agencies, with active USAID-funded programs to the Association of South East Asia Nations (ASEAN), and in Azerbaijan, Egypt, Guatemala, India, Nicaragua, Russia, and South Africa. In addition, the agencies have, on their own initiative, engaged in technical cooperation programs with China. The FTC and the DOJ also provided commentary on non-OECD countries’ proposed laws and regulations, hosted a number of visits and study missions by officials of younger agencies (inter alia those of Barbados, Pakistan, and South Africa), sent officials and staff to participate in seminars and conferences hosted by other agencies (e.g., Thailand), and engaged in other assistance efforts). In the multilateral organization arena, with OECD, the agencies hosted a workshop in Vietnam in March 2007 for ASEAN member nations on abuse of dominance, and participated in OECD case analysis programs in Budapest. Jointly with the ICN, the agencies also hosted a merger workshop in Pretoria for ten African countries in June 2007. In May 2007 the DOJ’s Antitrust Division invited ten agencies from eight different countries to participate in an intensive training program on antitrust economics. The FTC and DOJ overall capacitybuilding and technical assistance activities included thirty-one missions to thirteen countries, involving forty-seven different agency staff experts. 22 See, e.g., Ken Heyer, “A World of Uncertainty: Economics and the Globalization of Antitrust”, 72 Antitrust L.J. 375 (2005) (Heyer is the Economics Director, DOJ Antitrust Div.); J. Thomas Rosch, Commissioner, Federal Trade Comm’n, I Say Monopoly, You Say Dominance: The Continuing Divide on the Treatment of Dominant Firms: Is It the Economics?, Remarks Before the International Bar Ass’n Antitrust Section Competition Law Conference 8–16, Florence (Sept. 8, 2007), available at http://www.ftc.gov/speeches/rosch/070908isaymonopolyiba.pdf; Economic Advisory Group for Competition Policy, An Economic Approach to Article 82 (July 2005) (report prepared for DG Competition, Brussels), available at http://ec.europa.eu/comm./competition/publications/studies/eagcp_July_21_05. pdf.

758 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW does not work. The need for international cooperation in antitrust cases is clear. However, the success of international cooperation will very much depend on whether it is a discussion among equals, and I am not sure whether that is the case at the moment. PROF. HANSEN: John? MR. TEMPLE LANG: You asked me, Hugh, to talk a little bit about the different kinds of international cooperation. The cooperation between European Member States and national competition authorities in the European Union is very much closer and more highly organized than international cooperation anywhere else.23 National authorities are obliged to submit drafts of their decisions to the European Commission. There is an advisory committee of representatives of the authorities that consider Commission drafts. When there are appeals from national competition authorities, they are appealed to national courts. But since the national competition authorities are required to apply Community competition law, there may be issues that the national courts have to refer, questions of interpretation, to the European Court of Justice. So the cooperation, for all these reasons, is extremely close. The ICN is really quite different. It is purely voluntary. It is informal. It is ad hoc. They meet and discuss things. They choose subjects about market definition and so on that they would like to discuss.24 And no doubt it gives rise to bilateral discussions which also would be informal and voluntary, and which may be very important. It is a little bit hard to measure the effect of that sort of thing. The other cooperation arrangement that I should mention to you, because you may not have heard of it, is the Association of European Competition Law Judges, which was set up by some of the judges in the Court of First Instance in Luxembourg. Again, it is voluntary. It is for membership of judges with competition law issues regularly which they like to talk about. Now let me offer a few comments for a moment or two about ICN. I don’t think that in the sphere of intellectual property ICN is going to produce a very close degree of coordination, for several reasons. First of all, neither the law in Europe on these issues nor the law in the United States on these issues is clear. So it is not going to be obvious to an enforcement official in one of the other countries around the world that they are going to get a clear answer from either of the two big organizations. Of course if they actually have the same case to deal with, the same parties and the same issues, then of course they will tend to discuss them. I think that is obvious. But I think we are talking about convergence where the issues are similar but not identical. 23 See Lars-Henrik Röller, Chief Economist, DG Competition, “Economic Analysis and Competition Policy Enforcement in Europe”, in Theory, Competition Policy and Case Studies (Peter A.G. van Bergeijk & Erik Kloosterhuis eds., 2005), available at http://europa.eu.int/comm/competition/speeches/text/sp2005_011_en.pdf; Philip Lowe, Director General, and other DG Competition officials, The Modernisation of Article 82, Remarks Before the Second Annual Conference of the Global Competition Law Centre, Brussels (June 16–17, 2005); European Comm’n, DG Competition, Article 82 Review, available at http://ec.europa.eu/comm./competition/antitrust/art82/ index.html; Neelie Kroes, EU Competition Commissioner, Preliminary Thoughts on Policy Review of Article 82, Speech Before the Fordham Corporate law Institute, New York (Sept. 23, 2005), available at http://europa.eu.int/ rapid/pressReleasesAction.do?reference=SPEECH/05/537. 24 See, e.g., ICN, Competition Policy Implementation Working Group Options for Future Work 2007–2008, Draft Apr. 30, 2007, available at http://www.internationalcompetitionnetwork.org/media/library/conference_6th_moscow_ 2007/8CompetitionPolicyImplementationOptionsforFutureWork2007-2008.pdf; ICN, Unilateral Conduct Working Group, Report on the Objectives of Unilateral Conduct Laws, Assessment of Dominance/Substantial Market Power and State-Created Monopolies (May 2007), available at http://www.internationalcompetitionnetwork.org/ media/library/unilateral_conduct/Objectives%20of%20Unilateral%20Conduct%20May%2007.pdf; ICN, Unilateral Conduct Working Group 2007–2008 Work Plan, available at http://www.internationalcompetitionnetwork.org/ media/library/unilateral_conduct/Unilateral%20Conduct%202007-08%20Work%20Plan.pdf. The ICN also publishes Guidelines/Best and Recommended Practices, available at http://www.internationalcompetitionnetwork.org.

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Most national competition authorities all around the world, as far as my knowledge goes, tend to be very cautious on intellectual property issues. They have no jurisdiction to determine validity or infringement. They know that competition law issues involving IPRs are difficult and controversial. They will tend to stay away from them, I think, if they can. It is not obvious, if they do feel obliged to take a particular case, that they will want to discuss it with their colleagues in other countries, bearing in mind, in particular, that the national laws that are relevant are likely to be different. The European Member States are the only places where different national authorities are actually obliged to apply what is supposed to be the same law. So my conclusion is I don’t think that ICN will give rise to much convergence in the areas that we are primarily interested in, cases concerning intellectual property rights. PROF. HANSEN: Thank you. Christopher? PROF. LESLIE: I wanted to challenge one premise of international convergence, because it seems to me that there is an assumption in the discussion that you’ve got these well-informed systems and that you’ve got an intact American competition law system, an intact European system, and an intact Asian system, that we are comparing these systems. It seems to me that this state of enlightenment that Daryl is looking for internationally is something we don’t even have domestically yet. I think we need to find convergence in the United States before we can start thinking about having convergence internationally, especially with the intersection of competition law and intellectual property rights. For example, you’ve got the Federal Circuit and the Ninth Circuit taking different positions on when a patent holder can unilaterally refuse to license its intellectual property. You’ve got the Federal Trade Commission having a very different approach than the Federal Circuit on the relationship between antitrust and patent law. You’ve got federal antitrust authorities and state antitrust authorities having very different attitudes about Microsoft and the reach of antitrust law as applied to IP owners. Daryl mentioned the transition from the Harvard School of thought to Chicago to postChicago.25 But that is debated in the United States. A lot of people think where we are at now is Harvard. The Chicagoans do not acknowledge that post-Chicago exists. And post-Chicago thinks they won the day. There is no convergence among the scholars, let alone among the federal judges and the rules coming out of the different jurisdictions. So it seems to me that to even talk about an “American system” in the context of this overall international convergence assumes convergence at the domestic level that does not exist yet. PROF. HANSEN: Daryl, do you want to respond? MR. LIM: I agree that you should really be careful when comparing systems and when talking about systems, because it is very easy to generalize and be dogmatic about it. At the same time, in order to make any meaningful comparison, you have to make some generalizations about how things have been going and how things will be going. Now I think it is interesting that the United States and the European Union may well be taking opposite directions in the future. I think this is important to underline, because the discussion presumes a snapshot at this one point in time. But the interface between IP and competition law is evolving not just within countries, but over time, depending on, for example, in the United States, which administration is in charge. Recently, the Federal Trade Commission actually used the Federal Trade Commission Act Section 526 to address what was potentially an antitrust issue. They said that Section 5, under the heading of “fairness,” was broad enough to encompass antitrust abuses.27 It was not a See Kovacic, supra note 11; supra notes 9–11 and accompanying text. Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1). 27 In the Matter of Negotiated Data Solutions LLC (N-Data), FTC File No. 051-0094, slip op. (Jan. 23, 2008),... 25 26

760 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW unanimous decision. Two Commissioners dissented.28 But it was still a decision that indicated that the administration would probably in some cases be more willing to exercise extra-antitrust jurisdiction over antitrust cases without referring to the Sherman Act.29 On the other hand, the European Union might actually step down from what seems to be its current rather aggressive way of intervening in the exercise of IP rights, because it too must recognize, I think, that in a world where there is globally contestable output, this means that companies like Microsoft and Siemens will be able to choose not just the players in the markets in which it wants to exploit its IP but also the countries. It would tend to choose countries with more balanced or more friendly, pro-competition, pro-innovation type of competition laws. So the interface is not static. It is evolving; it is dynamic. I think we are far from reaching the last word on it. PROF. HANSEN: One question on cooperation. I am not really sure what the incentive is to any country to cooperate. If I think actually the best way to promote competition, or fairness, or whatever goal you want to have, is this, just because another country does that, why would we want the lowest common denominator? What is the advantage to any particular country of cooperating? At least they’ll be able to control their own markets the way they want. Now it may very well be that the more liberal ones in an economic sense ― the United States is going to lose, because if I’m a company operating in three jurisdictions, I am probably going to have to do my whole business model based on the most restrictive. So if I am Asia, why would I cooperate? If I am Europe, why would I cooperate? We are going to win. Why would we cooperate with the United States, because ultimately our rule is more restrictive ― everyone is going to have to obey it ― other than just that the American system is better? I think that probably what everyone should ask “What is the best system?” and try to strive for that. But I’m not sure, outside of that, that there’s a particular value in cooperation. MR. KOBAK: I think it depends on what you mean by “cooperation.” When you are talking about just sitting down and sharing ideas, that doesn’t mean you are committed to something. I think that to some extent is what happens. Now when you get into the area of cartel enforcement or something like that, you have actual cooperation, where people will talk about cases, where there is widespread agreement that certain conduct is wrong. That to me is where convergence really happens. PROF. HANSEN: That’s cooperation. MR. KOBAK: Right. I agree with the comment that the United States tried to push its model on everybody else and now we get frustrated when everybody doesn’t go along, as we do in a lot of areas. But I don’t really see the downside of talking and finding out what the United States is thinking, what Europe is thinking, and so forth. It doesn’t necessarily follow from that that people are going to go the same way, I don’t think. PROF. HANSEN: Obviously, talking is fine. But I think Christof’s point was talk isn’t enough, you actually have to accept some of our things, otherwise we’re not going to accept some available at http://www.ftc.gov/os/caselist/0510094/index.shtm (FTC Act § 5 used to address unilateral conduct where there was no violation of the Sherman Act). A majority of the Commissioners decided that an increase in the price of a license for the use of a patented technology that had been adopted by a standards-setting organization (SSO) was problematic. 28 See Dissenting Statement of Chairman Deborah Platt Majoras, Negotiated Data Solutions LLC, File No. 0510094, at 2, available at http://www.ftc.gov/os/caselist/510094/080122majoras.pdf (“[T]here is no allegation that [N-Data] engaged in improper or exclusionary conduct to induce [the SSO] to specify its NWay technology” for use in the standard); Dissenting Statement of Commissioner [now Chairman] William E. Kovacic, Negotiated Data Solutions LLC, File No. 051-0094, at 3, available at http://www.ftc.gov/os/caselist/0510094/080122Kovacic.pdf (“[T]he FTC ordinarily would not prosecute behavior whose adverse effects could readily be avoided by the potential victims”). 29 The Sherman Act, 15 U.S.C. § 2, forbids monopolization, attempted monopolization, and conspiracies to monopolize. See generally Robert E. Bloch et al., “A Comparative Analysis of Article 82 and Section 2 of the Sherman Act”, 7 Bus. L. Int’l 137 (2006).

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of your things, which means both people are compromising. I am not sure there is value in compromise unless there is merit in the ultimate decision. MR. KOBAK: Right. But I don’t think we have gotten to that yet, and maybe we never will in some of these areas. MR. SWAAK: I saw a very interesting program on U.S. TV where there was an interview with Antonin Scalia, a really hardball Supreme Court Justice, on the topic that very rarely in a U.S. Supreme Court decision is foreign case law quoted.30 He said: “Why should we look at what other judges do in all these other jurisdictions? We have a fine system. We have good brains. We can solve our own problems.” Now I am coming from a very tiny country, and I was raised with the idea that the world is a very large place with a lot of great minds. With an open mind, one can get inspiration for answers to legal questions from different areas in the world. There are a lot of other people out there who can be right as well. One should use that knowledge and these insights! PROF. HANSEN: You are misrepresenting the debate. The debate was on U.S. constitutional law. Justice Scalia said U.S. constitutional law should be based on the Framers’ language; there’s really no reason to look outside that. He wasn’t talking about any other type of law. He was just talking about U.S. constitutional law. I think actually that does make sense. It came on the death penalty for minors or mental incompetents, Roper v. Simmons.31 To the extent that anybody looks outside the United States, they can’t find anything anywhere else. It’s not like: “All right, let’s figure out what France is doing on this.” They figure out what they want to do on it, and if France has a nice precedent they chuck that in, like Breyer, and it’s after the fact, it’s not something that is driving it. In this country, we have so much law ― and I think Christopher was talking about this to some degree ― you don’t have a circuit even looking at other circuits. It’s an overload of law. If we even considered all the thirteen circuits, we’d go crazy, let alone looking at the foreign law. But I do think you’ve got to represent the story correctly. Scalia was talking about U.S. constitutional law. Whatever you think of Scalia, who is a little hardboiled — you’re absolutely right there — and also something of a jerk, not personally, but philosophically in the way he does things, I do think that it is legitimate to say that when doing U.S. constitutional law it’s legitimate to say we should look at U.S. origins and not others. You are from The Netherlands. MR. SWAAK: That’s an interesting thing to do, looking at the origins of the United States. Which of the various origins do you use? PROF. HANSEN: Well, that’s a different issue. You can say how you want to look at it, whether you want to look at a living, moving Constitution, which means you just make it up as you go along; or you might look at originalists, which means you don’t have to look at the 30 See Melissa A. Waters, “Justice Scalia on the Use of Foreign Law in Constitutional Interpretation: Unidirectional Monologue or Co-Constitutive Dialogue?”, 12 Tulsa J. Comp. & Int’l L. 149 (2004), available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=896838 (exploring Justice Scalia’s conservative alternative approach to recent efforts by other Justices to utilize foreign and international legal sources in the Supreme Court’s jurisprudence in the 2003–3005 term). On the one hand, Justice Scalia consistently denounced the use of foreign legal sources in constitutional interpretation, both in his concurring opinion in Sosa v. Alvarez-Machain, 124 S. Ct. 2739 (2004) (Scalia, J., concurring in part and concurring in judgment), and in his keynote address at the Annual Meeting of the American Society of International Law. Antonin Scalia, Foreign Legal Authority in the Federal Courts, Keynote Address to the Annual Meeting of the American Society of International Law (Mar. 31–Apr. 3, 2004), in 98 AM. SOC’Y INT’L L. PROC. 305 (2004). On the other hand, in his dissent in Olympic Airways v. Husain, 124 S. Ct. 1221 (2004) (Scalia, J., dissenting), he criticized the majority for failing to give sufficient consideration to foreign court decisions in interpreting the meaning of the Warsaw Convention. 31 Roper v. Simmons, 543 U.S. 551 (2005) (death penalty for juvenile); see infra note 32.

762 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW words specifically; and then you could have strict construction. You have all those different issues, and I think they are legitimate issues. The reality is federal courts in the United States make it up as they go along. They are policy-driven courts, and then they tack on doctrine afterwards. Especially if you look at Judge Posner, Posner is almost doctrine-free, precedent-free in his decisions. So really it is a policydriven situation. But certainly, internationally, I think one of the great things is that we are looking.32 No one in the United States used to care what Europe did, but at least now you hear about it. And no one 32 Justice Scalia dissented in both Lawrence v. Texas and Roper v. Simmons, marshalling arguments that what foreign parliaments and courts do is of no moment to U.S. interpretation of the U.S. Constitution. Lawrence v. Texas, 539 U.S. 558 (2003) 41 S.W.3d 349, reversed and remanded (striking down Texas’ sodomy law): The sweeping references by Chief Justice Burger to the history of Western civilization and to Judeo-Christian moral and ethical standards did not take account of other authorities pointing in an opposite direction. A committee advising the British Parliament recommended in 1957 repeal of laws punishing homosexual conduct. The Wolfenden Report: Report of the Committee on Homosexual Offenses and Prostitution (1963). Parliament enacted the substance of those recommendations 10 years later. Sexual Offences Act 1967, §1. Of even more importance … the European Court of Human Rights considered a case with parallels to Bowers and to today’s case … . The court held that the laws proscribing the conduct were invalid under the European Convention on Human Rights. Dudgeon v. United Kingdom, 45 Eur. Ct. H. R. (1981) ¶52. Authoritative in all countries that are members of the Council of Europe (21 nations then, 45 nations now), the decision is at odds with the premise in Bowers that the claim put forward was insubstantial in our Western civilization… . To the extent Bowers relied on values we share with a wider civilization, it should be noted that the reasoning and holding in Bowers have been rejected elsewhere. The European Court of Human Rights has followed not Bowers but its own decision in Dudgeon v. United Kingdom. See P. G. & J. H. v. United Kingdom, App. No. 00044787/98, ¶56 (Eur. Ct. H. R., Sept. 25, 2001); Modinos v. Cyprus, 259 Eur. Ct. H. R. (1993); Norris v. Ireland, 142 Eur. Ct. H. R. (1988). Other nations, too, have taken action consistent with an affirmation of the protected right of homosexual adults to engage in intimate, consensual conduct [citing an amicus curiae brief submitted to the court in Lawrence v. Texas by Mary Robinson, the then United Nations High Commissioner for Human Rights.] The right the petitioners seek in this case has been accepted as an integral part of human freedom in many other countries. There has been no showing that in this country the governmental interest in circumscribing personal choice is somehow more legitimate or urgent. Id. at 573, 576–77 (Kennedy, J.). Constitutional entitlements do not spring into existence because some States choose to lessen or eliminate criminal sanctions on certain behavior. Much less do they spring into existence, as the Court seems to believe, because foreign nations decriminalize conduct. The Bowers majority opinion never relied on “values we share with a wider civilization,” ante, at 16, but rather rejected the claimed right to sodomy on the ground that such a right was not “‘deeply rooted in this Nation’s history and tradition,’” 478 U.S., at 193–194 (emphasis added). Bowers’ rationalbasis holding is likewise devoid of any reliance on the views of a “wider civilization,” see id., at 196. The Court’s discussion of these foreign views (ignoring, of course, the many countries that have retained criminal prohibitions on sodomy) is therefore meaningless dicta. Dangerous dicta, however, since “this Court … should not impose foreign moods, fads, or fashions on Americans.” Foster v. Florida, 537 U.S. 990 n. (2002) (Thomas, J., concurring in denial of certiorari). Id. at 588 (Scalia, J., dissenting, joined by Rehnquist, C.J., and Thomas, J.); see also Joan L. Larsen, Importing Constitutional Norms from a “Wider Civilization”: Lawrence and the Rehnquist Court’s Use of Foreign and International Law in Domestic Constitutional Interpretation, 65 OHIO ST. L.J. 1283, 1320 (2004); Roper v. Simmons, 543 U.S. 551 (2005) (death penalty for juvenile): The overwhelming weight of international opinion against the juvenile death penalty is not controlling here, but provides respected and significant confirmation for the Court’s determination that the penalty is disproportionate punishment for offenders under 18. See, e.g., Thompson, supra, at 830–831, & n.31. The United States is the only country in the world that continues to give official sanction to the juvenile penalty. It does not lessen fidelity to the Constitution or pride in its origins to acknowledge that the express affirmation of certain fundamental rights by other nations and peoples underscores the centrality of those same rights within our own heritage of freedom. Id. (Kennedy, J.). The opinion also discusses Article 37 of the United Nations Convention on the Rights of the Child, 1577 U.N.T.S. 3, 28 I.L.M. 1448, 1468–470, entered into force Sept. 2, 1990, and the International Covenant on Civil and Political Rights (ICCPR), Dec. 19, 1966, 999 U.N.T.S. 175). [W]hy would foreign law not be “relevant” to [the moral proportionality] judgment? If foreign law is powerful enough to supplant the judgment of the American people, surely it is powerful enough to change a personal assessment of moral proportionality.

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in Europe cared what the United States was doing, and now they do hear about it. So I do think we are moving in a direction where people are actually aware of what other people are doing. They are not going to compromise for the sake of it, but they might actually think that there is an advantage to it. So I think we are today much better than we were even ten years ago. Dimitrios? QUESTION [Dimitrios Moscholeas, White & Case, New York]: I think it has turned into a little bit of a philosophical debate, not so much an antitrust debate. Very briefly, I just wanted to draw a line. I disagree a little bit with Professor Hansen. It is not bad to look at other people’s laws. Maybe it is bad to be bound by other laws or imposing them. That was maybe the meaning of Scalia, imposing them on your own people. But let’s say you are a legislator. Is it bad to look at what Denmark is doing, or Finland, and then take it into consideration when you are deciding about your own policy? This wouldn’t affect your precedents, your stare decisis. This is more a common law approach than a civil law approach, I guess. But why is it wrong to look at it, especially when it comes to policy considerations? You will take into account the different cultural backgrounds and social backgrounds and everything. You will take it into account and just look at it. You won’t be bound by it in a strict legal sense. I think that is basically the line that we can draw. So we don’t have to disagree on a philosophical basis. MR. KOBAK: Yes, that’s true. But there have been, I believe, in the last several congresses a number of congressmen who have introduced legislation — and I don’t think it is limited to constitutional law — that would basically say U.S. courts cannot give precedential value, or maybe even cite, anything from outside U.S. jurisprudence.33 Now most people in the United States do not think that way, but there is a political faction that does. PROF. HANSEN: I think it’s a straw man to say that anybody on this panel said it’s bad to look at other law. I don’t think anyone said that. The question then is: What do you do after you look at it? Do you use it to the extent you can to solve a problem? That’s fine. But to actually feel compelled to follow it as some sort of multinational goodwill gesture I think is something else. If you are actually looking at representative democracy, if you are looking at the legitimacy of courts, they should be really looking at the people who formulated the law, and the people formulating the law were the citizens in that particular jurisdiction. If you just think of judges as free-floating, independent people, basically Platonic benevolent despots, then I suppose they can. Of course, I think most people do, most elites do. That’s the interesting thing. Id. at 1183 (Scalia, J. dissenting, joined by Rehnquist, C.J., and Thomas, J.). For a discussion of Justice Scalia’s dissents in both Lawrence v. Texas and Roper v. Simmons, see note 31 supra. See also Mary Ann Glendon, “Judicial Tourism”, Wall St. J., Sept. 16, 2005, at A14. 33 Following the decision in Lawrence v. Texas, 539 U.S. 558 (2003) 41 S.W.3d 349, reversed and remanded, Florida Representative Tom Feeney introduced H. Res. 568, 108th Cong. 2d Sess.: Resolved, That it is the sense of the House of Representatives that judicial determinations regarding the meaning of the laws of the United States should not be based in whole or in part on judgments, laws, or pronouncements of foreign institutions unless such foreign judgments, laws, or pronouncements are incorporated into the legislative history of laws passed by the elected legislative branches of the United States or otherwise inform an understanding of the original meaning of the laws of the United States. H. Res. 372568, 108th Cong. (2d Sess. 2004). Rep. Feeney introduced H. Res. 372, 110th Cong. on May 3, 2007: Expressing the sense of the House of Representatives that judicial determinations regarding the meaning of the Constitution of the United States should not be based on judgments, laws, or pronouncements of foreign unless such foreign judgments, laws, or pronouncements inform an understanding of the original meaning of the Constitution of the United States. The status of this resolution is available at http://www.govtrack.us/congress/bill.xpd?bill=hr110-372; see also Christopher Roberts, “Going Beyond Stare Decisis: The Use of Foreign Courts, Statistics, Journal Articles and other Secondary Authorities in U.S. Supreme Court Opinions” (2005), available at http://www.allacademic.com/meta/ p_mla_apa_research_citation/0/8/7/3/1/pages87316/p87316-1.php.

764 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW I don’t think anybody believes in democracy. Democracy gets lip service. Except democracy is great until you don’t like the decision, and then you sue, you do something else, you scream, and everything else. Democracy used to mean you went out to the grassroots. You don’t like a decision, you go knock on doors and try to convince people. Grassroots democracy is gone. You don’t even want to look at your neighbor, let alone talk to him and try to convince him. The thing is that we really have is a bunch of elites. The question is: Which elite is going to control? If it can’t be a domestic elite, then you try to get an international treaty, like on human rights or environmental law, to overcome the domestic elite. Or with courts, if you can’t do human rights, you go to the International Court of Human Rights, which is where you have one elite overriding some other elites. But the actual thing of democracy I think is clearly is done. Anyway, I am not for it in that sense, because I think if you’re really interested in progressive things and rights and everything, usually they are trickle-down and not trickle-up. You have your elites who create them and then they flow from them. I think to some degree we are all elitist in that sense, especially Christof ― I can see it in his face — on this issue. Christopher? PROF. LESLIE: Convergence is great in theory, but there is this notion that we should just go for convergence because convergence is a good thing. Too seldom do we ask: Convergence towards what? A lot of times when speakers espouse the virtue of convergence, what they really mean is everybody gravitating toward their standard. I think that was Christof’s point. Certainly we had this in antitrust in the 1970s and 1980s, when there was talk about convergence for price-fixing cartels. But when the United States spoke about convergence, they meant everybody should criminalize price fixing like us. Europe meant maybe the United States should chill out a bit and not be so aggressive against it. One of the costs of convergence that isn’t being discussed is that in all of this discussion of innovation maybe there is something to be said about innovation among competing legal systems. A lot of times you have IP owners claiming that a certain legal standard is unworkable. When you have competing legal systems that can actually test out a legal standard or test out compulsory licensing and see whether or not it works, then you get the value of that experimentation. If convergence means everybody going towards the same system and the same rules, you might lose some of that experimentation. I guess I would just say it’s great to say convergence is a good thing, but you have to ask “convergence towards what?” and “convergence at what cost?” MR. KOBAK: In the United States, particularly in the antitrust area, I think there is always a big wild card, which is private treble-damage or other litigation, which is a big part of our system. If you go back in time ― it is not true of Microsoft particularly, but other major monopolization cases ― monopolization law was often made in private cases, not cases that were brought by any governmental body.34 So even if the Justice Department were to 34 See generally A. Neil Campbell & J. William Rowley, The Internationalization of Unilateral Conduct Laws — Conflict, Comity, Cooperation and/or Convergence?, 75 ANTITRUST L.J. 1001 (2008) (“The United States represents the highwater mark in the use of private litigation for antitrust matters, including unilateral conduct. The combination of treble damages, class actions, jury trials, contingency fees, broad rights of discovery, and few cost sanctions against losing litigants has created an environment where actual and threatened private litigation is far more frequent than government enforcement of Section 2 of the Sherman Act and other antitrust laws dealing with unilateral conduct.”). Compare Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), with Case IV/31.851, Magill TV Guide/ITP, BBC and RTE, 1989 O.J. (L 78) 43, aff’d, Joined Cases C-241/91 & C-242/91, Independent Television Publ’ns Ltd. v. Commission, 1995 E.C.R. I-743; Case C-418/01, IMS Health GmbH v. NDC Health GmbH, 2004 E.C.R. I-5039; Commission Decision Relating to A Proceeding Under Article 82 of the EC Treaty and Article...

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agree with DG-IV or something on some policy and that was their enforcement criteria, that wouldn’t stop aggrieved private plaintiffs who don’t get access to products they need, or think they need, from bringing their cases and going up through the court system, where you have an independent judiciary. So as a practical matter, I also think there are limits to what you could ever achieve in the way of convergence, if that were even a good thing to achieve. PROF. HANSEN: So is the whole thing hopeless? MR. KOBAK: No, I don’t think it’s hopeless that people talk. I just think that it is maybe utopian to think that people will actually agree on all the details. PROF. HANSEN: If you were creating an antitrust/competition law from scratch and you could only pick the whole law, not mix and match, would you pick the U.S. law or would you pick the EU law? MR. KOBAK: I guess I would pick the U.S. law because I’m a U.S. lawyer and it would be good for business. Also, I probably know it and understand it better. But I wouldn’t want to do that. I would want to mix and match if I were the antitrust czar of the world. PROF. HANSEN: Christof? MR. SWAAK: I would like to respond to what you are saying: Why convergence; what’s the interest of convergence? We should not forget that the legal system has “users” or “subjects.” Companies operating in a global economy and in various jurisdictions would very much be in favor of a more harmonized system, a “one-stop shop.” Operating in different jurisdictions with different sets of substantive and procedural rules is often very complicated. International cooperation and convergence can change that to some extent.35 PROF. LESLIE: That’s right. Convergence is a good thing. It’s just worth noting there’s a cost to convergence. You want to make sure you converge on the right rule. You don’t want to be so obsessed with harmonization and everybody getting together on the same page that everybody adopts a rule that’s not the most efficient rule. So all I say is convergence, but with caution and keeping in mind these other goals. PROF. HANSEN: Christopher, if I asked you the same question, what would your answer be? PROF. LESLIE: My answer would be: What do you mean by “the United States”? If you tell me what law to pick, I am not going to pick the Federal Circuit, but I’ll pick the Ninth Circuit or the Third Circuit. PROF. HANSEN: Let’s just do Microsoft, the approach of the Justice Department and courts in Microsoft as compared to the CFI and the Commission.36 Which approach would you take? PROF. LESLIE: I’m a fan of the D.C. Circuit approach in Microsoft.37 I thought it was a very nuanced, informed, and beautiful opinion. I don’t agree with all of it. Maybe my expectations 54 of the EEA Agreement Against Microsoft Corp. (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004), aff’d, Case T-201/04, Microsoft Corp. v. Commission, 2007 ECJ EUR-Lex LEXIS 2620 (Ct. First Instance Sept. 17, 2007); see also Bloch, supra note 29; Spencer Weber Waller, “Microsoft and Trinko: A Tale of Two Courts”, Utah L. Rev. 741 (2006), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=886143. 35 See Int’l Chamber of Comm., Commission on Competition, Comments on Selected Issues for Study by the US Antitrust Modernization Commission, at C. 5.0, “Should the U.S. Standard Move Closer Towards the European Standard?” (Sept. 1, 2005), available at http://www.iccwbo.org/uploadedFiles/Submission_%20to_%20the_%20 AMC.pdf; Antitrust Modernization Comm’n, Report and Recommendations (2007), available at http://govinfo. library.unt.edu/amc/report_ recommendation/amc_final_report.pdf (particularly Recommendations 15–17 and 55); OECD Business and Advisory Committee, OECD Competition Committee Roundtable on Competition on the Merits (June 1, 2005). 36 See, e.g., Donald I. Baker, “Differing Antitrust Concerns in U.S. and Europe Exposed by Record €497m Fine for Microsoft”, Fin. Times, Mar. 26, 2004; Press Release, U.S. Dep’t of Justice, Assistant Attorney General for Antitrust, Thomas O. Barnett, Issues Statement on European Microsoft Decision (Sept. 17, 2007), available at http://www. usdoj.gov/ atr/public/press_releases/2007/226070.htm. 37 United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2000); see Deborah Majoras, Deputy Ass’t Att’y Gen., DOJ, Antitrust Remedies in the United States: Adhering to Sound Principles in a Multi-faceted Scheme, Address Before...

766 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW were just so low of what was going to come out of the D.C. Circuit that I was very pleasantly surprised. PROF. HANSEN: Audience? Actually, you’ve been free riding almost this entire session, without questions. So let’s try to earn your keep here. Do you have any comments or thoughts? You’re not leaving. Dimitrios, you’re not going to make up for this deficit. Maurits and Jim are just exhausted back there. Are you going to ask a question? QUESTION [Maurits Dolmans, Cleary Gottlieb Steen & Hamilton, Brussels]: There appears to be a divergence of policy in spite of a convergence of law between the European Union and the United States. The analysis that the U.S. and EU courts applied to Microsoft’s tying and refusal-to-disclose practices was very similar, based on the rule of reason and taking the facts into account, both in the United States38 and Europe.39 Am I right to think that the policy of the Department of Justice is to ignore this and to take a “per se legality” approach to tying? PROF. HANSEN: Actually, our time is up. I would like to thank all our panelists.

the Canadian Bar Ass’n Nat’l Law Section Annual Fall Conference on Competition Law (Oct. 4, 2002), available at http://www.secinfo. com/d14D5a.22eFe.htm (commentary on U.S. remedy in Microsoft). 38 Microsoft, 253 F.3d at 58 (“If the monopolist asserts a procompetitive justification — a non-pretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal — then the burden shifts back to the plaintiff to rebut that claim. If the monopolist’s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the procompetitive benefit.”). 39 Case T-201/04 (C.F.I.), Microsoft Corp. v. Commission, 2007 ECJ EUR-Lex LEXIS 2620 (Ct. First Instance Sept. 17, 2007), ¶¶ 688 & 1144 (“[A]lthough the burden of proof of the existence of the circumstances that constitute an infringement of Article 82 EC is borne by the Commission, it is for the dominant undertaking concerned, and not for the Commission, before the end of the administrative procedure, to raise any plea of objective justification and to support it with arguments and evidence. It then falls to the Commission, where it proposes to make a finding of an abuse of a dominant position, to show that the arguments and evidence relied on by the undertaking cannot prevail and, accordingly, that the justification put forward cannot be accepted… . (¶ 1154) As the Commission and SIIA rightly submit, the other benefits on which Microsoft relies could just as easily be obtained in the absence of the impugned conduct.”).

CHAPTER VIII

Competition Law Interplay with IP Law Part C: Member States’ Competition Enforcement in the European Union The Role and Interaction of Member State Competition Authorities, Private Actions in Member State Courts.

Moderator JAMES B. KOBAK JR.

Hughes Hubbard & Reed, LLP (New York) Speakers MONIKA TOMCZAK

PROF. JEROEN KORTMANN

Miller, Canfield, Paddock & Stone (Warsaw)

Stibbe (Amsterdam) Panelists

MAURITS DOLMANS

PROF. VALENTINE KORAH

Cleary Gottlieb Steen & Hamilton (Brussels)

University College London (Emeritus)

MR. KOBAK: I thought I was to be the moderator for this session. Then Hugh kept emailing me and telling me I had up to five minutes of time and that meant to spend much less than five minutes. I think the latter part of what he told me, the importance of keeping things brief, is more important than being important as a moderator. So I am going to subscribe to that. This is a program basically about what is happening in Europe; how the European system is changing; what the EU Commission may recommend; and what is happening in the field of private treble-damage remedy or private remedy for competition law violations.

768 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW I understand that yesterday in Washington someone from the Commission was going to release the White Paper in time for the ABA Antitrust Section’s meeting, and then announced that he couldn’t do that.1 That gives you quite a challenge. I am an American lawyer, so this is like real life to me. I kind of muddle around with what is happening in Europe and then I call on people in Europe to give me the answers. So that’s what I am going to do today. Monika Tomczak, who is at Miller Canfield Paddock & Stone in Warsaw, is going to talk about changes in the European system generally. Professor Jeroen Kortmann, who is at Stibbe in Amsterdam, is then going to talk about the future of private enforcement actions. They are each going to speak for about fifteen minutes. Our panelists I’m sure are known to all of you. Most of you were here for the last session. Maurits Dolmans and Valentine Korah are then going to make some remarks. We should have fifteen or twenty minutes at the end for questions among the panelists and comments and questions from the audience. With that, I’ll ask Monika to begin.

Post-Modernization Landscape of Competition Law Enforcement in the European Union Monika Tomczak*

First of all, I would like to thank Hugh Hansen for inviting me. The goal of this presentation is, first, to guide you through the decentralized system that presently applies in Europe in terms of competition enforcement. The second goal is to answer the question: Who cares about what the competition authorities are doing in terms of IP enforcement, and who cares what the competition officials are discussing at their secret European Competition Network (ECN) meetings for practitioners? I think that people who actually practice IP law, and also people who are in the IP sector, should care what the competition officials are discussing at the secret ECN meetings, and I will explain why. The basics of the system are a multitude of actors and a play that is not always easy to follow when it comes to the plot. Let me explain that following the adoption of Regulation 1/2003,2 1 TheWhite Paper was releasedApr. 3, 2008. European Commission,White Paper on DamagesActions for Breach of the EC antitrust rules COM(2008) (Apr. 2, 2008), available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_ white_paper/whitepaper_en.pdf. The White Paper is accompanied by a Commission Staff Working Paper on Damages Actions for Breach of the EC antitrust rules, SEC (2008) 404 (Apr. 2, 2008), available at http://ec.europa.eu/competition/ antitrust/actionsdamages/files_white_paper/working_paper.pdf, and an Impact Assessment Report (Staff Working Document), SEC (2008) 405 (Apr. 2, 2008), available at http://ec.europa.eu/competition/antitrust/actionsdamages/ files_white_ paper/impact_report.pdf. * Miller, Canfield, Paddock & Stone, Warsaw. 2 Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, 2003 O.J. (L 1) 1, available at http://eur-lex.europa.eu/LexUriServ/LexUri Serv.do?uri=OJ:L:2003:001:0001:0025:EN:PDF. After implementation of the Regulation, in 2004 the Commission sponsored a comprehensive review of the conditions under which private parties can bring actions for damages before national courts for breaches of EU competition laws. DENIS WAELBROECK, DONALD SLATER & GIL EVEN-SHOSHAN, STUDY ON THE CONDITIONS OF CLAIMS FOR DAMAGES IN CASE OF INFRINGEMENT OF EC COMPETITION RULES: COMPARATIVE REPORT (Aug. 2004), available at http://ec.europa.eu/comm/competition/antitrust/actionsdamages/comparative_ report_ clean_en.pdf (report prepared by the Ashurst law firm for the European Commission). The Commission continued its extensive due diligence in search for ways to encourage private enforcement of competition laws. In a Green Paper, accompanied by a detailed Commission Staff Working Paper, the Commission set out a number of possible options to...

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people like me who live in the far corners of the European empire could start to enforce competition-related cases before their national authorities and national courts. Before, only people like Maurits had the competence and the opportunity to struggle with the European Commission, which was the only competent authority. Therefore, now we have the European Commission, which remains the “godfather” of competition enforcement, and we have the national competition authorities (NCAs) in twentyseven Member States. These authorities were formed in accordance with national legislation, in general, and their status and their position in the national systems vary. They do not always have the same competencies. They are sometimes under administrative law, sometimes under other forms of status. These are the authorities that have been appointed under Regulation 1/2003 to enforce Articles 81 and 82. Then we have the specialized courts in Member States that hear appeals from the decisions of the NCAs. This also varies across Europe. It is not that there is one system of appeal. This is normally left to the administrative procedure. In many Member States, this is an administrative judiciary who hears appeals. In some Member States, these are mixed civil/administrative courts. But generally, in every Member State there is the possibility to appeal to a court that is specialized from the decision of the NCA that involves the application of Articles 81 and 82. And then there are the general courts that are competent to apply Articles 81 and 82. This is not a novelty that resulted from Regulation 1/2003. It was there before. But after decentralization it got stronger, because the courts have been linked in the whole system in a stronger way than previously. These are generally civil courts. This can be any court that is competent to deal with a dispute that can directly apply Article 81 and Article 82, of course provided that it has the capacity and the knowledge to do so. And then there is this strange organism that is the European Competition Network (ECN), which does not have any legal personality and cannot be considered as a competition authority, but plays a very important role in the system. The issue at stake is to ensure a coherent and efficient application of EU competition law across the European Union. We have to remember that national law regimes coexist based on the laws that were there previously in every Member State, to some extent harmonized, to some extent not. But normally the competition authorities can apply both national law provisions and Articles 81 and 82, or they can do it separately. The goal here was to achieve convergence across Europe when the European Commission found that it could apply Articles 81 and 82 on an exclusive basis in a European Union of twenty-seven Member States. The European Competition Network was created in order to foster the exchange of information and to lead to convergence across the European Union. It is like a forum where the authorities can consult, discuss, and implement the policies that are pursued by the European Commission. It is a forum where procedures have to be observed that result from Regulation 1/2003. These are mostly, I would say, notification procedures that enable everyone concerned to know what is actually going on in the Member States. Therefore, there is an obligation to notify cases investigated under Articles 81 and 82.3 facilitate private damages actions, and solicited public comments. European Commission Green Paper On Damages Actions for Breach of the EC Antitrust Rules (2006) [hereinafter Green Paper], available at http://ec.europa.eu/comm/ competition/antitrust/actionsdamages/sp_en.pdf. These developments, following cases like Crehan and Provimi in Member State courts, will be critical in the development of private enforcement of competition laws in the European Union. Crehan v. Inntrepreneuer, [2004] E.W.C.A. 637 (judgment by U.K. court awarding damages in a competition case); Provimi Ltd. v. Roche Prods. Ltd., [2003] Q.B.D. (May 6, 2003) (holding that a non-English claimant suffering injury outside of England may sue non-English cartel participants in English courts so long as the cartel included English participants). 3 See generally Jacques H. Bourgeois’s commentary in Symposium, “The European Competition Network: What It Is and Where It’s Going”, Antitrust Source, July 2005, at 11–13, http://www.abanet.org/antitrust/at-source/5/07/...

770 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW Some statistics. On January 31, 2008, the Commission announced that 842 cases have been notified. There is a statistics table that must be very dear to the competition authorities, which is updated on a monthly basis, detailing the numbers of cases sent from the competition authorities.4 Of course, there are the champions, like Germany and France; and there are the struggling new entrants, like Bulgaria, which has notified one case. But for example, when the Polish Competition Authority notified its first case to the ECN, it was like they opened champagne.5 It is also a competition for the competition authorities, because they are listed in the table, and every month they want to put in more. What does it mean? That means for private practitioners business is booming, because they also want to have cases that are big enough to be notified to Brussels. Not only do they have to notify cases that they start to investigate, but they have to transmit envisaged decisions. This is basically like the godfather (the European Commission) will look at the draft decision and will see whether or not the pupils have committed any major errors. The fact is that, until now, the Commission has not resorted to the so-called “atomic bomb” option, where it directly opposes a draft decision that is envisaged by the NCA. It has just done this on an informal basis. However, if we look at the cases that have been notified and then finally adopted by the NCAs, the Commission tends to be prudent and allows the national competition authorities to take sometimes some exotic views, maybe just for them to think that they are independent. The ECN is definitely a forum for informal contacts. It has various working group sessions on different topics inspired both by the Commission and by itself. I will discuss later the impact of those informal contacts on the enforcement of competition-related cases in Europe. What does it mean for the users of law? First, the system is not very transparent for users. Interested parties have no access to the deliberations of the ECN. So unless you have good contacts at the NCAs that tell you what is going on, there is no possible formal way to find out what actually is the present trend and what kind of information has been exchanged. This has raised questions on waivers of confidentiality between the competition authorities across Europe. But the system is functioning, and apparently they will continue to discuss on an informal basis the experiences of their colleagues in neighboring Member States. This is something that I will be touching on very briefly because this will be discussed further in terms of the Green Paper and the White Paper to come regarding the enforcement of competition law before national courts.6 As I said, it is not just the national competition authorities that now can enforce Articles 81 and 82, but also the judges. Judge Lenaerts has said that these are the judges on the front lines of competition law enforcement.7 Jul05-ECNBr Bag7=28f.pdf. Bourgeois notes that although the European Commission monitors Member States enforcement activities in part through a database of national court decisions involving Articles 81 and 82, there are no current plans to develop a database of national competition authority decisions. 4 European Competition Network, Statistics, http://ec.europa.eu/comm/competition/ecn/statistics.html. 5 See Polish Office of Competition and Consumer Protection (Prezes Urzedu Ochrony Konkurencji i Konsumentów) (OCCP) Newsletter, available at http://www.uokik.gov.pl/en; see also OECD, Directorate for Financial and Enterprise Affairs Competition Committee, Annual Report on Competition Policy Developments in Poland — 2006, available at http://www.oecd.org/dataoecd/0/4/37028574.pdf; OECD, The Role of Competition Policy in Regulatory Reform in Poland (July 11, 2002), available at http://www.oecd.org/LongAbstract/0,3425,en_2649_37463_ 33915251_1_ 1_1_37463,00.html; Wojtek Dorabialski, “Can Competition Protection in Poland Become More Effective?”, Baltic Rim Economies, Bimonthly Rev. 1 (Expert Article 175, Feb. 29, 2008), available at http://www.tse.fi/FI/yksikot/ erillislaitokset/pei/Documents/bre2008/expert_article175_12008.pdf. 6 See Green Paper, supra note 2; White Paper, supra note 1. 7 See Koen Lenaerts, “Some Reflections on the Separation of Powers in the European Community”, 28 Common Mkt. L. Rev. 11 (1991); European Court of Justice judge Koen Lenaerts calls on CoR and legislative regions to prepare for greater powers under the Lisbon Treaty (May 20, 2008), http://www.eumonitor.net/ modules. php?op=modload&name=News& file=article&sid=101171 (“Local and regional authorities are in the front line.”).

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The problem is that in certain Member States the judges are like the Marine Corps, and in the other Member States the judges are like logistics personnel in the back waiting to see what will happen on the battlefield. So the degree to which the judges are keen to enforce competition cases varies across Europe. This leads to forum shopping and all the other issues that are maybe going to be discussed here. Actually, the courts not only have the competence, but they are obliged to apply Articles 81 and 82 when they see, for example, a dispute in which competition law issues arise that have an effect on trade, which is of course a discretionary matter. But in general, if someone tries hard, one can find an effect on trade usually in every big case involves some sort of flow between Member States. The courts can be assisted by the European Commission and the NCAs. In the system there is an obligation to transmit the judgments.8 If someone is interested, they can go to the ECN Web site and look at all the judgments that involve the application of Articles 81 and 82. There is an interesting question about the binding character of the decisions of the other NCAs for the courts in neighboring Member States. For example, the Polish NCA may take an exotic decision declaring that there was an abuse of dominant position in an IPrelated dispute, for example, in a patent settlement. Actually, in a German court the answer is simple, because in their national legislation they have acknowledged that you can take a decision of an NCA that is final and this is binding for the court. But in other countries the answer is not so simple. The question is whether you have to argue the case again or you can just show the decision of another NCA and say, “I have it here, and you have to give me the damages.” How does this impact cases for practitioners? I have picked a handful of recent cases that have been discussed across Europe. For example, there is a U.K. case that is very interesting.9 It shows the impact of the system. There was a patent settlement between two large manufacturers of brake systems that together held a collective dominant position. They concluded a patent settlement in Germany. Afterwards, one of the parties before the U.K. High Court tried to enforce the notion that the patent settlement is unenforceable because it may constitute a breach of Article 81. The High Court has confirmed the idea and said that this well may be the case. Why is this case significant? Because presently the competition authorities, together with the Commission, are investigating the pharmaceutical sector and are investigating closely the patent settlements in terms of whether those settlements may be contrary to Article 81. If this case, for example, would be decided that such a non-challenged provision is unenforceable as contrary to Article 81, this may be nice grounds for other cases brought in other jurisdictions across Europe in the pharmaceutical sector. So the system is like linked elements. There is for example a Polish case, a typical IP dispute between a collective management society and the artists, where the collective management society imposed an obligation to exclusively transfer all the rights to the society. The artists went to the Polish Competition Authority with a complaint. Following an investigation that was quite brief, the Competition Authority declared that this was illegal because it constitutes an abuse of dominant position under Article 82.10 So the shift from an ordinary IP dispute to a competition-related dispute presently in Europe is really quick. You can treat the competition-related aspects as a shield or as a sword, 8 The prescribed format for notification is determined by the Regulation of the Council of Ministers of 17 July 2007 on notification of an intended concentration of entrepreneurs. Journal of Laws of 2007, No. 134, item 937. 9 Knorr-Bremse Sys. for Commercial Vehicles Ltd. v. Haldex Brake Prods. GmbH, [2008] EWHC 156 (Pat), available at http://www.bailii.org/ew/cases/EWHC/Patents/2008/156.html. 10 See Press Release, Polish Office of Competition and Consumer Protect, Artists Under Protection (Oct. 17, 2007), available at http://www.uokik.gov.pl/en/press_office/press_releases/art95.html.

772 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW depending on the side you are on, and you can shift the balance of a case by involving the national competition authorities, or the courts, depending on the legislation. There is an interesting Dutch case regarding the application of Article 82 and the tying accusations against Apple.11 The Dutch Competition Authority has denied those accusations. Therefore, I conclude that the new system matters for IP-related disputes and that it is worthwhile looking at these cases before the ECN to find out how those can be used for IP cases.

The Future of Private Enforcement Actions in the European Union Prof. Jeroen Kortmann* Good afternoon. My name is Jeroen Kortmann. I am a Partner at Stibbe, attorneys in Amsterdam, and a professor at the University of Amsterdam. I should, as a note of warning, say that I am a civil litigator. I am not specifically expert in the area of IP. About 60–70 percent of my practice is civil litigation as a result of competition law infringement, but I have to admit that most of those cases relate to cartel infringements. For the purpose of today’s discussion, though, it doesn’t matter much. The question is to what extent civil litigation in Europe is up and coming and where it is going. The question that has been posed to me specifically is: What is the future of Private Enforcement Actions in the EU? I. INTRODUCTION

I guess for most of you, being an American audience, almost every time there is a public decision on a competition law issue you have attorneys knocking on your door almost within seconds after the decision has been published and asking for money. In America, it is said that approximately 600-to-1,000 civil claims are filed every year. In Europe, that has inspired the people at the Commission — as Monika calls them, the “godfather” of competition law. As a Dutchman, I am bound to associate the European Commission with Commissioner Neelie Kroes, so I think of the Commission as the “godmother” of competition law. It has inspired Commissioner Kroes to try to encourage parties to file these types of claims in Europe as well, the underlying assumption being that in Europe encouragement is needed because there is no such thing as private litigation as a result of competition law infringement.12 Now let me acknowledge right away that we are way behind America in this development. But as was said in the previous session, we are simply behind America in terms of history when 11 See NMA Annual Report (2007), available at http://www.nmanet.nl/Images/Annual%20Report%0NMa%02007_ cm16-113026.pdf; see also Thomas Crampton, “iTunes Legal Attacks Spread from France”, Int’l Herald Trib., June 9, 2006, available at http://www.iht.com/articles/2006/06/08/business/apple.php. * Stibbe, Amsterdam. 12 See Neelie Kroes, European Commissioner for Competition Policy, Reinforcing the Fight Against Cartels and Developing Private Antitrust Damage Actions: Two Tools for a More Competitive Europe, Speech Before the IBA Joint Conference on EC Competition Policy (Brussels) (Mar. 8, 2007) [hereinafter Kroes, Two Tools], available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/07/128; Neelie Kroes, European Commissioner for Competition Policy, Policy paper on compensating victims of competition breaches, Opening Remarks at Press Conference (Apr. 3, 2008), available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/167 (“A competition authority cannot be everywhere at once. A competition culture needs eyes and ears on the ground, and the capacity to respond quickly when an injustice has occurred. An option for private action increases greatly this possibility.”); see also Waelbroeck, Slater & Even-Shoshan, supra note 2.

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it comes to competition law in general. The question is not, therefore, are we behind or not, but is it going to evolve on its own or does it need further encouragement by the Commission? I put it to you, and to the European Commission, that in practice we have already seen a great increase of competition law claims as a result of infringements anyway — and that is not a matter of the past couple of years; that is a matter of the past ten years. However, many of these claims do not reach the surface. Why not? Because of course many of these claims are settled. We see it in The Netherlands. There have been very extensive claims in the construction sector, in the beer sector, in the chemical sector, in the pharmaceutical sector. And if you look around us, across the border to Germany and to France and to England, of course the Vitamins and the Cement cartel cases.13 This is simply a trend that is going to happen regardless of whether there is encouragement or not. However, Commissioner Kroes and her people have decided that this needs to be encouraged. Monika already briefly mentioned the Green Paper14 and the White Paper.15 We expected the White Paper yesterday, but it is not yet available. Now what are perceived as the main obstacles in Europe? It is mainly the fact that Europe, when it comes to private law, is a patchwork of legal systems. To some extent, of course, Europe is a political, and to a larger extent an economical, union. Thus it will come as no surprise to you that when it comes to cultural aspects and also to legal aspects, we are not a union at all yet. I think Starbucks discovered that to its detriment. While the English may like their coffee, the Italians will not have any type of milk in their coffee after 11 o’clock, and certainly no flavoring. When it comes to law, we have similar, very profound differences between our systems. I have decided for these fifteen minutes to highlight some of the important differences that make the climate so very different in these countries, and therefore make it relevant in which country you are if you are trying to bring a claim. The five issues that I would like to briefly highlight are: discovery; the availability (or, rather, the non-availability) of class actions and class settlements; the type of damages available, statutory interests; and time bars, or as some people like to call it statutory limitation. II. DISCOVERY

Let me start with discovery. I often have difficulty when discussing these issues with my American colleagues to make them understand that in most European countries we do not have 13 A fine of €462 million was levied against Hoffmann-LaRoche for its leadership role in the global vitamins cartel. Commission Decision Relating to a Proceeding Pursuant to Article 81 of the EC Treaty and Article 53 of the EEA Agreement, Case COMP/E-1/37.512 — Vitamins (Nov. 21, 2001), available at http://eurlex.europa.eu/LexUriServ/ LexUri Serv.do?uri=oj:l:2003:006:0001:0089:en:PDF. A fine of €479 million was imposed against Thyssen Krupp for its role in an elevators and escalators industry cartel. Press Release, European Comm’n, Commission Fines Members of Lifts and Escalators Cartels Over €990 Million (Feb. 21, 2007), available at http://europa.eu/rapid/pressReleasesAction. do?reference=ip/07/209. In 1994 the European Commission destroyed a pan-European cement cartel, penalizing forty-one companies from sixteen countries and an industry association for participating in a prohibited agreement aiming at dividing the market (initial fines of €250 million lowered by Court of First Instance to €110 million and the fine on the trade association nullified, Joined Cases T-21/95 et al. Press Release, European Comm’n, The Court of First Instance Reduces the Fines Imposed on the Cement Cartel by Almost EUR 140 Million (Mar. 15, 2000), available at http://curia.europa.eu/en/actu/communiques/ cp00/aff/cp0016en.htm. In 2002 the Commission imposed fines totaling €478 million on four companies that operated a long-running cartel on the market for plasterboard. Press Release, European Comm’n, Commission Imposes Heavy Fines on Four Companies Involved in Plasterboard Cartel (Nov. 27, 2002), available at http://europa.eu/rapid/pressReleases Action.do?reference=IP/02/1744; Press Release, European Comm’n, Competition: Commission Fines Members of Beer Cartel in The Netherlands Over €273 Million (Apr. 18, 2007), available at http://europa.eu/rapid/pressReleases Action.do?reference=IP/07/509. 14 Green Paper, supra note 2. 15 See White Paper, supra note 1.

774 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW such a thing as pretrial discovery. It is simply not true that in, for example, The Netherlands, you can ask for the data relating to sales or the data relating to profit of the defendant. You can ask — of course you can ask anything — but the answer will simply be “No.” There is no pretrial discovery.16 You have very limited access that can be enforced in courts with regard to documents that are owned by the defendants. You actually have to be able to specify or pinpoint them. If you cannot — and of course you can’t if you don’t know of the existence of those documents — that is the end of the story. Now what I have just said is a little unsubtle, because it is true in most of these jurisdictions that the courts have a power to order ex officio the production of certain documents that they find interesting and that they would like to see in the litigation. But one should realize that in a lot of these jurisdictions there is no penalty on it. So a Dutch judge for example will perhaps in some cases be inclined to say, “Well, of course you do not have a duty to disclose all the relevant documents. However, I would like to see the sales figures relating to this particular plaintiff because I would like to see what the likely damages are.” If the judge orders that and you refuse to do it, there is no contempt of court in The Netherlands. It is up to you to do it or not to do it. The only penalty is that the judge may draw his own conclusions. But what kind of conclusions can he draw from the fact that the defendant has not disclosed anything? You can hardly say, “I do not see any numbers, so the damages are $100 million or $1 billion.” You can’t. And you still need a reasoned decision. So it is an entirely different climate when it comes to that. III. AVAILABILITY OR NON-AVAILABILITY OF CLASS ACTIONS

The second issue is the availability or non-availability of class actions. There are large differences across Europe again. There are virtually no countries in Europe that have class actions.17 Sweden18 has an opt-in system, which basically means that you can’t find “closure” or negotiate a full settlement in any kind of case unless everybody opts in. It is said that in 16 Within the framework of Article 23 of the Convention on the Taking of Evidence Abroad in Civil or Commercial Matters, The Netherlands declared that it would not execute letters rogatory to conduct proceedings that, in Member States with a common law system, are known as “pre-trial discovery of documents.” This position has recently been confirmed by the Dutch legislator when implementing Council Regulation (EC) No. 1206/2001 of 28 May 2001 on the cooperation between Member States on the taking of evidence in civil or commercial matters. A legitimate interest in disclosure is generally assumed if the requested documents are necessary to prove facts stated by the requestor in pending litigation. A legitimate interest may also be assumed if any given obligation to disclose certain information is not fulfilled. The Dutch Supreme Court has ruled that there is no obligation, based upon Article 843a Dutch Code of Civil Procedure (DCCP) or the principle of “equality of arms,” to hand over material (including documents) to enable a party to control the completeness and authenticity of material. “Having a legally relevant interest” is, in its view, also insufficient to uphold a claim under Article 843a DCCP. Document disclosure can be enforced prior to, or pending, litigation in The Netherlands, if three cumulative conditions are satisfied: a requestor must argue and prove that (1) it has a legitimate interest, (2) the request is made for “certain documents/data,” and (3) the documents that are the subject of the request must relate to a legal relationship to which the requestor is a party. Timo Jansen, Document Disclosure in The Netherlands (July 2007), available at http://www.fplaw.nl/sites/default/files/Newsletter_July.pdf. 17 For a general survey of the scope for private litigation in twenty-seven jurisdictions worldwide, see Global Competition Review, Getting the Deal Through: Private Antitrust Litigation, Getting the Deal Through, 2008 (Samantha Mobley ed., 2007); see also European Commission, The Competition and Antitrust Review (2007); ABA, Litigation Section, 2006 ABA Annual Meeting, Aug. 3–6, 2006, Laurel J. Harbour & Marc E. Shelley, The Emerging European Class Action (2007), available at http://www.shb.com/FileUploads/the_emerging_European_ class_action__ expanding_multi-party_litigation_to_a_shrinking_world_1496.pdf. 18 Swedish Group Proceedings Act, SFS2002:599 (effective Jan. 1, 2003). The Act allows for both injunctive and monetary relief, and is not restricted to consumer law or environmental law only, but rather applies to goods and services as well. Class members must opt in to be included as a member of the class under the Swedish Act. Only individuals who have chosen to opt in by giving notice to the court will be bound by judgment in the case.

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Spain19 and Portugal20 you have something like a class action, but there is very little in the way of precedent on it. In most other countries you have no class action. In The Netherlands you do have an action that can be brought. You can ask for a declaratory judgment, but you cannot ask for damages. So it is an action “without teeth.” There is — and this is unique in The Netherlands — now, since 2005, something called a class settlement, which, if approved by the Court of Amsterdam, will bind the Dutch. But the question is, of course, in the case of European-wide, or even worldwide, infringements whether these types of settlements will bind anybody outside of the Netherlands.21 If we look at the recent American settlement in the Air Transportation Surcharge case, for example, where the U.S. class settlement in that case purports to bind both U.S. customers and U.K. customers, it is very questionable whether it actually binds any U.K. customers; that is, whether it prevents them from still bringing their own cases if they want to.22 In that case, practically it may not matter. The estimated damages are about £10 or £20 per person, so nobody is going to start their own case if they can come to the United States and hold up their hand and receive money. But of course, if we are looking at a different type of case, where you have large parties or large customers suing for large sums of money, it may be very different. IV. DAMAGES

The third issue — and I think this is a very important issue to realize — is the type of damages available. The purpose of our tort law, something as basic as that, is not something that we in Europe all agree on. Most European jurisdictions — and this is true since about the time of Grotius, so early 17th century — view the purpose of tort law as exclusively compensatory. The whole idea of using tort law to enforce anything, or prevent certain wrongs, let alone punish wrongdoers, is foreign to most of our systems. The Germans in the past century have come to view this slightly differently. The English, of course, have a different outlook on anything when it comes to private law in Europe. But for the rest of Europe this is the truth. So when it comes to issues such as passing on, it is almost automatic for a European civil lawyer to say, “Of course passing on matters.” The counter-argument — “then how do we punish the wrongdoers?” — is viewed as being irrelevant to tort law. If you want to punish the wrongdoers, you have to use public law. You have to look to the European Commission to punish. You have to look to the national legislators if you want to criminalize some of these acts. But punishment is simply not the purpose of our tort law. 19 Spain adopted a variation of class action procedure, effective Jan. 1 2001, Spanish Law of Civil Judgment 1/2000. The Spanish act permits collective actions by 1) groups of alleged victims; 2) consumer and user associations on behalf of their members and unidentified victims; and 3) other entities established to defend the interests of consumers and users. The procedure is only available to consumers and users. It is not available to recover other types of damages, such as those damages resulting from securities or environmental violations. See also Cani Fernandez, Alvaro Mendiola & Paul Anthony Hitchings, Spain, in Global Competition Review, Getting the Deal Through, supra note 17, ch. 18. 20 Decree-Law 108/2006, of 8 June, pursuant to Council of Ministers Resolution 100/2005, of 30 May 2006, allows the judge to “practice ‘mass acts’ so long as there is an element of connection between the actions and the combined performance of a procedural act or diligence simplifies the court’s task” (preamble to Decree-Law 108/2006); Code of Civil Procedure in the Administrative Courts, art. 48(1); see also Henrique Antunes, National Report: Class Actions, Group Litigation & Other Forms of Collective Litigation (2007), available at http://www.law.stanford.edu/display/ images/dynamic/events_ media/Portugal_National_Report.pdf. 21 Dutch Civil Code, art. 3:305a-c CC (effective July 1, 1994); Dutch Civil Code, art. 7:907-910 CC, and Dutch Code of Civil Procedure, art. 1013-1018 CCP (effective Aug. 1, 2005) cover the court approval of an opt-out collective settlement. 22 In re International Air Transp. Surcharge Antitrust Litig., MDL No. 1793 (N.D. Cal) (settlement entered into Feb. 15, 2006).

776 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW Similar kinds of arguments come in when it comes to the stripping of profit from a defendant. Generally, our tort law cannot be used to strip a defendant from his profits. V. STATUTORY INTERESTS

The fourth important difference is the availability of statutory interests. Virtually every country has something along the lines of statutory interests, but in most countries there are very complex rules as to when they start accruing and how to calculate the interests. To give two important highlights, there are only two countries in Europe where statutory interest is compounded — and, of course, that makes a huge difference in the type of money we are looking at — The Netherlands and Poland. Maybe Monika can confirm whether this is indeed true for Poland. Second, an important element is, of course, when do the interests start accruing? In most jurisdictions in Europe it does not start running until you have actually brought the claim or announced your claim. In some countries, like The Netherlands again, it actually starts at the moment that the damage is suffered, which makes The Netherlands for that reason an interesting jurisdiction for plaintiffs. A fifth important difference is time bars. Of course, we all understand, I think, the concept of time bars. To give you an idea of the differences between the various European jurisdictions, I have — and I should acknowledge this at an IP conference — “borrowed” this picture from the Ashurst Report.23 Currently Existing Interest Rates 18 16 14

% Rate

12 10 8 6 4 2 0

What we call “short-stop” periods of limitation are indicated in lavender. Those are periods of limitation that typically start running at the moment that you are aware of a claim. The reasoning there simply is: by the time you can actually bring your claim, you cannot wait forever. As you can see, the short-stop varies between about one year in Spain to about five years in most countries, six years in the United Kingdom, and ten years in countries like France. Then you have something called the “long-stop” period of limitation (in black). The longstop basically applies regardless of whether or not you know about your claim. The idea here is that at some stage we have to say “let bygones be bygones.” In court we are not going to go back further than, for example, in Germany, thirty years; in The Netherlands, not back further than twenty years. So if we have long-term infringements in the various countries, there are different rules as to how far back you can go. 23

Waelbroeck, Slater & Even-Shoshan, supra note 2, tbl.14.

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Consider also of course that if statutory interest can be sued for, “old” damages weigh much heavier on a defendant through statutory interest than “young” damages, if I can put it that way. Now the main question then becomes, of course, for any plaintiff — and, indeed, for any defendant — once they are confronted with a competition law infringement, whether it is in the area of IP law or outside of it: Which law applies to my conflict, to my problem? There is no clear law on this. Every country has its own rules on conflicts of laws. If you try to find any kind of common principle that is more or less applied across Europe, you will find that there is no real common principle. VI. STATUTORY LIMITATIONS — ROME II REGULATION

I was asked to talk about the future of these types of claims, so we should focus on the Rome II Regulation that will come into force as of 11 January 2009.24 Essentially, it says the laws apply of the countries or the jurisdictions in which the competition is affected by the wrongful act. It then says — this is a very last-minute insertion — that if the markets of many different jurisdictions are concerned, then if you sue the defendant in one of those jurisdictions, as a plaintiff you can choose to apply the law of that jurisdiction to the entire damages, also damages outside of it. Interestingly, I think this Regulation encourages forum shopping. It already happens a lot. In legal practice, what you see every now and then, depending on the internal policy of the lawyers assisting the parties, is they actually look for specific courts in which to bring their actions. Defendants sometimes try what we call “torpedo” procedures, the essence of which is try to find a court in a country that usually takes a long time to decide on issues of jurisdiction, bring their case there, and then see if you can argue long enough for the plaintiffs to be discouraged. Typically, in the past, the courts of southern Italy have been chosen to do this in, because apparently it was found that it usually takes about two years for a court there to decide that they have no jurisdiction over a claim. What we will see as a result of this existing patchwork and as a result of Rome II, I think, in the future of civil litigation: (1) there is going to be more of it, simply because companies are becoming increasingly aware of it; and (2) there is going to be a lot of forum shopping. Plaintiffs that do not have enough evidence will look for those jurisdictions in which discovery is easier. Plaintiffs that have an issue with passing on, because they think they probably have not suffered any damage, they’ve passed it all on to the downstream customers, will look for Germany, where passing on has been curtailed. Plaintiffs who think they have a lot of “old” damages and interest that will buff up their claim will look for The Netherlands. And sometimes plaintiffs will simply go for jurisdiction because in other jurisdictions their claim has already expired. In the absence of the White Paper we had all expected, there is not much more I can tell you. What I can say is that yesterday at the American Bar Association Section of Antitrust Law Spring Meeting Rainer Becker of the Commission Directorate suggested that the three key points on which the White Paper is going to say something were the issues of: (1) discovery; 24 Regulation (EC) 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2007/l_199/ l_19920070731 en00400049.pdf. The intention is to create a harmonized set of rules within the European Union to govern choice of law in disputes about torts and delicts arising from non-contractual obligations, analogous to the rules established for contract disputes by the Rome Convention of 1980. Initially submitted by the European Commission in July 2003.

778 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW (2) passing on; and (3) class actions. So I think we can expect that, especially when it comes to class actions, that they are going to try to centralize some of these rules.25 Thank you very much. MR. KOBAK: Now our panelists. I will start with Valentine. PROF. KORAH: I know rather a little about litigation because I don’t actually litigate. It seems

to me that it is very difficult to find a foreign court with jurisdiction and organize a case abroad. In the Courage case,26 the European Court of Justice confirmed that there is a right to sue for damages. The remedy must be “effective and nondiscriminatory.” What is “effective” and what is “nondiscriminatory” is another of these India rubber definitions. When you’ve got your judgment, there is still a problem. What used to be known as the Brussels Convention (now Council Regulation 44/200127) is deficient. You cannot sue your German distributor, and use that action against your French distributor unless it is between the same parties in the same matter. It is not likely to be that. So we have a great problem in enforcing foreign judgments. Everyone is saying that the common law countries have a great advantage in that we have discovery. But it is not like American discovery. We would consider most of American discovery as being a fishing expedition and it would be struck out. We have very much more limited discovery, but at least we have something. I think that is true also of Ireland. English barristers are pretty expensive by European terms, and that will be some discouragement for actions in England. Irish barristers on the whole are paid less, but not the sort of barristers who will be capable of doing an EC competition case of any complexity. They are paid more or less equivalently to London barristers. There is one other Member State, Cyprus, that allows some discovery.28 I don’t see how we can progress with all this forum-shopping and different rules unless the Commission is prepared to adopt a regulation and cover significant procedural matters. I dare say they are not going to make a completely uniform system of enforcement, but I would have expected that you would have to have some form of harmonization.29 There is power in the Treaty in Article 83.30 I can’t speak for Scotland at all; it’s a different jurisdiction and the procedural rules are different. But in Provimi31 we had a strike-out case at first instance in London where the action was not struck out by Aikens, J. and jurisdiction was very broad. If one of the subsidiaries came within the jurisdiction, any company in the group could be sued. But it is only a strikeout action and it is only at first instance. No doubt that will be challenged at some point. The United Kingdom does not allow exemplary damages.32 That has been decided at first instance.33 Well, that’s fair enough. One relies on the Commission to fine people for deterrence. It is some discouragement for people who are thinking of suing in the United Kingdom. 25 For an in-depth report on Mr. Becker’s presentation, see ABA Section Conducts Forum on State of Private Enforcement in European Union, 94 Antitrust & Trade Reg. Rep. (BNA) 354 (Apr. 4, 2008), available at http:// ippubs.bna.com/ip/ BNA/ATR.NSF/b98e90baa7fc51df85256b520075bdf7/317222ca3f2a0a6a85257420007d36ac? OpenDocument. 26 Case C-453/99, Courage Ltd. v. Bernard Crehan, 2001 E.C.R. I-6297, [2001] 5 C.M.L.R. 1058, [2001] C.E.C. 297 [hereinafter Crehan]. 27 2001 O.J. ( L 12) 1. 28 European Commission, Executive summary and overview of the national report for Cyprus, available at http:// ec. europa.eu/comm./competition/antitrust/actionsdamages/executive_summaries/Cyprus_en.pdf. 29 The White Paper on Damages for Breach of the EC Antitrust Rules was published on April 3, after the conference. See supra note 1. 30 Available at http://ec.europa.eu/comm/competition/legislation/treaties/ec/art83_en.html. 31 Provimi & Trouw v. Aventis & Roche, [2003] E.W.H.C. 1211 (Comm); [2003] ALL E.R. (D) 59.

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I think that is really all I have to say because I don’t litigate. MR. KOBAK: That was very well done actually for someone who doesn’t litigate.

The EC White Paper on Private Enforcement of EU Antitrust Rules* Maurits Dolmans** I was slated to comment on the long-anticipated White Paper on damages actions for breach of the EC antitrust rules, which was expected before this conference. It was eventually published on April 2, 2008. The White Paper is a modest ten-page document that summarizes the Commission’s proposals to address perceived obstacles to the development of private antitrust damages litigation in Europe. It is accompanied by detailed supporting documents, including a Staff Working Paper,34 which summarizes much of the reasoning underlying the White Paper’s recommendations, and an Impact Assessment,35 which analyzes the benefits and costs of various policy options that were considered in developing the White Paper. The White Paper aims “to improve the legal conditions for victims to exercise their right under the Treaty to reparation of all damage suffered as a result of a breach of the EC antitrust rules” by setting out concrete measures aimed at creating an effective private enforcement system in Europe.36 Despite the requirement that Member States establish an effective legal framework making exercising the right to damages a realistic possibility, the White Paper finds that significant legal and procedural hurdles remain in national civil litigation systems. The Impact Assessment concludes that victims of EC antitrust infringements rarely obtain compensation and are foregoing tens of billions of euros per year in compensation.37 To remedy this, the White Paper proposes several measures and policy choices intended to facilitate private antitrust claims. At the same time, the White Paper is careful to emphasize the need to preserve a “genuinely European approach” to the issue of damages actions that is “rooted in European legal culture and traditions.”38 There had been speculation that, following the Commission’s 2005 Green Paper on damages actions,39 which set forth a wide range of options for discussion, the White Paper might include ambitious measures that would foster “U.S.-style” litigation, such as multiple damages, opt-out class actions, or extensive discovery rules. By and large, however, 32 Article 24 of Rome II, however, sets out that for damages claims in the case of non-contractual obligations, it would be “contrary to Community public policy” to award exemplary or punitive damages. 33 See Devenish Nutrition v. Sanofi-Aventis SA (France), [2007] E.W.H.C. 2394 (Ch). * This paper is substituted for the ad hoc comments that Maurits Dolmans made during the Conference, since the White Paper was not yet available on the date of the conference. ** Cleary Gottlieb Steen & Hamilton, Brussels. 34 Commission Staff Working Paper accompanying the White Paper on Damages Actions for Breach of the EC Antitrust Rules, Brussels, SEC (2008) 404 (Apr. 2, 2008) [hereinafter Working Paper]. 35 Commission Staff Working Document accompanying document to the White Paper on Damages actions for breach of the EC antitrust rules Impact Assessment Brussels, SEC (2008) 405 (Apr. 2, 2008) [hereinafter Impact Assessment]. The Impact Assessment is based in significant part on findings set forth in a 671-page Impact Study prepared by a team of external consultants: Making Antitrust Damages Actions More Effective in the EU: Welfare Impact and Potential Scenarios, final report submitted to the Commission on Dec. 21, 2007 [hereinafter Impact Study]. 36 White Paper, supra note 1, § 1.2. 37 Impact Assessment, supra note 35, § 2.2. 38 White Paper, supra note 1, § 1.2. 39 Commission Green Paper, supra note 2.

780 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW the Commission has not proposed the measures contemplated in the Green Paper that would have been viewed as most dramatic or controversial; the White Paper’s recommendations fall largely within the scope of existing European civil law practice and principle. The main proposals set forth in the White Paper are summarized below. I. ISSUES OF STANDING AND PROCEDURE

A. Standing: Who Can Bring a Claim? The European Court of Justice in the landmark Crehan judgment articulated a broad standard of who has the right to bring a private action for violations of EC competition law, holding that the full effectiveness of EC competition law “would be put at risk if it were not open to any individual to claim damages for loss caused to him by a contract or by conduct liable to restrict or distort competition.”40 The White Paper follows this, proposing a similarly broad approach to the issue of standing. First, the White Paper advocates granting standing to indirect purchasers (i.e., purchasers who had no direct dealings with the infringer, but who nonetheless may have suffered harm because an illegal overcharge was passed on to them along the distribution chain). Taking a different position (as is done, for example, in the U.S. Federal Courts, which deny standing to indirect purchasers) would have been difficult in view of the Court’s holdings in Crehan and Manfredi. Second, the White Paper proposes measures to foster collective actions by or on behalf of individuals who have each suffered relatively low-level damage (but which may in aggregate be substantial). Such claims often remain uncompensated, as individual claimants lack sufficient incentive to seek damages and existing procedural inefficiencies often render collective actions impractical. The White Paper proposes two complementary measures to facilitate collective redress: • Representative actions brought by qualified entities, such as consumer associations, state bodies, or trade associations, on behalf of identified or, in some limited cases, identifiable victims. These entities would be either (i) officially designated in advance or (ii) certified on an ad hoc basis by a Member State for a particular antitrust infringement to bring an action on behalf of some or all of their members; and • Opt-in collective actions, in which victims expressly decide to combine their individual claims for damages suffered into one single action. Both of these types of actions have already been available at the Member State level, and neither proposal is likely to be seen as controversial. The White Paper does not propose introducing U.S.-style “opt-out” class actions. In the United States, collective antitrust claims are brought primarily through “opt-out” class actions, in which a single plaintiff is able to commence an action on behalf of an entire class of unnamed plaintiffs (thus requiring those who do not wish to participate in the action to opt out). The opt-out class action process has been widely regarded in Europe as one of the principal “excesses” of the U.S. system. In fact, in 2007 Commissioner Kroes stated expressly that she would not support the introduction of opt-out class actions in Europe,41 so the White Paper’s position is unsurprising.42 40 Case C-453/99, Courage v. Crehan, 2001 E.C.R. I-6314 (Crehan), ¶ 26 (emphasis added); see also Joined Cases C-295/04 to C-298/04, Vincenzo Manfredi v. Lloyd Adriatico Assicurazioni SpA, 2006 E.C.R. I-6619 (Manfredi), ¶ 61 (“[A]ny individual can claim compensation for the harm suffered where there is a causal relationship between that harm and an agreement or practice prohibited under Article 81 EC”). 41 Kroes, Two Tools, supra note 12. 42 By contrast, the U.K. Office of Fair Trading recently advocated a more aggressive approach, proposing to introduce the possibility of opt-out representative actions for damages on behalf of consumers/businesses at large...

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B. Costs and Funding Claims Litigation is expensive. The costs of bringing an action for damages can represent a serious barrier to seeking redress, in particular for final consumers. Competition cases tend to be complex, resulting in high legal fees. Civil litigation in EU Member States generally operates on a “loser pays” principle designed to discourage unmeritorious claims (and defenses) by requiring the losing party to pay its own costs as well as a proportion (e.g., in the United Kingdom, normally around 60 percent) of the costs of its adversary. This works to deflate legal costs for successful private plaintiffs. However, it also creates risk, as due to the inherent uncertainty in bringing a lawsuit, a plaintiff will always expose itself to the risk of losing the case and having to pay not only its own legal costs but also the defendant’s. The Green Paper had posed for consideration a number of options that would potentially have alleviated cost burdens on plaintiffs, including “cost-capping” (i.e., exempting unsuccessful plaintiffs from paying some or all of the defendant’s legal costs, save where actions have been introduced in a “manifestly unreasonable manner”) and the introduction of contingency fees (i.e., arrangements in which no fee is charged by the plaintiff’s lawyers unless the claim is successful, in which case the legal fee is often expressed as a percentage of the damages awarded). However, the White Paper takes a conservative approach and does not suggest any specific changes to national cost regimes in favor of claimants. It merely encourages Member States “to reflect on their cost rules so as to facilitate meritorious litigation, taking into consideration existing practices.”43 Appropriate measures could include: • Encouraging settlements as a way to reduce costs; • Setting court fees at a level where they do not become a disproportionate disincentive to antitrust damages claims; and • Giving national courts discretionary “cost-capping” authority (i.e., the possibility of issuing cost orders derogating, in justified cases, from the normal “loser pays” cost rules).43 C. Limitation Periods The White Paper observes that limitation periods, while providing legal certainty, can also be a significant obstacle to the recovery of antitrust damages. For example, a short limitation period that started to run upon termination of the (possibly covert) infringement could timebar follow-on actions in the wake of an infringement decision by a regulator or an initial successful test case, as the period could expire while public enforcement remained ongoing. Member State rules on limitation periods vary substantially. The White Paper makes two suggestions toward harmonization of limitation periods: • First, in the case of a continuous or repeated infringement, the limitation period should not start to run before the day on which the infringement ceases or before the victim of the infringement can reasonably be expected to have become aware of the infringement and of the harm it caused him; and • Second, Member States should remain free to set their own limitation periods with reference to stand-alone actions, but in case of follow-on actions, a new limitation period of at least two years should start once the infringement decision on which a follow-on claimant relies has become final. (as opposed to the current opt-in procedure on behalf of named consumers). Private Actions in Competition Law: Effective Redress for Consumers and Businesses, Recommendations from the Office of Fair Trading, OFT916resp (November 2007). 43 Working Paper, supra note 34, ¶ 245.

782 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW II. ISSUES OF EVIDENCE AND PROOF

A. Disclosure/Discovery The majority of Member States follow the civil law tradition, which does not embrace the concept of disclosure of documents between the parties in civil litigation. While the courts retain powers to order production of documents, the parties’ ability to compel production of documents is limited. Lack of access to evidence in these jurisdictions substantially impairs the claimant’s ability to prove an infringement in a stand-alone action. Without the benefit of the resources and investigatory powers of a competition authority, claimants must avail themselves of the possibilities offered by national discovery rules, many of which effectively require the claimant to have sufficient evidence to discharge the burden of proof even before launching an action. The White Paper follows proposals first tabled in the Green Paper, suggesting that Member States adopt special rules expanding the possibilities for claimants to obtain documentary evidence from third parties in EC competition-law actions for damages. In particular, the Commission proposes granting national courts the power to order parties to proceedings (or third parties) to disclose precise categories of relevant evidence, provided that the plaintiff: • Has presented all the facts and provided evidence reasonably available to him and that, from these, there are plausible grounds to suspect that he has suffered harm from an antitrust infringement committed by the defendant; • Has shown that, despite all efforts, without the discovery order, he would not be able to produce the requested evidence; • Has specified sufficiently precise categories of evidence to be disclosed; and • Has satisfied the Court that the evidence requested is both relevant to the case and necessary and proportionate. The White Paper states that such a “fact-pleading” disclosure regime, under strict judicial control, would assist in overcoming the inherent information asymmetry that disadvantages plaintiffs, while still preventing so-called “fishing expeditions”45 and “discovery blackmail.”46 The White Paper recommends further that national courts should be granted powers to impose sufficient sanctions to deter the destruction of relevant evidence or refusal to comply with a discovery order. It also highlights the importance of granting adequate protection from discovery to corporate statements by leniency applicants47 and to the investigations of competition authorities. B. Precedential Value of Prior Competition Authority Decisions In a follow-on action for damages, the burden of proving an infringement is substantially alleviated since the claimant can take advantage of the already-existing competition authority White Paper, supra note 1, § 2.8. I.e., “a strategy to elicit in an unfocused manner, through very broad discovery requests, information from another party in the hope that some relevant evidence for a damages claim might be found.” Working Paper, supra note 34, n.39. 46 I.e., “a strategy to request very broad discovery measures entailing high costs with the intention to compel the other party to settle rather than to continue the litigation, although the claim or the defence may be rather weak or even unmeritorious.” Id. n.40. 47 The White Paper recommends that all corporate statements submitted by a leniency applicant under Article 81, regardless of whether the application for leniency is accepted, is rejected, or leads to no decision by the competition authority, should be protected from disclosure. In a related point, the White Paper proposes for further consideration a rule whereby the immunity recipient’s civil liability would be limited to claims by his direct and indirect contractual partners. White Paper, supra note 1, § 2.9. 44 45

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decision finding an infringement. In actions following on European Commission infringement decisions, the precedential value of the decision is clear: Commission decisions are binding on national courts as to the existence of an infringement. According to Article 16 of Regulation 1/2003, in order to avoid the risk of conflicting decisions, national courts “cannot take decisions running counter to the decision adopted by the Commission.”48 Due in part to a lack of precedent, however, the situation in respect of actions following on from infringement decisions by national competition authorities (NCAs) is slightly less clear. The White Paper aims to clarify this issue by extending to infringement decisions by NCAs that are members of the European Competition Network the same precedential value that is accorded to Commission decisions. The Commission thus proposes that final infringement decisions taken by an NCA under Article 81 or 82, and final judgments by review courts upholding those decisions, should be accepted in every Member State as irrebuttable proof of the infringement in subsequent actions for damages.49 The proposed rule would apply only to NCA decisions that are final, i.e., where the defendant has exhausted all appeal avenues, and that relate to the same practices and same undertaking(s) concerned in the follow-on litigation. This raises the question whether decisions dealing with facts that are merely similar to those at issue before a court should also be binding. The Working Paper clarifies that binding effect should only be granted to decisions relating to “(i) the same agreements, decisions or practices that the NCA found to infringe Article 81 or Article 82 EC, and (ii) to the same individuals, companies or groups of companies which the NCA found to have committed this infringement (normally, the addressee(s) of the decision).”50 Therefore, while a prior infringement decision in a similar case may be admitted as evidence, and may even be highly persuasive, it will not constitute binding proof of the infringement and the court will need to reach its own determination on that issue.51 C. Fault Requirement The White Paper observes that once a breach of Article 81 or 82 has been proven, Member States take different approaches concerning the extent to which the claimant must also prove the element of fault to obtain damages. The White Paper endorses the approach of those Member States that either require no showing of fault or irrebuttably presume fault once an infringement has been proven. For other Member States, the White Paper states that the principle of effectiveness requires that any limitations imposed by a fault requirement would have to be limited. The White Paper thus suggests that, for Member States that require fault to be proven: • First, once the infringement of Article 81 and 82 has been proven, the defendant should be liable for damages caused unless he demonstrates that the infringement was the result of a genuinely excusable error; and 48 Recital 22 and Art. 16(1) of Regulation 1/2003; see also Case C-344-98, Masterfoods Ltd. v. HB Ice Cream Ltd., 2000 E.C.R. I-11369 (Masterfoods). 49 White Paper, supra note 1, § 2.3. 50 Working Paper, supra note 34, ¶ 154. 51 This is consistent with the view taken by the U.K. House of Lords, which considered this issue in the Crehan case, Inntrepreneur Pub Co. v. Crehan, [2006] UKHL 38. The House of Lords held that claimants will not be entitled to “piggyback” a private damages action on a prior competition authority infringement decision where the prior decision deals with a different — even if very similar — situation. The House of Lords explained that while it is clear that conflicting decisions must be avoided (citing Case C-234/89, Delimitis (Stergios) v. Henninger Bräu, 1991 E.C.R. I-935, [1992] 5 C.M.L.R. 210, [1992] 2 C.E.C. 530, and other precedents), there is no risk of such conflict where the legal and factual context of the case that was examined by the Commission is not completely identical to that before the national court (citing the Opinion of Advocate General Cosmas in Masterfoods, 2000 E.C.R. I-11369.

784 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW • Second, an error would be deemed excusable if “a reasonable person applying a high standard of care could not have been aware that the conduct restricted competition.”52 These proposals would, in practice, create a strong presumption of fault once the infringement is proven. III. ISSUES OF DAMAGES

A. Damages: Definition and Quantification According to the ECJ’s judgment in Manfredi, each Member State may choose how best to provide for the compensation of damages, provided that (i) the domestic rules do not discriminate against damage claims for breach of EC competition rules, as compared with claims under national rules (the principle of equivalence) and (ii) the domestic rules do not render the exercise of the right to damages excessively difficult (the principle of effectiveness). According to the Court, the principle of effectiveness requires Member States to allow claimants the potential to claim compensation for actual loss, lost profit, and interest caused by the infringement of EC competition law,53 but issues such as punitive damages and restitution are left to the Member States (subject to the principle of equivalence). The White Paper suggests that the rules set forth in Manfredi should be codified in a Community legislative instrument, but does not propose expanding the types of recoverable damages beyond the compensatory principle, which is already the basis for damages calculation in most Member States. Other options raised in the Green Paper — most notably, punitive double damages for horizontal cartels — have not been proposed. Compensatory damages are usually calculated as the difference between the claimant’s actual position and the hypothetical position that the claimant would have been in but for the unlawful conduct. Quantifying this can be difficult, since reconstructing the counterfactual “but for” scenario typically requires making key economic assumptions, small changes to which can have significant effects on the outcome. In recognition of this difficulty, the White Paper announces that, to facilitate the calculation of damages, the Commission intends to issue non-binding guidelines for quantification of damages in antitrust cases, including simplified rules on estimating the loss suffered as a result of the infringement. B. The Passing-on Defense The “passing-on defense” arises out of the compensatory principle of damages. In jurisdictions that allow the defense to be raised, defendants can argue that their direct customers should not be entitled to claim the full amount of damages to which they would otherwise be entitled (usually measured as the amount of overcharge attributable to a cartel or abusive pricing scheme) if they have passed the higher price through to their own customers downstream. The standing of indirect purchasers is linked directly to this issue, since if the overcharge has been passed on by the direct purchaser, indirect purchasers (the direct purchaser’s customers) become the primary injured parties. There are sound policy arguments favoring various different approaches to these issues. The compensatory principle of damages counsels in favor of allowing defendants to raise the passing-on defense, since a claimant that passed overcharge through to its own customers would be unjustly enriched if its damage award was not reduced correspondingly. This principle also supports allowing indirect purchasers (who may be the real injured parties) to 52 53

White Paper, supra note 1, § 2.4. Manfredi, 2006 E.C.R. I-6619, ¶¶ 95, 97.

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sue. On the other hand, the passing-on defense inevitably increases the complexity of litigation because it creates the need to analyze the distribution of an overcharge along the entire supply chain of the relevant product in order to determine damages. Moreover, allowing the passingon defense will make it more difficult for direct purchasers — precisely those who are most likely to have the greatest incentive and ability to bring private actions — to obtain antitrust damages, likely decreasing the overall level of private enforcement. The Green Paper invited comment on several options: (1) allowing the passing-on defense, with both direct and indirect purchasers entitled to sue; (2) excluding the passing-on defense, with only direct purchasers able to sue (i.e., the approach in the U.S. federal courts); (3) excluding the passing-on defense, with both direct and indirect purchasers able to sue (i.e., the de facto approach in the U.S. federal + state court system); and (4) the introduction of a two-step procedure under which in the initial procedure the passing-on defense is excluded and the defendant is sued for the total overcharge, and in later proceedings the damages are allocated among all parties (including direct and indirect purchasers) that suffered a loss.54 The Commission recognizes that given the complexity of these issues, a trade-off between justice (in the sense of full recovery for all those who have suffered a loss from an illegal practice) and efficiency is inevitable. The White Paper proposes a course grounded in the compensatory principle of damages, based on option (1). As explained above, the Commission proposes to grant standing to indirect purchasers. The Commission also proposes to allow defendants to raise the passing-on defense. At the same time, however, the Commission proposes to lighten the burden of proof for indirect purchasers by granting them a rebuttable presumption that the illegal overcharge was passed on to them in its entirety. The burden would then shift to the defendant to show that overcharge was not, or was only partially, passed on to the claimant. This approach reduces the possibilities that direct purchasers who have passed on overcharge may be unjustly enriched and that defendants may be required to pay twice for the same harm, while also recognizing and seeking to address in part the difficulties of proof that indirect purchasers commonly face. IV. NEXT STEPS

The White Paper does not set forth binding rules, but has been issued for public comment. The Commission does not indicate what the next step in its effort to promote private actions will be, but one logical possibility would be seeking to pass a Regulation, which would require support of the European Parliament and Council. The Parliament has already indicated its support in principle, having issued a Resolution in 2007 calling for the adoption of common measures at the EU level “to facilitate the bringing of ‘stand alone’ and ‘follow on’ private actions claiming damages for behavior in breach of the Community competition rules.”55 In the meantime, the White Paper may already provide guidance to national judges who are asked to decide on an action for damages under Article 81 or 82 EC. The Commission is welcoming comments on the White Paper until July 15, 2008.

MR. KOBAK: I have always thought that U.S. substantive law has been influenced by the fact that we have so much private antitrust litigation.56 I think you can see in some of the recent Green Paper, supra note 2, at 8. See id. 56 See generally A. Neil Campbell & J. William Rowley, “The Internationalization of Unilateral Conduct Laws — Conflict, Comity, Cooperation and/or Convergence?”, 75 Antitrust L.J. 1001 (2008) (“The United States represents the highwater mark in the use of private litigation for antitrust matters, including unilateral conduct. The combination... 54 55

786 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW Supreme Court cases the Court looking for ways to dismiss or limit cases that part of what is in the back of its mind is that it is not always going to be the government or some responsible party, but it is going to be private plaintiffs. Because we do have so much discovery, since these are big cases. Before you can dismiss them, everybody spends a lot of time and money. Do you think, with the growth of private remedies in Europe, that same phenomenon could happen, that it would start influencing the way the courts actually interpret the substantive law? MR. DOLMANS: For the time being, the relative irrelevance of national courts means that the Commission and NCAs have a more active role in the European Union than in the United States. As to the courts, I certainly see that there is a significant discrepancy in how different courts in Europe deal with antitrust issues. Courts in the countries that have a long experience with antitrust law are already well qualified. There are other countries where the judges are simply not trained in antitrust law and where they look at antitrust law not as an efficiency tool or a way to protect consumers by ensuring an effective structure of competition, but as a fairness tool. The Commission is doing several things in order to try to deal with this. • You already talked about the ECN and the possibility of intervening. The Commission can intervene as an amicus curiae in national proceedings. • The Commission has also set up a training system for judges, which is very important, because the quality of the case really depends on the quality of the judges. To have an understanding of the ethos of antitrust law and the purpose of antitrust law is extremely important. • Apart from the training, the possibility to intervene as an amicus, and the unifying role of the ECN, the Commission tries to harmonize and ensure that judges stay within a certain framework by publishing guidelines. These are basically descriptions on specific topics, like vertical agreements, horizontal agreements, and licensing arrangements.57 The big hole is Article 82, prohibiting abuse of dominance, because the Commission has not yet issued guidelines on abuse, and is engaged in an endless policy debate about this. • Then finally, of course, every supreme court in every European country has the obligation to refer questions of law to the European Court of Justice under Article 234 EC for a preliminary reference. So there is a whole system in place to try to harmonize Europewide implementation and interpretation of EC law. MR. KOBAK: Anyone else? Valentine? PROF. KORAH: On the difference between the judges, I can’t speak much from personal experience, but the British Institute of International and Comparative Law runs courses to which some of these come. They say that the quality of their students is incredibly mixed. We were rather concerned in the United Kingdom that the jurisdiction of the High Court, our main court of first instance when there are significant damages expected, appointed it to the Chancery Division. The judges there are concerned mainly with wills and trusts. We thought these were quite the wrong people. But actually they turned out to have very good of treble damages, class actions, jury trials, contingency fees, broad rights of discovery, and few cost sanctions against losing litigants has created an environment where actual and threatened private litigation is far more frequent than government enforcement of Section 2 of the Sherman Act and other antitrust laws dealing with unilateral conduct.”). Compare Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), with Case IV/31.851, Magill TV Guide/ITP, BBC & RTE, 1989 O.J. (L 78) 43, aff’d, Joined Cases C-241/91 & C-242/91, Independent Television Publ’ns Ltd. v. Commission, 1995 E.C.R. I-743; Case C-418/01, IMS Health GmbH & Co. v. NDC Health GmbH & Co., 2004 E.C.R. I-5039; Commission Decision Relating to A Proceeding Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement Against Microsoft Corp. (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004), aff’d, Case T-201/04, Microsoft Corp. v. Commission, 2007 ECJ EURLex LEXIS 2620 (Ct. First Instance Sept. 17, 2007). 57 EU Competition, Documentation, Publications, Speeches and Articles, http://ec.europa.eu/comm/competition/ publications.

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brains. There is a specialized bar that is extremely competent and which expects their clients to provide economists if they don’t know the economic issues. So the specialized bar ― and it’s very specialized — it’s Monckton Chambers, Brick Court, and Essex Court, and a few others do a little of it. So these are very expensive people. But they know a lot of economics. It is part of the function of barristers to teach the judge what he has to know. It is part of the function of the judge to listen to the barrister, unless he has good reason to exclude it. So, much to our surprise, we found that these Chancery judges were doing very well. We also have a provision in our statute that when I am suing Maurits for damages, competition matters might be referred to what we call the CAT, the Competition Appeals Tribunal. But the secondary legislation that is needed to bring this into force has not yet taken effect. I gather that in some countries — I think Spain — the competition matters go to a particular court, though the damages will go back to the original judge. I don’t know how successful that is. Do you? PROF. KORTMANN: No, I don’t. I have not seen any cases in Spain yet. I also do not speak Spanish. Maybe that makes it more difficult. I would like to say one thing, though, on what Professor Korah said. While she is probably right in saying that many of the national judges sometimes need some extra education on competition law matters — I realize that what I am going to say now is very much an echo of what Christof said in the previous discussion — it also works the other way round. Some of these judges on the European level are very much competition lawyers. While sometimes they are careful in trying to make sure that their rulings do not infringe too much on the territory of national private law or tort law, you see more and more that the court goes that way. Professor Korah already mentioned Courage/Crehan,58 but you see it more in the recent decision in Manfredi.59 Yes, the claim issues, the tort law issues, are for the national courts, but the principle of effectiveness means that national rules on for example statutory limitation may have to be questioned. On the issue of damages, interest has to be recoverable and damnum emergens has to be recoverable. So you see on the European level also the competition law judges, if you like, saying more and more on issues of private law where I sometimes wonder whether they are sufficiently aware of the underlying policies of tort law. It should be a twoway street. MS. TOMCZAK: I would add a comment about Spain. Competition-related cases in Spain are booming. In the past two years, we have been seeing really successful litigation where damages were awarded.60 I think that the general tendency in Europe is actually that we see more and more cases. We can search for inspiration in cases in the other jurisdictions and we can use it for our own purposes in the various Member States. That is something that I think is undeniable, that this is happening now. The question is how to tame the various ways it has been happening across Europe, because sometimes the cases, as Maurits has presented to us in a horror-story way, are not used for the merits of the case as such, but just as a leverage for settlement or for achieving a settlement in a dispute that is not mainly based on competition-related issues. Another horror story from Poland. In a recent decision of the Polish Competition Authority, one particular book, Harry Potter and the Order of the Phoenix, has been regarded as a relevant market.61 So you see that there are horror stories, definitely. Crehan, 2001 E.C.R. I-6314. Manfredi, 2006 E.C.R. I-6619. 60 A review of national competition cases in Spain is available at http://ec.europa.eu/comm/competition/elojade/ antitrust/ nationalcourts/?ms_code=esp. 61 See OECD Directorate for Financial and Enterprise Affairs Competition Committee, 2005 Report on Competition Policy Developments in Poland, DAFCOMP(2006)7/28, at 7 (May 29, 2006), available at http://www.oecd.org/ dataoecd/ 04/37028574.pdf. 58 59

788 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW QUESTION [Jason Albert, Microsoft Corporation, Redmond, WA]: We have seen a lot of American companies recently going to the European Commission and raising competition concerns for various reasons attributed generally to globalization.62 My question is: Do you see those companies still doing their civil litigation in the United States, or do you see them pursuing civil litigation in Europe as well, assuming they are successful on the original complaint? And the corollary question is: If they were to pursue civil litigation in Europe, do you expect them to try to make use of the provision in 28 U.S.C. § 1782, on U.S. discovery in aid of foreign litigation,63 to try to obtain their objectives in Europe with U.S.-style discovery? MR. DOLMANS: Not all companies are particularly interested in private litigation for damages, which may be significant but very hard to quantify. In a number of cases I have followed, the objective of the litigation or of the complaint is to obtain compliance; that is to say, to end an abuse of dominance or prevent enforcement of a restrictive agreement, in order to restore equal opportunities to compete. In recent years, we have seen several U.S. companies turning to the European Commission, in particular, in situations where the consumer harm is worldwide, but the U.S. Department of Justice hung a “Not at Home” sign on its door. The European Commission may in that case be a more attractive forum than a U.S. court, in part because U.S. courts would normally only regulate competition in the United States. And U.S. litigation is very expensive. Companies, in particular, like to avoid the huge costs and delays of abusive discovery in the United States. For the same reason, I also doubt that many firms will avail themselves of discovery under 28 U.S.C. § 1782. PROF. KORTMANN: I think that it is slightly different in the cartel cases, because there you do see plaintiffs’ attorneys using the U.S. case, if they manage to find somebody with standing in the United States within the Empagran decision,64 to actually get a broad scope of discovery 62 See, e.g., Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, 2004 E.C.R. I-5039; Commission Decision relating to a Proceeding Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004) (Sun complaint to European Commission against Microsoft), aff’d, Case T-201/04 (C.F.I.), Microsoft Corp. v. Commission, 2007 ECJ EUR-Lex LEXIS 2620 (Ct. First Instance Sept. 17, 2007); Press Release, European Comm’n, Commission confirms sending of Statement of Objections to Intel (July 27, 2007), available at http://europa.eu/ rapid/pressReleasesAction.do? reference=MEMO/07/314 (AMD complaint filed with European Commission against Intel); European Commission Directorate-General for Competition, XXXIst Report on Competition Policy 11, 53 fig. 1 (2001), available at http://ec.europa.eu/comm/ competition/annual_reports/2001. See generally Diane P. Wood, “Antitrust at the Global Level”, 72 U. Chi. L. Rev. 309, 316 (2005). 63 See In re Request from Czech Republic, No. 3:08-mc-001-J-33TEM, 2008 U.S. Dist LEXIS 3641, at *4 (M.D. Fla. 2007) (“Pursuant to § 1782, a court has authority to grant a request for judicial assistance when the following four requirements are met: (1) the request must be made by a foreign or international tribunal, or by any interested person; (2) the request must seek evidence, whether it be the testimony or statement of a person or the production of a document or other thing; (3) the evidence must be for use in a proceeding in a foreign or international tribunal; and (4) the person from whom discovery is sought must reside or be found in the district of the district court ruling on the application for assistance.”). 64 F. Hoffmann-LaRoche Ltd. v. Empagran SA, 542 U.S. 155 (2004). The decision contained a strong endorsement of the principle of comity. Whether foreign plaintiffs could use American laws and courts to sue foreign defendants for treble damages with respect to sales occurring outside the United States turned on an interpretation of cumbersome language in the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA), 15 U.S.C. § 6a. The Court held that the answer was generally “no” (unless the foreign harms were linked to domestic effects of the anticompetitive conduct. Empagran, 542 U.S. at 166–67). On remand, the case was dismissed on the basis that the foreign plaintiffs’ injuries were not caused by the domestic effects of the conspiracy in the United States, see Empagran S.A. v. F. HoffmanLaRoche Ltd., 417 F.3d 1267 (D.C. Cir. 2005), and anchored this conclusion in part on comity: We conclude that principles of prescriptive comity counsel against the Court of Appeals’ interpretation of the FTAIA. Where foreign anticompetitive conduct plays a significant role and where foreign injury is independent of domestic effects, Congress might have hoped that America’s antitrust laws, so fundamental a component of our own economic system, would commend themselves to other nations as well. But, if America’s antitrust policies could not win their own way in the international marketplace for such ideas, Congress, we must assume, would not...

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that also covers Europe, and then come to Europe for the rest of it. I suggested in my talk that in Europe they will, of course, pick and choose the system that they think for other reasons is more attractive. MR. DOLMANS: That actually raises a very interesting issue, which we have seen in 28 U.S.C. § 1782 cases as well. Plaintiffs may try to obtain discovery, including production of communications between the defendants and the European Commission, including leniency statements, complaints, defenses, and so forth. The European Commission in certain cases objects to that, because they have an accessto-file system that follows a specific procedure under Regulation 1/2003. Access to the file is provided if and when a Statement of Objection is issued, and not before. A defendant in an EC case (or a plaintiff in a damage case) may try to invoke 28 U.S.C. 1782 to do an end-run around European access-to-file rules and get much earlier access, and much broader access. The Commission feels that this interferes with its freedom to communicate with plaintiffs, or with leniency applicants. So it has in certain cases filed an amicus brief or intervened in 28 U.S.C. 1782 cases to try to convince the U.S. judge to deny discovery including all communications between the defendants and the Commission. As a result, in several cases U.S. discovery was denied.65 QUESTION: As a matter of curiosity, is it possible to bring a civil action for injunction and at the same time arrange for a criminal action for damages or punishment?66 PROF. KORAH: In the United Kingdom we have an Act under which criminal penalties may be imposed on managers.67 In those cases the rules of evidence are very strict. You’ve got to be fair to the accused. The Office of Fair Trading together with the public prosecutor can bring these actions. But these are not private actions. These are public actions. Sir Jeremy Lever Q.C., one of our very famous barristers, has done some historical research and discovered that there is a common law crime of conspiracy to defraud.68 So if you are thinking of a cartel that has been kept secret, that is probably a conspiracy to defraud. But again, those actions are being brought by the Office of Fair Trading, although I don’t think they have gotten a judgment yet. But they have started. A person could, I suppose, sue for damages at the same time. But do you think the court would stay the action on the basis that it was hard to defend two actions that were subject to very different procedures because the criminal ones are going to be so strict? have tried to impose them, in an act of legal imperialism, through legislative fiat. Empagran, 542 U.S. at 169. The European Union, Canada, and Japan had intervened to urge the Court to leave such claims to the laws and courts in which the commerce had occurred. See Eleanor M. Fox, “Extraterritoriality in the Age of Globalization; Conflict and Comity in the Age of Empagran”, 4 Antitrust Rep. 3, 12 (2005). 65 A court should not grant a § 1782 discovery request in the face of an express objection by the non-U.S. tribunal where the underlying proceeding is pending. In re Microsoft Corp., 428 F. Supp. 2d 188, 194 (S.D.N.Y. 2006). However, the Supreme Court held that 28 U.S.C. § 1782(a) permits a third party to seek discovery for use in European Commission proceedings; there is no blanket foreign-discoverability rule under§ 1782; a district court is not precluded from ordering discovery when the materials requested are not discoverable under the laws governing the foreign tribunal. Intel Corp. v. AMD, 124 S. Ct. 2466, 2475, 2487 (2004); see Cedric Ryngaert, “Assessing International Discovery After Intel v. AMD (U.S. Supreme Court, 2004): Expanded U.S. Discovery Opportunities for European Litigants?” (Institute for International Law Working Paper No. 70, Aug. 2005), available at http://www. law.kuleuven.ac.be/iir/nl/wp/WP/WP70epdf. The EC’s decision not to seek discovery of Intel’s documents in the U.S. case, Advanced Micro Devices v. Intel Corp., Civil Action No. 05-441 (D. Del. June 27, 2005), which AMD had urged, demonstrates the tension that differences in national admissibility of evidence laws can create in cross-border investigations. 66 Private actions to obtain injunctions and/or damages have not played a prominent role in the European system to date, but the European Commission is actively exploring options for increasing private litigation that would apply to abuses of dominant position as well as to concerted agreements. See Green Paper, supra note 2. 67 Enterprise Act, 2002. 68 See Jeremy Lever & John Pike, “Cartel Agreements, Criminal Conspiracy and the Statutory “Cartel Offence” (2005) 26 Eur. Comp. L. Rev. vol. 2, 70–77; vol. 3, 164–72.

790 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW PROF. KORTMANN: In The Netherlands, I think one point to make is that our competition law is not criminal law yet. But if your question is can you bring a civil action for an injunction, or indeed damages, and at the same time file a complaint with the competition law authority, of course hoping to jog them to some kind of fine or intervention, that is certainly possible. What typically happens in those types of cases is exactly what Professor Korah says: the civil judges will tend to try to stay the proceedings because they want to avoid having contradictory decisions on the facts themselves. They usually stay the civil proceedings. But injunctions can be demanded in summary proceedings. So, insofar as injunctions are concerned, an injunction can be given even though there is no decision from a competition authority yet. PROF. KORAH: We have a thriving trade in interim injunctions. You can get them pretty quickly. The High Court on one occasion was contacted at 11:00 a.m. and the hearing was held at 1:55 p.m. and completed by 2:00 p.m., and an interim injunction was obtained within a few hours. It might take a bit longer if this happened on Saturday. But on the whole they are very quick, whereas I think in most civil jurisdictions it is often years. Interim injunctions are very effective relief if all you want is to stop the bad conduct. In one bit of Scottish law — I don’t know whether it is still true — when the ship got to Glasgow you stuck a writ on the mast and you went for an interim injunction, which you got that day. The parties could come back two weeks later and object to the interim injunction. But their burden of proof was heavy. An interim interdict in Scotland is very effective. Someone ought to be writing a book about all the jurisdictions where you can get an interim injunction fast, including consideration of the ease with which they can be obtained or overturned. PROF. KORTMANN: One word of warning, though. Injunctions can also be had very quickly in The Netherlands, but if you turn out to be wrong in retrospect, there is strict liability and very extensive liability. So think twice before you ask for an injunction. MS. TOMCZAK: The Pfizer case in the United Kingdom shows the interoperability between interim injunctions and competition-related complaints.69 Pfizer denied supplies to wholesalers when they tried to introduce their direct distribution. The wholesalers did not succeed in obtaining an interim injunction. So it shows that often those two ways go together, but the result is not always the result that the complainant wants to achieve. MR. KOBAK: Thank you.

69 AAH Pharmaceuticals Ltd. v. Pfizer Ltd. & Unichem Ltd., [2007] E.W.H.C. 565(ch). Wholesalers brought a complaint before the U.K. Office of Fair Trading (OFT) for breach of both national and EU competition law, to obtain an interim injunction to order Pfizer to supply them. The OFT refused to grant the order as (i) infringement of Art. 81 prohibiting cartels or Art. 82 of the EC Treaty preventing the abuse of dominant positions was not obvious and (ii) there was insufficient proof of irresistible harm. The wholesalers then applied for an interim injunction before the High Court on the same grounds. Without examining the case on the merits, the High Court balanced the consequences of the granting of the injunction with the risk of damaging the market structure raised by Pfizer’s new distribution policy. The High Court finally considered that “the disruption and reputational damage likely to arise from an injunction for Pfizer and UniChem were real and not readily capable of compensation.” Assuming that this would be the less damaging solution, the Court decided to refuse to grant the injunction.

CHAPTER VIII

Competition Law Interplay with IP Law Part D: Standard Setting — The Interplay with IP and Competition Law Moderator GONZALO ULLOA

Gómez-Acebo & Pombes (Madrid) Speakers MAURITS DOLMANS

JONATHAN MOSKIN

Cleary Gottlieb Steen & Hamilton (Brussels)

White & Case (New York)

TIMO RUIKKA

WOLFGANG VON MEIBOM

Strategy Advisor, IPR Intellectual Property, Nokia Corp. (Helsinki)

Bird & Bird (Düsseldorf)

JASON ALBERT

Director of International IP Policy, Microsoft Corp. (Redmond, WA) Panelists JEFFREY M. BUTLER

PATRICIA MARTONE

Jones Day (New York)

Ropes & Gray (New York)

PROF. DAMIEN GERADIN

RICHARD S. TAFFET

Howrey (Brussels); Tilburg University (Netherlands)

Bingham McCutchen (New York)

792 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW MR. ULLOA: Welcome to the standard-setting session with the name of “The Interplay with IP and Competition Law.” I will try to be as strict as possible with the timing so the audience will have time at the end for some discussion and interplay with the panel. It is good to be here in the moot courtroom. We are talking about, not only theory, but about practice, about the way of enforcing some very specific issues of patent law. In the panel, as you can see, we have a very good balance of lawyers involved in these cases and industry. I will just go very quickly through the five speakers: Maurits Dolmans from Cleary Gottlieb Steen & Hamilton in Brussels; Timo Ruikka from Nokia Corporation in Helsinki; Jonathan Moskin from White & Case; Wolfgang von Meibom from Bird & Bird; and Jason Albert, Director of International IP Policy, Microsoft. Then there will be four panelists: Jeffrey Butler from Jones Day; Professor Damien Geradin from Howrey, Brussels and Tilburg University in The Netherlands; Patricia Martone of Ropes & Gray; and Richard Taffet from Bingham McCutchen. Maurits Dolmans, you have the floor.

Standards, IP, and Competition: How to Avoid False FRANDs Maurits Dolmans* Product standards are of increasing importance in the IT sector, the telecommunications sector, and other industries. I have been asked to give an introduction into competition problems that can arise when proprietary technology is included in public standards, and whether these can be resolved by undertakings to license on “fair, reasonable and nondiscriminatory” (FRAND) terms. I. PRO-COMPETITIVE GOALS OF STANDARDS

Standards may be necessary for safety, interoperability, network integrity, quality, and other legitimate reasons, especially where products from different vendors need to interact. This is recognized by the courts: Private standard setting advances [the goal of maximizing consumer welfare] on several levels. In the end-consumer market, standards that ensure interoperability of products facilitate the sharing of information among purchasers of products from competing manufacturers, thereby enhancing the utility of all products and enlarging the overall consumer market … . This, in turn, permits firms to spread the costs of research and development across a greater number of consumers, resulting in lower per-unit prices … . Industry-wide standards may also lower the cost to consumers of switching between competing products and services, thereby enhancing competition among suppliers.1 * Cleary Gottlieb Steen & Hamilton, Brussels. The speaker represents clients in several pending competition cases and litigations involving standard setting, including the Rambus, Qualcomm, and Microsoft cases, in certain instances on behalf of licensees, and in others on behalf of licensors. Comments in this presentation are not made on behalf of the clients and do not commit them. I am grateful in particular to the thinking of Prof. Carl Shapiro and Prof. Leveque, although they may not agree with all points in this presentation, and errors are of course mine. I am also thankful to the assistance of my colleagues David Rosner and Malorie Schaus. 1 Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 308–09 (3d Cir. 2007); see also Commission Notice, Guidelines on the Applicability of Article 81 of the EC Treaty to Horizontal Cooperation Agreements, ¶ 34, 2001 O.J. (C 3) 1 (Jan. 6, 2001) [hereinafter European Commission Notice on Horizontal Cooperation Agreements], available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:32001Y0106(01):EN:HTML.

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Setting standards also involves information exchange and agreements amongst competing manufacturers and their suppliers and customers that may restrict the parties’ freedom to design their products as they wish. “[A]rtificial standardization of products — [or] misuse of the standard-setting process — may serve to deter entry, exploit rivals, secure market power, or preserve dominance.”2 For these reasons, “private standard-setting by associations comprising firms with horizontal and vertical business relations is permitted at all under the antitrust laws only on the understanding that it will be conducted in a nonpartisan manner offering procompetitive benefits.”3 II. INCLUDING PATENTS IN STANDARDS MAY ENHANCE PATENTEES’ POWER AND CREATE THE RISK OF PATENT HOLD-UPS

Competition law problems may arise where standard setting organizations include proprietary technology in a standard. Doing so may greatly bolster the market power of the patent holders. A patent holder has a legal monopoly — or rather, an exclusive right to practice the invention described in the patent claims. Such an exclusive right is not necessarily equivalent to market power, because in many cases these patented technologies compete with other patented solutions or with technologies in the public domain. This “inter-technology” competition is eliminated where a patent is included in a standard, if the standard is mandatory or so successful in practice that all producers have to comply with it. In certain industries, network effects may drive a standard’s universal acceptance even where they are not legally binding and even if there are alternatives. Public procurement legislation or practices requiring use of public open standards may have a similar effect. Standardization around patented technologies may therefore convey significant market power beyond that provided by the patent itself:4 the 2 In the Matter of Rambus, Inc., FTC Docket No. 9302, (F.T.C. August 2, 2006) (holding that Rambus’s conduct constituted monopolization under Section 2 of the Sherman Antitrust Act), Concurring Op. of Comm’r Leibowitz, slip op. at 17 (Aug. 2, 2006). On April 22, 2008, the Rambus Decision was annulled on appeal, and an application for en banc review was denied as “moot” on August 26, 2008, without further reasoning. Rambus v. FTC, 522 F.3d 456 (D.C. Cir. 2008), and a jury found that Rambus had not been in breach of any disclosure obligations (Hynix Semiconductor, Inc. v. Rambus, Inc., Nos. C 00-20905 RMW, C 05-00334 RMW, C 06-00244 RMW, 2008 WL 1893502 (N.D. Cal. Mar. 26, 2008)). The European Commission is poised to adopt a decision finding Rambus in breach of Article 82 EC for patent hold-up. See Press Release, European Comm’n, Memorandum, Antitrust: Commission confirms sending a Statement of Objections to Rambus (Aug. 23 2007), available at http://europa.eu/rapid/pressReleasesAction.do?reference= MEMO/07/330 3 Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 506–07 (1988); see also EC Commission Communication on IPRs and Standardization, COM (1992) 92/445, European Commission Notice on Horizontal Cooperation Agreements, supra note 1, ¶ 32; Maurits Dolmans, “Standards for Standards”, 26 Fordham Int’l L.J. 163–208 (2002); Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, An Industrial Property Rights Strategy for Europe, COM (2008) 465/3, § 3.4 Industrial Property and Competition; Standardization, Competition, and Intellectual Property Rights, Draft Paper by Directorate-General for Enterprise of the European Commission, ICT/SC(2008) No 55; Commissioner Neelie Kroes, Being Open About Standards, Speech Before OpenForum Europe, Brussels (June 10, 2008). For an interesting perspective from an IT firm on the problems that arise in connection with software interoperability standards, see Press Release, IBM, IBM Announces New I.T. Standards Policy To encourage improved tech standards quality and transparency, and promote equal participation of growth markets in globally integrated economy (Sept. 23, 2008), available at http://www-03.ibm.com/press/us/en/pressrelease/ 25186.wss, and the standards wiki discussion at http://www.research.ibm.com//files/standards_wikis.shtml. 4 “A longer-term benefit will probably accrue to the manufacturer who voluntarily licenses his technology to become a standard, since his market share will eventually grow significantly in respect of the rights for which he receives royalty payments even if he is no longer the sole manufacturer of the product itself and even if the royalty rate which he receives is less than that which he would have obtained from a licensee on the open market.” Communication from the Commission on Intellectual Property Rights and Standardisation: Follow-up to the Commission Green Paper of October 1990, COM (92) 445 final (Oct. 27, 1992), ¶ 2.1.8, available at http://aei.pitt.edu/1222/01/COM(92)445final. pdf; see also European Comm’n, Open letter to ETSI and CBEMA (Feb. 1994), available at http://www.etsi.org/...

794 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW power to “hold up” an entire industry, i.e., all companies implementing the standard or using the standardized technology, all of whom are dependent on being able to access all essential intellectual property (IP) included in the standard. Patent holders may use this hold-up power in various ways, as illustrated by the following diagrams. These show examples of consumer harm arising from hold-ups in a static environment (a standard for a product that does not change much over time) and in a dynamic environment (a standard for a product that is constantly being innovated and where successive generations of standards are developed to track consumer demand for further functionality and improvements).

Consumer Harm in a Static Environment Step 1 Include IPR in standard

Extract monopoly rent

Step 2 – Impose exploitative and/or restrictive T&Cs

or monopolize downstream competition

In a static market, case 1 and 2 have the same effect = IP owner could appropriate entire value of the standard. That is not FRAND

In a static environment, after an intellectual property right (IPR) is included in a standard and the industry is “locked in,” an unconstrained IPR owner ignoring competition law would have at least two ways to exploit consumers. The simplest way (case 1) is to impose a royalty equal to the estimated monopoly rent — that is to say, the full profits derived industry-wide from implementing the standard, minus the minimum amount required to convince licensees to implement the standard.5 The IP owner may also use its power to demand a royalty-free grant-back license or right to use and pass on improvements or complementary patents owned by the licensee that the licensor or its customers need or wish to use. An alternative method of exploitation (case 2) is for the IPR owner to impose exclusionary terms and conditions, discriminating against licensees and providing the IPR owner’s own downstream division with a competitive advantage. This may involve either a straightforward refusal to license downstream rivals, or the imposition of restrictive license terms and conditions. Examples are royalty increases for licensees who buy components from the licensor’s rivals, or who refuse to buy key components for the downstream products only from the IPR owner. Such penalties can be imposed in various ways, e.g., by raising percentage rates, increasing upfront lump-sum payments, defining a less attractive base for the calculation of the royalty, or refusing to pay fair and reasonable consideration for the right to use the patents belonging to licensees who buy components from the IP owner’s competitors. Moreover, once the IP owner has gathered sufficient power in the downstream market for components or WebSite/document/Algorithms/a066r1V1-0.pdf (concerning the ETSI IPR Policy: “Once an essential technology is included with the agreement of the IPR holder in a standard, particularly one that is made mandatory pursuant to Community legislation, the owner of the IPR relating to that technology occupies in most if not all situations a dominant position … vis-à-vis manufacturers requiring licenses on that IPR in order to be able to participate in the market for the equipment in question.”). 5 In an “ultimatum game” the IPR owner would normally allow the licensees the minimum amount needed to convince them not to ignore the standard and not to direct development resources to more promising areas (assuming they could avoid the standard).

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products implementing the standard, it can hasten or consolidate the monopoly by downstream exclusionary practices such as loyalty rebates to customers buying only from it. These practices would allow the IP owner to monopolize the downstream market, and extract monopoly rents there. The method may differ from case 1, but consumer harm is no less. Indeed, it could be greater, since the effect of the exploitation may not be immediately visible, and the IP owner can adjust prices from time to time to reflect changes in market conditions, which is more difficult to do if exploitation is done through imposition of excessive royalties that are locked in by contract. The greatest concern arises when the IP owner combines both methods. The possibilities of gaming the system are even more interesting in dynamic environments. The following slide shows a strategy that would allow an IPR owner not only to extract monopoly rents, but also to perpetuate control over successive generations of standards in spite of consumer demand for constant innovation. This strategy involves several steps. Step 1 is the inclusion of the IP in the standard. As in the case of the static standard, this may be perfectly legitimate and the result of a standards organization’s choice of the best available technology. Step 2 may involve the imposition of exploitative conditions in the form of excessive royalties, or requiring the licensee to grant the licensor a right to exploit the licensee’s future technology without adequate remuneration. This may discourage innovation. Alternatively, or in addition to exploitative terms and conditions, the IPR owner may attempt to monopolize the downstream market for standard-compliant products or components (step 3 in the diagram). As is the case in a static environment, this may involve a refusal to license, or the imposition of restrictive license terms and conditions along the lines described above.

Consumer Harm in a Dynamic Environment Step 1 IPR included in next standard

Step 4 – using downstream power to influence next standard

Step 2 – Impose restrictions and exploitative T&Cs Step 3 Monopolize downstream competition

Restricting downstream competition, reducing innovation, extracting monopoly rent, and reducing incentive to participate in SSO work

In a dynamic environment, imposition of exploitative or exclusionary terms may have negative reputation effects, causing members of the standards body to avoid the licensor’s technology when developing the next generation of the standard. But avoidance may not always be possible, for instance, where the next generation incorporates or builds upon the previous one, where licensees continue to have a need for the prior generation of technology in order to maintain backwards compatibility, where the licensor is able to manipulate voting by “committee packing”6 or “patent traps,”7 or where the licensor through one or more shrewd 6 Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 511 (1988). Vote-stacking problems also plagued the IEEE 802.20 mobile communications standards committee; ultimately IEEE recognized the committee packing among its members and changed its voting procedures to a “one entity, one vote” system. See Media Statement from IEEE Standards Association Regarding the Status of the IEEE 802.20 Standard and Working Group, available at http://standards.ieee.org/ announcements/802.20std_status.html.

796 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW acquisitions has acquired a stake in all alternative technologies vying for adoption as the next standard.8 Moreover, monopolization of the downstream markets provides an additional opportunity to emasculate the licensees and prevent them from punishing the licensor for past exploitation and from avoiding its IPRs when developing new (generations of) standards. Once the licensor has conquered the market downstream, many of the users will have become dependent on the IP owner, because it not only owns essential IP reading on the existing standard, but also has the ability to cut off, delay, raise prices for, or reduce supplies of standardcompliant components to customers who do not support its proposal for the next standard. In sum, absent constraints, owners of essential IP may be tempted to use their IP to control the downstream market, and to use the downstream monopoly to control the process of selection of new standards, creating a cycle of exploitation of successive standards. This prospect not only raises prices for consumers, but also threatens innovation. The anticipation of exploitation may dampen incentives to develop new standards not only for licensees, but also other licensors. They are confronted with a Cournot effect if they charge for their IP: Since the offending IP owner already extracts monopoly rents from the market, any increase in the royalty stack results in multiple marginalization, reducing the attractiveness of the standard and reducing output. They therefore have little or no scope to recover investment in R&D for the new standard. What is needed, therefore, is a system that prevents owners of essential IP from blocking rivals in the downstream market from extracting monopoly rents from royalties or sales of downstream products, and using control over a standard to leverage power into other product markets or next generations of standards. This is a concern especially in network markets, like telecommunications and IT. Problems may arise also in a converse situation, where licensees in a standards organization hold up patent owners, threatening to boycott a specific IP offered at a competitive rate unless it is made available for free or for a below-competitive royalty. Such an attempt should be rare, since a threat of selecting a clearly inferior technology is not credible where it could jeopardize the success of the standard. Also, it would presumably fail in a properly organized ex ante auction context if the members of the standards body have no royalty-free or cheap alternative of comparable quality.9 Nevertheless, collective boycotts might in theory arise in biased standards bodies, or where a subgroup of members misuses the standards body to raise barriers to entry to outsiders.10 7 In the Matter of Rambus, Inc., FTC Docket No. 9302, Opinion of the Commission, Aug. 2, 2006. For concerns related the IEEE 802.16e standardization, see also Rethink Research, “WiLan Exits Equipment, Highlighting Patents Issue for WiMAX Players”, WiMax.com, http://www.wimax.com/commentary/spotlight/spotlight2-09-2006mw1; Nancy Gohring, “Qualcomm Signs First Patent Deal for WiMAX Product”, IDG News Serv., Apr. 28, 2006, available at http://www. networkworld.com/news/2006/042806-qualcomm-signs-patent-deal-wimax.html. 8 See, for instance, Deutsche Bank Analysis Report, 12 Aug. 2005, S2N #170: Qualcomm+Flarion could be a problem for WiMAX (“[T]his acquisition is strategic in nature and will further strengthen Qualcomm’s vast and diverse patent portfolio… . In our opinion this development could seriously diminish WiMAX’s (802.16e) ability to offer a competing and alternative standard to existing 3G cellular standards.”). Acquisition of patents may require a merger control notification, but even were the turnover associated with the patents exceeds the requisite thresholds, antitrust authorities may be wary of speculating on the implications for future standardization. 9 Where there is a cheap or royalty-free equivalent alternative, it is normally legitimate and consistent with competition policy to select that alternative over the more expensive one. This may not always be possible. The Section 3 of ETSI IPR Rules provides, for instance, that “[i]t is ETSI’s objective to create STANDARDS and TECHNICAL SPECIFICATIONS that are based on solutions which best meet the technical objectives of the European telecommunications sector, as defined by the General Assembly.” 10 A comparable allegation was made, without success, in Golden Bridge Technology, Inc. v. Nokia, Inc., No. 2:05cv151, 2007 WL 294176 (E.D. Tex. Jan. 29, 2007). Nor is avoidance of IPRs necessarily illegitimate or inefficient. Certain standards organizations (for instance, the W3C) may have made a legitimate choice to avoid royalty-bearing technologies as a matter of principle, which could be perfectly permissible under a rule of reason analysis.

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To avoid the risk of exploitation and exclusion of competition discussed above, and to ensure a balanced treatment for licensees and licensors, competition law and consumer interest require that standards organizations (a) oblige their members to declare any current or future potentially essential IPRs11 (including patent applications) of which they are or become aware during the standards development work,12 and/or (b) ask IP owners, as a condition for inclusion of their technology in a standard, to issue a promise to license irrevocably on “fair, reasonable, and non-discriminatory” (FRAND) terms, or even declare their maximum license terms.13 FRAND obligations in any event also result from Article 81(3) EC and 82 EC, even where they are not imposed by the standards body.14 III. ALLOWING EX ANTE AUCTIONS IS NOT ENOUGH TO PREVENT PATENT HOLD-UPS, AND DOES NOT OBVIATE THE NEED FOR FRAND UNDERTAKINGS

In an ideal world, standards bodies can avoid hold-ups by arranging an auction before the standard is finally adopted and the industry is locked in. The standard organization would invite various technology owners to present their solutions, and to offer competitive terms and conditions. The one that offers the best solution at the cheapest price, and without restrictive terms, will win the auction and be selected for the standard.15 This is referred to as an “ex ante” auction. 11 “Essential” tends to be defined as “that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL.” ETSI IPR Policy, Clause 16(6). This definition is arguably too narrow, and for the ETSI IPR Rules to have practical effect, commercially essential IPR should be included as well. 12 Thus, Clause 4 of the ETSI IPR Policy provides: “4.1. Subject to Clause 4.2 below, each MEMBER shall use its reasonable endeavours, in particular during the development of a STANDARD or TECHNICAL SPECIFICATION where it participates, to inform ETSI of ESSENTIAL IPRs in a timely fashion. In particular, a MEMBER submitting a technical proposal for a STANDARD or TECHNICAL SPECIFICATION shall, on a bona fide basis, draw the attention of ETSI to any of that MEMBER’s IPR which might be ESSENTIAL if that proposal is adopted. 4.2. The obligations pursuant to Clause 4.1 above do however not imply any obligation on MEMBERS to conduct IPR searches.” The European Commission is expected to find Rambus in breach of its obligations under Article 82 by failure to disclose patents in breach of a good-faith obligation to reveal the existence of royalty-bearing patents reading on the DRAM technology being standardized in JEDEC. 13 Clause 6 of the ETSI IPR Policy provides: “the Director-General of ETSI shall immediately request the owner to give within three months an undertaking in writing that it is prepared to grant irrevocable licences on fair, reasonable and non-discriminatory terms and conditions under such IPR to at least the following extent: MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE; sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED; repair, use, or operate EQUIPMENT; and use METHODS. The above undertaking may be made subject to the condition that those who seek licences agree to reciprocate. 6.2. As long as the requested undertaking of the IPR owner is not granted, the COMMITTEE Chairmen should, … use their judgment as to whether or not the COMMITTEE should suspend work … .” Clause 8 confirms: “Where … an IPR owner informs ETSI that it is not prepared to license … in accordance with Clause 6.1 above, the General Assembly shall review the requirement for that STANDARD or TECHNICAL SPECIFICATION and satisfy itself that a viable alternative technology is available for the STANDARD or TECHNICAL SPECIFICATION which: is not blocked by that IPR; and satisfies ETSI’s requirements. Where, in the opinion of the General Assembly, no such viable alternative technology exists, work on the STANDARD or TECHNICAL SPECIFICATION shall cease … .” 14 See Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements, 2001 O.J. (C 3) [hereinafter Guidelines on Horizontal Agreements]; see also Technology Transfer Guidelines, 2004 O.J. (C 101) 2, ¶ 167. 15 Ex ante auctions were questionable under Sony Electronics, Inc. v. Soundview Technologies, Inc., 225 F. Supp. 2d 164 (D. Conn. 2002), but are now allowed under EC and U.S. antitrust law, under a rule of reason analysis, even where they qualify as joint purchasing. See Technology Transfer Guidelines ¶ 225, 2004 O.J. (C 101) 2; Cecilio Madero Villarejo & Nicholas Banasevic (DG Competition), “Standards and Market Power”, Global Competition...

798 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW Ex ante auctions may be viable for specific technologies or discreet components of standards, and standards organizations should keep this option open, but they may not be feasible in practice for all cases, in particular complex standards. Telecommunications standards, for instance, may incorporate hundreds, or even thousands of patents, and grow over a period of years. Even if an ex ante auction were feasible to choose the initial technology direction, the standards organization may be locked-in afterwards, limiting technology choice that might otherwise have existed for further development. As additional work is done to write the detailed specifications, and it becomes clear that firms that were not involved in the auction own additional essential patents, the danger of a patent hold-up arises again. Moreover, patent applications that were not public at the time of the auction – and whose owners were not involved in the auction — may be published or emerge as issued patents only after the auction is finished (so-called “submarine patents”). Another concern could be the risk of collusion or “horse-trading” amongst patent owners who might agree to accept each others’ terms and conditions including high fees, knowing that they can set off royalty payments owed each other, while raising costs and barriers to entry to IP-poor outsiders. These outsiders may not have made investments in R&D and therefore legitimately could be asked to pay royalties, but not at a level based on collusion. Apart from this, there are situations where only one technology is available, but that solution requires complementary technologies or inclusion in a standard to be commercially viable.16 Allowing that technology owner in an ex ante auction to propose a royalty close to monopoly rent would discourage other firms from investing in standardization or development of further technologies to finalize or implement the standard, or develop next generations. Finally, problems also arise where the same firms own IP in all competing alternatives. Whenever any of these situations arise, ex ante auctions provide no relief. The European Commission and others have suggested that standards organizations should ask IP owners to declare, before the standard is adopted, the maximum royalties that they would charge and most restrictive terms that they would impose if their technology were selected.17 Such ex ante declarations could lead to a process akin to an ex ante auction, and should therefore be considered, but provide no relief where ex ante auctions are impractical. Recent experience suggests that they may in fact create some further pitfalls: IP owners may be tempted to demand royalties as high as possible, in order to “stake their claim” for follow-up negotiations, in the hope that follow-up negotiations lead to an agreement that each IP owner will proportionally reduce its claim. In such a case, it pays to have made high demands as soon as possible. Worse, if the first IP owner makes high demands, others are tempted to follow, since they do not wish to lose out. This can eventually lead to an excessive and prohibitively high “royalty stack.” It takes a long time to reduce such a stack. Game theory suggests that the Pol’y, May 2008, http://www.globalcompetitionpolicy.org/index.php?&id=1101&action=907; Deborah Platt Majoras, Chair, Federal Trade Comm’n, Recognizing the Procompetitive Potential of Royalty Discussions in Standard Setting, Remarks Prepared for Standardization and the Law: Developing the Golden Mean for Global Trade, Stanford University (Sept. 23, 2005), available at http://www.ftc.gov/speeches/majoras/050923stanford.pdf; see also Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee An Industrial Property Rights Strategy for Europe, COM (2008) 465/3, § 3.4, Industrial property and Competition; Standardization, Competition, and Intellectual Property Rights, Draft Paper by Directorate-General for Enterprise of the European Commission, ICT/SC(2008) No. 55, § 4. 16 See Motorola, Inc. v. Rockwell Int’l, No. 95-575-SLR (D. Del. 1995). Under EU law, the fact that no alternative technology was available may not be a defense against infringement of the FRAND obligations under Article 82(a) EC (ban on unfair terms) or 82(c) EC (ban on discrimination). 17 The European Commission is recommending such ex ante declarations. See, for instance, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, An Industrial Property Rights Strategy for Europe, COM (2008) 465/3, § 3.4, Industrial property and Competition; Standardization, Competition, and Intellectual Property Rights, Draft Paper by Directorate-General for Enterprise of the European Commission, ICT/SC(2008) No. 55.

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situation may not be resolved at all, because no IP owner will lower its demands unless others do. A system of ex ante declarations may therefore lead to a “game of chicken” or a game of “last man standing,” where no IP owner lowers its demands, and as a result the standard fails. For these reasons, ex ante auctions and ex ante declarations of royalties are not a panacea, and a FRAND undertaking would be appropriate (and arguably necessary) as a safeguard in all cases, even for standards organizations that also allow ex ante auctions or ex ante royalty declarations. The question is: what does “fair, reasonable, and non-discriminatory” licensing mean in this context? IV. WHAT DOES “FAIR, REASONABLE, AND NON-DISCRIMINATORY TERMS” MEAN?

To determine the meaning of FRAND, it is important to understand what a FRAND rule is designed to avoid, including the examples of exploitative and exclusionary practices described above. Clause 3 of the ETSI IPR Policy describes the high-level policy objective, in a way that is relevant also for other standards bodies: 3.1… . the ETSI IPR POLICY seeks to reduce the risk … that investment in the preparation, adoption and application of STANDARDS could be wasted as a result of an ESSENTIAL IPR for a STANDARD … being unavailable. In achieving this objective, the ETSI IPR POLICY seeks a balance between the needs of standardization for public use in the field of telecommunications and the rights of the owners of IPRs. 3.2 IPR holders … should be adequately and fairly rewarded for the use of their IPRs … . 3.3 ETSI shall take reasonable measures to ensure, as far as possible, that its activities which relate to the preparation, adoption and application of STANDARDS and TECHNICAL SPECIFICATIONS, enable STANDARDS and TECHNICAL SPECIFICATIONS to be available to potential users in accordance with the general principles of standardization.

The “general principles of standardization” can be found, inter alia, in the 1992 Paper on IPR, standards and competition, which states that “1. all persons wishing to use European standards must be given access to those standards. 2. standards are available for use on fair, reasonable and nondiscriminatory terms, regardless of whether the users participate in the work of the standard-making body or not, but taking into account the circumstances of the use.” 18 See also the European Commission Guidelines on Horizontal Agreements.19 A. Ban on Actual or Constructive Refusals to License and a Ban on Demands for Injunctive Relief First of all, a FRAND undertaking is a promise to license. In fact, under certain laws it may actually be the license itself, 20 or create a cause of action in promissory estoppel.21 A refusal to 18 EC Commission Communication on IPRs and Standardization, COM (1992) 92/445, 6.2.1.1 & 6.2.1.2 (Oct. 22, 1992). 19 Guidelines on Horizontal Agreements, supra note 14, ¶ 174. 20 See, for instance, the arguments made in Plaintiffs’ Opening Pre-Trial Brief, at 55–60 (redacted public version July 15, 2008), and Plaintiffs’ Answering Pre-trial Brief, at 16–19 (redacted public version filed July 18, 2008), in Case C.A. No 2330 VCS, Nokia Corp. v. Qualcomm Inc., (Court of Chancery in the State of Delaware, settled in July 2008), referring to an opinion from Prof. Aynes dated 5/21/2008, para. 1.1.2 at 5, citing Bull. civ. Ass. Plen. Nos 7, 8, and 9. It is argued that the FRAND promise creates a contract between the promisor and ETSI, governed by French law, which includes a third-party beneficiary clause, which is enforceable even though no specific price is set, since under French law no specific price is needed for leases or licenses if the property being licensed or leased is sufficiently identified. 21 Id. The civil law equivalent of promissory estoppel is the principle of “venire contra actum proprium.” For an example recognizing the possibility of a contractual cause of action against members of ETSI who have issued a FRAND undertaking, see the judgment of the Regional Court of Düsseldorf of Feb. 13, 2007 in Case No. 4a O 124/05,...

800 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW license in breach of a FRAND promise would also give rise to an antitrust violation.22 In the words of the Third Circuit in Broadcom v. Qualcomm, We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct . . .. Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder … . Deceptive FRAND commitments, no less than deceptive nondisclosure of IPRs, may result in such harm.23

The implication of a promise to license on FRAND terms is that the IP owner is no longer allowed to obtain injunctive relief against a prospective licensee who is ready and able to sign a license on such terms, even where negotiations on the terms and conditions have stalled.24 Seeking an injunction in these circumstances, and thereby threatening to exclude the company from the market and hold it up, is a way of putting pressure on the prospective licensee to agree to rates of royalty and other terms and conditions that are potentially inconsistent with FRAND and contrary to Articles 82 and 81(3) EC. In the words of Qualcomm in its litigation against Ericsson in the late 1990’s, where Qualcomm objected to a request for injunctive relief: the holder of essential patents, after identifying its patents ... could stand idly by after adoption of the standard as others invested huge sums of money in the development of products compliant with the standard. Once those others began to enjoy some commercial success, the patent holder could then demand the payment of royalties for the allegedly essential patents. Those who had invested in the standard would either have to accept the patent holder’s claims and terms without challenge or risk having their investment destroyed ... . And that is, of course, precisely what open standards are meant to prevent.25

Where the injunction threat is successful and the licensee agrees to the unreasonable or restrictive terms, consumers are hurt by higher prices, reduction of innovation, etc. Where injunctions in fact are awarded, consumers are hurt by being deprived of downstream Siemens v. Amoi, Judgment of the Regional Court Düsseldorf, Feb. 13, 2007. In ¶ 4(b), the Court holds “[i]f the owner of the IPR — as it is the case here — is in principle willing to license and has committed itself contractually to grant a license, the only issue that remains, once he has made a license offer to the license-seeker, is the question whether unreasonable license fees are demanded (misuse by exploitation) or whether its licensing practice is discriminatory and/or unreasonable.” (emphasis added). Compare Judgment of the District Court Düsseldorf, Case No. 4b O 346/05, Video Signal Encoding; Court of Appeal Karlsruhe, Case No. 6 U 174/02, Orange Book-Standard; District Court Düsseldorf, Case No. 4a O 124/05, Zeitlagen-multiplexverfahren. 22 See Siemens v. Amoi, supra note 21, § 4. 23 Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297, 314 (3d Cir. 2007). The notion that the promise must be “intentionally false” can be criticized and should perhaps not be read too strictly as requiring evidence of ex ante intent. To the extent this is based on U.S. criteria for attempted monopolization, which do not apply in the EEA, the requirement should not be applied under Articles 81(3) and 82 EC. Evidence of intent can be concealed and is extremely difficult to discover, especially in the EEA, where discovery is limited. The European Court has held that abuse is an “objective concept” and that intent is not required for a finding of infringement. It should be enough that the IP owner acts falsely in that it knowingly violates the FRAND promise by refusing to license, demanding injunctive relief, or imposing restrictive or exploitative terms. 24 See, for instance, the arguments made in Qualcomm’s Answer to Ericsson’s Corrected Third Amended Compliant and Amended Counterclaim, in Ericsson v. Qualcomm, No 2:96-CV183 (E.D. Tex. filed May 3, 1999) (case settled in 1999), at 20, and Declaration of Irwin M. Jacobs in support of Qualcomm’s Motion for Summary Judgment, at ¶ 9; see also Nokia’s Opening Pre-Trial Brief, at 49–61 (redacted public version July 15, 2008), and Nokia’s Answering Pre-trial Brief, at 16–19 (redacted public version filed July 18, 2008), in Case C.A. No 2330 VCS, Nokia Corp. v. Qualcomm Inc., (Court of Chancery in the State of Delaware, case settled in July 2008). 25 Qualcomm’s Reply in Support of its Motion for Partial Summary Judgment to Limit Ericsson’s Requested Relief, in Ericsson v. Qualcomm, No 2:96-CV183, at 8–9 (E.D.Tex. filed Mar. 12, 1998) (case settled in 1999).

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competition for the standardized products and by reduced consumer choice. The appropriate remedy is for the courts or arbitral tribunal to implement the FRAND promise, and award (single, not treble) damages at a level that they consider to be fair and reasonable.26 There is support for this approach not only in European case law, but also in a recent circular from the Supreme Court of China.27 This does not mean that injunctive relief should be excluded in all cases. It would be appropriate, for instance, where the licensee refuses to license its essential patents to the licensor (“defensive use” against a “reverse hold-up”), refuses to or is manifestly unable to pay fair and reasonable royalties, or refuses to accept the terms that undisputedly are in compliance with the FRAND obligations, or have been adjudicated to be so. B. Ban on Excessive Royalties Second, FRAND declarations are intended to avoid the kind of abuse described above, where IP owners rely on the incremental market power that may result from inclusion of a patent in 26 See Siemens v. Amoi, supra note 21, § 4. Suits for injunctive relief against companies alleged to be practicing a patent covered by a FRAND promise are arguably contrary to the principles of equity. Justice Kennedy’s opinion in eBay recognized that “the economic function of the patent holder present considerations quite unlike earlier cases.” This is the case with companies offering FRAND promises, who irrevocably represent to the world their willingness to license their patents to everyone in exchange for a modest fee. This economic function stands in contrast to the classical innovator, who patented inventions in order to exploit exclusively the inventions’ commercial potential. Justice Kennedy found that in the case of patent trolls, who are willing to license their patents so long as they are able to extract the maximum possible royalty, “legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest.” Justice Kennedy’s reasoning is a fortiori applicable to companies that have offered FRAND promises, as they have publicly and irrevocably represented to the world their willingness to license their patents to all others. Such a representation must be taken to be a statement that compensation will always be adequate for the company, and accordingly, it would be exceedingly rare for the company to require an injunction against another company practicing the patent without a license because the licensor could not prove the first legal requirement of an injunction, namely that there be a serious risk that it would suffer irreparable injury without an injunction. eBay Inc v. MercExchange, LLC, 547 U.S. 388 (2006). The judgment in “Standard-Spundfass” suggests that injunctive relief may also be available if the defendant has begun using the patents without asking for a license or without applying to the antitrust authorities for a mandatory license (although a compulsory license was available under antitrust law to avoid restriction of downstream competition (German Federal Court of Justice, decision of 13/7/2004 — Standard-Spundfass II, WuW DE-R 1329, GRUR 2004, 966, and Regional Court Düsseldorf, Decision of Nov. 30, 2006, 4b O 508/05; Kühnen, FS for Tillman, 513, 514). But in the Siemens/Amoi case, the Regional Court of Düsseldorf declines to follow the reasoning in Spundfass, and indicates that no injunction would be available (Judgment of the Regional Court Düsseldorf, Feb. 13, 2007, 4aO124_05). See also Judgment of the District Court Düsseldorf, Case 4b O 346/05, Video Signal Encoding; Court of Appeal Karlsruhe, Case 6 U 174/02, Orange Book-Standard; District Court Düsseldorf, Case 4a O 124/05, Zeitlagen-multiplexverfahren. The inability to obtain injunctive relief may affect the ability to extract monopoly rents, but it is not enough to avoid a breach of the FRAND licensing duty; supracompetitive royalties may still be possible under the criteria of Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y 1970). These criteria appear to contemplate a royalty based on an ex post analysis, rather than an ex ante approach (see below). 27 See Supreme People’s Court Circular to the Supreme People’s Court of Liaoning Province on Whether the Implementation of a Patent in a Standard by Chaoyang Xingnuo Company in its Design and Construction in Accordance with the Industry Standard Issued by the Ministry of Construction Constitutes a Patent Infringement, Document (2008) Min San Ta Zhi No. 4 (July 8, 2008) (“Given the fact that at present the standard-setting organizations have not set up any system governing public disclosure and use of patent information in a standard, if a patentee has participated in setting a standard or if, upon its consent, its patent is incorporated into a national, industrial or local standard, it is considered that the patentee permits any third party to exploit the patent while implementing such standard, and a third party’s exploitation of that standard shall not constitute an infringement as provided by Article 11 of the PRC Patent Law [which prohibits third parties from practicing the patent without license]. The patentee may request the exploiting party to pay royalties. However, such fees shall be substantially lower than the normal licensing fees. In case the patentee promises to waive such patent licensing fees, the matter shall be handled according to its promise.”). The circular applies in a situation where “the standard-setting organizations have not set up any system governing public disclosure and use of patent information in a standard, if a patentee has participated in setting a standard or if, upon its consent, its patent is incorporated into a national, industrial or local standard.” It therefore applies a fortiori where the patentee has given a FRAND promise.

802 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW a standard to impose excessive prices or exploitative terms. Excessive or exclusionary terms may be tantamount to a constructive refusal to license, which would be in direct contravention of the FRAND promise. But even absent a constructive refusal, members of standard setting organization (often including licensors and licensees as well as users in certain cases) could not be expected to invest in the development of a standard without a universally applicable rule of “mutual moderation” that prevents one or more IPR owners from appropriating all or most of the economic benefits of the standard, to the detriment of users and other contributors to the standard. This is entirely consistent with Article 82(a) EC, which requires dominant firms to avoid “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions.” The European Court of Justice has held that it may be a violation of Article 82 for an undertaking in a dominant position to charge a price that is excessive in relation to the economic value of the service provided or the good supplied.28 In Port of Helsingborg the European Commission confirmed this criterion and used various proxies to conclude that no violation had occurred in that particular case.29 Case law that concentrates on “value” is consistent with economic theory. Economic theory posits that a fair royalty for an intellectual property is the royalty that the IP owner would be able to obtain in an ex ante competitive auction where different technologies compete for the standard before the standard is locked in. Quoting Swanson and Baumol, the FTC held in Rambus (at 17) that a reasonable royalty “is or approximates the outcome of an auction-like process appropriately designed to take lawful advantage of the state of competition existing ex ante … between and among available IP options.”30 Assume, for instance, a technology A and a technology B that is equally good but more expensive to implement than A, or that is inferior and expected to generate less demand than A. In a competitive environment without collusion — in a Dutch auction system, for instance — the fee for technology B will be competed down to a level close to marginal costs, which are near zero in the case of technology, or perhaps close to the costs that the IP owner could expect to have to incur after the auction to bring the standard to market if its solution is chosen (and that it could avoid if A is chosen). Knowing that, the owner of technology A will try to estimate how much licensees gain from implementing the better technology A, as opposed to the next-best alternative. That is the amount that it will charge for the intellectual property. This means, in other words, that a fair royalty is the sum of (a) the price of the next best alternative (normally close to marginal cost of zero in a competitive environment), plus (b) the incremental value that the licensees derive from using that technology rather than the next best alternative, plus (c) the licensor’s transaction costs. The 2004 European Commission decision in the Microsoft case is consistent with this approach. It distinguishes between two types of “value” transferred to competitors by the compulsory license that the Commission imposed, in a way that is also relevant to standards cases. It differentiates between (a) “‘strategic value’ stemming from Microsoft’s 28 See General Motors v. Commission, 1975 E.C.R. 1367; United Brands v. Commission, 1978 E.C.R. 207. The Court indicated in the United Brands case, “it is for the Commission to prove that the applicants charged unfair prices.” The Commission’s normal investigative practice is to pass the burden of prima facie proof on to the complainant. 29 Case COMP/A.36.568/D3, Scandlines Sverige AB v. Port of Helsingborg, Commission Decision of 23 July 2004; see also Marcus Glader & Sune Chabert Larsen, Excessive Pricing and Article 82, COMPETITION LAW INSIGHT, July 2006, at 3–5. 30 In the Matter of Rambus, Inc., FTC Docket No. 9302, Opinion of the Commission on Remedy, Feb. 5, 2007, at 17 (quoting Swanson & Baumol); see also Carl Shapiro, Expert Report in U.S. ITC Qualcomm v. Nokia (“A natural economic benchmark for FRAND is the royalty that would have been negotiated before specific investments have been made in the patented technology … . [T]he royalties negotiated ex ante reflect technology competition and thus the actual contribution of each patent holder . . .. The FRAND commitment is a way of obtaining the benefits of technology competition, and avoiding hold-up, when it is not feasible to engage in full, actual ex ante negotiations.”).

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market power,” and (b) value derived from true innovation.31 The former is the amount that Microsoft could extract in a hold-up of the users of its interoperability information, considering that the industry cannot avoid that information because of the need for their servers to communicate with Microsoft clients and servers on an equal footing as Microsoft’s servers. The latter is the value derived from true innovation, i.e., the incremental value (if any) over the next best alternative had there been open standardization and an auction before the industry was locked in. In practice, it is not easy to calculate the incremental value of the best technology. Economists therefore tend to use proxies, such as the fee that the same licensor charges for the same technology in competitive markets, or for similar technology, or the amount that similarly situated licensors charge for comparable or complementary patents. Any such comparison must be “consistent,” according to the European Court of Justice, that is to say, involve similar products with similar quality and functionality, in similar volumes, subject to similar terms and conditions, and with prices set in competitive conditions.32 The proxy must therefore be carefully selected and reviewed. If there are no substitutes available for the proxy, the market in which the proxy competes is not competitive. Similarly, if the owner of the alternative for the proxy refuses to license it, the comparison may be biased and result in an excessive fee. In a standards context, royalties charged for complementary patents may be a good proxy (provided absence of collusion between the defendant and the owners of the proxy technology), because the technologies relate to the same products, are used by all licensees in the same circumstances and volumes, with prices set in comparable conditions. To determine whether an IP owner’s royalties are fair and reasonable, they can be compared with the fees for complementary essential patents owned by the other contributors to the standard in question. If the former are much higher than the latter, they are presumed excessive, although the IP owner might attempt to rebut that presumption by showing that there were ex ante equal alternatives for all of the complementary patents, but no independent alternatives for its patents. Another approach, based on the same considerations, would be to calculate the aggregate royalty that would apply if all patent owners were to charge the same royalty as the defendant. If that hypothetical royalty stack is so high as to undermine the commercial viability of the standard,33 31 See Microsoft Commission Decision of Mar. 24, 2004, Case COMP C-3/37.792, Commission v. Microsoft Corp., 2007 O.J. (L 32) 23–28, ¶ 1008. The 2004 Microsoft decision was upheld by the European Court of First Instance in its judgment of Sept. 17, 2007. Case T-201/104, Microsoft Corp. v. Commission, [2007] 5 C.M.L.R. 846, 2007 WL 2693858 (Sept. 17, 2007), available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=en&Submit=Rechercher& alldocs=alldocs&docj=docj &docop=docop&docor=docor&docjo=docjo&numaff=T-201/04&datefs=&datefe=&no musuel=&domaine=&mots=&res max=100. The question whether Microsoft’s penultimate royalty offer was “fair and reasonable” was addressed in Decision of the European Commission C (2008) 764 final (Feb. 27 2008), fixing the definitive amount of the periodic penalty payment imposed on Microsoft. This decision is subject to appeal. Case T-167/08, Microsoft v. Commission, 2008 O.J. (C 171) 41 (May 7, 2008). 32 United Brands v. Commission, 1978 E.C.R. 207; see also SACEM III, 1989 E.C.R. 2811 (referring to “a comparison of the fee levels … on a consistent basis.”); Bodson v. Pompes Funebres, 1988 E.C.R. 2479 (similar wording). 33 This is sometimes called a “double marginalization” or “Cournot” problem, after the French 19th century economist who discovered that monopolists controlling complementary goods may each attempt to charge a monopoly rent, resulting in a total cost stack that is higher than a single profit-maximizing monopolist could have charged, reducing output to a level below even what would have prevailed in a monopoly. A cynical IP owner may argue that so long as it is the first to set its fee at a near-monopoly level, there is no consumer harm because other owners of complementary patents will have an incentive to limit their demands so as to avoid this problem of multiple marginalization. This does not avoid the problem, since it will merely cause a run to be the first IP owner to declare the highest royalty. Moreover, other IP owners may declare equivalent royalties, knowing that this creates a Cournot problem in the short term, in an attempt to force an agreed solution where all essential patent owners agree to lower their fees proportionally to their technical contribution (a “game of chicken”). These “games” are inefficient and harm consumers by raising costs, reducing output, and slowing down development and acceptance of...

804 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW the defendant’s royalties can be deemed excessive, resulting in a switch of the burden of proof, allowing the defendant to show that its patents add more value than the complementary patents.34 Interestingly, there are several precedents where firms agree to mutual moderation to avoid an excessive royalty stack, while maintaining the incentives to innovate for all contributors. They proposed a rule combining a maximum aggregate royalty combined with an allocation of royalties that is proportional to each IP owners’ contribution to the standard: NTT DoCoMo, Ericsson, Nokia and Siemens ... reached a mutual understanding to introduce licensing arrangements whereby essential patents for W-CDMA are licensed at rates that are proportional to the number of essential patents owned by each company ... . The intention is to set a benchmark ... to achieve fair and reasonable royalty rates. ... This arrangement would enable the cumulative royalty rate for W-CDMA to be at a modest single digit level. ... As essential patent holders, Japanese manufacturers Fujitsu, Matsushita Communication Industrial (Panasonic), Mitsubishi Electric, NEC and Sony Corporation have also expressed their willingness to co-operate with such arrangements ... targeted cumulative 5% level.35

Interestingly, a single-digital aggregate royalty cap (5–10 percent of the wholesale price of the standard-compliant product) appears to be roughly consistent with the “Goldscheider rule,” so called after its creator. This rule proposes that IP owners in the aggregate should generally be entitled to about 25 percent of the downstream gross profits made on the licensed product. This rule of thumb, based on past experience in licensing, is on occasion controversial and should not be applied without careful review and adjustment. The 25 percent is just a starting point, for instance. “The assumption is that if a licensor comes to the bargaining table armed with a relatively strong arsenal of assets, it should, as a starting point, consider itself to be entitled to 25 percent of the pie.”36 The rule is not intended for individual licensors, but applies to the aggregate of the intangible assets required for a product. After all, if there is more than one contributor to a standard (and there may be dozens or more licensors owing hundreds or thousands of patents reading on a standard), and if all claim 25 percent of the licensees’ profits, the total royalty stack would be completely prohibitive. In determining the reasonable aggregate, and in dividing the revenues amongst patent owners, adjustments should also be made for the enforceability and essentiality of the patents, the geographic scope of various patents and their remaining life, the costs of complementary technology needed, the value conveyed by the patents compared to the next best ex ante alternative, the risk borne and investments made by the licensee relative to the costs and risks borne by the licensor, the volume of sales expected in the market, and so forth. It should be adjusted downwards for instance, in situations where the licensee takes more than the usual risk. Downwards adjustments would also be appropriate where the expected volume of sale is very substantial, or where the licensee provides consideration in the form of a grant-back license or right to use the licensee’s technology. the standard. FRAND undertakings avoid these problems, and replace it with what would in any event be the most efficient outcome, namely, a consensual system of reciprocal restraint in royalty demands. 34 See also Siemens v. Amoi, supra note 21. The Court reasoned that if other owners of patents claimed as essential tried to charge the same royalty rate per patent as Siemens, the cumulative royalty rate would be approximately 33 percent, which would make the standard uneconomic. This was accepted as evidence that the requested royalty rate was excessive. 35 See Press Release, 3G.co.uk, 3G W-CDMA Mutual Understanding Between Big 4 (Nov. 7, 2002), available at http://www.3g.co.uk/PR/November2002/4377.htm; see also ETSI 3GPP/PCG Meeting 1, document 3GPP/ PCG#1(99)11, Third Generation Mobile Communications: The way forward for IPR, March 1-4,1999. These principles are also applied to LTE, the fourth generation of Europe’s mobile telecommunications standard. See Press Release, Nokia Corp., Wireless Industry Leaders Commit to Framework for LTE Technology IPR Licensing (Apr. 14, 2008), available at http://press.Nokia. com/PR/200804/1209094_5.html. 36 Robert Goldscheider, New Companion to Licensing Negotiations: Licensing Law Handbook ¶ 7.02[8][b] (2003– 2004).

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As will be clear from the hold-up examples described above, whether a license is unfair or unreasonable does not just depend on the royalty, but also on other terms and conditions. For instance, it would be unreasonable for a licensor to insist that licensees provide cross-licenses of (or non-assertion of patent clauses covering) their technology royalty-free or on belowcompetitive rates. Licensees should grant licensors the reciprocal right to use their essential patents on FRAND terms, but deserve fair royalties on the same basis as the licensor. This was recognized by the Regional Court of Düsseldorf in Siemens v. Amoi.37 C. Ban on Restrictions of Competition, and non-discrimination Third, FRAND declarations are intended to avoid a tilting of the playing field in markets for products implementing the standard.38 No member of a standards body can be expected to cooperate with standardization that results in his exclusion from the downstream market or in dependency on a single supplier of components for the standardized product. Restriction of competition in downstream markets may arise in particular if the patent owner discriminates amongst licensees, or between licensees on the one hand and its own downstream activities on the other hand. Under Article 82(c) EC, a dominant firm is required to avoid conduct “limiting [rivals’] production, markets or technical development” and to avoid “applying dissimilar conditions to equivalent transactions with other trading partners, thereby placing them at a competitive disadvantage.” This rule is particularly relevant to owners of IPRs that, as a result of including in a de jure or de facto standard, qualify as “essential facilities”: 41. A dominant undertaking which both owns and controls and itself uses an essential facility, i.e., a facility or infrastructure without access to which competitors cannot provide services to their customers, and which refuses its competitors access to that facility or grants access to competitors only on terms less favorable than those which it gives its own services, thereby placing the competitors at a competitive disadvantage, infringes Article [82]39

Impermissible restrictive provisions would include all forms of exclusivity (because that would prevent all interested parties from having access to the standard), discrimination (since that would distort competition on a level playing field),40 provisions that would allow termination of the license so long as the standard still exists (because that would violate the ETSI rule that the license should be “irrevocable” and would prevent the licensee’s access to the standard) except where the licensee violated material provisions of the license and the breach cannot be cured nor remedied by monetary damages, but also clauses that are blacklisted in the technology transfer block exemption, and provisions discouraging innovation (such as non-assertion of patent clauses or cross-licenses depriving the licensee from reasonable remuneration for the licensee’s technology) or maintaining artificial barriers to entry (such as patent validity nochallenge clauses).41 37 See Section 4(c) of the judgment of the Regional Court of Düsseldorf of February 13, 2007 in Case 4a O 24/05, Siemens v. Amoi, supra note 21 (concluding that Amoi was entitled to a patent license, and that Siemens was not entitled to insist on a royalty-free cross-licence of “non-essential” patents). 38 Daniel G. Swanson & William J. Baumol, “Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power”, 73 Antitrust L.J. 1 (2005). 39 B&I Line v. Sealink, [1992] 5 C.M.L.R. 255; Decision 94/19, Sea Containers v. Stena Sealink, Commission Decision of 21 Dec. 1993, IV/34689, 94/19/EC, 1994 O.J. (L 15) 8; see also Microsoft 2004 Decision, ¶ 1008 (“[T] erms imposed by Microsoft [must] be reasonable and non-discriminatory ... in particular: ... (iii) ... restrictions should not create disincentives to compete with Microsoft, or unnecessarily restrain the ability of the beneficiaries to innovate”). Commission Decision of Mar. 24, 2004, Case COMP C-3/37.792, Commission v. Microsoft Corp., 2007 O.J. (L 32) 23. 40 See, for example, the Standard-Spundfass case, supra note 26 (patent owner is not allowed to discriminate, where the IPR has become an essential facility as a result of inclusion in a standard, and a compulsory license can therefore be imposed under antitrust law to avoid restriction of downstream competition). 41 The Technology Transfer Block Exemption would normally allow the licensor to terminate the license in case the licensee challenges the validity of a patent, but since termination could prevent access to the standard and a no-

806 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW V. APPLICATION OF ARTICLE 81(3) EC

The principles based on Article 82 EC, described above, find a parallel in Article 81(3) EC. Pursuant to Article 81(3), restrictions of competition inherent in many standards agreements are permissible if four conditions are met, namely, (a) the agreement must achieve an improvement of production or distribution, which is normally the case if the standard serves a legitimate goal, as discussed above; (b) the standardization must be “indispensable” to achieve the benefits sought; (c) the agreement must allow consumers a fair share of the resulting benefits, i.e., the patent owner is not allowed to appropriate all of the benefits of the standard or impose a monopoly rent; and (d) competition in the relevant market must not be substantially excluded, i.e., competition in the downstream market for products implementing the standard should not be distorted. The “fair and reasonable” elements of a FRAND undertaking reflect the third condition, whereas the “non-discrimination” component reflects the fourth condition. The Technology Transfer Guidelines confirm this:42 [A]n industry standard [can lead] to a situation in which there is little competition in terms of the technological format. Once the main players in the market adopt a certain format, network effects may make it very difficult for alternative formats to survive … in order for the agreement to comply with Article 81(3), it must be ensured that the agreement does not unduly restrict competition and does not unduly restrict future innovation… . It will normally be required that the technologies which support such a standard be licensed to third parties on fair, reasonable and non-discriminatory terms.” … “Where the pool has a dominant position on the market, royalties and other licensing terms should be fair and non-discriminatory and licences should be non-exclusive. (para. 226)

The requirement that the agreement must allow consumers a fair share of the resulting benefits tends to confirm that where the IP owner has developed or purchased patents in every viable solution and thereby could prevent competition between them, the patent owner is not allowed to appropriate all of the benefits of the standard and charge a monopoly rent. There should at the very least be a comparison with the benefits that the licensor and licensees would have been able to obtain had the standard not been implemented. The incremental value derived from implementing the standard should be shared out between all owners of IP that is ex ante essential, with due account for the incremental value contributed by IP for which there are ex ante alternatives, and the interests of consumers. VI. CONCLUSION

In standardization, licensors are required under competition law to license essential patents on fair, reasonable, and non-discriminatory (FRAND) terms. A FRAND obligation has three main components: (1) an obligation to license, and a ban on obtaining injunctive relief against licensees to force them to submit to the licensor’s demands regardless of whether they are fair and reasonable; (2) an obligation not to charge monopoly rent, and to limit demands to what the licensor would have been able to obtain in a competitive market had there been an auction before the standard is set, with other technologies competing for the standard; (3) an obligation not to discriminate between licensees, or between licensees and the licensor’s own downstream business. The “non-discrimination” component of a FRAND undertaking is designed to guarantee a level playing field. This is in the consumer interest because it lowers prices and increases output, while maintaining incentives to maximize efficiency of production and distribution that would be reduced by foreclosure challenge clause could maintain artificial barriers to entry, the agreement should not provide for termination in case the licensee challenges the licensors’ patents. 42 European Comm’n, EC 2003 Technology Transfer Guidelines, 2003 O.J. (C 235) 10–54, ¶¶ 152 et seq.

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of downstream competition. To allow proper monitoring of the FRAND obligations, all licensors should be required to make a standing offer to license on FRAND terms to all interested parties. Of course, the licensor and licensee may by negotiated agreement deviate from these provisions, and specific licensees may be granted more advantageous conditions if these are justified by objective and relevant considerations, for instance, if the licensee provides a grant-back license to its technology to the licensor. Similarly, the parties may agree to more burdensome terms on the licensee (provided they are not restrictive of competition) if the licensor provides additional non-essential products or services to the licensee beyond the license of the essential patents for the standard. But at all times, the licensor must maintain the offer of the standard terms available to all, to ensure that the licensee has a way out if the licensor attempts to impose unreasonable customized terms. If the licensee takes a legitimate position that the licensor’s terms are not FRAND, and refuses to sign the standard license while declaring itself ready to pay FRAND royalty, the licensor should not be allowed to seek injunctive relief. This should be allowed only where the licensee refuses to license its essential patents to the licensor, refuses to or is manifestly unable to pay fair and reasonable royalties, or refuses to accept the terms that undisputedly are in compliance with the FRAND obligations, or have been adjudicated to be so.

“Frand” Undertakings in Standardization — A Business Perspective Timo Ruikka*

ABSTRACT

This paper discusses the business reasoning for the practice whereby standard development organizations (SDOs) require fair, reasonable a nondiscriminatory (FRAND) undertakings in respect of essential patents as a condition of approving standard specifications. The central business reason for this practice is for the stakeholders to avoid excessive royalty costs that would be possible due to patent holder bargaining power when negotiations are conducted ex post standardization and ex post implementer investment. This paper proposes an ex ante investment analysis (not to be confused with ex ante declaration of licensing terms) and a top-down approach for determining reasonable royalties. In order for implementers to determine whether royalties would make it economic to invest in implementations, it is necessary for them to evaluate the total cost of licenses for use of all essential patents against their business case in investing to standard implementations. It is argued that licensors should base their offered rates as a justified proportion of such total cost. To improve the predictability of licensing outcomes at FRAND rates, it is recommended to SDOs to expressly require application of the principle of aggregate reasonable terms (ART) and the principle of proportionality. I. INTRODUCTION

There is significant controversy regarding the meaning and legal significance of FRAND undertakings. These undertakings are formal commitments given by patent holders * Timo Ruikka is Strategy Advisor, Nokia Corporation (email: [email protected]), and he has served in several senior positions at Nokia since 1988. He has extensive experience in commercial contracts, intellectual property, and licensing, standardization, and industry policy issues.

808 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW participating in standard development organizations (SDOs) to license their “essential” patents for interoperability standards on terms that are FRAND. For example, the patent policies of both the European Telecommunications Standards Institute (ETSI) and the American National Standards Institute (ANSI) have similar requirements in this regard. This paper does not attempt to analyze the differences in wording between ETSI and ANSI IPR policies or their legal implications. The premise of this paper is that the underlying business reasons for ETSI and ANSI each requiring FRAND terms are similar. The assumption here, for sake of my argument, is that these policies are equivalent in this regard. In this paper I adopt the perspective of a businessperson. The focus is on the issue of what “fair and reasonable” should be taken to mean in the financial sense, specifically for establishing the appropriate value of a patent or a technology. The issue of aggregate patent costs is looked at in relation to the standardization objectives and business objectives underlying SDO policy requirements of obtaining FRAND undertakings. I propose that, in the light of the objectives discussed, it is a relevant test of reasonableness of royalty levels to establish at most how much an implementer is willing to pay for the needed patents and still invest in the business of implementation. This is called the “ex ante investment” analysis. Theoretically, this is consistent with the method of establishing the patent value by utilizing a comparison of the chosen technology against the next-best alternative at the time of standardization.43 Legal considerations and economic theory are referred to throughout the paper, but the focus remains on the business argument. This argument should also be firmly kept in view while legal and economic analysis is brought to bear on the issues. IPR policies and undertakings issued pursuant to those policies are contractual commitments. What their exact legal effect in an actual case is, and the extent to which they bind their issuers, are important legal considerations which are beyond the scope of this paper. My aspiration is to put the practice of requiring FRAND undertakings into the proper context — the business reasoning of why they are required and what they are intended to achieve. This paper commences with a description of the underlying problem and proceeds with an analysis of what RAND undertakings are intended to achieve. The central focus is on the impact of ex post circumstances on patent license negotiations because licenses are, as a rule, negotiated ex post standard and ex post implementer investment. The argument is that issues related to bargaining power of patent holders and implementers in the licensing negotiations involve a significant risk that royalty rates in licenses occurring in the marketplace may in fact exceed FRAND. Drawn from this analysis, I put forward recommendations regarding improvement of standards body rules. It is argued that these rules should require offered royalty rates to be expressed as a justified proportion of what the licensor regards as an appropriate total value of all essential patent licenses. The proposed improvements for adoption by SDOs do not change the substance of existing FRAND undertakings. Adopting the proposed changes would, however, better ensure the intended outcome. Additionally, in order to deal with the risk of over-declaration of patents as allegedly essential in respect of standards, SDOs should take measures to have patents declared as essential reviewed by independent experts in order to improve the quality of information about essential patents. As divergence of interests is likely to prevent SDOs from reaching sufficient consensus for improvement of their IPR policies and FRAND undertakings, continuing litigation is foreseen. In the meanwhile, adverse impacts to stakeholders in standardization and to the broader society are likely. This paper is informed, and the argument presented is influenced, by the author’s 43 This approach and the theoretical basis for it is described by Carl Shapiro et al. in several writings, including the 2007 paper, Joseph Farrell, John Hayes, Carl Shapiro & Theresa Sullivan, “Standard-setting, Patents and Holdup”, 74 Antitrust L.J. 603 (Dec. 1, 2007), available at http://faculty.haas.berkeley.edu/shapiro/standards2007.pdf.

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extensive experience from Nokia and its business environment. As a party to multiple litigation actions touching upon the issues discussed in this paper, Nokia is not an impartial stakeholder in this controversy. Therefore, each reader is invited to critically assess my argument and to draw his or her own conclusions. II. WHY ARE REASONABLE ROYALTIES A REQUIREMENT FOR STANDARDS AND WHAT IS THE CONTROVERSY?

Let’s first review the purpose of standardization and the market effects that widely implemented standards bring about. These multiple effects — from now on called “ex post effects” — point towards a significant risk of patent holder opportunism, as they have fundamental impact on the bargaining situation between implementers and essential patent holders. The meaning of FRAND undertakings should be interpreted in the light of the business considerations that prompt standard-setting organizations to require them to be formally issued. These considerations strongly suggest that royalties must not be left to be set by unregulated price mechanisms, as is favored by standard economic theory for most other situations, and that FRAND undertakings are required precisely for this reason. Additionally, the presence and likely impact of multiple ex post effects further supports the legal conclusion, put forward elsewhere,44 that FRAND undertakings are intended to remove the availability of injunctive relief to patent holders who have consented for the inclusion of their patented inventions into the standard specification. Indeed, if implementers were to face the risk of injunctive relief, that circumstance would further worsen the already large impact of ex post effects on bargaining power, unjustly favoring patent holders. The controversy surrounding this issue arises from the divergence of stakeholder interests in the situation where standards body IPR rules do not specify what criteria must be met for royalty rates to be “fair and reasonable.” Further, standards body IPR rules do not deal with the coordination problem arising from multiple patent holders — up to dozens — each licensing their essential patents independently of each other in most cases,45 and also without proper regard for the totality of all essential patents. As the ex post effects of standardization fundamentally alter the balance of licensing negotiations, lack of clear rules in these respects leaves room for essential patent holder opportunism. These gaps should be better addressed by SDOs. As any change would provide gains to some stakeholders and losses to others, the issue (and even its existence) remains hotly contested. Thus chances are remote of major SDOs actually adopting improved rules by consensus. A. The Market Impact of Successful Standards Telecommunications, computer, and consumer electronics industries create interoperability standards setting out what functionalities should be present in software, products, and services (implementations) from different vendors (or implementers) for a given activity or use involving interconnected devices or installations. This paper is primarily concerned with what become market-defining standards because these standards most clearly demonstrate the very material ex post effects of successful standardization. Moreover, the discussion here concentrates on the standardization impact in respect of products (implementations) for which the standard defines a material core set of functionalities. In the case of such standards, the 44 See, e.g., Mark A. Lemley & Carl Shapiro, “Patent Holdup and Royalty Stacking”, 85 Tex. L. Rev. (2007), available at http://ssrn.com/abstract=923468; Carl Shapiro, Injunctions, Reasonable Royalties, and Patent Licensing, (Competition Policy Ctr., Univ. of California at Berkeley Working Paper No. CPC06-062, 2006), available at http:// faculty.haas. berkeley.edu/shapiro/royalties.pdf. 45 The main exception being the occasional patent pool.

810 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW essential patents likely cover some of the most significant technologies utilized in typical implementations.46 The issue discussed here is a generic conundrum relevant for the entire information, communications, and consumer electronics technology industry, much beyond mobile phones and like devices. In the networked environment, where the capability to interoperate has the most pronounced significance, markets are prone to tip to a dominant design. A successful standard47 is capable of providing a dominant design that is available for competitive implementation among multiple vendors. These circumstances are relevant for all telecommunications standardization. The benefits of network effects (positive externalities) and the increase in consumer welfare resulting from competitive supply are strong public policy arguments in favor of standardsbased inter-operability.48 When a standard becomes prevalent, most (and, in many cases, all) market participants include it in their implementations. In fact, it may become irrelevant to offer noncompliant products to the market: Where network effects are strong, there may be few, if any, customers for products that do not support the prevailing standards. B. The Tension Between Patents and Standards; Definition of Essential Patents Standards are employed to accomplish a uniformity of implementations regarding those aspects that are critical for interoperability. Patents, on the other hand, confer a legal monopoly to the patent holder to control whether, and on what terms, others may use the protected implementation choice, also called an invention. Patents amount to a power to exclude others from using the same choice, whereas standards amount to a recommendation that everyone should use the same choice for a given purpose. These purposes are clearly opposed to each other, which creates a tension between the two instruments. FRAND undertakings are a widely utilized mechanism permitting parties to make their relevant decisions in relation to this tension — for patentees whether to license the patents involved, and for implementers whether to implement standards requiring use of those patents. FRAND undertakings are given in relation to “essential” patents49 — those whose infringement it is not possible to avoid in an implementation complying with the standard specification. The main significance of essentiality for an implementer is that using essential patents is, for the standard-compliant implementation, not a matter of choice. For a patentee, the status of “essential” means that all relevant implementations of the standard utilize, by definition, those essential patents. These circumstances greatly affect the dynamics of licensing negotiations. FRAND undertakings are required primarily in anticipation of the consequences those dynamics would have unless the patent holders were required to adhere to a royalty level that is “fair and reasonable.”

46 Accordingly, discussion of the many possible reasons for failures of standards to attract wide implementation is not included and neither are battles between competing proposed standards. Also, due to this focus, discussion here does not cover marginal valuation methods, which might have application in the case of standards that are substantially peripheral rather than concerned with the core functionalities of the products in question. 47 For clarity, while economists may use the expression “standard” when discussing a dominant design also in the case of a proprietary solution, this paper uses the word “standard” to mean a specification available from a standardsetting organization for implementation by any and all vendors. 48 It follows that there are public policy concerns if behavior is observed that undermines the success of standardization by discouraging investment into implementations or by discouraging participation in standardization. Further, if opportunism leads to lower supply-side externalities, then that is likely also to be against antitrust law. 49 In practice, such undertakings are issued for a large number of patents that are not, in fact, essential. Such overdeclaration may occur in good faith, but it may also be abused, which is why we later in this paper support measures to screen declarations of essential patents.

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III. FRAND UNDERTAKINGS

A. The Undertakings Required by ETSI and ANSI IPR Policies In order to address the tension between essential patents and standardization, SDOs utilize IPR policies and patent licensing undertakings. This practice supports the wide implementation (market adoption) of the technical specifications produced. Specifically, the purpose is to anticipate the ex post effects of standardization on the licensing negotiations between implementers and holders of essential patents. A very significant and important part of global standardization relies on FRAND undertakings.50 Although only ETSI and ANSI have been specifically mentioned, there are several dozen organizations developing hundreds of standard specifications at any given time that rely on FRAND type of patent licensing undertakings. FRAND undertakings are not strictly obligatory — patent holders are at liberty to decline giving them: Patent holder membership in an SDO does not limit the possibility of that patent holder “opting out” its patent or patents from a given proposed standard.51 But they are considered necessary: Inability to obtain them is taken to pose severe threats to standardization. The necessity of obtaining FRAND undertakings is, thus, a self-imposed requirement by the SDOs. The IPR rules of the most significant SDOs in the communications field, ETSI52 and ANSI,53 operate so that existence of essential patents is not considered to be an issue preventing the adoption of a specification as a standard so long as all known holders of essential patents in relation to that specification have given FRAND undertakings. The IPR policies strongly suggest that if such undertakings are not available, the specification must be modified to avoid the unavailable essential patent or the specification cannot be adopted — or should be abandoned — as a standard. The final decision is left to the standards bodies to take in each case. A FRAND undertaking requirement is designed to achieve several things. It is designed to prevent blocking of standards by outright refusals to license implementations and by patent holders seeking injunctive relief.54 More importantly for the present paper, it is described below how the FRAND requirement is designed to ensure licensing not just on any terms (at any price) but specifically to prevent the use by the patent holder of excessive bargaining power ex post standard and ex post implementer investment to extract higher than reasonable royalties from implementers. In order to understand the logic prompting the SDO requirement for these undertakings as a condition for standards adoption, it is necessary to analyze the business risks that would be faced by the standards community in their absence. The issue of fair and reasonable royalty discussed in this paper is not relevant for licensing regimes based on royalty-free undertakings that are utilized in some SDOs. The pros and cons of FRAND and royalty-free undertakings respectively would be another interesting topic that is beyond the ambit of this paper. 51 It is not possible to include here a discussion of the many possible tradeoffs that a patent holder may have to consider when deciding whether or not to grant a FRAND undertaking for a given patent, except to note that the benefits from standardization to patentees must be considerable, as decisions to withhold the giving of a FRAND undertaking are rare indeed. 52 ETSI IPR Policy, §§ 8.1–8.3, adopted by the ETSI 21st General Assembly on Nov. 23, incorporated in the ETSI Directives as Annex 6 to the ETSI Rules of Procedure, available at http://www.etsi.com/WebSite/document/Legal/ ETSI_ Guide_on_IPRs.pdf 53 The ANSI Patent Policy — Inclusion of Patents in American National Standards Institute, Essential Requirements: Due process requirements for American National Standards (Jan. 2008), available at http://publicaa.ansi.org/sites/ apdl/Documents/Standards%20Activities/American%20National%20Standards/Procedures,%20Guides,%20and%20 Forms/2008%20ANSI%20Essential%20Requirements/2008%20ANSI%20Essential%20Requirements%20031108. pdf. 54 This paper is concerned with business, rather than legal, arguments, so I will here refrain from putting forward detailed legal analysis supporting this conclusion. 50

812 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW B. Absence of Detailed Rules on What FRAND Means Within standards body rules, there is no authoritative definition of what “fair and reasonable” means in actual fact and in concrete circumstances. Such definition or elaboration is not found in a licensing undertaking, in the IPR policies, or in related SDO documents. Both ETSI IPR policy and ANSI Patent Policy refrain from elaborating what they mean by “fair and reasonable terms” or by “reasonable terms and conditions,” respectively. One consequence of this ambiguity is that it is difficult and burdensome to contest an offered royalty rate as not being in compliance with a FRAND undertaking, even if that were the case. Interpreting the language used in the IPR policy expressions, “fair” and “reasonable” appear to exclude excessive or unbalanced results when applied to contract situations. Reasonableness is an antithesis of extremes. Use of these expressions should be understood to address the risk for excessive rates present in the ex post effects of standards and, specifically, to prohibit patent holders from charging royalties that they, in the absence of those ex post effects, would not achieve. C. Essential Patent Licenses Are Negotiated ex post Standard and ex post Investment Only a small portion of all ICT industry patent licensing deals are conducted in “ex ante” circumstances. The standards context is one where ex ante licensing is truly the exception rather than the norm. The practice of relying on FRAND undertakings may, in itself, contribute to this phenomenon: Investment prior to obtaining a license may be viewed as less risky regarding patent costs when the SDO has a track record of consistently procuring FRAND undertakings. But there are many other reasons for licensing occurring ex post. Decisions on the contents of the standard specification — what solutions are prescribed by the standard in order for implementations to be compatible with each other — determine which patents become essential for the standard. These decisions are made far in advance of deployment of the standard in products and services, usually by several years. Licenses for the use of essential patents, on the other hand, are negotiated much later, even years after substantial deployment of the standard. The total time span between a technical selection (producing the essential status of patents) and actual patent license agreements emerging can easily be from five to ten years. There are several reasons why licenses are not obtained up-front. Certainly patent licensing does not occur at the time of drafting and debating the specification, involving dozens or hundreds of design choices, leading to decisions affecting the potential “essentiality” of up to hundreds of patents. Many of those patents may at that point still be recent nonpublic applications and the essential property of a patent may be unknown even to its owner, let alone to others, at an early stage of a standard life cycle. Licensing negotiations are typically lengthy and their commencement may be substantially deferred beyond standard approval and beyond initial deployment due to various reasons, including unpredictability of market success of the standard, lack of visibility of which firms become the major implementers of the standard, the poor quality of information about essential patents, etc. The burdensome and inefficient nature of patent licensing as a business process is likely a factor as well. Further, a standard in many cases evolves for several years after initial issue over multiple successive releases, often progressing from a core functionality set to a broader and further elaborated specification. This means that the technical content of future releases (and, thus, any information about related essential patents) is unavailable at the point in time of implementer investment into business in implementations.

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The time delay involved in this sequence means that standard implementers most often engage in patent-licensing negotiations only after they have made significant investments into standard-compliant products. By that time, there may not be much of a market for comparable products outside the standard. While conforming to a standard, designing around a mandatory specification requirement is unavailable as a means of avoiding a given essential patent. Implementers additionally face other barriers with regard to switching to alternatives. These circumstances greatly affect the bargaining power of the parties to ex post patent licensing negotiations. C. Bargaining Power in the Presence of ex post Effects Ex post circumstances severely impair the applicability of mainstream valuation theory based on markets and competition and warrant the use by SDOs of binding FRAND undertakings. The effects of these ex post circumstances include patent holdup, absence of markets for noncompliant products, implementer switching costs by individual implementers, and the switching costs of the entire ecosystem involved in standard implementation. The implementer’s ex post negotiation situation is adversely affected by patent holdup: Given that substantial investments into implementation design, manufacturing arrangements, marketing and distribution are already expended, theory suggests that an implementer’s financial decision-making is impacted by the intervening investment: The patent holder can take advantage of the implementer’s sunk costs to demand a higher royalty. An implementer faced with the threat of ceasing its business utilizing the standard is prepared to absorb a higher patent royalty cost than would have been the case if negotiations were conducted ex ante of implementer investment. Further, in the case of a standard that is broadly utilized, there may be no market outside the standard. Once the standard has become the dominant design supporting consumers’ expectation of compatibility, users will be reluctant to acquire alternative designs. An ad hoc design circumventing a particular essential patent renders an implementation nonconforming. In a market defined by reference to a standard this alternative — otherwise potentially available as the next-best alternative to a negotiated patent license — is not a valid option. Even if the possibility of abandoning the standard products and offering a different design were feasible from a market entry perspective, any individual implementer deciding to abandon the standard in favor of another product offering faces considerable switching costs involving duplication of all or part of the investment already incurred. Among those switching costs are the effects of the resulting time delay for market re-entry, which in itself may be sufficient to render switching infeasible as a business proposition. Finally, even if individual implementers were theoretically able to migrate to another product offering, broader industry inertia related to standard setting and adoption makes such migration unlikely. Collective switching costs of modifying or replacing already deployed investments, together with concerns over adverse end user reactions, are such that an industry-wide rejection of a standard already in substantial deployment is either impossible or imaginable only in exceptional circumstances. D. Market Data Likely Includes Non-FRAND Rates Combined, the multiple ex post factors boost the bargaining power of the patent holder to one of very strong domination. The purpose of obtaining FRAND commitments is to check the patent holder’s excessive bargaining power. If it were acceptable to standardization stakeholders and to society to leave the outcome of licensing negotiations to market forces

814 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW and competition, FRAND undertakings would not be required. Further, this is why FRAND undertakings must be effective and legally binding or they will not achieve their purpose. While many essential patent holders may in fact apply rates that actually are fair and reasonable, others may take advantage of the challenges in determining the compliance of any given licensing proposal with FRAND. As there is doubt and controversy about the precise meaning of FRAND, the ex post effects mean that at least some patent holders may achieve, and at least some implementers may accede to, royalty rates that are above FRAND. Such excessive rates are above FRAND but not so high as to drive implementers completely out of the market. Ex post effects do not make it possible for the patent holder to raise the royalty rates without limits, as implementers will abandon a business leaving them no profits. They do, however, make it plausible that market participants may enter into license agreements at royalty rates in excess of FRAND, particularly if it is highly challenging for an implementer to prove the non-FRAND character of a given individual offered royalty rate.55 This is the case in the circumstances of the existing SDO IPR rules. And, if it (contrary to the author’s position) were so that FRAND undertakings were short of legally binding and enforceable, we must assume the effect of at least some licensor opportunism in at least some proportion of such agreements. In these circumstances, it is prudent to conclude that evidence of licenses being concluded and the royalty rates applied under those licenses is not in itself persuasive evidence, let alone proof, that all, or even most, of the patent licensing for standards meets the requirements of FRAND. Nor can guidance for reasonable rates be drawn from such potentially tainted data. Therefore, data from market transactions cannot be used with confidence as indications of royalty levels required by FRAND. Market data may be used only where it is clear that the royalties in question have not been influenced by anticompetitive practices or infringement of FRAND obligations. This may be impossible to establish. Instead, we need to utilize ex ante investment methodology. E. FRAND is Required in Order to Preserve Business Viability of Implementations and Legal Viability of Standardization Standards are created for wide implementation by many implementers. Given the risks of excessive patent royalties in the absence of FRAND undertakings, a promise to grant “fair and reasonable” or “reasonable” terms, including financial terms, must mean a royalty rate that should not remove the business viability of investing into standard-compliant implementations and supplying and using them in a competitive market. “Business viability” does not mean a breakeven level. or merely positive profits. Investment is economic or viable in the business sense if the attainable profit level, taking the patent royalty cost level into account, is sufficient to justify going ahead with the investment. The business rationale for requiring FRAND undertakings is to ensure that the standard being created will be capable of being economically implemented as far as patent costs are concerned. Standardization also has competition law significance because it limits both upstream (technology) competition and competition from non-standardized products in the downstream market. For these reasons, it is a requirement of antitrust laws and policy that standards collaboration is conducted in an acceptable manner so that benefits of standardization outweigh its anticompetitive impacts. Standardization is allowed under competition laws provided it leads to efficiencies, and provided further that a fair part of these benefits are passed on to 55 For the same reasons, existence of licenses is not proof of absence of abuses beyond the scope of this paper, such as discriminatory practices or inappropriate bundling of patent licenses with other commercial offerings.

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consumers. Both Articles 8156 and 82 apply under EU law: the essential patent holder must not price unfairly (violation of Article 8257) nor make licensee operations uneconomic, and thereby monopolize the downstream market (an Article 81 violation). The practice of requiring FRAND undertakings is one way of meeting these key antitrust requirements58 as it directly addresses the risk of overpricing by unreasonable royalty rates. FRAND also supports the antitrust objective that the additional value created by the standard is passed on to consumers and not to holders of essential patents. A further antitrust objective is that FRAND should also prevent the shielding of a downstream business from competition. Thus, if the IPR policy of a SDO were not to provide these outcomes, the entire standard-setting activity would be exposed to serious antitrust concerns. For SDO activity to be legally acceptable, the FRAND undertakings must be legally binding and effective. F. FRAND Must Form an Effective and Binding Obligation Given the very substantial business concerns outlined above, as well as the legal requirement of having a suitable patent policy and practice in place to prevent antitrust abuses, it is clear that FRAND undertakings do not achieve their purpose unless they are made effective and binding obligations of the parties issuing them. Given the stakes, one may even have to conclude that standards work should cease until effective and binding arrangements are put in place. These are strong arguments to the effect that FRAND undertakings are legally binding commitments and that they actually do have a specific meaning for the royalty rates that may be charged by holders of essential patents. However, the current controversy and ongoing lawsuits are evidence of serious claims of patent holder opportunism occurring and of the legal complexity and burden of proving the exact effects of FRAND undertakings in court. It would be in the interest of the entire standards community to alleviate this situation by adopting substantial clarifications to the IPR policies of standards bodies. IV. IMPLEMENTER INVESTMENT PERSPECTIVE

In an ex ante investment situation, an implementer whose options remain open will embrace a business with sufficient possibility for achieving a profit and avoid a business where the achievable returns are not commensurate with the investments and risks that must be assumed. A prohibitively high cost of any major input, including an excessive royalty, will discourage a decision to enter. FRAND undertakings are inherently linked to the purpose of standards, which is to encourage the widest possible implementation. This encouragement is achieved by providing for FRAND royalty rates, which make implementation feasible (as far as patent Article 81 applies where no alternative standard exists or is likely to be developed, the principal companies in the industry are parties to the standard-setting agreement, and products not complying with the standard would not in practice find a market. See Joined Cases 56 & 58/64, Etablissements Consten SA & Grundig-Verkaufs GmbH v. EEC Comm’n, 1966 E.C.R. 299, [1966] C.M.L.R. 418, C.M.R. 8046 (companies cannot use IP rights to do what they cannot do by agreement); see also Commission Regulation (EC) No. 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements (2004/C 101/102), 2004 O.J. (C 101) 2, available at http://europa.eu/eur-lex/pri/en/oj/dat/2004/c_101/c_10120040427en00020042.pdf. It is well-established in EC competition law under Article 81(3) that members of a patent pool, joint venture, or a group of companies agreeing on a substantial restriction of competition, such as a standard, may have a legal duty to license non-parties on nondiscriminatory and reasonable terms. If this is not done, the agreement becomes unlawful. See, e.g., SaloraIGR Stereo Television (1981), European Commission, Eleventh Report on Competition Policy ¶ 94 (1982); British Interactive Broad./Open, Case No. IV/36.539, 1999 O.J. (L 312) 1. For a list of similar cases, see 1999 Fordham Corporate Law Institute 447–49 (Barry Hawk ed., 2000). 57 This duty arises under art. 82(e) (no discrimination), art. 82(b) (no foreclosure of rivals), and art. 82(a) (no unfair prices), in each case if harm to consumers results. 56

816 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW royalties are concerned) for all potential implementers. Conversely, a royalty that would make investment uneconomic is in excess of what is “fair and reasonable.” In a true ex ante situation, a patent holder can charge an appropriate royalty but not an excessive one — he will negotiate his offered rate aware that a would-be implementer will abandon the proposed line of business if the patent royalty is too high. This perspective offers the best analytical starting point for assessing what is a reasonable royalty and what is not, despite the fact that this method requires one to analyze a hypothetical situation: Ex ante negotiation of standards-related patent licensing is only rarely carried out in practice, for the reasons described in Part III. Today’s complex standards are related to large numbers of (allegedly) essential patents held by numerous patent holders. Therefore, the ex ante perspective cannot be directly applied to determine a royalty rate appropriate for any single patent license. An implementer’s investment decision is, after all, not dependent on the cost of any single license, but upon the aggregate cost of all of the licenses put together. In the presence of up to several hundred essential patents, the cost of a single license may be almost meaningless for the investment case if it is taken in isolation. Therefore, from an ex ante perspective, one can evaluate the reasonableness of licensing rates for a given patent or group of patents only by first calculating or estimating the aggregate essential patent cost (in order to determine the feasibility of the entire business in implementations) and then determining what would be an appropriate part of that aggregated royalty that should be paid for the use of the patents of a given patent holder. Applying an ex ante test in order to determine reasonableness thus requires one to utilize a “top down” method. This is the direction SDOs must take. The proposed method has the advantage that it allows the making of FRAND calculations with limited data — much more limited than a patent-by-patent evaluation taking into account alternative technologies and other factors. These two methods should yield approximately59 same rates when they properly account for the existence of FRAND undertakings. Licensors of essential patents should be required to justify their offered rates in the context of what they consider to be an appropriate cumulative royalty cost attributable to essential patents. Licensees, as investors into the business of making implementations, should provide information relevant for determining investment viability, such as information on industrytypical operating margins. Parties to licensing negotiations should each ask and answer the question of what would be the proportionate royalty, out of the cumulative royalty cost, properly attributable to a particular set of essential patents. As is acknowledged in Part V, a wide variety of arguments can be brought to bear in any such discussion. Even so, codifying the principle of FRAND royalties requiring a justified proportion of an appropriate cumulative essential patent cost would have a significant impact on licensing practices. V. STANDARDS COMMUNITIES MUST ADOPT FURTHER MEASURES

There are at least three areas in which SDOs should take measures in order to ensure that FRAND undertakings will in fact produce license costs that are compatible with FRAND. These areas are (1) obtaining and screening of essential patent declarations; (2) recognition of the principle of aggregate reasonable terms; and (3) recognition of the principle of proportionality among essential patent holder royalty rates. 58 Including the important requirement of not discriminating between licensees. This aspect is outside the scope of the present paper. 59 As the variables in both a “top down” assessment and in a patent-by-patent or “bottom up” evaluation are numerous and require estimation of parameters that are difficult to measure, the results are not necessarily exact in either case.

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A. Obtaining and Screening (Certification) of Essential Patent Declarations ETSI requires its members to declare to ETSI the essential patents of which they are aware.60 In practice, each notification is accompanied with a FRAND undertaking, as lack of such an undertaking would trigger other measures under the ETSI IPR policy. Unlike many other SDOs, ETSI maintains a public database of all such declarations of essential patents. It is appropriate to require members to declare essential patents as this information helps the standards community to develop an approximate understanding regarding the magnitude of the licensing requirements for a given standard. But requiring declarations is not sufficient. The quality of the declared information may be very poor, with the result that the aggregated data are inflated and inconsistent and lead to highly misleading conclusions. In order to correct abuses caused by over-declaration, essential patent databases should undergo screening by independent experts capable of assessing essentiality. Such screening or certification is necessary in the light of results from studies showing drastic divergence between quantities of patents declared essential and those estimated, based on a de minimis review, to more realistically be essential.61 Such screening or certification appears necessary, as patent holders have multiple incentives to over-declare the allegedly essential patents they hold. One incentive follows from antitrust considerations under which it may be better to err on the side of declaring too many rather than too few patents. Licensing practices provide another incentive: numbers of patents do matter. Furthermore, upstream firms have an incentive to over-declare more aggressively than vertically integrated firms.62 It would be impractical to propose that SDOs would conduct definitive screening — every party to licensing discussions should retain the possibility of obtaining an infringement decision from a competent court. The cost of having definitive technical assessments of whether all patents declared essential are really essential would be very great and would, in any event, have to be subject to court review. In practice, companies make their own assessments, even if they are superficial. However, a reasonable certification system would stop overly inflated declaration practices. B. Principle of Aggregate Reasonable Terms As I have argued in this paper, ex post effects together with ambiguity of what FRAND means in practice involve a risk for opportunistic licensing by essential patent holders. It is proposed that SDOs reduce that ambiguity and risk by anchoring the meaning of FRAND in an ex ante analysis from the implementer perspective. In the case of complex standards involving many patents held by multiple patent holders, an ex ante analysis of any given licensing offer is practically meaningless if it is attempted in isolation of all patents that need to be licensed for the same implementations. This requires the parties to, first, take a view on what would be the highest acceptable cumulative royalty cost for a given type of business in implementations. Thus, in order to enable parties to evaluate licensing offers and whether they are FRAND or not by using an ex ante analysis, SDO IPR rules should suggest that FRAND rates must be compatible with a reasonable cumulative royalty cost or Aggregate Reasonable Terms (ART). It is not proposed that SDOs would have to establish any given ART or cumulative royalty rate. Rather, it is proposed that patentees are required to justify their offered rates by reference to what these patentees consider as an appropriate total cost (and, as described See ETSI IPR Policy, supra note 30, §§ 4.1, 4.2. The patent database is available at http://www.etsi.com. See David J. Goodman & Robert A. Myers, “3G Cellular Standards and Patents”, in Proceedings of IEEE Wireless. Com 2005 (June 13–16, 2005), available at http://www.frlicense.com/wireless2005-b.pdf. 62 Mathias Dewatripont & Patrick Legros, “Essential Patent Games in Standard Creation” (July 19, 2007), available at http://www.cebr.dk/upload/legros.pdf. 60 61

818 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW below, their justified share of such cost). Any discussions of appropriate aggregate levels between companies, whether potential licensors or potential licensees or both, would have to be arranged carefully on the basis of legal advice, and perhaps with competition law clearance, to avoid any risk of being accused of illegal price fixing. C. Principle of Proportionality It follows from the top-down approach necessary for an ex ante evaluation that one then must derive an appropriate value of a single essential patent, or of one patent holder’s portfolio of essential patents licensed as a bundle, in relation to the cumulative value of all essential patents (or ART). This is not a trivial task. It must be acknowledged that the significance of the technical contributions to standards, and thus the contributions of the related essential patents, vary, whether they are estimated by utility to users, by cost advantages, or by other effects. Such contributions may be more or less central to the uses of the implementations. Moreover, as patents can be more or less broad in what they cover, this is an area highly prone to divisive argument. However, even if one points to possible differences in value between individual essential patents, averages are likely to provide a satisfactory approximation of appropriate value when comparing large portfolios of essential patents. Thus, in the case of substantial portfolios, after adjusting for differences in declaration practices and geographic coverage, quantitative comparisons provide a relevant starting point for proportion-of-value analysis. Qualitative arguments, then, are quite possible based on a multitude of factors and in both directions: that specific patents are more valuable than essential patents on average, and that they are less valuable than average. This being the case, the burden of proof should be placed on the party arguing for the higher or lower-than-average value of any given patent or group of patents under discussion. Accordingly, it is reasonable to conclude that SDO IPR policies should be codified to convey a clear articulation of the principle that the appropriate FRAND royalty for each essential patent or a group of essential patents licensed together should be a proportionate fraction of the ART cumulative royalty cost based on the technical contribution of the licensed patents out of the combined contribution of all essential patents. However, SDOs should not engage in determination of actual proportionate fractions or, indeed, any specific rates for specific patents. This should be left, as before, to bilateral licensing negotiations. With the introduction of the ART and proportionality principles in SDO IPR policies, the confidence that negotiated rates actually reflect FRAND would be considerably improved as in the negotiations between patent holders and implementers there would be greater visibility of how FRAND royalty levels should be calculated. Such awareness will assist the parties in achieving more accurate identification of both excessively high and excessively low negotiating positions as well as allowing them to evaluate the probable outcome of arbitration or court proceedings. Given the divergence of interests around this matter and the possible complexity of applying the proportionality principle in some circumstances, there is reason to be skeptical that improvement proposals for SDO IPR policies would attract the levels of consensus necessary for adoption. Thus, there is reason to believe there will be more litigation until sufficient court decisions emerge spelling out the exact meaning of FRAND undertakings.

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VI. CONCLUSION

Failing the adoption of these further measures, standards work requires further clarity by court decisions, regulation, or legislation. SDOs require FRAND undertakings for specific business purposes. As is noted above, this practice also is necessary for standards collaboration to be consistent with competition law. Market transactions are not proof of FRAND licensing actually occurring, as the ex post negotiation situation of essential patent licensing involves significant risks of patent holder opportunism and, thus, higher-than-FRAND rates. This is believed to be a serious problem in today’s standardization environment. It threatens the very objectives of standardization and the public interest in having interoperable multivendor systems in the information, communication, and consumer electronics industries. Unless this risk of patent holder opportunism is reduced or eliminated, there is reason to believe that standardization work is in significant jeopardy both from the business perspective and from the legal perspective. Action by industry would be the least costly and most rapid way of addressing the issues described in this paper and, furthermore, a solution that the industry could itself control to a significant extent. As SDOs, however, are unlikely to achieve sufficient consensus to adopt appropriate additions and clarifications to their IPR policies and/or to the required FRAND undertakings, we instead are likely to see reduced availability of supply from multiple vendors — including reduced feature sets and reduced support for publicly available standards due to patent cost concerns — and/or increased litigation about FRAND compliance by patent holders, or both. We may also see standards fail due to unresolved patent cost issues. While amending SDO rules is not the only available route — patent pools or other multilateral licensing vehicles, preferably including implementer involvement in the screening of essential patents and royalty rate setting, are one possibility — litigation around these issues will likely continue until the matter is resolved by clear jurisprudence or government intervention. Appropriate tools for such intervention may be sectoral or industry-wide regulatory measures related to standardization, antitrust policy guidance and enforcement, and/or legislative initiatives addressing these problems.

Rambus: Standard-setting and Hindsight Legal Standard-setting Jonathan Moskin* I come at this subject matter not as an antitrust lawyer, but as an intellectual property lawyer. My views on the subject of standard setting are perhaps somewhat different, as a result, from most of the people on the panel. I will mention that I happen also to be representing Rambus. But, of course, that doesn’t influence my views at all. Let me ask, before I begin, how many people in the room are familiar with the Rambus case,63 broadly stated? We have heard a lot of discussion of lofty ideals. One of my basic points is that, really, the devil is in the details. The ideals are all fine. Let me ask you, how many of you — speaking of devils — think Rambus is guilty of standards abuse? [Show of hands] * White and Case. 63 Rambus Inc. v. Federal Trade Comm’n, 522 F.3d 456 (D.C. Cir. 2008), setting aside the decision of In the Matter of Rambus, Inc., No. 9302, 2007 WL 2086203 (F.T.C. Apr 27, 2007). All documents relating to the Rambus case are available at http://www.ftc.gov/os/adjpro/d9302/index.shtm.

820 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW How many think they did nothing wrong? [Show of hands] Many of you are, I guess, agnostic on the subject. [Show of hands] I. INTRODUCTION

The Rambus case, very broadly speaking, concerned a new technology developed in the late 1980s by two inventors, Drs. Horowitz and Farmwald, for DRAM technology. Rambus joined the standard-setting body Joint Electron Device Engineering Council (JEDEC), which ultimately adopted various technologies that Rambus had developed, and, many years later, we find ourselves in a dispute: whether Rambus made adequate disclosures to its co-members of JEDEC and whether it withheld information, and therefore whether it was guilty of standards abuse, when ultimately, beginning in the year 2000, Rambus began enforcing its patents, when they did ultimately did issue, seeking royalties. Mr. Dolmans pointed out that there was a very recent decision — in fact, just two days ago, a jury in California decided three questions against most of the manufacturers with whom Rambus has been fighting (Hynix, Samsung Electronics Co., Nanya Technology Corp., and Micron Technology, Inc.).64 Three specific questions were answered by the jury: (1) Rambus did not engage in any anticompetitive conduct; (2) Rambus made no misrepresentations to JEDEC about its intellectual property; and (3) JEDEC members did not share a clearly defined expectation that members would disclose relevant knowledge about patent applications or intent to file patent applications. I should say here that what much of the dispute concerning Rambus has been about is not whether Rambus had issued patents that it should have disclosed to JEDEC when it was still a member of JEDEC for the brief period from 1992 to mid-1996, but, rather, whether it should have disclosed patent applications it had filed that may, and ultimately did, read on certain of the standards that JEDEC adopted. As I will point out a little bit later, every court that has addressed this issue has ruled in Rambus’s favor. The reason Rambus remains such a hot issue is that the Federal Trade Commission (FTC) and, more recently, the European Commission have taken a different view. II. THE U.S. FTC CASE

The U.S. FTC case began in February 2004. After a fifty-four-day trial, Chief Administrative Law Judge Stephen J. McGuire dismissed the complaint, finding that the FTC had failed to discharge its burden of proof.65 He ruled down the line in favor of Rambus: that Rambus had not violated the JEDEC disclosure policy; that Rambus’s conduct was not deceptive; that Rambus had no undisclosed patents or patent applications during its JEDEC membership that it was obligated to disclose; that while a JEDEC member, Rambus had no patents or pending patent applications that were necessary to build a JEDEC-standard DRAM; that it is lawful to amend pending patent claims in response to market developments; that Rambus did not intentionally mislead JEDEC; that Rambus’s conduct did not produce anticompetitive effects; that Rambus’s acquisition of market power was by virtue of its superior technology; that there Hynix Semiconductor, Inc. v. Rambus, Inc., Nos. C 00-20905 RMW, C 05-00334 RMW, C 06-00244 RMW, 2008 WL 1893502 (N.D. Cal. Mar. 26, 2008). 65 In the Matter of Rambus, Inc., File No. 011 0017, Docket No. 9302 (F.T.C. Feb. 2004), available at http://www. ftc.gov/os/adjpro/d9302/040223initialdecision.pdf [hereinafter Initial Decision]. 64

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was no proof that there were viable alternatives to Rambus’s technologies; that the DRAM industry was not locked into using Rambus’s technologies; and that Rambus’s royalties were reasonable. In March 2004, the FTC Complaint Counsel appealed the Initial Decision to be set aside.66 This was then taken up to the full FTC, which, on August 2, 2006, ruled to the contrary, that Rambus had engaged in standards abuse. It reversed the decision of the ALJ and found that Rambus had engaged in illegal monopolization.67 The FTC determined that Rambus had not proven that its technology was superior and that there was no industry “lock in” to Rambus’s technology. Reversal of the burden of proof — Rambus was now required to prove alternative technologies were not as good and others were free to not use Rambus’s technologies. One of the key issues that stands out to me, though, in discussing this issue of standards setting is that one of the principal legal bases for the full FTC’s decision was that, independent of the rules that JEDEC had in place at the time, Rambus was bound by a broader duty of good faith to its co-members of the JEDEC committee. In February 2007, the FTC issued a majority opinion on remedy,68 capping DDR SDRAM royalties at 0.5 percent and SDRAM royalties at 0.25 percent. On February 14, 2008, Rambus’s appeal of the FTC decision was heard in the D.C. Circuit.69 III. THE EC COMPLAINT

Shortly after the FTC ruling, the European Commission got into the act and issued its Statement of Objections:70 • 1991–2000: Rambus set a patent trap. Rambus somehow lulled its JEDEC co-members into adopting its technology as the standard. While a member of JEDEC, Rambus failed to disclose its relevant patent applications. This deprived JEDEC of the opportunity to adopt standards which did not necessitate the use of Rambus patents. Having left JEDEC in 1996, Rambus tailored its patent applications to cover the technologies disclosed in the JEDEC standards (SDRAM and subsequently DDR), standards which became accepted industry-wide. • 2000: Rambus sprang the patent trap in 2000, when its patents finally issued. In 2000 Rambus began asserting its relevant patents against companies manufacturing JEDECcompliant DRAM and demanding royalties. • This was charging unfair or excessive royalties, contrary to Article 82. 66 Complaint Counsel’s Notice of Appeal (Mar. 1, 2004), available at http://www.ftc.gov/os/adjpro/ d9302/040301notice ofappeal.pdf. 67 Opinion of the Commission, by Commissioner Pamela Jones Harbour For A Unanimous Commission (Public Record Version) (Aug. 2, 2006), available at http://www.ftc.gov/os/adjpro/d9302/060802commissionopinion.pdf. 68 Opinion of the Commission On Remedy, by Chairman Deborah Platt Majoras [Public Record Version] (Feb 5, 2007), available at http://www.ftc.gov/os/adjpro/d9302/070205opinion.pdf. 69 Rambus v. FTC, 522 F.3d 456 (D.C. Cir. 2008). Subsequent to the Conference, on Apr. 22, 2008, the D.C. Circuit Court unanimously set aside the FTC’s decision, in In the Matter of Rambus, Inc., No. 9302, 2007 WL 2086203 (F.T.C. Apr 27, 2007) (holding that Rambus’s conduct constituted monopolization under Section 2 of the Sherman Antitrust Act) and remanded the matter back to the FTC for further proceedings consistent with the court’s opinion. The court determined the FTC failed to demonstrate that Rambus inflicted any harm on competition. In its order, the court stated “we hold, therefore, that the Commission failed to demonstrate that Rambus’s conduct was exclusionary and thus to establish its claim that Rambus unlawfully monopolized the relevant markets.” In addition, regarding the chance of further proceedings on remand, the Court expressed “serious concerns about the strength of the evidence relied on to support some of the Commission’s crucial findings.” In dicta, the court suggested that the FTC had taken “an aggressive interpretation of rather weak evidence” to conclude that the failure to disclose was a violation of JEDEC disclosure rules (citing NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998)). 70 Case COMP/28/52, EC Rambus case, supra note 61.

822 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW I will move very quickly over the timeline of the EC Complaint: • December 18, 2002 Infineon and Hynix lodged a complaint against Rambus. • April 5, 2005, Infineon withdrew its complaint following a settlement with Rambus. • July 30, 2007, the European Commission issued Rambus a Statement of Objections. • October 31, 2007, Rambus filed a response to the Statement of Objections. • December 4–5, 2007, an oral hearing was held before the Commission. Third-party intervenors at the oral hearing supporting the complaint were Micron, IBM, Samsung, and Cray. IV. WHAT THE RAMBUS CASE IS NOT

I think it is useful to make a comparison to the Broadcom case, recently decided by the Third Circuit,71 and what Rambus is not about. (1) Rambus never actively promoted the inclusion of its technologies when it was a member of JEDEC. (2) Rambus never deliberately and explicitly lied (making an “intentionally false promise” to license on RAND terms) in ways that had nothing to do with trade secrets; (3) Rambus never violated any explicit, unambiguous SSO rule; and (4) Rambus never caused JEDEC to adopt a standard that it would not have adopted otherwise. Rambus never proposed its own technology. As found by the Administrative Law Judge, Rambus neither cast any votes at JEDEC (except a single “no” vote against a standard it believed was technically unfeasible) nor promoted the inclusion of any of its technologies in the SDRAM standard.72 When Rambus asked to be permitted to present its technology, JEDEC Chairman Kelley refused to allow it to do so, in what was held by the Administrative Law Judge to be a “clear conflict of interest”: He made and enforced his unilateral decision to bar Rambus from presenting its technology two weeks after he wrote in an internal company document that his company’s interests were threatened by the Rambus technology and were best served if Rambus “fails to become standard.” He did not disclose this conflict to Crisp or to anyone else.73

Rambus’s pending claims during the relevant period did not read on the SDRAM Standard. As noted, Rambus had no issued patents while attending JEDEC. This was stipulated by the FTC. Ultimately, as the federal courts have found, when the two later standards were somewhat more advanced on DDR and DDR2, Rambus had already left JEDEC. In its opinion … the district court stated that Rambus had pending claims “related to” five technologies: two-bank design, externally supplied reference voltage, PLLs, programmable CAS latency, and programmable burst length… . This court has examined the claims of the cited applications as well as the relevant portions of the SDRAM standard. Based on this review, this court has determined that substantial evidence does not support the finding that these applications had claims that read on the SDRAM standard.74

One of the key issues as to why Rambus has been deemed a bad actor is that it made “no comment” statements when asked if it had intellectual property that would pertain to subject matter being considered by JEDEC. Here, for example, is Crisp’s written statement in the official JEDEC Meeting Minutes that indicated that Rambus refused to comment on some technology: Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007). Initial Decision, supra note 65, ALJ Op. ¶ 330. 73 Id. ¶¶ 824, 523. 74 Rambus, Inc. v. Infineon Techs. AG, 318 F.3d 1081, 1102 (Fed. Cir. 2003). 71 72

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At this time, Rambus elects to not make a specific comment on our intellectual property position relative to the SyncLink proposal. Our presence or silence at committee meetings does not constitute an endorsement of any proposal under the committee’s consideration nor does it make any statement regarding potential infringement of Rambus intellectual property.75

With regard to the implications of Rambus’s refusal to comment about its IP at May 1992 and September 1995 JEDEC meetings, consider what Silda Spitzer might have thought if she had asked Eliot recently, “So who is this Kristen that I’ve been hearing about?” and he said, “No comment.” Do you think she would have taken that as a good thing and passed over it without further thought? Indeed, the finding of the Administrative Law Judge was, based on the extemporaneous evidence, that “no comment” was understood by members as a red flag.76 Similarly, when Rambus withdrew from JEDEC in June 1996, it advised that it was withholding all rights and put JEDEC on notice: Recently at JEDEC meetings the subject of Rambus patents has been raised… . We trust that you will understand that Rambus reserves all rights regarding its intellectual property.77 V. RAMBUS ROYALTY RATES

Turning quickly to the subject of how FRAND would apply in this case — although Rambus never did give a FRAND commitment and never was asked to give a FRAND commitment — the findings of both the courts and the FTC show that Rambus’s actual rates were well within industry standards — indeed, below industry standards — for licensing. Typical industry royalty rates cluster around 4–5 percent. Rambus’s SDRAM and DDR royalty rates 0.75 percent and 3.5 percent) fall well within the rates charged by others in the DRAM and semiconductor industries and its SDRAM rate is at the low end.78 In recent litigation applying the “reasonable royalty” test of Georgia-Pacific Corp. v. United States Plywood Corp.,79 a district court found that reasonable royalty rates for Rambus’s technology were 1 percent for SDRAM and 4.25 percent for DDR.80 Imposing on Rambus a royalty-free (RANDZ) rate — which the Commission’s Statement of Objections suggests — in fact means imposing a severe fine, given Rambus’s size and the fact that its only income is from licensing technology. V. CONCLUSION

At the very end, let me just leave you with a picture of the ex ante world. Many of the other members of JEDEC were, in fact, aligned against Rambus, considering it a “deadly menace.” I want to leave you with a picture of that deadly menace. In 1991 this was the entirety of Rambus [photograph of Rambus employees in 1991], the “dominant” company that has been the subject of so much controversy lately. Crisp written statement, Official JEDEC Minutes, JX 27 at 26. A “no comment” a JEDEC member in response to a question about intellectual property was “unusual” and “surprising” and was “notification to the committee that there should be a concern.” Gordon Kelley (JEDEC Chair) May 1992, Trial Tr. at 2579. Chief ALJ McGuire concluded that Mr. Crisp’s refusal to comment “put members on notice, both expressly and implicitly, of Rambus’s intent to seek broad patent coverage.” Initial Decision, supra note 65, ALJ Op. ¶ 281. 77 June 1996 Withdrawal Letter, CX 0888. 78 Initial Decision, supra note 65, ALJ Op. ¶ 138; see also David J. Teece, Managing Intellectual Capital: Organizational, Strategic, and Policy Dimensions 10423–51 (2000); David J. Teece & Edward F. Sherry, “Standards Setting and Antitrust”, 87 Minn L. Rev.1913, 1938–39 (2003). 79 318 F. Supp. 116 (S.D.N.Y. 1970). 80 See Hynix Semiconductor, Inc. v. Rambus, Inc., No. CV-00-20905 (N.D. Cal. July 4, 2006) (order granting remittitur). 75 76

824 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW What are the broad lessons we can learn from the Rambus case? • One size does NOT fit all. • Rights and duties defined by SSO itself. • Rights and duties defined by IP law — How cross-licensing bears on RAND. • Hindsight isn’t always 20/20 — Benefits of prospective rulemaking. I will leave this for comments for later during discussion.

European Case Law on Frand Defense in Patent Infringement Proceedings Wolfgang von Meibom*

I. INTRODUCTION

Licensing standard essential patents under fair, reasonable and non-discriminatory terms and conditions — FRAND conditions — is increasingly a “hot topic” in Europe. There are certainly various reasons for this development. Just let me point to two aspects which I consider to be quite important: Firstly, computer and communication technologies have become crucial and continue to be more and more important for our everyday life and for our economies. In these sectors, standardization is extremely important to allow for interoperability between various products, transmission technologies, and so on. In addition, we see a very high number of patented technology patents in these sectors. Secondly, this combines with a more recent development we experience especially in Europe: We see an increasing importance of non-producing patent owners aiming solely to exploit patent portfolios mostly acquired from third parties. These companies — often referred to as “patent trolls” — are often focusing on standard essential patents, trying to maximize profit by exploiting the typical lock-in situation, which is the consequence of setting industry standards. It seems that also the European Commission, as Europe’s watchdog in competition matters, is becoming increasingly aware of this situation.81 You will know that the Commission has reacted positively to a complaint filed by a number of important players in the mobile phone industry and is investigating Qualcomm’s licensing practice under European antitrust law.82 Another important case currently pending with the European Commission is the Rambus case, which focuses on “patent ambush.”83 Both proceedings will be very important both for * Bird & Bird, Düsseldorf. 81 See, e.g., Grazyna Piesiewicz & Ruben Schellingerhout, Intellectual Property Rights in Standard Setting from a Competition Law Perspective, EC COMPETITION POL’Y NEWSL., March 2007, available at http://ec.europa. eu/competition/ publications/cpn/cpn2007_3.pdf; Madero & Banasevic, supra note 12; Douglas Lichtman, Patent Holdouts and the Standard-Setting Process, GLOBAL COMPETITION POL’Y, May 16, 2006, available at http:// www.globalcompetitionpolicy. org/index.php?=&action=907&id=344; Commissioner Neelie Kroes, European Commission, DG Competition, Being Open About Standards, Speech Before Open Forum Europe (Brussels, June 10, 2008), available at http://europa.eu/rapid/press ReleasesAction.do?reference=SPEECH/08/317. 82 See Press Release, European Commission, Antitrust: Commission initiates formal proceedings against Qualcomm, MEMO/07/389 (Oct. 1, 2007), available at http://ec.europa.eu/competition/antitrust/cases/decisions/39247/ proceedings.pdf. 83 Case COMP/28/52; see Press Release, European Commission, Antitrust: Commission confirms sending a Statement of Objections to Rambus (Aug. 23, 2007) [hereinafter EC Rambus case] (noting that the Statement, sent...

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applying European cartel law to licensing of standard essential patents as well as specifying the application of FRAND84 concepts and the procedural rules set up by the relevant standardsetting organizations (SSOs). These activities of the European Commission are very important. However, on a day-to-day basis the battles currently are lost and won in patent infringement proceedings. So it is important to see how the FRAND concept is developing and how standard-setting organizations might adopt their IPR rules to enforce the system. If you are attacked under standard essential patents or allegedly standard essential patents or if you intend to assert yourself essential patents, it is of crucial importance to know how to apply or react to the FRAND defense in patent infringement proceedings. This is what I would like to talk about now, and please let me do this in two sections: • What is our experience with regard to the admissibility of a FRAND defense? • What are the preconditions for successfully applying the FRAND defense? II. ADMISSIBILITY OF A FRAND DEFENSE

There is one legal position in Germany specifically according to which you simply cannot raise a FRAND defense in patent infringement proceedings. In a nutshell, the argument is that a user of standard-essential patents might be entitled to a license under fair and nondiscriminatory terms — be it under cartel law or directly as a result of a patent owner’s FRAND commitment — and he might complain to the national competition authorities or file a complaint with the European Commission. He might even start legal proceedings asserting his claim for a license. But according to this legal position, you are not allowed to use standard essential patents unless you actually have agreed on a license with a respective patent owner. This legal argument is superseded by a number of court decisions in Germany. First of all, the German Federal Supreme Court has ruled that you are entitled to use the claim for a license against the patent owner’s claims for damages.85 The Supreme Court, however, left it open whether this also applies to the patent owner’s injunction claims. So far we have no applicable case law of the Supreme Court. However, we have a number of decisions issued by District Courts, especially by the District Court of Dusseldorf, which is, as you might know, besides Munich and Mannheim, the most important District Court in patent matters.86 According to this case law of the Düsseldorf court — I might call it the court’s settled case law — the claim for a license actually can be used as a defense against a patent owner’s injunction claim. I believe this is the correct approach. A patent owner who is obliged to grant July 30, 2007, claims that “Rambus engaged in intentional deceptive conduct in the context of the standard-setting process, for example by not disclosing the existence of the patents which it later claimed were relevant to the adopted standard.”), available at http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/07/330. 84 FRAND terms and conditions for ex post licensing required by arts. 81(3) and 82 EC. EC 2003 Technology Transfer Guidelines, 2003 O.J. (C 235) 17. “[A]n industry standard [can lead] to a situation in which there is little competition in terms of the technological format. Once the main players in the market adopt a certain format, network effects may make it very difficult for alternative formats to survive … in order for the agreement to comply with Article 81(3), it must be ensured that the agreement does not unduly restrict competition and does not unduly restrict future innovation.” Id. ¶ 152. “It will normally be required that the technologies which support such a standard be licensed to third parties on fair, reasonable and non-discriminatory terms.” Id. ¶ 164. “Where the pool has a dominant position on the market, royalties and other licensing terms should be fair and non-discriminatory and licences should be non-exclusive.” Id. ¶ 226; see also Commission Regulation (EC) No. 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements, 2004 O.J. (L 123) 11, available at http://europa.eu/eur-lex/pri/en/oj/dat/2004/c_101/ c_10120040427en 00020042.pdf. 85 German Federal Court, Docket No. KZR 40/02: “Tight-Head Drum.” 86 See, e.g., District Court Düsseldorf, Docket No. 4b O 346/05: “Video Signal Encoding I”; Court of Appeal Karlsruhe, Docket No. 6 U 174/02: “Orange Book-Standard”; District Court Düsseldorf, Docket No. 4a O 124/05, “Zeitlagenmultiplexverfahren.”

826 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW a license under reasonable and nondiscriminatory terms but refuses to do so should not be allowed to assert its patents. It appears to me that it is clearly abusive to treat someone as an infringer of standard essential patents who would be licensed and, thus, allowed to use the patents if only the patent owner fulfilled its legal obligations to grant a license. The Düsseldorf court follows this approach. The Mannheim court currently denies the possibility to raise claims for a license as a defense against injunction claims. However, the Mannheim court accepts such claims to be raised as a counterclaim. Also, the Higher District Court of Karlsruhe, which is the court of appeal for decisions in Mannheim, is at least inclined to accept this defense. In summary, therefore, there are good chances in Germany to raise a claim for a license as a defense against injunction claims. In addition, I would like to add one specific point regarding the FRAND defense: As you know, the European Telecommunications Standardisation Institute (ETSI) provides for a FRAND commitment to be given under Section 6.1 of the ETSI IPR Policy.87 Patent owners are not obliged to provide this FRAND commitment, but if they refuse to do so they risk that their respective patent will not be included into the standard. The patent owner’s FRAND commitment under the ETSI rules provides for its obligation to grant irrevocable licenses on fair, reasonable, and non-discriminatory terms and conditions. As you further will know, ETSI is located at the Cote d’Azur in the South of France. Therefore, the ETSI IPR rules are subject to French law. I do not want to go into details, but, according to French law, there are very good arguments that a FRAND commitment under the ETSI rules results in a license agreement between the patent owner and interested third parties even before they have agreed on specific FRAND terms. This license agreement can come into force just be using truly essential patents to implement a standard in question. The consequence of such FRAND license is that any third party is directly entitled to use patents which are subject to an ETSI FRAND commitment. Until now, however, German courts have not yet ruled on this specific point. III. PRECONDITIONS FOR APPLYING THE FRAND DEFENSE

Having clarified that you are entitled to raise a FRAND defense in patent infringement proceedings, the question now is how to make it work. According to the current case law of the German courts, it is crucial that the potential licensee submits a specific and reasonable licensing offer to the patent owner. It is not entirely clear yet what has to be understood as “reasonable.” In Düsseldorf, we understand it is sufficient to submit an offer that is within a certain bandwidth of what market players would consider reasonable. The Mannheim and Karlsruhe courts require more: Accordingly, potential licensees have to submit an offer at the most upper level of what can be considered reasonable. This logic was applied to a cartel law defense and I have strong reservations against applying it also to a FRAND defense. This logic would force potential licensees to come up with very high licensing offers and they would risk committing themselves to clearly excessive conditions. As a further precondition for a successful FRAND defense, potential licensees have to demonstrate in court that the patent owners terms and conditions for the essential patents in question are not reasonable or discriminatory. Let me start with the second aspect, the aspect of discrimination: Here the concept is rather clear. Potential licensees have to demonstrate that they are treated not in the same way as other licensees. The patent owner then has to demonstrate that such unequal treatment is 87

ETSI IPR Policy, supra note 30.

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justified. In case it is not justified, the FRAND defense is successful. However, the first step of demonstrating unequal treatment is not an easy task as terms and conditions often are not transparent. The other aspect of specifying “reasonable” or “non-reasonable” terms and conditions is much more complex. In that regard, we were able to obtain a very positive decision before the District Court of Düsseldorf in the case of Siemens v. Amoi.88 As far as I know, this was the first decision ever where a FRAND defense was raised successfully. Beyond the specific case, it is important to know that the Düsseldorf court acknowledged that FRAND means limiting the cumulative burden, which is the result of all standard essential patents. The court did not venture into deciding on a specific maximum cumulative rate. However, the court stressed that the patent owner has to provide for some sort of “escape clause” according to which the royalties are reduced in case the overall cumulative rate exceeds a certain level. I believe this decision is an important basis for specifying FRAND conditions: The cumulative aspect is crucial and should be a cornerstone in determining “reasonable” terms and conditions.

Standard Setting: The Interplay of IP and Competition Laws — Corporate Perspective Jason Albert* I have the pleasure of being the last speaker on this panel before we get to the discussion. So I will try to make it, hopefully, a little bit entertaining and interesting. Maurits has addressed how you set the price of the IP that’s included in the standard. It is always important to keep in mind that the underlying purpose of IP law is in promoting innovation, when you think about it. So I am going to give a little bit of a different structure than Maurits gave. A lot of what we discuss in terms of appropriate royalty licensing and pricing in the context of standards really relates to static efficiencies.89 If you drive the price of the licensed technology down, you can also drive down the price of the product, benefiting consumers and creating a good amount of static efficiency. What you may be harming there a little bit is your dynamic efficiency, the development of new technologies, as people do not see that they can get the return to justify the investment in creating new IPR. So I think it is important, when we look at the issue of royalty licensing and FRAND, as my colleagues have discussed, that we end up with a system that promotes the maximum balance between static and dynamic efficiencies. I think it is always important for us to keep in mind the underlying purpose of IPR laws and why they give the rights that they do to right holders in that context. We have been talking a lot about the problem of holdup.90 This holdup, as I think several of the panelists have mentioned, is a case where somebody has a technology that is embodied in a standard and they seek unreasonable licensing terms, either an unreasonable royalty or some 88 Siemens v. Amoi, judgment of Feb. 13, 2007, Landgericht Düsseldorf (examined reasonableness of licensing terms against what could have been achieved in negotiations “under the conditions of an open market”). * Director of International IP Policy, Microsoft Corp., Redmond, WA. 89 Static efficiency refers to competition that occurs within an existing technology whereby firms compete primarily by cutting costs, making incremental improvements to efficiency and lowering prices. 90 See, e.g., Lemley & Shapiro, supra note 22.

828 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW other term that is not nondiscriminatory. It is important always to note that holdup does not exist simply because some licensees are unhappy that a certain company holds a patent. It is also important to understand that holdup does not occur simply because implementers do not like the royalty rate. You have to evaluate this in terms of the FRAND definition, as we have been discussing, to see if this occurs. The other question that we ought to look at when we discuss this problem is: How often does holdup occur? I want to be very clear: Holdup does occur, and it is a very, very painful experience for those involved when it does occur. It involves a lot of litigation. It can delay implementation of the standard. But the fact is, I think, if you look at the thousands of ICT Standards Board (ICTSB) standards that are adopted each year, you will find holdup in a very, very small percentage of them. I think that should inform, as we look at the system and see if there are any needed reforms, about how often this problem occurs. Are we adopting a solution that will make more things worse, given that frequency? We have to know that many patent holders are also implementers. It is sort of like game theory, but we are playing the game over and over and over. I have the IP one day; you may have the IP that I need another day. So we all tend to cooperate and not engage in this sort of zero-sum holdup game. The second thing, of course, is that if I do engage in holdup, it is a very visible conduct. I will face lawsuits, I will face enforcement actions, and things like that. So that is also a disincentive. In practice, when you look at IPR holders and standards, there are many of them. They make RAND licensing commitments. They do not actively seek to monetize them. If you go to them for a license, they will give you one, because they committed to do it. But if you do not go to them and you implement the standard anyway, a lot of them are not going to go though the effort of trying to come after you. They may not even develop licensing terms until you go there, because that is a cost that they may never recoup. The question is whether any of the possible reforms might disturb a lot of these sleeping dogs. Now we move to ex ante. I was very pleased to hear my colleague Timo say that he did not think ex ante was necessarily the solution to the problem. The idea in an ex ante system is that you would disclose your patents and your licensing terms in advance of development of the technology, so that people would know this when you negotiate. There are some advantages: You have more information; you can get a sense of what the royalties might be. But I think there are some things to consider when you look at this. The first is: Is this really needed? Again, how often does the problem of holdup occur? The second thing you need to look at is: If you were to adopt a system like this, do the benefits outweigh the increased costs for participants? If I have to disclose patents, then now I have to do patent searches. If I really am not intending to enforce my FRAND licenses or seeking to affirmatively go out and assert against people, it may be something that I do not want to do. That is a very expensive process. I have to develop the license. If I develop the license, I am more likely to want to actually get some return on it. So now you have disturbed all those sleeping dogs. If I am going to be faced with this owner’s commitment, it may affect my willingness to participate in a standards body and reduce the number of companies coming to the table to develop the standard. It is also not clear how practically this is going to work. Are you going to bring a bunch of lawyers into the technical committees to discuss licensing terms and the technology? I love lawyers. I am a lawyer. I do not think we work particularly well in technical committees. Are you going to have the technologists discussing licensing terms? I love them, too, but they sometimes do not have an appreciation of all the things that we lawyers pore over with our green eyeshades and that sort of thing.

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There is, again, the possibility that the standard may be more costly to implement. We have talked about sleeping dogs. If they have to develop these license terms and declare everything in advance, they are going to seek royalties. It is not clear that this will provide better information. Maurits made the point that in an ex ante auction you would have to constantly be conducting the auction as technology changes, because the standard will change as it goes to the technical committee. Things will go in; things will go out. New technologies will develop over time that you may want to incorporate. There will be revisions. Then, of course, remember, any RAND commitment, be it ex ante or ex post, applies only to the members who participate in the standards body. Then you have this whole problem of the third-party patent holders who are not part of this process at all. It is not clear that you really are bringing in a lot more information. There are a couple of other things worth noting. First, as Maurits discussed, a refusal to license after a FRAND commitment in the Third Circuit now is actionable by antitrust law.91 But there are antitrust problems with this ex ante disclosure. When you have collective discussion, you run the risk of a buyers’ cartel (“We are not going to incorporate your technology in the standard unless you reduce the royalty rate”) or a group boycott (“We don’t want your technology in there because of what you are doing, so we are going to go do a different technology).” You really do run some serious antitrust risk, which is why at least the U.S. Department of Justice has not really taken a position whether standards organizations should do this.92 Again, you have to look at the advantages and disadvantages in a given situation. But it is not a panacea. It does carry some risks there. The final point that I will make here is that everyone who is engaged in this debate, whatever side they are on, are all patent holders, and most of us engaged in this debate are for-profit companies. We have different business models. When you look at the different participants and you look at the positions they take, it is important to keep in mind the business models. At the end of the day, the consumer who buys a product says, “I think this is a great product. I am going to spend twenty euros for it.” They don’t care that of those twenty euros five go to the IPR holders and fifteen go to the person who makes the box or whether the proportion is reversed. So again, when you are driving down royalty rates for IPR holders, it is not necessarily that the price is lower for the consumer. That is one possibility. The other possibility is that more Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007). See Letter from Thomas O. Barnett, Ass’t Att’y Gen., U.S. Dep’t of Justice, to Robert A. Skitol (Oct. 30, 2006) (VITA Business Review Letter), available at http://www.usdoj.gov/atr/public/bureview/219380.pdf (saying there could be benefits from an ex ante pricing/royalty-setting scheme); Letter from Thomas O. Barnett, Ass’t Att’y Gen., U.S. Dep’t of Justice, to Michael A. Lindsay (Apr. 30, 2007) (IEEE Business Review Letter), available at http://www.usdoj.gov/atr/public/bus review/222978.pdf; see also U.S. Dep’t of Justice & Federal Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition: A Report Issued by the U.S. Department of Justice and the Federal Trade Commission (Apr. 2007), available at http://www.ftc.gov/ reports/ innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf; U.S. Dep’t of Justice & Federal Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property § 1.0 (1995), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,132, available at http://www.usdoj.gov/atr/guidelines/0558.pdf (“The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare.”); Thomas O. Barnett, Ass’t Att’y Gen., Antitrust Div., U.S. Dep’t of Justice, Interoperability Between Antitrust and Intellectual Property, George Mason University School of Law Symposium, Managing Antitrust Issues in a Global Marketplace, at 1–2 (Washington, D.C. Sept. 13, 2006), available at http://www.usdoj.gov/atr/public/speeches/218316.pdf (“Antitrust and intellectual property policy are complements in that both seek to create a set of incentives to encourage an innovative, vigorously competitive marketplace that enhances efficiency and improves consumer welfare.”); Federal Trade Comm’n, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy”, ch. 2 at 31, n.220; ch. 3 at 38–41, available at http://www.ftc.gov/os/ 2003/10/innovationrpt.pdf (2003) (“[C]onduct by ‘non-producing entities’ — sometimes referred to as ‘patent trolls’ — may harm consumers when such firms force manufacturers to agree to licenses after the manufacturers have sunk substantial investments into technologies”). 91 92

830 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW money goes to the implementers. So I think it is important to keep in mind these business models and see, when we look at the system and consider reforms, the impact on how that works. I really appreciate your attention. I am sure it is going to be a very lively discussion. MR. ULLOA: Thank you very much to all the speakers. I would now like to have in the remaining twenty-six minutes an introduction of panelists first and then the audience. We will follow the order of the program: Jeffrey Butler, Professor Damien Geradin, Patricia Martone, and Richard Taffet. MR. BUTLER: Thank you. Let me please express some personal observations that do not necessarily reflect the views of my firm or of any client of my firm. I think that one of the key issues that arises, as we have heard this morning, in any discussion of standard-setting organizations is: Are they subject to abuse and manipulation by unscrupulous persons who want to abuse and manipulate the process; and, if they are, what can we do to prevent that from happening? Many believe that standard-setting organizations are, unfortunately, susceptible to manipulation by IP owners who wish to skew the standard-setting process and, thereby, obtain an unfair advantage. Let us look at the Rambus facts as an example, to illustrate this point. In that case, the JEDEC patent policy applied. If a disinterested person were to review the JEDEC patent policy, I think that there is a reasonable chance that that person would conclude that those standards are not a model of clarity. A JEDEC member, whether that member had ill intentions or otherwise, might violate that patent policy simply because it is very difficult, in my personal opinion, to understand what a member is obliged to do or not to do. What are the actual patent obligations under the JEDEC patent policy that applied to Rambus and other members of JEDEC? The then-effective patent policy used expressions that IP practitioners would not use in their everyday professional lives. There were phrases and terms in the patent policy that an IP attorney probably would not use when referring to patent rights, simply because those terms are, arguably, neither clear nor precise. Even today, if one goes to the JEDEC Web site, one will find that the currently posted JEDEC patent policy93 — in the very provisions that ostensibly impose patent disclosure obligations on its members — uses language such as “patents that are granted or pending that are involved in a standard.” I think we could debate for the next ten hours whether a patent is “involved” in a standard or not. Unfortunately, the policy does not use terms such as “claims that may be infringed by the proposed standard” or “claims that may read on the proposed standard” or similar such language that would give an IP practitioner a clearer idea as to a member’s IP disclosure obligations. In other words, the policy did not state — but I think easily could have stated — that a member promptly must disclose any patent application or granted patent in which it has any rights (as owner, co-owner, licensee, or otherwise), if such application or patent contains any claims that may be infringed by, or may read on, the proposed standard. A policy also could word such patent-disclosure obligations so as to clarify that the member must disclose any patent or application that that member believes may be related to the subject matter of the proposed standard (in an attempt to impose a subjective standard). But, as with patents that are “involved” in a standard, patents that are “related” to a standard leaves much open to interpretation. The JEDEC patent policy seems to impose some sort of obligations on someone, although one easily could argue that it is not clear what are the obligations so imposed — to advise 93 JEDEC Manual of Organization and Procedure, JEP21-I (Jan. 2005), available at http://jedec.org/Home/ manuals/JM5. pdf.

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of patents that “may be involved in the work that they are undertaking,” and so on — on the JEDEC committees or on the members themselves. So that is one example of how standard-setting patent policies might be “beefed up,” and, if they were, how that very likely might help avoid situations such as the Rambus cases, which involved so much litigation to date. The other issue that I think is perhaps worth further discussion is the recent N-Data case from the FTC.94 I think that one easily might conclude that FTC came down quite hard on N-Data. N-Data was the transferee of a transferee of a patent for a FRAND commitment that was made by National Semiconductor. It was then transferred to Vertical Networks, then transferred to Negotiated Data Solutions LLC (N-Data). N-Data apparently decided that it did not want to abide by that commitment. Should it or should it not be subject to that commitment made by a predecessor in interest to the IP right at issue? Of course, the case also brings up an interesting point about whether the FTC can and should go after alleged violators of standard-setting rules where there is no Sherman Act or Clayton Act antitrust violation but simply an alleged violation of Section 5 of the FTC Act.95 MR. ULLOA: Thank you. Please be as concise as possible because I would like for the audience to have an opportunity to ask questions, and I know some of the speakers have also some comments. PROF. GERADIN: I am glad to be here. This is a wonderful conference. It says on the cover: “Learn something, engage in the debate, and have fun.” I will focus on these three points briefly. Learn something. Well, we have learned quite a bit about the Nokia litigation agenda. In fact, if you look at this session, all the points are basically drawn from either Nokia complaints or Nokia litigation. Three of the speakers are acting for Nokia, plus the moderator. So I think that my role here is to try to introduce a little bit of balance, although Jason already introduced some nuance in what was said. Have fun. I have a lot of fun, because we do this almost every week in different places. Three weeks ago, we had a debate in Brussels over FRAND, where I faced George Carey, Maurits’s lead. Actually, two weeks ago in Washington we had another debate where again I spoke with George Carey. And today we are in New York. So this is a lot of fun. It allows you to travel a lot. Actually, all the miles I am getting are funding my family vacation next week in Florida. Engage in the debate. This is what I am going to try to do, focusing on a couple of issues.96 First of all, I think that Maurits really sees evil everywhere. If you look at his presentation, with the arrows going in all directions, you really have the impression that firms go to SSOs with very bad intentions, to capture and rent and whatever. Whereas, in fact, if you look at the sector, if you take, for example, a twenty-to-twenty-five-year perspective, you see an immense growth in innovation and competition in a range of industries — computing, mobile telephony, and so on and so forth. So that is slightly ironic. Of course, Jason mentioned the fact that if you look at the case law, you have only a very limited number of difficulties or issues. 94 See Statement of the Federal Trade Commission In the Matter of Negotiated Data Solutions LLC, File No. 0510094, (Jan. 23, 2008) (accepting proposed consent agreement), available at http://www.ftc.gov/os/caselist/0510094/080122 statement.pdf. 95 Section 5 of the FTC Act prohibits “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(1). 96 See Damien Geradin, “Pricing Abuses by Essential Patent Holders in a Standard-Setting Context: A View from Europe”, Global Competition Pol’y, July 1, 2008, available at http://www.globalcompetitionpolicy.org/index. php?&id= 296& action=907; Damien Gerdin & Miguel Rato, “Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND” (Apr. 2006) (unpublished working paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=946792&rec=1&srcabs=1081997.

832 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW My position would be to say that FRAND works. Of course you can have some disputes. Talking of disputes, obviously there is a dispute between Nokia and Qualcomm. As you have certainly realized, I act for Qualcomm in a number of the current cases.97 Two things were said. Essentially, if you want to avoid holdups, there are two strategies. One is you act ex ante. A number of proposals are being discussed in standard-setting organizations to see whether essential IP holders should be forced, for example, to declare the royalties they would seek ex ante standardization, and so on and so forth. Auction is another possibility. But I understand from Maurits — and I agree with him — that they would be very difficult to organize, for all sorts of reasons. Then, of course, you may look at the problem ex post. This is what is happening actually in the current litigation, where, on the one hand, some firms believe that royalties can be excessive, and of course the IP holders believe that their royalties are reasonable and nondiscriminatory and so on and so forth. So how will you determine whether a given royalty rate plus a set of terms and conditions comply with FRAND ex post? Maurits is offering a methodology, which is that in order to be FRAND a royalty should amount to no more than what, let’s say, ex ante competition would have produced. So then what you have to do ex post — sometimes many years after a standardization — is look at whether at the time of standardization there was an alternative, because if there is no alternative you have no competition. Of course, in many cases there is no alternative. So if there is no alternative, basically I think the methodology does not work. If there is an alternative, then you have to determine whether it is a real alternative, of course, and what is an alternative. What was an alternative at the time of standardization? It is an extremely difficult question. You may have competing solutions, but are they alternatives? Then, assuming you have alternatives, you have to determine: What would an auction prestandardization (say, ten years ago) have produced as an outcome? It is extremely difficult. It is too late. You cannot roll back history. So what you have to do then is probably to construct a relatively complicated model, such as the sort of model that we saw following the 1996 Telecommunications Act,98 to construct what would have been a competitive outcome ten years ago. I am not sure this is really what we want to do. And, even assuming that we could construct models like that and that they would be correct — as you may remember, in the United States these sorts of models have created immense litigation — they would create huge uncertainty. Why? Because that means that every time an essential IP holder signed a licensing agreement with a firm, that firm could say five years down the road that the royalty is not FRAND because its royalty does not correspond to the outcome that would have been produced by an auction between its solution and an alleged alternative a long time ago. So I think really that this sort of ex post examination of royalty rates is very, very difficult. I very much hope that antitrust authorities all over the world will not engage in that sort of effort. Thank you very much. MR. ULLOA: Patricia, please. MS. MARTONE: I don’t represent either Nokia or Qualcomm or anyone else who was mentioned here today. But I am a patent trial lawyer and I have represented both plaintiffs and 97 Prof. Geradin represented Qualcomm in connection with six coordinated complaints brought by Nokia, Ericsson, NEC, Panasonic, and Texas Instruments before the European Commission (these matters raise complex legal and economic issues at the intersection of intellectual property rights and antitrust law and reveal differences in the approach by antitrust enforcement agencies in the United States and European Union); Qualcomm v. Nokia (the competition law aspects of patent infringement cases brought by Qualcomm against Nokia in France, Italy, Germany, and the United Kingdom); KFTC Complaints Against Qualcomm (assisting Qualcomm in a KFTC antitrust investigation of its business practices). 98 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (codified. at 47 U.S.C. § 609 et. seq.).

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defendants in assertions of essential patents in both litigation and licensing. I just have a few observations on what was said today, again from the U.S. perspective. First of all, there is a reason why I think Rambus fared differently in the district courts with respect to the patent cases than it did in the FTC. That is because in the district courts, other than in antitrust cases, in defense-to-patent cases, we have only two defenses: equitable estoppel and implied license. Those are very personal defenses. They are about the patent owner tricking the particular licensee, not about the patent owner getting a standards body to rely on their assertions, which is really the basis of the Broadcom decision, for example.99 Now, patent lawyers have known for a long time that there is always some inconsistency between the patent law and the antitrust law in the United States, because the patent law is meant to protect innovation whereas the antitrust law is meant to protect competition. But I do think that one important point is that I don’t think that the courts or the FTC should impose a different standard of conduct on the rules of a standards organization. Many antitrust commentators and economists argue for this. I think that would be a mistake. First of all, there would be a lack of predictability for participants in standards setting. Second, I think that we might have inconsistent decisions between the United States and Europe, which is already an issue. These are global markets, and we would like to have some sense that we are not going to be treated differently in the United States and Europe. In the United States, a FRAND royalty determination is actually not as hard to do as people think in litigation. We can use the Georgia-Pacific factors, which is the same standard for determining a reasonable royalty in damages.100 I do not think it is wise for standard-setting organizations to impose any more regulation after the introduction of a standard than they have already. I think someone has already mentioned the antitrust problems. There are price-fixing issues as well. And that is just going to be a third layer of problems on top of figuring out the differences between the patent law and the antitrust law. Basically, I do not think this needs to be fixed as much as some other people do. MR. TAFFET: Good morning and thank you for allowing me to address you this morning. My name is Richard Taffet. I am with Bingham McCutchen here in New York. I am both an antitrust lawyer and an IP lawyer. I do not represent Rambus. I certainly do not represent Nokia. I do represent Qualcomm. But I also have represented standards developers for close to twenty-five years, starting in the early 1980s. There are a few observations or take-aways that will perhaps synthesize what many of the speakers have said here this morning. One is the concept that standards-development organizations and standards development is itself right now, and has evolved into, a competitive marketplace. I think Jason made the point that there are many, many interests in standards development, and I think that is an important factor to take away from this. I think it is also important that we have to understand that when people talk about what the concept of RAND or FRAND is we have to look back at what it was. We have to be careful. I have debated these issues at meetings with Maurits in Brussels, with his partner two days ago at the American Bar Association Section of Antitrust Law Spring Meeting in Washington. It is not competition law principles. It includes some of that, but it also recognizes and reflects the balance that is necessary to be drawn. Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007). See Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y 1970). Several cases in the United States have already so held. See, e.g., ESS Tech., Inc. v. PC-TEL, Inc., Nos. C-99-20292 RMW, C-01-1300 VRW, C-01-1981 VRW, 2001 WL 1891713 (N.D. Cal. Nov. 28, 2001); see also Roy J. Epstein & Alan J. Marcus, “Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors”, 85 J. Pat. & Trademark Off. Soc’y 555 (July 2003). 99

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834 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW Including patent technologies in standards is a good thing. If the consensus of the industry says “this is the optimal solution” — not necessarily the cheapest, not necessarily the most expensive, not necessarily the best technology, but the optimal solution — then that is a good thing. What does FRAND seek to do, or RAND here in the United States? It balances these interests by encouraging. It does not require. There is no SDO in this world, putting aside the consortium and the special-interest groups, that requires the disclosure of IPR. ETSI does not. It says you must undertake reasonable endeavors to disclosure. It does not require you to give a FRAND commitment; it seeks it. It is important to understand what the facts are and not just the theories that are put forward — perhaps strategically, perhaps not — not all in good faith. Perhaps the best commentator to define FRAND is a Nokia colleague, who basically said what it does is it allows people to negotiate outside of the SDO. Jason is fearful of lawyers partaking in the standards development. I traveled around with engineers for three years to SDOs, and I can assure you it is not a good thing to have lawyers there. So it is very good to negotiate your license terms outside of that SDO setting. The negotiated license terms is the best indication of whether license terms are fair and reasonable. As a final point, I perhaps will go further than some of the commentators here and state that I am not sure there is a holdup problem. I think there are commercial disputes. I am not sure that there is a holdup problem that warrants competition law or antitrust law application. I would assert to you that there is no case, other than the FTC’s decision in Rambus, that held there to be a violation of competition law to date. And indeed, that decision is on appeal. All the good betting money right now is suggesting it is going to get reversed by the D.C. Circuit.101 I would assert to you that the FTC’s decision in Rambus is irreconcilable with the Federal Circuit’s decision in Rambus, in part, because when you have uncertain policies and uncertain terms, how could you impose a duty ex post on a patent holder or a participant in that body? So, perhaps even further than Jonathan would go, I would say that Rambus may have some good lessons here. We will see how the D.C. Circuit comes out. There may be, as I say, business disputes. Standards is a competitive arena. The Federal Circuit observed, indeed, in the Rambus/Infineon case that because of the competitive environment that occurs in SDO activity that one cannot assume that there is this implicit duty that arises.102 I think we should just enhance the competition that occurs in the marketplace, let competition occur, and let technology advancements occur as they have, at an incredibly rapid pace, balancing — and I do think the IP laws and the antitrust laws are reconcilable. I’ll refer you to my paper that I delivered two days ago to prove these points.103 Thank you very much. MR. ULLOA: We now have seven minutes for questions. I know that the panelists have questions, but I would like to hear also your questions. If not, I know that Maurits and Timo have comments or questions. MR. RUIKKA: I have two comments. One to Jason, who is concerned about preserving dynamic efficiencies. Patent holders can decide not to give FRAND undertakings. There is no SDO that I know of that would require all participants always to give FRAND undertakings for all of their patents. They can decide See supra note 47. Rambus, Inc. v. Infineon Techs. AG, 318 F.3d 1081, 1102 (Fed. Cir. 2003). 103 Richard S. Taffet, Fostering Competition and Innovation in Standards Development Through Strong Intellectual Property Protection, Presented at the ABA Antitrust Spring Meeting, Washington, D.C. (Mar. 26, 2008), available at http://www.abanet.org. 101 102

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patent-by-patent not to give them. I think it implies that that means giving up some possible up-side. Yet, refusals are very, very rare. Patent holders do agree to include their patents in standards in droves. There is a big incentive in becoming a patent holder in a successful standard: Everybody in the business will be using your patent. That is the quid pro quo for giving a FRAND undertaking. My second comment is about Georgia-Pacific.104 Georgia-Pacific gives you a lot of options on where to start searching for a reasonable royalty. What I propose putting forward, where the standard-development organization should give guidance on reasonable royalty further, is fully compatible with a couple of the criteria in Georgia-Pacific. You have to choose which ones are relevant. MR. ULLOA: Maurits. MR. DOLMANS: It is being said that there are no problems with holdup in practice, and that antitrust authorities should therefore leave it to the market to set license terms for essential patents in standards. But concerns about holdup arise in an increasing number of cases.105 By way of example, let me read some emails from Richard Crisp of Rambus, illustrating a holdup in practice. Rambus joined JEDEC “to learn what the competition was working on.”106 When question arose whether the S-DRAM technology was patent-free or not, Rambus was very well aware of its obligation to disclosure under JEDEC rules.107 Rambus’s Mr. Crisp said, “The things we should not do are not to speak up when we know that there is a patent issue” — in other words, if there is a patent issue, we cannot keep quiet. “In fact,” Mr. Crisp said, “I know that JEDEC takes the position that we should disclose.”108 Now, if Rambus thought that its technology would be selected anyway, why didn’t it disclose? The fact they did not disclose indicates they were aware that there were alternative technologies, and thought it more advantageous to delay royalty claims until the industry was locked in. They explained this in a strategy paper of October 1998: “We should not assert patents against direct partners until the ramp reaches a point of no return.”109 I think that sounds like a holdup. Geoff Tate, the CEO of Rambus, wrote in December 1999, “It is important NOT to indicate/hint/wink, etc., what we expect the results of our infringement analysis to be.”110 So what do we learn from this? We learn from this that holdup problems do exist. We also learn that, in spite of the fact that maybe Rambus was a small company early on, they make high royalty demands and are exceedingly expensive. We are talking about very large amounts of money, which the consumers are eventually paying. Something has gone to be done about it. Hold-up problems may be rare, I’ll grant that, because there are only a few published cases so far. But these problems are increasing. And when hold-up occurs it is very expensive. If people are seen to get away with it, it will happen more often. MR. MOSKIN: May I respond? MR. DOLMANS: Yes, of course you may. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y 1970). Current examples include the WCDMA, MediaFlo, Bluetooth, IEEE 802.20, and H.264 disputes (all involving Qualcomm), Rambus, N-Data, Rembrandt’s demands on ATSC, IP Com’s demands on Nokia, and others. 106 CX 711. 107 To ensure that its members could make fully informed decisions, JEDEC imposed an “Obligation on all participants to inform the meeting of any knowledge they may have of any patents, or pending patents, that might be involved in the work they were undertaking.” Response of Complainant, In re Rambus, Supplemental Spoliation Memorandum, X 0903, available at http://www.ftc.gov/os/adjpro/d902/050330ccsupplemememeorespoliation.pdf. 108 Dec. 1992 Richard Crisp email, CX 5105. 109 HTX 128.004. 110 Rambus CEO Geoff Tate email, Dec. 9, 1999, CX 919. 104 105

836 CHAPTER VIII: COMPETITION LAW INTERPLAY WITH IP LAW MR. MOSKIN: If I may, I would like to respond to that, and I will add I have one other comment I want to make. It has been quite common in the accusations against Rambus to take things out of order and selectively quote. The email from which we just heard was in the context of a meeting in December of 1993, at least a two-day meeting. The day before, JEDEC heard a presentation from a patent lawyer warning people not to disclose if they didn’t have to.111 The next day Richard Crisp, Rambus’s representative at JEDEC, sent an email back to the company saying, “I know they think we should disclose,”112 and raising a question: What was Rambus’s disclosure obligation? The answer to that question came at the very next JEDEC meeting, when the Chair of JEDEC, Gordon Kelly of IBM, said: “IBM refuses to disclose its minutes.”113 That is in the contemporaneous minutes. The Administrative Law Judge cited those very facts in ruling.114 MR. TAFFET: Perhaps I can cut through this. Contrary to “Judge” Dolmans, we have the jury in California that held no antitrust violation, no fraud.115 We have the district court in Virginia that held no fraud.116 The Federal Circuit held no fraud.117 We had the ALJ in the FTC who held no antitrust violation,118 reversed by the Commission,119 up on appeal.120 We’ll see where we go. Who knows what is going to happen in the European Commission? You could read all the things you want. MR. MOSKIN: The broader point I wanted to make is that I suspect that in twenty years we can have this same discussion, because standard-setting organizations are fraught with problems. They are competitors joining together. Rambus left JEDEC in 1995 because of a draft consent decree of the FTC that threatened to impose broader duties. My fear is that what is going on now is the FTC again is seeking to legislate in hindsight, much as the European Commission is doing. The actual contemporaneous documents, as found by the trial judge in the FTC — not because they are a different set of rules in the FTC and the district courts, but because he heard the facts for fifty-four days121 — show that we shouldn’t legislate in hindsight and shouldn’t drive innovators out of standard-setting organizations. MR. ALBERT: I would like a brief opportunity to respond to Timo’s point on dynamic versus static efficiencies. Timo, I basically agree. I think that there are some standards organizations that certainly seek a licensing commitment where it is totally free. But, in general, I agree most permit charging of royalties. My point is that if you end up with an ex ante system and you have some of this potential cartel behavior, you could end up driving the royalty rate, where I have made a RAND commitment and I want to get a royalty, below the level that will spur new innovation. So I don’t think you and I are ` MR. ULLOA: We have run out of time. Thank you very much to the excellent speakers and panelists. See Lee, Tr. 6597; Landgraf, Tr. 1698–99; Williams, Tr. 786–87; G. Kelley Tr. 2406–07; Rhode, Tr. 332. CX 543a at 14–17. 113 G. Kelley, Tr. 2408. 114 See Initial Decision, supra note 65, ALJ Op. 115 Hynix Semiconductor, Inc. v. Rambus, Inc., Nos. C 00-20905 RMW, C 05-00334 RMW, C 06-00244 RMW, 2008 WL 1893502 (N.D. Cal. Mar. 26, 2008). 116 Rambus, Inc. v. Infineon Techs. AG, 164 F. Supp. 2d 743 (E.D. Va. Aug. 9, 2001). 117 Rambus, Inc. v. Infineon Techs. AG, 318 F.3d 1081, 1102 (Fed. Cir. 2003). 118 In the Matter of Rambus, Inc., File No. 011 0017, Docket No. 9302 (Feb. 2004) (Initial Decision, supra note 65); 119 Opinion of the Commission, by Commissioner Pamela Jones Harbour For A Unanimous Commission (Aug. 2, 2006) (Public Record Version), available at http://www.ftc.gov/os/adjpro/d9302/060802commissionopinion.pdf. 120 Rambus Inc. v. Federal Trade Comm’n, 522 F.3d 456 (D.C. Cir. 2008), setting aside the decision of In the Matter of Rambus, Inc., No. 9302, 2007 WL 2086203 (F.T.C. Apr 27, 2007). 121 Initial Decision, supra note 65. 111

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