Intellectual Property Bulletin - Summer 2022
By: Ethan M. Thomas , Zach Harned , Stuart P. Meyer , Michael J. Sacksteder
On March 28, 2022, the Supreme Court granted certiorari in Andy Warhol Foundation v. Goldsmith, a case concerning whether Andy Warhol’s use of Lynn Goldsmith’s photograph of Prince (the musician) to create illustrations in his classic pop art style was fair use. The case could also implicate software, specifically creative and expressive software. We examine the case and the copyright issues at hand.
— Anthony Fares and Ethan Thomas
The Ninth Circuit’s recent decision in Starz v. MGM has clarified when damages begin to accrue in copyright cases in that jurisdiction, but it has also created a divide by contradicting the Second Circuit Court of Appeals—the only other circuit court to rule on the same issue. We look at this division and what it means for copyright holders nationwide.
Using “Abandoned Trademarks” Is Whiskey Business — Kristen Rovai
Lessons from the Axon AI Ethics Board Resignation — Sydney Veatch and Zach Harned
Boat Designer’s Speculation Sinks Its Trade Secrets Case — Stuart P. Meyer
No More Waco, Texas Hold ‘Em on Patent Litigation Cases — Michael Sacksteder
By Rina Plotkin
The U.S. Supreme Court will again confront the concept of “transformativeness” and how broadly it should be interpreted in the context of fair use analyses for copyright infringement actions. On March 28, 2022, the Supreme Court granted certiorari in Andy Warhol Foundation v. Goldsmith, a case concerning whether Andy Warhol’s use of Lynn Goldsmith’s photograph of Prince (the musician) to create illustrations in his classic pop art style was fair use.
In 1984, Vanity Fair was writing an article about Prince and wanted to use a photograph that Goldsmith took of him as an artist reference to create an illustration for the article. Goldsmith’s licensing agency granted the magazine a one-time license to use the photograph for this limited purpose. Vanity Fair in turn commissioned Andy Warhol to create an illustration for the article and gave him the Goldsmith photograph as source material. When the article was published, it included Warhol’s artwork together with an attribution to Goldsmith. Unbeknownst to anyone, Warhol also created 15 additional works based on the Goldsmith photograph, known together with the Vanity Fair image as the “Prince Series.”
After Prince died in 2016, Vanity Fair was preparing to publish a special issue about Prince and contacted the Andy Warhol Foundation (AWF) to reuse the print from the 1984 article. But when it learned that there were additional works in the Prince Series, Vanity Fair licensed a different Prince Series image for the tribute magazine cover. When the magazine was published, Goldsmith was not given any credit or attribution. This is when Goldsmith became aware of the Prince Series and contacted AWF about the apparent, unauthorized use of the photograph. About a year later, in April 2017, AWF sued Goldsmith and her licensing agency for a declaratory judgment of non-infringement or, in the alternative, fair use. Goldsmith countersued for copyright infringement.
Warhol comes to the Supreme Court from the U.S. Court of Appeals for the Second Circuit, which reversed the district court finding that Andy Warhol’s paintings (the Prince Series) were a transformative fair use of Goldsmith’s photograph. The district court reasoned that the Prince Series “can reasonably be perceived to have transformed Prince from a vulnerable, uncomfortable person to an iconic, larger-than-life figure.” Additionally, the district court found that the Prince Series works “are not market substitutes that have harmed—or have the potential to harm—Goldsmith.”
The Second Circuit reversed, holding that “whether a work is transformative cannot turn merely on the stated or perceived intent of the artist or the meaning or impression that a critic—or for that matter, a judge—draws from the work.” Instead, a court should view “the works side-by-side” to determine whether the secondary work has a fundamentally different and new artistic purpose and stands apart from the source material. When the Second Circuit performed that analysis, it found that the Prince Series “retains the essential elements of its source material” and “the Goldsmith Photograph remains the recognizable foundation upon which the Prince Series is built.” Even though the Second Circuit instructed district judges not to act as art critics, it seemed to act contrary to its own instruction and make an aesthetic judgment. It was also persuaded by the fact that “the overarching purpose and function of the two works at issue here is identical, not merely in the broad sense that they are created as works of visual art, but also in the narrow but essential sense that they are portraits of the same person.”
As the Supreme Court considers this case, it will be guided by two important precedents: Campbell v. Acuff-Rose Music, decided in 1994, in which the Court ruled that a rap, parody version of Roy Orbison’s “Oh, Pretty Woman” is fair use because it added new meaning to the original song, as well as the recent and long-awaited opinion in Google v. Oracle. We previously covered this decision, which concerned Google’s copying 11,500 lines of functional software code from Oracle’s Java APIs to build the Android operating system. The Court held that this was fair use because Google’s purpose in the use—to build a mobile operating system—was transformative. The Court explained that even exact copying of computer code can be considered fair use where the purpose and character of the use are transformative.
Although Google helped to clarify a few points regarding fair use, there are still a lot of questions left for the Supreme Court to address in Warhol, the most important of which will be: can transformativeness, i.e., whether a secondary work has a new meaning or message, be assessed solely on visual similarity without considering intent and audience? Most commentators believe that the Second Circuit’s opinion is in stark contrast to Google, Campbell, and other circuits’ broad interpretation of “transformativeness.”
Another key question will be: how far-reaching is Google? The opinion repeatedly stated that the case is about “declaring code” and even drew a distinction between that and implementing code. This way, the opinion focused solely on the more functional code—which is entitled a “thinner” level of protection—rather than the more expressive code. The Supreme Court in Warhol therefore could state that Google is limited to functional works such as APIs and is not applicable to creative works. Alternatively, the Supreme Court could rule that Google is another in the line of cases broadly interpreting transformativeness.
Still another question will be whether unrealized licensing opportunities are to be considered an effect on the market for the copyrighted work. Justice Thomas’s dissent in Google emphasized that this is the most important factor in the fair use analysis, and he was persuaded by the fact that before Android, companies paid Oracle’s predecessor millions of dollars for licenses to embed the Java platform in their software, but after Google released its cost-free Android, those licenses were renegotiated at an over 95% discount.
While the Google majority was not influenced by this, and cautioned against considering theoretical licensing markets, the Supreme Court in Warhol may decide differently when it comes to individual artists who have previously licensed their work. For a lot of artists, licensing is how they make money, and copyright law is intended to protect their ability to benefit from their works.
Regardless of the Supreme Court’s decision, Warhol will almost certainly have an impact beyond Andy Warhol. Already, multiple groups of artists—including documentary filmmakers, appropriation artists, and fan artists—have filed amici briefs arguing that adopting the Second Circuit’s interpretation would chill their artistic expression. All of these groups often directly copy from a copyrighted work, but they believe it is fair use because they do so with a unique purpose that transforms the work. For instance, a documentary may present clips sourced from other works. When comparing those clips to the original works side by side, they will look identical. However, if one looks at the documentary holistically with the context and new perspective that the documentary provides, it alters the character of the clip and brings about a new meaning.
This case could also implicate software, specifically creative and expressive software. The APIs at issue in Google were relatively unoriginal, functional and close to mathematics, which cannot be copyrighted. But not all software is like that. The Supreme Court itself in Google pointed out that implementing code is “creative expression,” and that type of software could be affected by the decision in Warhol.
It is difficult for potential users of copyrighted material to know definitively if their use will be considered fair use because each case is decided in a fact-specific way, using a balancing of factors that often provides only limited guidance beyond that case. This is all the more problematic when the interpretation and application of the factors themselves remain unsettled. But with each Supreme Court case concerning fair use, there is hopefully more clarity and less risk. We will be tracking Warhol and posting updates on any developments.
By Anthony M. Fares and Ethan M. Thomas
The Copyright Act prescribes a three-year statute of limitations (17 U.S.C. § 507(b)), and the default “incident of injury” rule dictates that the three-year clock starts running when the infringement occurs. However, when a rightsholder exercising reasonable diligence is unaware of infringement when it occurs, the “discovery rule” applies and the three-year statute of limitations on copyright claims begins to run only once the copyright holder knows or reasonably should know that an infringement occurred. Though these principles are well-settled, a circuit split has emerged concerning damages in late-discovered copyright claims.
The U.S. Court of Appeals for the Ninth Circuit’s recent decision in Starz v. MGM has clarified when damages begin to accrue in copyright cases in the Ninth Circuit, but it has also created a divide by contradicting the Second Circuit Court of Appeals—the only other circuit court to rule on the same issue. Central to this divide is the interpretation of a quote from the U.S. Supreme Court’s decision in Petrella v. Metro-Goldwyn-Mayer. In that case, the Supreme Court stated that, under § 507(b) of the Copyright Act, “a successful plaintiff can gain retrospective relief only three years back from the time of suit. No recovery may be had for infringement in earlier years. Profits made in those years remain the defendant’s to keep.”
The Second Circuit in Sohm v. Scholastic interpreted this to mean that copyright holders can collect damages only for infringement that occurred in the three years prior to filing suit, regardless of when they discover the infringement. But the Ninth Circuit in Starz disagreed, finding that this language in Petrella should not be applied in cases involving the discovery rule and that copyright holders’ damages are not universally limited to injury occurring in this three-year period. This provides copyright holders more leeway to enforce their rights when infringement goes undetected. But in light of the circuit split, companies operating outside of the Ninth Circuit should take particular care to diligently monitor and swiftly enforce their copyrights in case a court adopts the Second Circuit’s interpretation of Petrella.
In May 2020, a panel for the Second Circuit issued the first opinion of any circuit court to address this question. The plaintiff in Sohm, a professional photographer, sued Scholastic, alleging that the company exceeded the print runs permitted by licenses to use his photographs in children’s books. On appeal from the district court, which found that there was no time limit on damages distinct from the statute of limitations, the Second Circuit reversed and held that, in light of Petrella, copyright infringement damages were recoverable for only three years prior to the filing of the complaint—even when the discovery rule tolled the statute of limitations.
Noting a divide among district courts on this issue, the court read Petrella to “explicitly dissociate” the statute of limitations on the Copyright Act from the three-year damages time limit. The Second Circuit therefore drew a distinction between when a claim accrues (to which the discovery rule applies) and when damages may be recovered (which is limited to a “three-year lookback period” notwithstanding the discovery rule).
In July 2022, in Starz v. MGM, the Ninth Circuit arrived at a different interpretation of Petrella. In this case, MGM entered into two licensing agreements with Starz, one in 2013 and one in 2015, providing Starz exclusive exhibition rights to hundreds of movies and television shows. In 2019, more than three years later, Starz discovered that MGM breached these agreements by licensing over 300 of these titles to other service providers.
Starz filed suit in May 2020, bringing copyright and contractual claims against MGM for each violation. The district court found that Petrella left the discovery rule undisturbed. Therefore, the damages bar does not preclude recovery for claims “when the plaintiff reasonably was not aware of the infringements at the time they occurred.”
The Ninth Circuit affirmed the district court’s ruling and found that the Petrella decision “was solely concerned with laches” and did not implicate the discovery rule. The court distinguished the three-year damages bar in Petrella on the basis that the incident of injury rule applied in that case, noting that where the discovery rule is not at play, “the three-year look-back period from the date of filing suit is coextensive with the three-year period following the act of infringement.” Thus, the three-year damages rule in Petrella was “shorthand” for the Copyright Act’s look-back language rather than an additional limitation on damages “in a case where the issue was not before it.” The Supreme Court therefore “could not have intended its language to address the situation where a copyright holder does not know about the infringing act to which the discovery rule, not the incident of injury rule, applies.”
The Ninth Circuit rejected the Second Circuit’s opinion in Sohm as “inherently self-contradictory,” finding that a standalone limitation on damages would “eviscerate” the discovery rule. In practice, the Ninth Circuit noted, the discovery rule would serve no purpose if it nominally allowed for an infringement claim to survive but did not allow plaintiffs to recover damages for infringing acts that the copyright holder only became aware of years later. For example, Starz would have had to file suit in 2016 to recover any damages for 2013, when the infringement began, yet it was not reasonably aware of the infringement until 2019.
Even though Starz brought a timely claim under the discovery rule, it would be unable to recover damages for most instances of infringement, making the discovery rule functionally identical to the incident of injury rule.
The tension between the Ninth and Second Circuits creates a clear circuit split that may require clarification from the Supreme Court to resolve. As of the date of this publication, no certiorari petition has been filed in either Sohm or Starz. In the meantime, copyright holders beyond these circuits are left wondering when damages begin to accrue. As the Ninth Circuit pointed out, applying the Sohm decision would essentially make the discovery rule a dead letter for many copyright plaintiffs, and a lawsuit filed in the wrong circuit could mean the difference between no recovery and full recovery for infringement.
As demonstrated by a list provided in the Starz opinion, district courts from all but the Eighth and Eleventh Circuits have explicitly or implicitly rejected the rule advocated in Sohm. While most of these decisions are unpublished and it is impossible to predict how their corresponding circuits may rule, a preponderance of precedent in some of these circuits may indicate a preference more in line with the Ninth Circuit’s Starz decision than the Second Circuit’s Sohm opinion.
As courts continue to grapple with this issue, copyright holders would be wise to closely monitor use of their content and expeditiously enforce their rights so that they do not risk forfeiting damages in a court bound by, or sympathetic to, the rule in Sohm. Litigants should also be mindful of the forum in which they bring their claims, as this circuit split is unlikely to resolve soon absent intervention by the Supreme Court to clarify the reach of its ruling in Petrella.
By Kristen Rovai
In June 2022, the U.S. Court of Appeals for the Federal Circuit rejected an application filed by Tiger Lily, a UK-based liquor company, for the use of LEHMAN BROTHERS on its whiskey bottles despite the trademark having been allowed to expire by its previous owner. The case serves as a reminder for companies looking to use expired trademarks: just because a trademark has expired does not mean that it has been abandoned.
Before filing for bankruptcy in the wake of the 2008 financial crisis, Lehman Brothers Holdings Inc. (Lehman Brothers) was a premier investment banking institution with more than 25,000 employees and $1.5 billion in assets. The LEHMAN BROTHERS trademark eventually expired, but continued to be used by Barclays, which bought the Lehman Brothers’ assets, in winding down the business.
Shortly after the LEHMAN BROTHERS trademark expired, the opportunistic Tiger Lily began selling three LEHMAN BROTHERS-branded whiskeys that, according to their website, “tell the tale of the rise and fall of the Lehman Brothers.”
When Tiger Lily applied to register the trademark for use on alcohol bottles and for bar services, the USPTO granted Barclays’s opposition to the application. Tiger Lily then appealed, arguing that Barclays had abandoned the trademark and the use of the trademark for use on alcohol bottles and for bar services would not cause consumer confusion with the former banking giant. The Federal Circuit affirmed the USPTO’s decision, rejecting both of Tiger Lily’s arguments.
The Federal Circuit found that even though Barclays had allowed the trademark to expire, and the trademark was a source indicator for a bankrupt company that was soon to be nonexistent, the trademark was not abandoned.
By continuing to use the trademark in the winding down of the business (e.g., in email signatures, web addresses, correspondence, regulatory filings, etc.), Barclays successfully negated the nonuse element of a claim for abandonment. Such use, though limited and not directly related to the financial services Lehman Brothers once provided, was sufficient.
Additionally, Tiger Lily could not prove an intent not to resume use, the second element of a claim for abandonment, because Barclays granted Lehman Brothers a perpetual license to use the trademark in connection with Lehman Brothers’ continuing business. Thus, the license provided the opportunity to continue use of the trademark at any point in the future, even after the bankruptcy proceedings.
Finding that the trademark had not been abandoned, the Federal Circuit then determined that Tiger Lily’s use of the trademark in relation to alcohol bottles and bar services was likely to cause consumers to confuse the goods and services as being sold by Lehman Brothers. The LEHMAN BROTHERS trademark was famously associated with Lehman Brothers, and the trademark frequently appeared in movies, TV shows and music.
The fame of the LEHMAN BROTHERS trademark in relation to Lehman Brothers was likely to create confusion among consumers, especially since Tiger Lily admitted that it intentionally sought to draw a connection between its whiskeys and Lehman Brothers. While the “goods and services [were] distinctly different, goods and services need not be identical or even competitive in nature to support a finding of likelihood of confusion,” the Circuit said in its decision.
Finally, the Federal Circuit found that Lehman Brothers had distributed alcohol-related products—including decanters, wine gift sets, wine books, wine carriers and coasters—that were still being collected, sold and traded by the public at the time of Tiger Lily’s application, which further increased the likelihood of consumers confusing Tiger Lily’s products with Lehman Brothers’ products.
Those wishing to use expired trademarks and those acquiring trademarks of bankrupt companies alike should reflect on their own trademark practices in the aftermath of this case. Companies that wish to use expired trademarks, especially famous trademarks, for their own products or services should be wary of the availability of the trademark. An assignment of the trademark or a licensing agreement with the company acquiring the trademark is strongly suggested prior to use.
As for companies acquiring the trademarks of a bankrupt company, it would be wise to keep a diligent eye on the acquired trademarks and police unauthorized use of those trademarks thoroughly. This extra diligence will put an early stop to unwitting infringers who mistook the winding down of the bankrupt company for the abandonment of the acquired trademark.
By Sydney Veatch and Zach Harned
A few short days after 19 children and two teachers were killed in Uvalde, Texas, Axon Enterprise, a leading provider of law enforcement technology solutions including the Taser, announced plans to develop “non-lethal armed drones,” dubbed Taser Drones, which Axon claimed could be installed in schools to combat mass shootings. However, Axon failed to consult with its AI Ethics Board before announcing the development of the Taser Drone, prompting the resignation of nine of the 13 board members. In their joint resignation letter, the nine members noted that the board had extensive discussions in the past with Axon about similar technology and had voted against Axon moving forward, even on limited terms.
As AI capabilities continue to expand, the development of law enforcement–related and weaponized AI has been and will likely remain controversial. Axon aimed to redress this controversy by establishing its own AI ethics board. Formed in 2018, the board drew the attention of over 40 civil rights groups who urged it to prohibit certain capabilities, such as real-time facial recognition, from being developed and deployed. Since that time, the board has published three annual reports detailing its recommendations to Axon on other prominent issues. It is unclear why Axon did not continue to consult with its AI Ethics Board before announcing development of the Taser Drone, especially given past board reports indicating that Axon had been open to the board’s suggestions, even when the recommendations were negative regarding proposed developments. Shortly after the resignations, and considerable negative press, Axon announced it was pausing the development of the Taser Drone and asserted that the original announcement was intended to “initiate a conversation of a potential solution” and not “an actual launch timeline.”
These resignations and the public relations backlash should serve as a reminder to all companies with AI ethics boards that establishing such a board is only the first step; the company must have processes in place to consult with its AI ethics board ahead of important product decisions, as well as giving serious weight to the board’s recommendations. The purpose of an AI ethics board is not to fall in line and justify the actions of the company, it is to challenge the company and push for truly ethical product development. A recent example of a company taking ethical recommendations seriously comes from Microsoft, which just retired its facial analysis capabilities that purported to infer emotional states and identify attributes such as gender and age in order to meet the requirements of its newly released Responsible AI Standard.
The larger takeaway from this story is that companies addressing AI risk issues (among other concerns) must not only establish appropriate policies and practices, but also use them. Whether addressing privacy, trade secrets, HR concerns or AI risk, having a policy and not adhering to it runs counter to the principles that motivated creating the policy in the first place.
In June 2022, the Court of Appeals of North Carolina granted summary judgment (Elite Vehicles v. Lee) for a trade secret misappropriation defendant after the plaintiff principal admitted in deposition that it was “possible” that a third party who allegedly received its design came up with a similar design concept through independent thinking. This statement was presented in the context of the defendant’s summary judgment motion—in which the defendant needed to establish that “no genuine issue of material fact” existed. Yet the plaintiff’s statement was taken as sufficient to establish the lack of a trade secret. While this case is reported as nonprecedential, it serves as a timely reminder to be careful in characterizing your own trade secrets and how others may have come up with similar designs.
At issue was a proposed design for a swim platform for a boat. The plaintiffs disclosed design drawings to the defendant under confidentiality restrictions and later contended that the defendant disseminated the design to others without authorization. The court recognized that the defendant, as the moving party, assumed the burden of showing that there was no genuine issue of material fact. The court explained that once this burden is met, the plaintiffs must either show that such an issue of material fact does exist or provide an excuse for not doing so. The court also noted that all inferences are to be drawn against the moving party (the defendant) and in favor of the opposing party (the plaintiffs).
Nonetheless, the court of appeals began by considering whether the plaintiffs had made a prima facie case of misappropriation of a trade secret. The court determined that the plaintiffs had not met this burden, specifically with the requirement from the North Carolina Trade Secrets Protection Act that the design “[d]erives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use.”
The court asserted that the plaintiffs’ principal “acknowledges various swim platform designs are prevalent in the industry, and the possibility that a competitor could independently develop a design that is substantially similar to the one that he created.” More specifically, the court pointed to evidence of various patents on swim platform designs and the principal’s admission in deposition that it was “possible” for the third-party manufacturer to independently come up with his design concept. As a result, the court granted the defendant’s summary judgment motion. Although the rationale is not clearly laid out and it may be that the court was influenced by multiple factors, the court determined that the facts, as a matter of law, did not support the claim that the information at issue was a trade secret.
One can imagine countless trade secret misappropriation situations in technology areas in which patents are also present—the court here did not make any determination whether those designs were anything more than “comparable.” Likewise, it is a maxim of trade secrets law that independent development is a defense to misappropriation, but acknowledging the possibility of such independent development does not seem to speak to whether the subject matter qualifies as a trade secret in the first place.
Regardless of whether this case is further appealed, the takeaway for trade secret owners is to be careful to both argue differences to distinguish what might be construed as “comparable” designs and to avoid speculating in a manner that might be interpreted as an admission against interest.
It isn’t every day that the literal landscape of patent litigation changes radically with the stroke of a pen. Monday, July 25, 2022 was such a day. That’s when Chief Judge Orlando H. Garcia of the U.S. District Court for the Western District of Texas issued an “Order Assigning the Business of the Court as it Relates to Patent Cases.” The Order mandated that “all civil cases involving patents” filed in the court’s Waco Division from that day forward “shall be randomly assigned” to a list of 12 district court judges. Random assignment of cases may seem commonplace, but the move is expected to effectively eliminate a massive concentration of patent cases before a single judge in Waco.
As many readers are likely aware, during the past several years, the Waco Division has become the most popular venue for patent infringement lawsuits in the country. Just before the Order issued, more than 800 patent cases—approximately 20% of those pending in any U.S. court—were before Judge Alan Albright, Waco’s only district judge.
A former patent litigator, Judge Albright actively encouraged plaintiffs to file their complaints in his court, and certain of his policies and practices kept them coming. He proved extremely reluctant to invalidate a patent at the pleadings stage for failure to claim patent-ineligible subject matter under 35 U.S.C. § 101, and publicly indicated he would not stay suits pending inter partes review proceedings (IPRs). Practitioners found him reluctant to grant motions to transfer venue to other courts.
The resulting concentration of patent suits in Waco drew critical attention from influential circles. U.S. Senators Patrick Leahy and Tom Tillis sent a letter to Chief Justice Roberts expressing concern, and the Chief Justice asked the Judicial Counsel to investigate venue issues in patent cases. Judge Garcia’s July 25 Order appears likely to address those concerns.
The Order will distribute newly filed Waco patent cases randomly to Judge Albright and 11 other judges who sit across Texas, in the Austin, San Antonio, El Paso, Midland/Odessa, Pecos and Del Rio Divisions. Only a handful of the judges—notably Judge Lee Yeakel and Judge Robert Pitman—have had a significant number of patent cases. By eliminating the previous virtual guarantee of assignment to Judge Albright, this change is expected to eliminate the Western District of Texas as a venue of choice for patent plaintiffs.
Where will the cases go now? As interpreted by the courts, the Patent Act permits patent infringement suits against U.S. entities only in a district where the entity is incorporated (where it “resides” in the words of the statute) or where it is alleged to have committed acts of infringement and has a “regular and established place of business.”
Infringement suits against non-U.S. entities may be filed in any district where the defendant is subject to personal jurisdiction. Under this framework, the most popular jurisdictions for patent suits have been the District of Delaware (where many corporations are incorporated), the Eastern District of Texas (another forum regarded by some as plaintiff-friendly), and the Northern and Central Districts of California (where many companies are headquartered or have places of business). Many believe that a large number of cases that would have been filed in the Western District of Texas will now be filed in those districts, while others will be distributed to other courts where venue is proper against particular defendants.
The reign of patent litigation concentrated in Waco is winding down. With this sea change, patent suit filers will be re-evaluating jurisdictions and this may mean venues considered by many to be less plaintiff-friendly in some cases—a change the frequent targets of patent suits may applaud.