“Adapting to the Realities of 21st Century Journalism”: Keith Olbermann and an Examination of Legal and Political Constraints in an Era of Partisan News Outlets

By Benjamin Kabak* A pdf version of this article may be downloaded here. Three days after Election Day 2010, Politico, the multimedia news outlet that covers all things politics, dropped a bombshell on the political media world. Keith Olbermann, MSNBC’s lead commentator and the host of the increasingly controversial Countdown, donated money to three Democratic politicians in advance of Election Day.[FN1] Olbermann confirmed to Politico that in late October 2010, he gave $2,400, the maximum amount allowed by federal campaign contribution law, to Rep. Raul Grijalva, Rep. Gabrielle Giffords and Jack Conway, the Democratic nominee and eventual loser in the race for a Kentucky Senate seat.[FN2] These donations violated NBC News’ own internal policies barring personal contributions; as Politico’s Simmi Aujla reported, news organizations and reporters “consider[] it a breach of journalistic independence to contribute to the candidates they cover.”[FN3] NBC News eventually suspended Olbermann indefinitely, and he did not host Countdown on either Friday, November 5 or Monday, November 8, 2010. Olbermann returned to the airwaves on Tuesday, November 9, 2010, one week after Election Day and just two days after he was suspended. MSNBC President Phil Griffin announced the end of the suspension: “[A]fter several days of deliberation and discussion, I have determined that suspending Keith through and including Monday night’s program is an appropriate punishment for his violation of our policy.”[FN4] When he returned to the airwaves, Olbermann defended his actions, saying that the NBC News policies he allegedly violated were “not in his contract” and were “probably not legal” either.[FN5] Still, he apologized to his viewers for various breaches of trust, yet maintained that he made “legal political contributions as a U.S. citizen.”[FN6] In the weeks following his suspension, commentators wrung their hands over the Olbermann controversy. In this paper, I will add my voice to the fray as I explore and analyze the Olbermann suspension and discuss the legal ramifications of both his claims and those of NBC News. In Part I, I will further explore the circumstances surrounding the suspension, how the story broke and the reaction and fallout to the story. In Part II, I will delve into the rationale behind the increasingly more opinionated television news offerings and what Olbermann termed “the realities of Twenty-First Century journalism.”[FN7] Part III will examine various standards and practices codes put forth by news organizations, and Part IV will examine these codes in the context of employment in the entertainment and news industry. I will conclude with my own thoughts on the legality of Olbermann’s suspension and the tension between NBC News’ standards and practices and MSNBC’s mission and liberal viewpoint. In an age where news commentary and news reporting have become increasingly segmented, I believe NBC News’ policies do not fit its news presentation scheme. I. The Keith Olbermann Suspension A. MSNBC’s Rise to Prominence In 1996, after seeing CNN’s popularity and ratings grow and recognizing that cable news could be the next great money-making frontier for major television networks, NBC and Microsoft joined forces to launch MSNBC.[FN8] Originally intended as a joint venture consisting of a cable channel and an Internet news site, the fledgling cable news network struggled to find an audience during its early years. In fact, in mid-2006, one newspaper columnist questioned the viability and success of the network. Calling it a “[w]eb site with a cable channel,” Don Kaplan of The New York Post noted that the leaders in the cable news field – Fox News and CNN – “regularly average three or four times as many viewers” as MSNBC.[FN9] Today, MSNBC is the second-most watched cable news network, and 2010 marked the second year in a row that MSNBC’s prime time ratings for the year outpaced CNN’s by a wide margin.[FN10] How has MSNBC managed to attain such a quick turnaround over a period of less than four years? Olbermann himself termed the focus of the turnaround a part of the “realities of 21st Century journalism.”[FN11] In essence, MSNBC has discarded programming that features seemingly unbiased news reporting and has replaced it with commentary, particularly in its primetime lineup, that features a strong leftward slant. Instead of presenting itself as an unbiased news outlet such as CNN and the New York Times news section, the network has become the liberal equivalent of Fox News, more akin to the opinionated editorial pages of a major newspaper. The change, as Howard Kurtz of The Washington Post explored after the 2008 Presidential election, occurred as the race between John McCain and Barack Obama unfolded. With Olbermann leading the political charge, the channel’s hosts no longer hid their biases, and commentators like Rachel Maddow, Chris Matthews, Andrea Mitchell and David Gregory further contributed to the channel’s left-leaning bent. Even as NBC Senior Vice President Phil Griffin disputed charges of partisanship, only one conservative host, Joe Scarborough, remained with the network, and Republican operatives highlighted Olbermann’s Countdown commentary as a clear sign of bias.[FN12] Yet, despite this rise to prominence borne seemingly on the back of a progressive bent, MSNBC remains very much a work in progress. Amidst the network’s move toward the left, Griffin denied that his network was “tied to ideology.”[FN13] In fact, not until mid-2010 did Griffin discuss MSNBC’s push to reclaim an audience of left-leaning viewers who had no obvious liberal equivalent to the conservative Fox News channel.[FN14] Lately, armed with a new tagline – “Lean Forward” – the network has clearly been “embrac[ing] its progressive political identity.”[FN15] However, as the network moves leftward, it seems to be suffering from an internal identity crisis thanks to its close relationship with NBC News. MSNBC shares some on-air talent with NBC News, and NBC News’ standards and practices guidelines apply to MSNBC. In 2007, MSNBC.com reprinted various news organizations’ policies on campaign donations and included in that list was MSNBC’s and NBC News’ own policies, which state:
“Anyone working for NBC News who takes part in civic or other outside activities may find that these activities jeopardize his or her standing as an impartial journalist because they may create the appearance of a conflict of interest.  Such activities may include participation in or contributions to political campaigns or groups that espouse controversial positions.  You should report any such potential conflicts in advance to, and obtain prior approval of, the President of NBC News or his designee.”[FN16]
It is this guideline that Keith Olbermann violated in October 2010. B. What Keith Did As MSNBC’s star rose, so too did Keith Olbermann’s. His “is one of MSNBC’s most recognizable faces, and [he] has emerged as one of the country’s most prominent liberal commentators. A former ESPN star, Olbermann’s ‘Countdown With Keith Olbermann’ started in 2003 as a traditional news show but evolved into a left-leaning opinion program – and in some ways, led the network into its new identity as the cable-news voice of the left and an attempt to be a counterweight to Fox News.”[FN17] Today, Countdown averages over 1.038 million viewers per episode and is considered MSNBC’s flagship program.[FN18] On Thursday, October 28, 2010, Raul Grijalva, a four-term incumbent Democratic House Representative involved in a competitive race in Arizona, appeared on Countown. As Olbermann explained in a statement issued on November 5, 2010, it was after this interview with Grijalva that he made the controversial contributions to three congressional campaigns: “One week ago, on the night of Thursday October 28, 2010, after a discussion with a friend about the state of politics in Arizona, I donated $2,400 each to the reelection campaigns of Democratic Representatives Raul Grijalva and Gabrielle Giffords. I also donated the same amount to the campaign of Democratic Senatorial candidate Jack Conway in Kentucky.”[FN19] Olbermann continued, “I did not privately or publicly encourage anyone else to donate to these campaigns, nor to any others in this election or any previous ones, nor have I previously donated to any political campaign at any level.”[FN20] Shortly after Election Day, which saw Grijalva and Giffords emerge as winners and Conway return home, Politico uncovered Olbermann’s campaign donations, and NBC News suspended him for violating their policies. Phil Griffin, the president of MSNBC, issued only a perfunctory statement: “I became aware of Keith’s political contributions late last night. Mindful of NBC News policy and standards, I have suspended him indefinitely without pay.”[FN21] Two days later, as the media firestorm swirled, MSNBC reinstated Olbermann. Upon returning to the air, he apologized for his ethics breach, but seemed to be basking in the limelight of political attention he had garnered during his two days off the air.[FN22] C. A Swift and Divisive Reaction As news of Olbermann’s suspension spread, commentators from all walks of life voiced their opinions. Olbermann had recently engaged in a heavy-handed attack of Fox News’ less restrictive campaign donations policy,[FN23] but his suspension earned him supporters from the left and the right. William Kristol, Fox News commentator and the editor of The Weekly Standard, supported Olbermann: “[H]e’s not a reporter. It’s an opinion show. If Olbermann wants to put his money where his mouth is, more power to him…Republicans of the world, show you believe in the free expression of opinion! Tell the crony corporatists at NBC—keep Keith!”[FN24] Others weren’t nearly as dogmatic as Kristol. Greg Sargent of The Washington Post interpreted NBC News’ standards and practices policy as applying only to those who wished to project a “standing as an impartial journalist” – something Olbermann does not appear to desire – and wondered if other politically active reporters for the network were subjected to the same rigorous standards as Olbermann.[FN25] Politico’s Michael Kinsley called the suspension “absurd in so many ways it’s hard to keep track.”[FN26] He continued:
If Olbermann had merely put these politicians on his show, representing a viewpoint he obviously shares, that would have been worth more than a campaign contribution of a few thousand dollars, but Olbermann would be considered blameless. Does anyone think that by suppressing the expression of his views (via these donations), Olbermann would have stopped having them? Does anyone doubt what Olbermann’s views are on politics in general and these races in particular? Most journalists try to suppress their biases — Olbermann gets paid to flaunt his biases. On a crude political scale, Olbermann is a left-wing liberal. MSNBC hired him to be a liberal and last week suspended him for the same thing. Or rather, not for being a liberal but for revealing it.[FN27]
Joshua Greenman of the Daily News praised NBC News for sticking to its policies, but highlighted the partisanship inherent in cable news coverage today. He wrote: “Let’s not pretend that everyone is playing by the same rules. Fox News’ parent company, News Corporation, gave $1 million to the Republican Governors Association, making no mistake that the entire network is in one partisan corner.”[FN28] Ultimately, the Olbermann suspension snared another MSNBC commentator as well. Joe Scarborough, the conservative host of the network’s Morning Joe, had donated $4,000 over five years to political candidates, and as the network came under fire for suspending Olbermann but not Scarborough, its executives had no choice but to keep their morning show host off the air for two days as well. “It is critical that we enforce our standards and policies,” Phil Griffin said.[FN29] Left unanswered in the controversy were questions surrounding the role of the partisan news organizations in American democracy and the interplay between NBC News employees’ legal obligations and the ramifications of the suspensions. In the next sections, I will tackle these issues. II. On Cable, A Partisan Media Emerges A. A Viewpoint Emerges Out of Objectivity In the early 1980s, cable news appeared to occupy a highly specialized market without the potential for earning strong viewership totals or millions in revenue. The Cable News Network, more commonly known as CNN, had yet to emerge as a popular source of news coverage, and network coverage had long been ruled by the Fairness Doctrine. The FCC has always exercised jurisdiction over traditional broadcast networks but has had limited oversight of cable networks.[FN30] The agency’s stance was that network broadcasters were “responsible for providing the listening and viewing public with access to a balanced presentation of information on issues of public importance. The basic principle underlying that responsibility is ‘the right of the public to be informed, rather than any right on the part of the Government, any broadcast licensee or any individual member of the public to broadcast his own particular views on any matter.’” This became known as the Fairness Doctrine.[FN31] Two events – a war in the Middle East and the end of the Fairness Doctrine – would set the stage for a rise in partisan news coverage and analysis. In 1987, over the objections of Congress, the FCC repealed the Fairness Doctrine and released broadcasters from their obligation to be truly fair and balanced. According to one commentator, “[a] dramatic consequence of the Fairness Doctrine’s repeal was the rise of talk radio in the 1990s. Previously there had been discussions about unheard voices, and the underlying assumption was that they were on the left – but talk radio went right. It turned out that many conservatives believed that their voices were not being heard and that ABC, CBS, and NBC, as well as the major newspapers, were liberal organs, slighting conservative issues and viewpoints. Thus, many conservatives migrated to talk radio to listen to Rush Limbaugh and his imitators – programming that would have been impossible before the repeal.”[FN32] Meanwhile, a few years later, in the early 1990s, CNN would garner praise, Emmy Awards, viewers and, more importantly, advertiser dollars with its 24-hour focus on the Gulf War and later the Black Hawk Down incident in Somalia. As the talk radio ad dollars poured in and CNN emerged as a leader in the television news field, media companies and the television networks turned to cable and new on-air experiments in news coverage. Fox News and MSNBC both launched in 1996, and Fox eventually emerged victorious in the ratings war. Fox’s programming consistently outpolls that of the other cable news networks,[FN33] and it has a balance sheet to match. In 2008, the News Corp. cable giant drew in revenues in excess of $1 billion and turned a profit of nearly $450 million.[FN34] In 2009, its profit surged to nearly $500 million.[FN35] Fox News has become a success largely by advocating for and featuring conservative and “right-wing” hosts. Despite its promise of “Fair and Balanced” coverage, Fox News is home to such hosts as former Republican presidential candidate Mike Huckabee and the extremely conservative agitators Glenn Beck, Don Imus and Bill O’Reilly. Fox News does not hide its biases. Although the network, in response to the 2004 film Outfoxed, denied an editorial bias, today, it serves as a de facto cable news outlet for Republican talking points.[FN36] As previously mentioned, News Corp., the parent company of Fox News, donated $1 million to the Republican Governors Association in early 2010, and Roger Ailes, the station’s president, previously worked for three Republican presidents.[FN37] In recent years, MSNBC has adopted a more partisan approach, similar to that of Fox News, and as its ratings and revenues climbed. MSNBC projected a 25 percent increase in revenues in 2008 over the previous year.[FN38] Furthermore, viewer opinion shows how bifurcated and partisan cable news has become. A 2009 Pew Research study revealed how American attitudes toward news coverage had changed over time.[FN39] In 2007, 66 percent of Americans felt the press favored one side of the story over the other, and by 2009, that number had climbed to 74 percent. Seventy-two percent of Republicans gave Fox News a favorable rating while just 43 percent of Democrats agreed. MSNBC earned praise from 60 percent of Democrats and just 34 percent of Republicans. Just 26 percent – down from 36 percent in 1985 – of respondents viewed news organizations as “careful to avoid bias,” and 60 percent said news organizations are politically biased, a 15 percent increase over similar surveying in 1985. For better or worse, television news viewers believe that their news coverage now comes with a partisan viewpoint from which the media companies profit. Meanwhile, news commentary and news reporting have become two distinct parts of the television news package. This is what Keith Olbermann means when he urges NBC News to “adapt to the realities of 21st Century journalism.” B. The Media and Democracy: Biases Trump Objectivity As TV journalism reaches new levels of partisanship and the dollars flow in, political commentators, who have long believed that the news – the so-called Fourth Estate – should serve an educating function in American democracy, see an uncertain future. Blake D. Morant summarized this theoretical concept:
Media’s status as the fourth estate conjures images of an industry that fosters democracy through the dissemination of information that ensures self-governance. The industry’s legitimacy and utility hinges upon the fulfillment of this important societal duty. This duty takes center stage during elections, which are bedrocks of a functional democracy. Media’s coverage of elections should focus public attention on the conduct of elected officials and the generalized workings of government. Adherence to this essential task should legitimize the industry’s role in a complex democracy.[FN40]
Yet, with the rise of the Internet and the ever-expanding reach of do-it-yourself journalists and bloggers, this model for the media seems to be under attack. It is easy for politically-interested readers to find themselves inside an echo chamber, where expression may not be stifled, but only one viewpoint is being expressed. Some believe this isolation began with cable news.[FN41] Some media analysts think this segmentation could lead to an ill-informed public who watch only commentary programs and not traditional news reports. Mark Emery, writing as a law student at the University of Notre Dame, called upon the FCC to avert a democratic crisis:
FCC regulation of the content of televised news is the best option available if we want to preserve televised news as a medium that promotes a just, democratic society. The public’s choice is between government content regulation, with the ever-present risk of government censorship, or the risk of the private managerial censorship of new outlets. Without reasonable, government-enforced standards for minimal news content, there is a risk that managerially censored news will descend into a Roman circus, a popular public forum where small pieces of important news are lost in a forum for appetite and entertainment, to the neglect of serious affairs of state, the marginalized, and suffering.[FN42]
Writing from a “confessedly moral” viewpoint, he believes that without regulation, “the content and quality of reporting…[will] quickly slip []away.”[FN43] What Emery views as a crisis in news is simply a distinction between opinionated commentary and objective news reporting that many news companies have embraced lately. It is debatable whether or not this new paradigm will bring about a crisis amongst the electorate. While Emery may be of the school that believes journalists can maintain true objectivity in the face of personal and social biases, his belief seemingly ignores history. For centuries, objectivity in the press was consigned to the news pages while the editorial and opinion pages have been rife with so-called biased commentary. As Watergate and the drive to expose scandals gave rise to celebrity investigative journalists, objectivity in news gathering remained a true concern for news editors. Yet, as Edward Bernays proposed in his influential 1928 book Propaganda, politicians and society’s leaders had long used news coverage and the open forum journalists provided to shape public opinions and put forward a viewpoint.[FN44] Borne out of the yellow journalism from the turn of the 20th Century, Bernays’ Propaganda found a media willing to be influenced by politicians and politicians willing to use the media to influence constituents and potential voters. Nearly 70 years before Fox News and MSNBC would first begin broadcasting (and, in fact, long before Bernays put his thoughts to the paper), the news was a malleable media, and those with the right access could use it to shape a message. Democracy has survived, news companies are making hundreds of millions of dollars, and viewers at home watch by the millions. Ultimately, then, the Olbermann scandal is not about projecting an aura of impartiality on the part of MSNBC of NBC News. It is, rather, about reconciling competing approaches to news coverage. Just as The New York Times editorial pages contain opinions, so too do the programs of MSNBC. The network cannot overtly proclaim its Democratic sympathies any more than Fox News cannot proclaim itself to be an unofficial arm of the Republican Party. Yet, through signals – such as politically loaded slogans, corporate campaign donations and opinion-based news magazine programs – the networks accomplish just that. They do not need to tell their viewers the shows they watch are slanted. The viewers, as surveys show, simply know and accept that fact. The Olbermann scandal is instead about how news organizations’ standards and practices codes interact with employment provisions and news anchors’ legal rights in the new era of 21st Century television reporting and commentary. It is to those concerns that I now turn. III. Standards and Practices Codes in Journalism: A Self-Policing Mechanism A. What Purpose Newsroom Codes? As journalists and news organizations are, in part, in the business of bringing information to a skeptical public, they have to do so with a degree of reliability and integrity. Thus, “all media, whether broadcast or print, have codified rules of professional responsibility. These various codes share language that confirms the importance of truth and accuracy in the reporting of news and information.”[FN45] Morant elaborated on the roles of ethical codes in the newsroom:
Ethical codes function both internally and externally. As rules of reporting behavior, they regulate the internal processing of news that is reported. They establish professional order and certainty, and serve as goals for professional conduct. The external operation of ethical codes relates to their demonstration of media’s intent to report responsibly and respect the collective interests of society. When dogmatically followed, ethical codes enhance credibility and impose an almost moral obligation for media to act responsibly, thereby ensuring that subscribing sources will avoid distortion, bias and falsity. Operating under such rules, media garner a presumptive degree of credibility that is further established, or even increased, by its actual behavior.[FN46]
These codes create a “culture of responsibility” within newsrooms, as colleagues, producers and corporate leaders know that their employees – the journalists reporting and writing stories – will obey the codes. Ideally, ethics codes compel journalists to “consider deliberately responsible journalistic behavior. The ingrained obligations of truth and good faith, which all ethical codes reinforce, become operational tenets that, if violated, prompt a degree of cognitive dissonance. A breach of an ethical code, thus, compels the individual to justify her conduct.”[FN47] Keith Olbermann, for instance, went on the air to justify his conduct once his standards and practices violation became public knowledge. For media consumers these codes are designed to signal credibility. If the code is designed to convince consumers that news reporters it have adhered to industry standards, those consumers should feel confident that they are getting a version of events that closely resembles the truth. Thus, news organizations publicize their standards and practices codes and expose those who violate them in order to show potential audience members that they take their craft seriously. “Because public perception of media credibility is an inexorable part of audience size, the industry must also externalize the influence of ethical codes by informing the public of the importance and influence of these norms on journalistic behavior. Increased public awareness of the operation of ethical codes in the industry fosters greater public confidence in the reality of media responsibility and veracity.”[FN48] B. How Standards and Practices Codes Work By and large, news organizations adopt their own internal standards and practices codes, and many of those codes are available online.[FN49]Employees are contractually required to abide by their codes. The Radio Television Digital News Association has put forward a model code that highlights the ways in which journalists should remain independent of their sources and those they cover. Journalists must strive to be fair and must avoid “real or perceived conflicts of interest.”[FN50] To adhere to these goals, journalists should not pay sources or “engage in activities that may compromise their integrity or independence.”[FN51] These are vague standards that allow for journalists to interpret them at their own discretion, and often, newsrooms will promulgate their own rules and codes, especially in the realm of political activity where conflicts can be viewed as a sign of journalistic bias. As seen with the Keith Olbermann debacle, NBC News has a policy against campaign contributions without the permission of the network president. The New York TimesNewsweek, ABC News, CBS News and National Public Radio have similarly restrictive codes while Fox News, Forbes and Reuters are among those that allow political activity within limits.[FN52] Fox News, for instance, requires that “any employee who becomes involved with a political group must make it clear that his or her activities are being conducted purely in a personal capacity and not on behalf of or in connection with the Company.”[FN53] While NBC News’ policy strives for impartiality, Fox News’ policy recognizes that its employees will inevitably support candidates and causes. If the viewers – and more importantly, station executives – expect an opinion and understand the personal biases of those providing the commentary, the standards codes are relegated to relics from another era, and the tension between these codes and the current model of television news programming may just be what ensnared Olbermann. IV. Employment Agreements and Ethics Codes When he returned to the airwaves after his two-day suspension for violating NBC News’ own internal policies, Keith Olbermann was highly critical of those policies. He claimed that the policies were “not in his contract” and “probably not legal” either.[FN54] NBC News is in the process of “adapting to the realities of 21st Century journalism,” and Olbermann , as the host of a show that presents opinionated commentary and has an agenda, clearly felt constrained by NBC News’ attempts to achieve impartiality in its newsroom.[FN55] That impartiality, he seems to believe, should apply to news reporting but not news commentary. On the surface, Olbermann’s claim that NBC News’ limitations on political contributions is an extra-contractual enforcement mechanism may bear weight. NBC News’ standard provisions form contains no mention of the network’s own ethical guidelines. NBC News though can easily claim otherwise. One provision calls attention to internal guidelines. It reads, “The services and the material, if any, furnished by Artist shall comply with all of Company’s rules and policies, including but not limited to the then applicable news policies and/or guidelines.”[FN56] Another requires those at the company to comply with “procedures concerning the financial investments and holdings of its employees.”[FN57] Had NBC News failed to provide Olbermann with further explanations, the policies could easily have been construed as an attempt to control the actions of employees through mechanisms not agreed upon in contractual negotiations. But NBC News makes it clear that its employees and on-air talent must adhere to its standards and practices guidelines. Olbermann’s claims therefore rest on uneasy footing. Olbermann raises a further concern of illegality as well. As the Supreme Court recently reinforced, political speech is “speech that is central to the meaning and purpose of the First Amendment.”[FN58] Thus, the government cannot promulgate regulations that would have a chilling effect on speech. Over the years, many have debated whether or not the FCC Fairness Doctrine had such effect.  Furthermore, as the elimination of the Fairness Doctrine led to an increase in the number of partisan news outlets, it is unlikely that the Court would uphold the Fairness Doctrine today. The FCC, therefore, could not place any restrictions on NBC News because doing so would serve to chill speech protected by the First Amendment. However, NBC News can, as a private employer, limit its employees’ actions without treading on their First Amendment rights. Therefore Olbermann’s legal claims seem weak at best and non-existent at worst. Ultimately, though, these legal arguments are weaker than the ones based on public perception and the practical realities of MSNBC’s liberal bias. NBC News has maintained its relationship with Keith Olbermann because it believes his personal commentary and viewpoints generate an audience. The network executives see how popular his show has become and how influential he can be on the air. As Politico’s Michael Kinsley said, Olbermann’s views are well known and his job is to espouse them on television.[FN59] In an era when partisanship drives ratings and ratings drives substantial revenues and profits, news organizations should not restrain their commentators from espousing political viewpoints. If Keith Olbermann can give free airtime to a candidate and voice his support for the candidate on television while the audience watches with awareness of his personal biases, he should be able to make personal donations to the that candidate as well. The current news policies, put forward in an another era, simply do not recognize the reality of expectations today. If partisanship is to be embraced on the air, it cannot be avoided off the air, and doing so creates unnecessary conflict between on-air talent and employers. The 21st Century, as Olbermann said, is calling, and NBC News’ standards and practices are seemingly outdated. The network should consider devising separate sets of standards for its commentators and its true news reporters. Olbermann’s words and actions have thrust him into the middle of that paradigmatic conflict. V. Conclusion In this paper, I have explored how changing paradigms in cable news have led to conflicts between a network’s push for profits on the one hand and on the other, its adherence to outdated ethical codes and internal policies. Through the lens of MSNBC’s rise to prominence and the controversy over Keith Olbermann’s suspension in November, it is possible to see how newsrooms are struggling to balance demands of impartiality with the expectations of both its on-air talent and its viewers. When impartiality is not to be expected on the air, it should not be expected off the air either. Ultimately, this conflict between Olbermann and NBC News should serve as a starting point for an examination of the role that standards and practices codes play in the news and entertainment employment contexts and their future in an age of partisan media. As more and more news coverage resembles entertainment programming, it does not make financial sense for a network or personal sense for on-air talent to have codes that constrain personal political dealings but encourage agenda-laden views on television. Network executives will have to determine if commentators should adhere to separate codes from their reporters. Olbermann’s star amongst liberals is brighter now than it was in late October, and as NBC News embraces the MSNBC format, those in charge will have to reassess the policies that impact their employees.  
* J.D. candidate, NYU School of Law, 2011; B.A., Swarthmore College, 2005. [FN1] Simmi Aujla, Keith Olbermann suspended after donating to Democrats, Politico, Nov. 5, 2010, http://www.politico.com/news/stories/1110/44734.html. [FN2] Id. [FN3] Id. [FN4] Lisa de Moraes, Chastened Olbermann returns to MSNBC, a sadder but wiser man, The Washington Post, The TV Column, Nov. 10, 2010, http://voices.washingtonpost.com/tvblog/2010/11/olbermann.html. [FN5] Countdown with Keith Olbermann (MSNBC television broadcast Nov. 9, 2010), available at http://www.msnbc.msn.com/id/40099422/ [hereinafter Olbermann Broadcast]. [FN6] Id. [FN7] Id. [FN8] Stefanie Olsen, Ballmer: Would not launch MSNBC again, CNET News, June 7, 2001, http://news.cnet.com/2100-1023-268073.html (last visited Dec. 20, 2010). [FN9] Don Kaplan, Do We Need MSNBC?, N.Y. Post, June 14, 2006, at 99. [FN10] Press Release, MSNBC, MSNBC Beats CNN For Second Year In a Row in Primetime 2010 Ratings (Dec. 20, 2010), http://tvbythenumbers.zap2it.com/2010/12/20/msnbc-beats-cnn-for-second-year-in-a-row-in-primetime-ratings/76083. [FN11] Olbermann Broadcast, supra note 5. [FN12] Howard Kurtz, MSNBC, Leaning Left and Getting Flak From Both Sides, The Wash. Post, May 28, 2008, at C1. [FN13] Aaron Barnhart, MSNBC prez on Fox News: “You can’t trust a word they say,” The Kansas City StarJuly 18, 2008, http://blogs.kansascity.com/tvbarn/2008/07/msnbc-prez-on-f.html (last visited Dec. 26, 2010). [FN14] Phil Rosenthal, MSNBC boss stands ready in ideological battle with Fox News, Chicago Tribune, May 2, 2010. [FN15] Brian Stetler, With Tagline, MSNBC Embraces a Political Identity, N.Y. Times, Oct. 4, 2010, at B3. [FN16] Newsroom policies vary on campaign donations, MSNBC.com, June 21, 2007, http://www.msnbc.msn.com/id/19178161/ (last visited Dec. 20, 2010). [FN17] Aujla, supra note 1. [FN18] Press Release, MSNBC, supra note 12. [FN19] Washington Post Editors, Olbermann suspended indefinitely for donation to Dem candidates, The Wash. Post, 44: Politics and Policy in Obama’s Washington, http://voices.washingtonpost.com/44/2010/11/keith-olbermann-donates-to-dem.html (last visited Dec. 20, 2010). [FN20] Aujla, supra note 1. [FN21] Id. [FN22] Olbermann Broadcastsupra note 5. [FN23] The News Corp.-owned cable news leader allows and seems to encourage its reporters and commentators to be active in politics. Its ethics policy says, in part, “Personal involvement in political activity is permitted as long as the activity does not interfere with or impair the performance of the employee’s duties for the Company.” See Rosenthal, supra note 14. I will return to Fox News’ role in this controversy in the next section. [FN24] William Kristol, Keep Keith!, The Weekly Standard, Nov. 5, 2010, http://www.weeklystandard.com/blogs/keep-keith_514980.html (last visited Dec. 20, 2010). [FN25] Greg Sargent, Did Keith Olbermann even violate NBC policy?, The Wash. Post, The Plum Line blog, Nov. 5, 2010, http://voices.washingtonpost.com/plum-line/2010/11/did_olbermann_even_violate_nbc_1.html (last visited Dec. 20, 2010). [FN26] Michael Kinsley, The absurdity of Olbermann’s sin, Politico, Nov. 9, 2010, http://www.politico.com/news/stories/1110/44855.html. [FN27] Id. [FN28] Joshua Greenman, Keith Olbermann’s suspension by MSNBC was right – but there’s a double standard, N.Y. Daily News, Nov. 5, 2010, http://www.nydailynews.com/opinions/2010/11/05/2010-11-05_keith_olbermanns_suspension_by_msnbc_was_right__but_theres_a_double_standard.html. [FN29] Sam Schechner, MSNBC Suspends Scarborough for Donations, Wall Street Journal, Nov. 20, 2010, at B3. [FN30] Due to the differences between cable and broadcast technology and Supreme Court limitations on the Federal Communication Commissions’s regulatory power, the FCC historically could impose more rigorous content standards on broadcast networks than it could on cable channels. Today, the FCC, thanks to Supreme Court rulings and Congressional action, has a very limited role in regulating cable content; in fact, some would call it no role at all. For more on the history of the FCC and its relationship with cable channels, see Pamela B. Gullett, The 1984 Cable Flip Flop: From Capital Cities Cable Inc. v. Crisp to the Cable Communications Policy Act, 34 Am. U.L. Rev. 557 (1985). [FN31] CBS v. Democratic Nat’l Comm., 412 U.S. 94, 112 (1973). [FN32] L.A. Powe, Jr., Free Speech and Press in the Digital Age: Red Lion and Pacifica: Are They Relics?, 36 Pepp. L. Rev. 445, 457 (2009). [FN33] Bill Gorman, Cable News Ratings for Friday, December 17, 2010, TV By the Numbers, Dec. 20, 2010, http://tvbythenumbers.zap2it.com/2010/12/20/cable-news-ratings-for-friday-december-17-2010/76044. [FN34] The Project for Excellence in Journalism, Cable TV Economics, 2009, http://www.stateofthemedia.org/2009/narrative_cabletv_economics.php?cat=2&media=7. [FN35] Ryan Nakashima, News Corp. Earnings Up Surprising 11%, Fox News Income Grows 41%, The Associated Press, Nov. 4, 2009, http://www.huffingtonpost.com/2009/11/04/news-corp-earnings-up-sur_n_346080.html. [FN36] Fox News, Fox News Channel Statement on ‘Outfoxed,’ July 13, 2004, http://web.archive.org/web/20060927182708/http://www.foxnews.com/story/0,2933,125436,00.html. [FN37] Ben Smith, News Corp. gave $1 million to pro-GOP group, Politico, Sept. 30, 2010, http://www.politico.com/news/stories/0910/42989.html. [FN38] Supra note 34. [FN39] See generally Pew Research Center for The People & The Press, Press Accuracy Rating Hits Two-Decade Low, Sept. 14, 2009, http://pewresearch.org/pubs/1341/press-accuracy-rating-hits-two-decade-low. [FN40] Blake D. Morant, The Inescapable Intersection of Credibility, Audience and Profit in Broadcast Media’s Coverage of Elections, 24 St. John’s J. Legal Comment. 479, 482 (2009). [FN41] See generally Brian Lehrer, A Million Little Murrows: New Media and New Politics, 17 Media L. & Pol’y 1 (2008). [FN42] Mark Emery, Note: Regulating Televised News: A New Season for the Public Interest Standard, 19 Notre Dame J.L. Ethics & Pub. Pol’y 737, 739 (2005). [FN43] Id. at 740. [FN44] Edward Bernays, Propaganda. Ig Publishing 2005 (1928). [FN45] Morant, supra note 43 at 495. [FN46] Id. [FN47] Id. at 498. [FN48] Id. at 502. [FN49] See Ethics Codes, Pew Research Center’s Project for Excellence in Journalism (Dec. 20, 2010), http://www.journalism.org/resources/ethics_codes. [FN50] Code of Ethics and Professional Conduct, Radio Television Digital News Association (Dec. 20, 2010), http://www.rtnda.org/pages/media_items/code-of-ethics-and-professional-conduct48.php. [FN51] Id. [FN52] Newsroom policies vary on campaign donations, supra note 15. [FN53] Id. [FN54] Supra, note 5. [FN55] Id. [FN56] Standard Provisions, ¶ 1(a) [(YEAR)]. NBC Universal’s Standard Provisions are on file with the author. [FN57] Id. at ¶ 1(e). [FN58] Citizens United v. FEC, 130 S. Ct. 876, 892 (2010). [FN59] Kinsley, supra note 25.

You May Not “Like” This Title: Everything Stored on Facebook Is Discoverable

By Darren A. Heitner* A pdf version of this article may be downloaded here. On its own Fan Page, Facebook describes itself as a service that gives “people the power to share and make the world more open and connected.”[FN1] People over the age of twelve, but not too old to understand how to use a computer keyboard, are able to sign up for a Facebook account and immediately share content and information with the world.  Facebook users may upload photos and videos, update their statuses, share links, create events and groups, make comments, write notes, write messages on their own or others’ “Walls,” and send private messages to other users (all of which will hereinafter be referred to as “Published Facebook Content”).  Facebook delivers on its promise to permit sharing in an online environment where people can easily get caught up on their friends’ actions and activities.  The openness is what makes Facebook extremely desirable; it also makes the platform a potential legal nightmare for those who do not understand how its content may be used as evidence in a lawsuit. In an effort to provide its users with a sense of security, Facebook regularly updates its privacy options, including one which allows users to change the visibility of their profiles from the default “everyone” setting to something more limited or completely private.  If the “everyone” setting is enabled, any person, Facebook user or not, has access to Published Facebook Content (other than private messages) and its association with the user who posted the information.[FN2] Facebook users have the ability to block others from seeing their contact information, personal information, gender and birth date, and Published Facebook Content.[FN3] However, nestled into Facebook’s Privacy Policy in the section titled, “How We Share Information” is a paragraph that begins with, “To respond to legal requests and prevent harm.”[FN4] The paragraph states the following:
We may disclose information pursuant to subpoenas, court orders, or other requests (including criminal and civil matters) if we have a good faith belief that the response is required by law. This may include respecting requests from jurisdictions outside of the United States where we have a good faith belief that the response is required by law under the local laws in that jurisdiction, apply to users from that jurisdiction, and are consistent with generally accepted international standards. We may also share information when we have a good faith belief it is necessary to prevent fraud or other illegal activity, to prevent imminent bodily harm, or to protect ourselves and you from people violating our Statement of Rights and Responsibilities. This may include sharing information with other companies, lawyers, courts or other government entities.[FN5]
Any privacy granted to a Facebook user is only temporary, as Facebook, at any point in time and at its complete discretion, may invoke the aforementioned paragraph and disclose Published Facebook Content to, not only a court of law, but also a private company, attorney, or other governmental entity.  Even if Facebook attempts to protect a user’s privacy rights, a court may deem that the Published Facebook Content is discoverable.  While there is a deep concern regarding Facebook’s apparent willingness to share Published Facebook Content with companies, lawyers, courts and other government entities, this discussion will focus exclusively on a court’s effort to require Facebook to produce information. I. Discovery Background Under the Federal Rules of Civil Procedure (FRCP) for the United States District Courts, a party may obtain discovery regarding any non-privileged matter that is relevant to any party’s claim or defense, and the court may order discovery of any matter relevant to the subject matter involved in the action.[FN6] The responding party may claim that the information being requested is privileged, and thus refuse to submit the information.[FN7] Alternatively, a party may move for a protective order to guard against annoyance, embarrassment, oppression, or undue burden or expense.[FN8] In lieu of modern civil procedure contemplating liberal disclosure rules for discovery requests, “discovery is not unbridled and not unlimited,” and individuals deserve to have their privacy protected.[FN9] While not all states have adopted rules of civil procedure that match or even closely resemble the FRCP, many states have discovery procedures that are based on the federal system. II.  McCann v. Harleysville Insurance The Supreme Court, Appellate Division, Fourth Department of New York addressed the protection of a Facebook user’s Published Facebook Content in a case involving a driver injured in an automobile accident.[FN10] The Defendant, Harleysville Insurance Company of New York, was not convinced that the Plaintiff, Kara McCann, had sustained serious injuries, and requested production of photographs from McCann’s Facebook account as a means of verification.[FN11] The trial court denied Harleysville Insurance’s motion to compel discovery based on the motion’s being overly broad and the apparent lack of proof regarding the relevancy of the Facebook photos.[FN12] The Appellate Court affirmed the trial court’s holding.[FN13] The decision reveals that parties do not have carte blanche in discovery requests concerning Published Facebook Content.  If a party wishes to require a Facebook user to produce Published Facebook Content, the party must be specific in its demand and clearly identify the relevancy of producing such information.  The Court stated that Harleysville Insurance “essentially sought permission to conduct a ‘fishing expedition’ into plaintiff’s Facebook account based on the mere hope of finding relevant evidence.”[FN14] With a clear showing of relevance by Harleysville Insurance, however, McCann might not have escaped the production of her Facebook photographs, whether she made them available to all through the “everyone” setting or restricted their exposure to a limited group of people. III. Romano v. Steelcase Inc. In another New York case, the Court showed what might happen when a discovery request involving Published Facebook Content is relevant and specific.  A party may have to produce requested Published Facebook Content, even though it was originally marked as private on the social network. In Romano v. Steelcase Inc., Judge Spinner held that, 1) private information sought from Plaintiff Kathleen Romano’s Facebook account was material and necessary for Defendant Steelcase’s defense; 2) Romano did not have a reasonable expectation of privacy in information published on Facebook; and 3) Steelcase’s need for access to Romano’s private information on Facebook outweighed any privacy concerns voiced by Romano.[FN15] Whereas the court in McCann refused to allow the defendant to access a single photograph that the plaintiff posted on her Facebook page, in the instant case, Steelcase was able to reach Romano’s current and historical Facebook pages and accounts, including deleted pages.[FN16] The key difference is that this Court found that the information request was material and necessary, which is a standard that is to be interpreted liberally, requiring disclosure of “any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.”[FN17] Romano claimed that she suffered serious injuries which affected her enjoyment of life based, at least partially, on her lack of capacity to participate in certain activities.[FN18] If true, those facts could influence the Court to sympathize with Romano, likely affecting the outcome of the case.  Viewing only the public sections of Romano’s Facebook and MySpace pages, Steelcase discerned that Romano’s active lifestyle had not been affected by any injury.[FN19] Romano claimed that she was confined to her house; public Facebook pictures displayed Romano outside of her home, smiling happily as if she enjoyed her life as much as she had in her pre-injury state.[FN20] With this type of information readily available for the general public to view, what could Steelcase find in the private sections of Romano’s Facebook profile? The Court did not limit Steelcase’s discovery to Romano’s public Published Facebook Content.[FN21] Instead, the Court stated that preventing access to Romano’s private postings would be “in direct contravention to the liberal disclosure policy in New York State.”[FN22] As stated supra, liberal disclosure rules for discovery requests exist on the federal level and within many other states’ disclosure policies. The severity of the claimed injury and the amount of damages requested might play a role in whether a court compels the discovery of private Published Facebook Content as well.  Additionally, private Published Facebook Content may be easier for a defendant to compel in a personal injury case than one involving a different cause of action.  The Court in Romano quoted a Canadian court, which also permitted the discovery of private Published Facebook Content in a personal injury scenario.  The quoted portion is as follows, To permit a party claiming very substantial damages for loss of enjoyment of life to hide   behind self-set privacy controls on a website, the primary purpose of which is to enable people to share information about how they lead their social lives, risks depriving the opposite party of access to material that may be relevant to ensuring a fair trial.[FN23] In response to the Canadian case, the Court held, “To deny Defendant an opportunity to access these sites not only would go against the liberal discovery policies of New York favoring pre-trial disclosure, but would condone Plaintiff’s attempt to hide relevant information behind self-regulated privacy settings.”[FN24] Not only would a party aiming to compel discovery of private Published Facebook Content have a better chance of success in a loss of enjoyment of life case, but they will likely also have a better chance of proving that the opposing party is hiding relevant information in bad faith. Another noteworthy part of the decision is the Court’s rejection of Romano’s Fourth Amendment’s right to privacy argument.  The Court’s reasoning was that Facebook does not guarantee complete privacy and, thus, Romano had no legitimate reasonable expectation of privacy.[FN25] In the Court’s dicta, the following quote was referenced, “[i]n this environment, privacy is no longer grounded in reasonable expectations, but rather in some theoretical protocol better known as wishful thinking.”[FN26] IV.  Conclusion Facebook users may have a false sense of security regarding their Published Facebook Content.  No matter what types of privacy settings a user puts in place, a court may determine that the Published Facebook Content is discoverable by a party to a lawsuit.  For a party attempting to learn more about an adverse party, this could be a pleasant surprise; for a party attempting to hide something that was once posted on his Facebook Page without any thought, it could be the piece of evidence that tears apart his case.  
* Darren Heitner is an associate in the Fort Lauderdale, Florida law firm of Koch Parafinczuk & Wolf, P.A., where he practices all kinds of litigation, including an emphasis on intellectual property law.  He is the Founder and Chief Executive Officer of Dynasty Athlete Representation, a full service sports agency, and is the Founder and Chief Editor of SportsAgentBlog.com and ChangeLegal.com.  Darren graduated from the University of Florida and the University of Florida Levin College of Law. [FN1] Facebook, http://www.facebook.com/facebook (last visited Dec. 31, 2010). [FN2] Statement of Rights and Responsibilities, Facebook, http://www.facebook.com/terms.php (last visited Dec. 31, 2010). [FN3] Facebook’s Privacy Policy, Facebook, http://www.facebook.com/policy.php (last visited Dec. 31, 2010). [FN4] Facebook, supra note 4. [FN5] Facebook, supra note 4 (emphasis added). [FN6] Fed. R. Civ. P. 26(b)(1). [FN7] Fed. R. Civ. P. 26(b)(5)(A). [FN8] Fed. R. Civ. P. 26(c)(1). [FN9] Hecht v. Pro-Football, Inc., 46 F.R.D. 605, 607 (D.D.C. 1969). [FN10] See McCann v. Harleysville Ins. Co. of N.Y., 912 N.Y.S.2d 614, 615 (N.Y. App. Div. 2010) [FN11] Id. [FN12] Id. [FN13] Id. [FN14] Id. [FN15] Romano v. Steelcase Inc., 907 N.Y.S.2d 650, 654-657 (N.Y. Sup. Ct. 2010). [FN16] Id. at 657. [FN17] Id. at 652. [FN18] Id. at 653. [FN19] See id. at 653. [FN20] Id. at 654. [FN21] See id. at 655. [FN22] Id. at 655. [FN23] Leduc v. Roman (2009), 308 D.L.R. 4th 353 (Can. Ont. Sup. Ct. J.). [FN24] Steelcase, 907 N.Y.S.2d at 655. [FN25] Id. at 656. [FN26] Dana L. Flemming & Joseph M. Herlihy, What Happens When the College Rumor Mill Goes Online?, 53 B.B.J. 16, 16 (2009).

Patent Eligibility of Molecules: “Product of Nature” Doctrine After Myriad

By Can Cui* A pdf version of this article may be downloaded here. I.  Introduction The 1952 Patent Act sets forth four categories of subject matter that are patent-eligible: process, machine, manufacture, and composition of matter.[FN1] The Supreme Court has interpreted the subject-matter eligibility to be very broad[FN2]; instead of delineating what is patent-eligible, the Supreme Court has crafted a number of categories of “patent-ineligible” subject matter.[FN3] These judicially crafted categories, however, are not well defined.  The boundaries of these categories are also constantly challenged by the advancement of science and technology, particularly biotechnology.  While the Patent Act has remained largely unchanged since its codification in 1952, the discovery of the structure of deoxyribonucleic acid (“DNA”) in 1953 has revolutionized our lives in a great number of ways.  The complete mapping of the human genome has also changed our way of thinking about life and dealing with disease.  Discoverers of new genes, especially those associated with disease susceptibilities, rushed to the patent office to protect their discoveries.  Whether DNA molecules should be patented had been the topic of active policy debate for more than twenty years until the early 2000’s, when the question about their subject-matter eligibility was first seriously raised in the academy.[FN4] On March 29, 2010, in a 156-page-long decision, the U.S. District Court in the Southern District of New York held that claims directed to isolated DNA molecules were invalid under 35 U.S.C. § 101 for failing to claim patent-eligible subject matter, because the claimed isolated DNA molecules were not “markedly different” from native DNA molecules as they exist in nature, according to Senior Judge Robert W. Sweet.[FN5] This Note discusses the patent-eligibility of the subject matter set forth in these DNA-molecule claims. In determining that these claims-in-suit were invalid under 35 U.S.C. § 101, Judge Sweet first analyzed the scope of § 101, focusing heavily on the so-called “product of nature” doctrine.[FN6] He then reviewed Supreme Court cases and some lower court opinions that are purportedly related to the “product of nature” doctrine, and provided a test for determining whether a product purified from nature is patent-eligible: “the purified product must possess ‘markedly different characteristics’ in order to satisfy the requirements of § 101.”[FN7] Finally, Judge Sweet applied this test to the subject matter in the claims-in-suit.  Focusing almost exclusively on “DNA’s unique qualities as a physical embodiment of information,” Judge Sweet concluded that “none of the structural and functional differences cited by [defendant] Myriad between native BRCA1/2 DNA and the isolated BRCA1/2 DNA claimed in the patents-in-suit render[ed] the claimed DNA ‘markedly different’” from its naturally-occurring counterpart, thus failing the test.[FN8] Needless to say, the outcome of this case, if upheld upon appeal, would have a profound impact on the biotechnology industry.  This Note, however, does not try to delve into any policy arguments, but will focus on the more fundamental question about the “product of nature” doctrine, how it has been applied to different types of claimed subject matter prior to Judge Sweet’s opinion, and what an appropriate test should be for applying the doctrine to claims directed to molecules.  This Note will propose such a test and apply the proposed test to the DNA-molecule claims-in-suit, leading to a legal conclusion contrary to that of Judge Sweet.  This Note will also make an effort to address certain issues in Judge Sweet’s opinion, and to provide some practical tips to patent practitioners in drafting DNA molecule claims. II.  Analysis A.  The “Product of Nature” Doctrine: Does It Really Have a Legal History? Is there a “product of nature” doctrine?  At the very least, it is fair to say that the doctrine has not been articulated very well by courts.  Judge Sweet cited four cases in which “product of nature” or “products of nature” was recited, none of which has a claim-in-suit directed to a molecule.[FN9] Because the subject matter of the claims-in-suit in Myriad is DNA molecules, this Note will include judicial treatment of molecule claims in the history review of relevant case law in the context of the “product of nature” doctrine.  Instead of a chronological order, this Note will apply a brand new analytical framework to the history review, categorizing the relevant cases based on whether the claimed subject matter is an element, a molecule, or a microorganism.[FN10] 1. Naturally-occurring chemical elements are generally patent-ineligible subject matter. One of the earliest cases ever mentioning a “product of nature” is Gen. Elec. Co., where a claim-in-suit is directed to “[s]ubstantially pure tungsten having ductility and high tensile strength.”[FN11] Even though pure tungsten as claimed had not been found in nature, the Third Circuit’s view was that since tungsten is an element, all of its properties are natural by definition.[FN12] Judge Sweet cited this case to prove the “well established” “product of nature” doctrine.[FN13] One sentence from this case is, however, particularly relevant and worthy of analysis: “a patent cannot be awarded for a discovery or for a product of nature, or for a chemical element.”[FN14] First, the second “or” suggests that the patent-ineligibility of a product of nature is dicta, because the opinion is about the patent-ineligibility of a chemical element, tungsten.  Second, the patent-ineligibility of a discovery expressed in this sentence makes the entire sentence susceptible to constitutional attack.[FN15] The patent-ineligibility of naturally-occurring chemical elements was followed by the Court of Customs and Patent Appeals, which seemed to have more readily relied on the “product of nature” doctrine in its decisions.[F16] 2. Claims to molecules, including those to DNA molecules, had never been invalidated by courts under the “product of nature” doctrine before Judge Sweet’s opinion. Somewhat surprisingly, case law on the patent-eligibility or –ineligibility of molecules does not prove to be abundant.  The only case from the Supreme Court that touched on the issue was decided in 1884, where a claim to a molecule was found invalid based on lack of novelty.[FN17] Similarly, molecule claims were often not attacked before lower courts under the “product of nature” doctrine, but simply for alleged lack of novelty[FN18] or for obviousness.[FN19] One case, Merck & Co. v. Olin Mathieson Chemical Corp., 253 F.2d 156 (4th Cir. 1958), specifically mentioned the “product of nature” doctrine.  There, the claimed “composition comprising recovered elaboration products” (emphasis added) was found to be patent-eligible because it “did not exist in nature in the form in which the patentees produced it.”[FN20] Of particular relevance to claims to DNA molecules are two Federal Circuit cases decided in the last decade of the 20th century.  In Amgen, Inc. v. Chugai Pharmaceutical Co., 927 F. 2d 1200 (Fed. Cir. 1991), the Federal Circuit held that a claim directed to “[a] purified and isolated DNA sequence” was novel and thus valid.[FN21] Subject matter patent-eligibility was not an issue in this case.  Nine years later, the Federal Circuit accepted a district court’s interpretation of “substantially pure DNA sequences” in a patent claim as including “both naturally-occurring and non-naturally occurring sequences.”[FN22] This was an affirmance of a summary judgment of non-infringement, however, and so validity was not an issue in this case at all. 3. Microorganisms: Few but highly relevant cases. The Supreme Court has thus far taken up only two cases where patent claims reciting microorganisms came under its scrutiny.  In Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127 (1948), the Supreme Court held that a product claim directed to “[a]n inoculant . . . comprising a plurality of selected . . . strains of different species of bacteria” did not “disclose an invention or discovery within the meaning of the patent statutes.”[FN23] The opinion did not recite “product of nature,” however, and Justice Douglas’ analysis deserves a closer look.  First, the “product” claim-in-suit was not directed to a single bacterial species, but to a composition comprising a plurality of species, which do not co-exist in nature in the form in which they are found in the claimed composition.[FN24] Second, what rendered the product patent-ineligible was not the bacterial species per se, and Justice Douglas did not exclude them from being patent-eligible.[FN25] Thirty-two years later, the Supreme Court recognized the patent-eligibility of a genetically-engineered bacterium in Chakrabarty.  The claimed bacterium was a new strain of Pseudomonas into which two stable energy-generating plasmids[FN26] had been introduced to give the bacterium enhanced “hydrocarbon degradative” properties.[FN27] Chakrabarty confirmed the patent-eligibility of what Justice Douglas did not exclude as being patent-ineligible in Funk Bros., i.e., a new bacterium, a changed bacterium, or a bacterium with improved functioning beyond its natural functioning.[FN28] Chakrabarty does not recognize Funk Bros. as good law because of the “product of nature” doctrine, however, because Funk Bros. does not articulate the doctrine and the claimed subject matter in Funk Bros. is not a product of nature.[FN29] B.  A Critique of Judge Sweet’s Test and the Proposal of a New Test. Judge Sweet readily took one sentence out of Chakrabarty and formulated the “markedly different characteristics” [FN30] test.  What led Judge Sweet to reach the conclusion of patent-ineligibility of the claimed DNA molecules is not the lack of markedly different characteristics between them and their naturally-occurring counterparts, however, but some overwhelmingly identical function between them – the function of DNA as genetic information carrier.[FN31] This categorical exclusion of all differences in light of one common function is not the correct approach, however, because where subject matter patent-eligibility is an issue, there is almost always more similarity than difference between the claimed subject matter and its naturally-occurring counterpart.  Judge Sweet’s test is also inherently difficult to apply because there is no bright line between a difference that is marked and a difference that is not. Taking for granted that the “product of nature” doctrine exists, this Note proposes a two-part test in determining subject matter patent-eligibility of molecules under the doctrine.  This test puts structure before function, because the latter is at least in part determined by the former.  Under this test, the first step is to determine whether there is any structural difference between the claimed molecule(s) and its naturally-occurring counterpart(s) in the absence of any isolation or purification.  If a structural distinction is found, the entire analysis is complete.  Because of the structural difference, the claimed molecule, by definition, is not a “product of nature,” and is thus patent-eligible.  If a claimed molecule has the same structure as its naturally-occurring counterpart in the absence of any isolation or purification, then the next step is to determine whether there is any functional difference between the two.  Only a functional difference which would not have existed “but for” the isolation or purification puts the claimed molecule outside the scope of “product of nature.”  If the claim passes both parts of the test, i.e., the claimed molecule is structurally identical to its naturally-occurring counterpart and there is no functional difference between the two which would not have existed but for the isolation or purification, then the claimed molecule is a product of nature and patent-ineligible. C.  Application of the Proposed Test Would Have Yielded Results Consistent with the Vast Majority of Relevant Case Law on Molecule Claims. Retroactive application of the proposed test to molecule-claim case law would have yielded results consistent with the vast majority of relevant cases.  For example, the claim in Cochrane would have been found invalid if the “product of nature” doctrine were forced upon it and the proposed test applied, because it would likely have passed both parts of the test, i.e., the claimed molecule is structurally no different from and is used for exactly the same purpose as its naturally-occurring counterpart in the absence of any isolation or purification – as a red dye.  In both Parke-Davis and Kuehmsted, the product claims-in-suit could not have been invalidated under the “product of nature” doctrine because the products claimed were structurally different from anything found in nature.  In In re Williams, the validity of the product claim-in-suit would have been upheld, too, if the proposed test were applied.  Structurally, the claimed molecule, the laevo rotary form of lactone, is different from its naturally-occurring counterpart, which is in racemic form.  Even if one could argue that the racemic form necessarily contains the laevo form, the laevo form has a drastically and noticeably different function from the racemic form, which would not have existed but for the purification of it from the racemic form.[FN32] The only case where the claims-in-suit are true molecule claims and application of the proposed two-part test may have yielded a result inconsistent with the decision of the court is In re Bergstrom.  In this case, the claimed PGE2 and PGE3 molecules are structurally no different from their respective naturally-occurring counterparts, and there is no evidence of any functional difference between the claimed molecules and the naturally-occurring molecules either.[FN33] The reason for the inconsistent results does not lie in the proposed test, however, but in the court’s belief that compounds that “do not exist in nature in pure form” are not “naturally occurring.”[FN34] As some of the most fervent proponents of the “product of nature” doctrine clearly pointed out, In re Bergstrom was “not a section 101 patentable subject matter case.”[FN35] The proposed test is applicable specifically to molecule claims and should not be used on claims directed to elements, because an element, when in pure form (assuming that it does not exist in nature in such pure form), can have very different functions from its status as part of a molecule, and so would have been patent-eligible under the test.[FN36] The inapplicability of the proposed test to element claims is of no significance to patent applicants today, however, because all naturally-occurring elements have been identified by now. It is also hard to apply the proposed test to claims directed to microorganisms, because microorganisms are so complex that it is meaningless to define if two are “structurally” the same.  For now, Chakrabarty has made some bright-line rules, i.e., a difference as large as a few exogenous plasmids would make a new bacterium.  It remains to be seen if any smaller difference, e.g., only one exogenous plasmid, or addition or deletion of genomic DNA sequences, or even one or more point mutations, would distinguish a bacterium from its naturally-occurring counterpart under the “product of nature” doctrine. D.  Application of the Proposed Test to the Composition Claims-in-Suit Yields a Legal Conclusion Contrary to That of Judge Sweet’s. The proposed test can be easily applied to the DNA molecule claims-in-suit in Myriad.  The claimed DNA molecules are patent-eligible because they are all structurally different from their naturally-occurring counterparts, i.e., the chromosomes on which BRCA1 and BRCA2 genes are located.[FN37].  Such structural differences are at least two-fold.  First, the sequences of the claimed DNA molecules are different from the sequences of the respective chromosomes.  For example, the specification defines “isolated DNA,” which is recited in all composition claims-in-suit, as follows: “An ‘isolated’ . . . DNA . . . is one which is substantially separated from other cellular components which naturally accompany a native human sequence or protein, e.g., ribosomes, polymerases, many other human genome sequences and proteins.”[FN38] In the case of DNA, only other sequences on the same chromosome as a certain native sequence are considered naturally accompanying that native sequence.  When a DNA molecule comprises the native sequence substantially separated from the naturally accompanying sequences, such DNA molecule cannot have the same sequence as the chromosome on which the native sequence is located. Second, the claimed DNA molecules do not contain intron sequences that are parts of the chromosomes.  Judge Sweet argues that because native, intron-containing DNAs by definition encode the BRCA1 and BRCA2 proteins, such claims as Claim 1 of the ’282 Patent and Claim 1 of the ’492 Patent read on the native DNAs and so the claimed DNAs are patent-ineligible.[FN39] This argument indeed has some merit with regard to Claim 1 of the ’282 Patent.  In contrast to that claim, the distinction between molecule and sequence in Claim 1 of the ’492 Patent helps the patentee obviate such an attack.  Native, intron-containing chromosomal DNA falls outside the scope of this claim because even though it encodes the recited polypeptide, the polypeptide is not encoded by a single nucleic acid sequence as required by the claim but collectively by a number of distinct exon sequences interspersed by the introns.  This claim represents an excellent example of how careful claim drafting can obviate a “product of nature” rejection. The claimed DNA molecules are also patent-eligible because there exist functional differences between them and their naturally-occurring counterparts, the chromosomes, which would not have existed but for the isolation.  Defendant Myriad focused on the gain of function as a result of the isolation.[FN40] The isolation also causes loss of function, e.g., the isolated DNAs no longer encode, let alone express, the hundreds of genes other than BRCA1 and BRCA2 expressed by their respective chromosomes.  Neither the gain of function nor the loss of function would have existed but for the isolation.  Therefore, the claimed DNA molecules are not products of nature and are patent-eligible. III.  Conclusion The legal history of the “product of nature” doctrine is messy, if not extremely thin.  This Note at the outset reviewed judicial opinions on the patent-eligibility and –ineligibility of various claimed subject matter related to the “product of nature” doctrine.  Of particular relevance to the DNA molecule claims in the patents-in-suit in Myriad are those cases in which the claims-in-suit were directed to molecules.  Significantly, not even one molecule claim was invalidated by courts under the “product of nature” doctrine before Judge Sweet’s opinion. Assuming the existence of the “product of nature” doctrine, this Note proposed a two-part test applicable to claims directed to molecules that would have unified the holdings of relevant case law and yielded results consistent with them, with one justified exception.[FN41] Applying the proposed test to the composition claims-in-suit in Myriad leads to only one legal conclusion – the claimed DNA molecules are not products of nature and are patent-eligible.  The key to the successful understanding and application of the proposed test is to know what the naturally-occurring counterpart is.  The Myriad court compared the sequences of the claimed molecules with certain sequences on the chromosomes.  Such comparison is fundamentally flawed.  When the claimed subject matter is a molecule, its naturally-occurring counterpart must also be a molecule, not part of a molecule, e.g., a partial sequence of a DNA molecule. Judge Sweet’s opinion has also been objected to by a wide array of educational institutions and companies in the biotech and the pharmaceutical industries, as evidenced by the vast majority of the amicus briefs filed before the Federal Circuit that are in support of reversal.  This Note did not focus on analyzing those briefs.  Rather, this Note proposed a test that can be applied to molecule claims under the “product of nature” doctrine and unify the vast majority of relevant case law.  The proposed test can, hopefully, draw some bright line in judicial determination of the patent eligibility of molecules.  
…* B.Sc., Peking University; Ph.D., Harvard University; J.D. candidate, New York University. [FN1] 35 U.S.C. § 101. [FN2] J.E.M. Ag Supply, Inc. v. Pioneer Hi-Bred Int’l, Inc., 534 U.S. 124, 131 (2001). [FN3] See, e.g., Gottschalk v. Benson, 409 U.S. 63, 67 (1972) (“Phenomena of nature, . . . mental processes, and abstract intellectual concepts are not patentable . . . .”); Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980) (“The laws of nature, physical phenomena, and abstract ideas have been held not patentable.”). [FN4] See John M. Conley & Roberte Makowski, Back to the Future: Rethinking the Product of Nature Doctrine as a Barrier to Biotechnology Patents (Part I), 85 J. Pat. & Trademark Off. Soc’y, 301 (2003) [hereinafter Conley & Makowski, Back to the Future (I)]; John M. Conley & Roberte Makowski, Back to the Future: Rethinking the Product of Nature Doctrine as a Barrier to Biotechnology Patents (Part II), 85 J. Pat. & Trademark Off. Soc’y, 371 (2003) [hereinafter Conley & Makowski, Back to the Future (II)].  Those articles discuss the patent-eligibility of “genes” and “DNA sequences.”  See, e.g., Conley & Makowski, Back to the Future (I)supra, at 309.  “Gene patenting” is simply a misnomer.  No patent claim has ever been directed to a gene, partly because the word “gene” itself has always been and will perhaps always be an indefinite word even to those skilled in the art.  See, e.g., Helen Pearson, What Is A Gene?, 441 Nature 399 (2006).  While the word “sequence” is used by many patent practitioners and appears in the preamble of many patent claims, the author of this Note takes the position that “sequence” refers only to the order in which nucleotides are arranged in a DNA molecule, and so it is the DNA molecule that should be the claimed subject matter, not any sequence.  This basic concept must be understood first before analyzing the patent-eligibility of these claims. [FN5] Ass’n for Molecular Pathology v. USPTO (Myriad), 702 F. Supp. 2d 181, 232 (S.D.N.Y. 2010). [FN6] It appears that Judge Sweet thinks that “products of nature” encompass all patent-ineligible subject matter.  See id. at 220 (“[T]he proper analysis requires determining . . . whether the claimed invention constitutes statutory subject matter . . . or whether the claimed invention instead falls within the judicially created ‘products of nature’ exception to patentable subject matter, i.e., ‘laws of nature, natural phenomenon, and abstract ideas,’ Chakrabarty, 447 U.S. at 309.”).  The author of this Note takes the position that “product of nature” is but one judicially created category of patent-ineligible subject matter, if at all.  For example, it is obvious that “product of nature” does not encompass “abstract ideas.” [FN7] Id. at 227 (quoting Chakrabarty, 447 U.S. at 310). [FN8] Id. at 229.  “BRCA1” and “BRCA2” refer to the human breast cancer susceptibility genes 1 and 2, respectively. [FN9] Id. at 218 n.40.  In particular, the claim-in-suit in Chakrabarty is directed to a microorganism.  The claims-in-suit in Gen. Elec. Co. v. De Forest Radio Co., 28 F.2d 641 (3d Cir. 1928), In re Marden, 47 F.2d 957 (C.C.P.A. 1931), and In re Marden, 47 F.2d 958 (C.C.P.A. 1931) are all directed to elements. [FN10] These categories are by no means an exhaustive list of the subject matter that may appear in patent claims where the “product of nature” doctrine may be applied.  The choice of these three categories for analysis is based on the available case law where subject matter patent-eligibility was or could have been discussed by the relevant authorities. [FN11] U.S. Patent No. 1,082,933 p.9 l.120-21 (filed Jun. 19, 1912). [FN12] See Gen. Elec. Co., 28 F.2d at 643. [FN13] Myriad, 702 F. Supp. 2d at 219 n.40. [FN14] Gen. Elec. Co., 28 F.2d at 642. [FN15] “Discoveries” is explicitly written in the “IP Clause” of the Constitution.  U.S. Const. art I, § 8, cl. 8. [FN16] See, e.g.In re Marden, 47 F.2d 957, 1046 (C.C.P.A. 1931) (“Uranium is a product of nature, and the appellant is not entitled to a patent on the same, or upon any of the inherent natural qualities of that metal.”); In re Marden, 47 F.2d 958, 959 (C.C.P.A. 1931) (“[P]ure vanadium is not new in the inventive sense, and, it being a product of nature, no one is entitled to a monopoly of the same.”). [FN17] Cochrane v. Badische Anilin & Soda Fabrik, 111 U.S. 293, 311 (1884) (“Artificial alizarine,” though “made artificially for the first time,” is “an old article” that could be “eliminated from the madder root,” and is not patentable as “a well-known substance.”).  Judged by today’s standard, the claim-in-suit is a product-by-process claim and would have been novel over the same product produced by known methods.  See Abbott Labs. v. Sandoz, Inc., 566 F.3d 1282 (Fed. Cir. 2009).  Another often cited case is American Wood-Paper Co. v. Fibre Disintegrating Co., 90 U.S. 566 (1874).  The product claim-in-suit in this case, however, is not directed to a molecule, but “a pulp suitable for the manufacture of paper.”  Id. at 594.  The claim was invalidated because the pulp was not novel.  Were it novel, it “might have been patented.”  Id. at 596.  These two cases, as some of the most fervent proponents of the “product of nature” doctrine clearly stated, “were not really product of nature cases.”  Conley & Makowski, Back to the Future (I)supra note 4, at 328 n.193. [FN18] See, e.g.In re Williams, 171 F.2d 319 (C.C.P.A. 1948) (holding that laevo rotary form of lactone was patentable over the known racemic form); In re Bergstrom, 427 F.2d 1394 (C.C.P.A. 1970) (holding that purified prostaglandins PGE2 and PGE3 were not anticipated by those previously extracted from human or animal prostate glands).  Another often cited case is Parke-Davis & Co. v. H.K. Mulford Co., 189 F. 95 (S.D.N.Y. 1911), holding that purified adrenaline in base form was not anticipated by the existence of adrenaline in suprarenal glands, because adrenaline in suprarenal glands exists as a natural salt, not in base form.  Id. at 103.  Yet another often cited case that is further removed from the “product of nature” doctrine is Farbenfabriken of Elberfeld Co v. Kuehmsted, 171 F. 887 (7th Cir. 1909) (holding that the claim directed to acetyl salicylic acid (“aspirin”), the product of a new process which for the first time produced it in a pure state and rendered it valuable for medicinal use, is valid and infringed), because aspirin is not a product of nature, but man-made. Id. at 890. [FN19] See, e.g.In re Kratz, 592 F.2d 1169, 1172 (C.C.P.A. 1979).  The “synthetically produced” limitation in the composition claim-in-suit would have brought the scope of the claim outside the ambit of “product of nature,” so that the doctrine would not have applied in this case in the first place.  Judge Sweet agreed that Kratz was not attacked or discussed as a subject matter patent eligibility case, but did not make it clear whether it could have been attacked under the “product of nature” doctrine.  Ass’n for Molecular Pathology v. USPTO (Myriad), 702 F. Supp. 2d 181, 227-28 (S.D.N.Y. 2010). [FN20] Merck & Co. v. Olin Mathieson Chemical Corp., 253 F.2d 156, 157, 164 (4th Cir. 1958); U.S. Patent No. 2,703,302 col.21, l.70 through col.22 l.6 (filed Dec. 8, 1952).  The claims-in-suit are not really molecule claims, as evidenced by the highlighted plural form of “products.”  The court also agreed that the claimed composition was not pure.  Merck & Co., 253 F.2d at 160. [FN21] Amgen, Inc. v. Chugai Pharmaceutical Co., 927 F. 2d 1200, 1202, 1204, 1206 (Fed. Cir. 1991).  To ensure consistency and to minimize confusion, the claim should have been drafted to be directed to a purified and isolated DNA molecule.  See supra note 4. [FN22] Schering Corp. v. Amgen Inc., 222 F.3d 1347 (Fed. Cir. 2000); Schering Corp. v. Amgen Inc., 18 F. Supp. 2d 372, 400 (D. Del. 1998). [FN23] Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 128 n.1, 132 (1948). [FN24] See id. at 128 n.1. [FN25] See id. at 131 (“The combination of species produces no new bacteria, no change in the six species of bacteria, and no enlargement of the range of their utility. . . . Their use in combination does not improve in any way their natural functioning.”).  This language suggests that once the conditions expressed in the negative are met, the subject matter may be patent-eligible. [FN26] A plasmid is a kind of DNA molecule. [FN27] Diamond v. Chakrabarty, 447 U.S. 303, 305 (1980). [FN28] See supra note 25 and accompanying text. [FN29] See supra notes 23-25 and accompanying text.  Contra Conley & Makowski, Back to the Future (II)supra note 4, at 376. [FN30] Chakrabarty, 447 U.S. at 310. [FN31] Myriad, 702 F. Supp. 2d at 228-29 (“[DNAs] are physical carriers of information . . . . This informational quality is unique among the chemical compounds found in our bodies, and it would be erroneous to view DNA as ‘no different[]’ than other chemicals previously the subject of patents.  Myriad’s argument that all chemical compounds . . . necessarily conveys [sic] some information ignores the biological realities of DNA in comparison to other chemical compounds in the body.  The information encoded in DNA is not information about its own molecular structure incidental to its biological function . . . .  Rather, the information encoded by DNA reflects its primary biological function: directing the synthesis of other molecules in the body – namely, proteins . . . .”) (second alteration in original) (emphasis in original) (footnote omitted) (citations omitted) (internal quotation marks omitted).  While there is no doubt that DNA’s function as a carrier of genetic information is of great importance, this function is determined by its molecular structure.  After all, the course that teaches DNA and the central dogma is called Molecular Biology, not Informational Biology.  No molecular structure is incidental to the molecule’s biological function; the molecular structure at least in part determines the biological function.  The biological function may be directing the synthesis of proteins, as in the case of DNA molecules, or binding some targets in the body, as in the case of many other biologically active chemical compounds.  The ability of a certain chemical compound to bind some targets and not others is also information about other molecules in the body.  Such information is the subject of study in the fields of chemoinformatics and pharmacoinformatics.  Even though this information is not “genetic” information, it nevertheless is of great importance to our understanding of the human body. [FN32] The laevo rotary form of a compound has the property of deflecting polarized light to the left, while the racemic form produces no deflection of polarized light.  In re Williams, 171 F.2d 319 (C.C.P.A. 1948). [FN33] In re Bergstrom, 427 F.2d 1394, 1398, 1402 (C.C.P.A. 1970). [FN34] Id. at 1401. [FN35] Conley & Makowski, Back to the Future (II)supra note 4, at 387-88. [FN36] For example, pure tungsten has ductility and high tensile strength not observed in a tungsten compound.  See supra note 11 and accompanying text. [FN37] A chromosome is a naturally-occurring DNA molecule. [FN38] U.S. Patent No. 5,747,282 (filed Jun. 7, 1995) (the “’282 Patent”) col.19 l.8-18; U.S. Patent No. 5,837,492 (filed Apr. 29, 1996) (the “’492 Patent”) col.17 l.62 through col.18 l.5 (emphasis added). [FN39] Ass’n for Molecular Pathology v. USPTO (Myriad), 702 F. Supp. 2d 181, 230 (S.D.N.Y. 2010); ’282 Patent col.153 l.56-58 (“An isolated DNA coding for a BRCA1 polypeptide, said polypeptide having the amino acid sequence set forth set forth in SEQ ID NO:2.”); ’492 Patent col.167 l.16-19 (“An isolated DNA molecule coding for a BRCA2 polypeptide, said DNA molecule comprising a nucleic acid sequence encoding the amino acid sequence set forth in SEQ ID NO:2.”) (emphasis added). [FN40] See Myriad, 702 F. Supp. 2d at 230-31 (quoting Myriad Defendants’ Memorandum in Reply to Plaintiffs’ Opposition to Myriad Defendants’ Motion for Summary Judgment at 9, Myriad, 702 F. Supp. 2d 181 (No. 109CV04515)). [FN41] See supra notes 33-35 and accompanying text.

What Are the Constitutional Limits on Awards of Statutory Damages?

By Andrew Berger* A pdf version of this article may be downloaded here. Tenenbaum Finds That a Jury’s Award Within the Statutory Range Violates Due Process In July 2010 Judge Nancy Gertner in Sony BMG Music Entertainment et al. v. Tenenbaum, did what no court has ever done before. The court held the jury’s statutory damages award of $675,000 violated the Due Process Clause even though the award was within the statutory range set by Congress.[FN1] The court stated that the “award is far greater than necessary to serve the government’s legitimate interests in compensating copyright owners and deterring infringement.”[FN2] Judge Gertner slashed the award by 90% to $2,250 per work infringed for a total of $67,500. Tenenbaum thus becomes the first file sharing case to reach an appellate court following trial. Why this Constitutional Attack on Statutory Damages? Will Judge Gertner’s decision withstand appeal? Why are statutory damages, so long a staple of copyright litigation, now under increased constitutional scrutiny? For answers we need to go back a bit into history. For many years tort defendants complained that awards of punitive damages were unpredictable and imposed crippling financial burdens. Mindful of these concerns, the Court in the late 1980’s started to question whether these “skyrocketing” awards might adversely impact “research and development of new products.”[FN3] Gore Finally in 1996 the Court in BMW of North America, Inc. v. Gore held unconstitutional a jury’s award of punitive damages.[FN4] There an Alabama jury awarded plaintiff $4,000 in compensatory damages and $4 million in punitive damages based on BMW’s failure to disclose that plaintiff’s supposedly “new” car had been repainted before he bought it.[FN5] The Alabama Supreme Court reduced the punitive damages award to $2 million, representing a ratio of punitive to compensatory damages of 500:1.[FN6] Despite this reduction, the Supreme Court held the award violated due process. The Court acknowledged that “[p]unitive damages may further a State’s legitimate interests in punishing unlawful conduct and deterring its repetition” and that “only an award that is ‘grossly excessive’ in relation to these interests” would violate due process.[FN7] Gore then set forth three criteria, often referred to as “the Gore guideposts,” to assist court in determining if a punitive damage award comports with due process: (1) The degree of reprehensibility of defendant’s misconduct; (2) The disparity or ratio between the actual or potential harm suffered by plaintiff and the punitive damages award; and (3) The difference between the punitive damages awarded by the jury and civil penalties authorized or imposed in comparable cases.[FN8] Campbell Thereafter in State Farm Mutual Automobile Insurance Co. v. Campbell the Court, applying these three guideposts, concluded that a punitive damages award of $145 million, compared with actual damages of $1 million, “was an irrational and arbitrary deprivation of the property of the defendant.”[FN9] Although Campbell expressly declined to create a bright-line constitutional limit to the punitive-to-compensatory damages ratio, the Court expressed a general preference for single-digit ratios.[FN10] Do the Gore Guideposts Apply to Test the Constitutionality of a Statutory Damages Award in Copyright Cases? Following Gore and State Farm, courts uniformly opted not to apply the Gore framework to test the constitutionality of statutory damages awards in copyright cases.[FN11] Instead, post-Gore cases preferred to assess constitutionality by applying the standards set forth years earlier by the Court in St. Louis, I.M. & S. Ry. Co. v. Williams.[FN12] In Williams, the Court considered whether a jury’s award within a statutorily prescribed range violated the due process clause. In that case, a railroad charged two sisters 66 cents each more than the statutorily prescribed fare. A state statute sought to deter over-charges by providing for statutory damages between $50 and $350 for each violation. The sisters sued and received statutory damage awards of $75 apiece — 114 times more than the 66 cents in damages each had incurred. Williams held that award constitutional. The Court stated that the validity of the awards should not be tested by comparing the small amount of the overcharges with the magnitude of the judgments.[FN13] Instead, the Court, in assessing the awards’ constitutionality examined whether the statutory scheme appropriately responded to “the interests of the public, the numberless opportunities for committing the offense, and the need for securing uniform adherence to established passenger rates.”[FN14] Williams stated that an award would only violate due process if it were “so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.”[FN15] The Court expressly rejected defendant’s attempt to test the constitutionality of the “large” penalty by comparing it with the actual damage, stating that statutory remedies for “public wrongs” are not required to “be confined or proportioned to [plaintiff’s] loss or damages.”[FN16] Williams added that when comparing the size of an award against the gravity of the offense, a court must bear in mind that legislatures “still possess a wide latitude of discretion” when setting statutory damages.[FN17] Zomba Zomba v. Panorama, supra, is representative of the post-Gore cases applying Williams to test the constitutionality of a statutory damages award. In Zomba the 6th Circuit found that a statutory damages verdict of $806,000 (44 times actual damages) was constitutionally permissible.[FN18] Zomba acknowledged Campbell’s preference for a lower punitive-to-compensatory ratio.[FN19] But Zomba noted that Campbell did not deal with statutory damages and therefore Zomba said it would follow Williams until the Court held otherwise.[FN20] Tenenbaum But Tenenbaum did not wait for the Court. Instead, Judge Gertner applying the Gore framework, held unconstitutional the jury’s verdict of $675,000.Tenenbaum added that even under Williams the award was “so severe and oppressive as to be wholly disproportioned to the offense and obviously unreasonable.”[FN21] Do the Gore Guidelines Apply Here? The Gore guidelines are an ill-fit to test the constitutionality of a statutory damages award for a number of reasons. Before focusing on each guideline, I began with some overall considerations. Courts such as Gore review punitive damages to establish whether a defendant had fair notice of the size of a potential award and to create an outer limit on the jury’s unrestrained discretion to impose punitive damages. But in the statutory damages context concerns about fair notice and unbounded liability are inapplicable. The Copyright Act already gives notice of the potential award and sets a statutory range within which it must fall.[FN22] Further, punitive damages serve a singular purpose: to punish in amounts that are not constrained. But statutory damages in copyright litigation serve other purposes besides punishment: to compensate, impose appropriate damages on wrongdoers, deter future infringements and promote the creation of intellectual property.[FN23] In addition, statutory damages are expressly authorized by Congress, which makes their review a question of the scope of Congress’ legislative authority. Punitive damages, by contrast, are typically awarded by juries without explicit statutory authorization or limitations and thus present no basis upon which courts could easily defer to legislative judgments. Moreover, the Gore guideposts compensate for the absence of legislative guidance. Courts apply them to facilitate judgments the legislature never made. But the present statutory damages scheme is the result of a long history of Congressional action. That scheme already gives guidance regarding the appropriate range of statutory damages. Therefore, a within-statutory-range-verdict is entitled to substantial deference. The Three Guideposts Turning to the specific guideposts: The first guidepost, the degree of defendant’s reprehensibility, has no role to place in a constitutional review of statutory damages because reprehensibility is already embraced and calibrated in the Copyright Act. An innocent infringer risks damages of no less than $200. A non-willful infringer faces damages of no more than $30,000; and a willful infringer risks a maximum of $150,000 per infringed work. Because Congress has already crafted these limits, a court’s role should be limited to reviewing the rationality of Congress’ statutory scheme. That is why Williams instructs courts to examine the reasonableness of Congress’s determination, giving deference to its assessment of the “interests of the public, the numberless opportunities for committing the offense, and the need for securing uniform adherence” to the law.[FN24] The second Gore guidepost weighs the relationship between the punitive award and the actual harm. But this guidepost has no application to statutory damages in copyright litigation for a number of reasons. First, statutory damages may be awarded, as Tenenbaum acknowledged, without any showing of harm.[FN25]Second, § 504(c) of the Copyright Act does not condition the availability of statutory damages on proof of actual damages. Instead, the statute permits a copyright owner to recover statutory damages “instead of actual damages and profits.” And as Judge Gertner acknowledged “every authority [before Tenenbaum] confirms what the language of section 504 indicates — statutory damages may be elected even if the plaintiff cannot, or chooses not to, prove” actual damages.[FN26] Third, Williams forecloses any attempt to compare an award’s ratio to actual damages stating that statutory damages must not “be confined or proportioned to [plaintiff’s] loss or damages.”[FN27]Instead, Williams holds that “the Legislature may adjust [the award’s amount] to the public wrong rather than the private injury.”[FN28] Lastly, requiring proof of actual damages subverts a purpose of statutory damages which relieves the copyright holder of the sometimes impossible burden of proving actual damages.[FN29] The third Gore guidepost judges the propriety of the statutory damages award by focusing on its relationship with the applicable civil penalty. But this guidepost is irrelevant in this constitutional analysis because the award is, by definition, the applicable civil or statutory penalty. The Court Created a Safe Harbor for College-Age File Sharers Judge Gertner admitted that this third guidepost was “the most troublesome for Tenenbaum.”[FN30] Nevertheless, Tenenbaum sidestepped this troublesome fact by reaching an extraordinary conclusion. The court stated that there was “substantial evidence indicating that Congress did not contemplate that the Copyright Act’s broad statutory damages provision would be applied to college students like Tenenbaum who file-shared without any pecuniary gain.”[FN31] The court repeated its bizarre conclusion, “[i]n fact, a careful review of section 504(c)’s legislative history suggests that Congress likely did not foresee that statutory damages awards would be imposed on noncommercial infringers sharing and downloading music through peer-to-peer networks.”[FN32] No doubt collegiate music file sharers are loudly toasting this result. But the “substantial evidence” and the “legislative history” the court relied on consisted of off-hand, post-hoc comments made by Senators Hatch and Leahy at hearings held after Congress passed that statue.[FN33] In fact, the legislative history of the aptly-named the Digital Theft Deterrence and Copyright Damages Improvement Act of 1999[FN34] (the “Digital Act”) demonstrates the opposite—that it addressed the growing online theft of intellectual property by all infringers, commercial or not. Congress expressed the need for this legislation in words that echo Tenenbaum’s conduct:
By the turn of the century … the development of new technology will create additional incentives for copyright thieves to steal protected works. Many computer users … simply believe that they will not be caught or prosecuted for their internet conduct. Also many infringers do not consider the current copyright infringement penalties a real threat and continue infringing even after a copyright owner puts them on notice.[FN35]
The text of the Digital Act (which amended the Copyright Act) does not distinguish between classes of infringers, much less immunize file sharers from statutory damages. Nor does § 504 (a)(2) of the Copyright Act. Instead, that section exposes any “infringer of copyright” to liability “for … statutory damages, as provided.” Further, courts resort to legislative history to divine the meaning of an otherwise ambiguous statutory provision, not to create ambiguity where none exists.[FN36] Because the statutory language was plain, Tenenbaum should not have examined congressional intent, much less relied on informal comments from two Senators made after the Digital Act was enacted.[FN37] Further, if the court were correct that the Copyright Act was not intended to apply to collegiate file sharers, the logical result would have been to find that the verdict violated that Act.[FN38] But the court expressly recognized that the Act unambiguously authorized the jury’s award. Nonetheless, after acknowledging that it “must give effect to this clear statutory language,”[FN39] the court flip flopped stating that § 504(c) “does not embody” any judgment to which the court could defer.[FN40] Tenenbaum’s Damage Calculation Was Equally Problematic Tenenbaum took another unusual turn by setting the damages at $2,250 per work. The court first determined that the actual damage Tenenbaum caused the labels was $1 per song.[FN41] This figure ignores the wide distribution Tenenbaum made of the downloaded songs to an untold number of others, File sharing essentially places the songs in the public domain. Then Tenenbaum purported to rely on the doctrine of treble damages under which a court may increase the award by three times the amount of actual damages.[FN42] But instead of trebling this $1 figure, Tenenbaum trebled $750, which is the minimum amount of statutory damages permitted under the Copyright Act for any infringement other than one done innocently. In other words, the court did not treble the amount of actual damages of $1 per infringed song it determined the labels had suffered. The court instead multiplied its determination of actual damages by 2,250 to reach the damage amount of $2,250 per work, an amount that under the circumstances appears arbitrary. The Verdict Passes Muster Under Williams The jury’s verdict in Tenenbaum, although substantial, fits comfortably within the Williams framework. That case requires deference to the legislature’s “wide latitude of discretion” in responding to public wrongs.[FN43] Under Williams, a court must defer to Congress’ judgment in assessing “the interests of the public, the numberless opportunities for committing the offense, and the need for securing uniform adherence to establish [law].”[FN44] So long as the statutory damages scheme adequately addresses these concerns, that scheme satisfies due process. Here the jury’s award of $22,500 per song award is toward the low end of the willful infringement range (which extends upward to $150,000 per work) and was 15% of the maximum of $4.5 million the jury could have been assessed. It therefore seems not “obviously unreasonable” or “oppressive” considering there is nothing unconstitutional about an award greater than the quantifiable harm and further considering that the jury’s award was an appropriate response to Tenenbaum’s near decade of willful conduct. As the district court noted, Tenenbaum started file sharing in 1999 and continued through 2007, “downloading thousands of songs for free and without authorization.” Tenenbaum “was aware his conduct was illegal” and even continued it after receiving a cease and desist letter. When sued he tried to shift responsibility for his downloading to others and lied during his “sworn responses to discovery requests” and “made several misleading or untruthful statements in his deposition testimony.”[FN45] The record labels should not be faulted for being unable to quantify the extent of injury Tenenbaum caused. The nature of peer-to-peer file sharing technology Tenenbaum used made that showing nearly impossible. Peer-to-peer networks operate without any centralized control or oversight. They allow computer users to transfer music files directly to their peers without the knowledge of third parties. As the jury may have determined, Tenenbaum should not avoid the consequences of his misconduct simply because he made it difficult for the labels to quantify injury.[FN46] Music piracy is a major problem in this country robbing the economy of billions each year.[FN47] If piracy is to ever end, large verdicts of the kind meted out in Tenenbaum may be necessary. What Are the Consequences If Tenenbaum Is Affirmed on Appeal? Affirming the result in Tenenbaum will negatively impact copyright enforcement for years to come for a number of reasons. First, affirmance will cause many meritorious copyright claims never to be litigated. That is because Tenenbaum, contrary to the Copyright Act, requires copyright owners to prove actual damage as a pre-condition to recovering statutory damages. But many copyright holders will be unable to show actual damages. The value of a copyright, especially at inception, is often impossible to estimate. How much is an unpublished novel by a first-time author worth? Second, removing the teeth from the statutory damage scheme, which is what Judge Gertner essentially did, relegates litigants to actual damages. But they are often inadequate for a number of reasons. First, actual damages may be less than the cost of detecting, investigation and, for sure, litigating. So why bother? Second, actual damages, often requiring extensive accounting analysis, may be prohibitively expensive to prove. Third, although actual damages in copyright litigation include the infringer’s profits attributable to the infringement, there may be none to collect either because an infringer earned none, conveniently lost its sales records or never kept any. What Will Be the Eventual Outcome? Predictions about how the Court might rule should this case reach the high court are not for the faint of heart. But, as Justice Ginsburg noted in Eldred v. Ashcroft,[FN48] albeit in a different context, the Court has been “deferential to the judgment of Congress in the realm of copyright.” I suggest that that deference will continue should the Court ever weigh the constitutionality of the jury’s award in Tenenbaum.[FN49] But at the same time the Court may wish to update its constitutional analysis of statutory damages in the copyright context. Williams is nearly a century old. The internet, new technologies and the ease and frequency of downloading have now reshaped the copyright landscape. Further, copyright holders are in many cases no longer interested in protecting their exclusive rights. Instead, they now place their works on social media sites with every expectation and hope that they will be copied, adapted, modified, published, transmitted and displayed to an untold number of others by any means of distribution now know or later created. These copyright holders who freely share their works often advocate and expect that others will do the same. This advocacy is not likely to lead to changes in the Copyright Act. But it may continue to influence the judicial response to infringement as it did in the district court’s opinion in Tenenbaum.  
* Mr. Berger is counsel to the New York firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP where he specializes in copyright and trademark infringement litigation. He also publishes an intellectual property blog called IP In Brief at www.ipinbrief.com. [FN1] 721 F. Supp. 2d 85 (D. Mass. 2010). [FN2] Id. at 89. [FN3] Browning-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 282 (1989) (O’Connor, J., concurring in part & dissenting in part);Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1, 23 (1991) (Punitive damage award that was more than 4 times the amount of compensatory damages came “close to the line.”). [FN4] 517 U.S. 559 (1996). [FN5] 646 So. 2d 619 (Ala. 1994). [FN6] Id. at 629. [FN7] 517 U.S. at 568. [FN8] Id. at 574-84. [FN9] 538 U.S. 408, 429 (2003). [FN10] Id. at 425. [FN11] See, e.g., Lowry’s Reports, Inc. v. Legg Mason, Inc., 302 F. Supp. 2d 455, 460 (D. Md. 2004); Zomba Enters, Inc. v. Panorama Records, Inc., 491 F.3d 574, 587 (6th Cir. 2007) (Noting that Gore and State Farm’s application to statutory damages for copyright infringement was questionable); Arista Records LLC v. Usenet.com, Inc., 2010 WL 3629587 at *4-*5 (S.D.N.Y. Sept. 16, 2010) ($6,585,000 award did not violate due process); Propet USA, Inc. v. Shugart, 2007 WL 4376201 at *2-*3 (W.D. Wash. Dec. 13, 2007) ($500,000 statutory damages award for copyright infringement—“some forty times … actual damages”—not unconstitutionally excessive). [FN12] 251 U.S. 63 (1919). [FN13] Id. at 67. [FN14] Id. [FN15] Id. [FN16] Id. [FN17] Id. at 66. [FN18] 491 F.3d at 587-88. [FN19] Id. at 587. [FN20] Id. [FN21] 721 F. Supp. 2d at 116. [FN22] Plaintiffs-Appellants Opening Brief to the First Circuit in Tenenbaum at 38-9 (“Plaintiffs’ Brief”). [FN23] See, e.g., F.W. Woolworth Co. v. Contemporary Arts Inc., 344 U.S. 228, 233 (1952) (“The statutory rule, formulated after long experience, not merely compels restitution of profit and reparation for injury but also is designed to discourage wrongful conduct.”); Feltner v. Columbia Pictures Television Inc.,523 U.S. 340, 352, (1998) (“[A]n award of statutory damages may serve purposes traditionally associated with legal relief, such as compensation and punishment.”); Fitzgerald Publishing Co. v. Baylor Publishing Co., 807 F. 2d 1110, 1117 (2d Cir.1986) (“[T]he expenses saved and the profits reaped by the infringers are considered” as are “the revenues lost by the plaintiff . . . the value of the copyright, . . .and the deterrent effect on others besides the defendant.”); Stevens v. Aeonian Press, 64 USPQ2d 1920, 1921 (S.D.N.Y.2002) (“In making such an award [of statutory damages], the Court is required to consider various factors, including . . . the revenues lost by the Plaintiffs, the value of the copyright, the deterrent effect of the award on other potential infringers, and factors relating to individual culpability.”). [FN24] 251 U.S. at 67; Plaintiffs’ Brief at 41-2. [FN25] 721 F. Supp. 2d at 87; see also, F.W. Woolworth Co. v. Contemporary, supra, 344 U.S. at 233 (“Even for uninjurious and unprofitable invasions of copyright the court may, if it deems just, impose a liability within statutory limits to sanction and vindicate the statutory policy.”); Superior Form Builders, Inc. v. Dan Chase Taxidermy Supply Co., Inc., 74 F.3d 488, 496 (4th Cir.), cert. den., 519 U.S. 809 (1996) (Affirming then-maximum statutory damages award of $100,000 per infringement despite plaintiff’s inability to identify damages or lost profits and even though defendant’s revenues from the infringing sales only totaled $10,000); [FN26] Tenenbaum, supra, 721 F. Supp. 2d at 92. [FN27] Williams, 251 U.S. at 66. [FN28] Id. [FN29] Congress enacted statutory damages because “actual damages are often conjectural, and may be impossible or prohibitively expensive to prove.” Staff of H. Comm. on the Judiciary, 87th Cong., Copyright Law Revision: Report of the Register of Copyrights on the General Revision of the U.S. Copyright Law at 102. [FN30] 721 F. Supp. 2d at 103. [FN31] Id. at 89. [FN32] Id. at 104. [FN33] Id. at 106-07. [FN34] Pub. L. No. 106-160, 113 Stat. 1774. [FN35] H.R. Rep. 106-216 at 3. [FN36] See Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994). [FN37] See, e.g., Connecticut Nat’l Bank v. Germain, 503 U.S.249, 253-54 (1992) (“We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. When the words of a statute are unambiguous, then, this first canon is also the last: judicial inquiry is complete.” (internal quotations and citations omitted)). [FN38] See Plaintiffs’ Brief at 33. [FN39] 721 F. Supp. 2d at 107 [FN40] Id. [FN41] Id. at 112. [FN42] Id. at 117. [FN43] 251 U.S. at 66. [FN44] Id. at 67. [FN45] 721 F. Supp. 2d at 90-91. [FN46] See Bigelow v. RKO Radio Pictures, 327 U.S. 251, 264 (1946). [FN47] The Record Industry Association of America quotes with approval a source stating that U.S. internet users annually consume between $7 and $20 billion worth of digitally pirated recorded music. http://www.riaa.com/faq.php, last visited February 17, 2011. [FN48] 537 U.S. 186, 198 (2003). [FN49] Pamela Samuelson & Ben Sheffner, Debate, Unconstitutionally Excessive Statutory Damage Awards in Copyright Cases, 158 U. PA. L. REV. PENNUMBRA 53, 62 (2009), http://www.pennumbra.com/debates/pdfs/CopyrightDamages.pdf.

Substantial Disparity: Copyright Chaos in the Second Circuit

By Graham Ballou* A pdf version of this article may be downloaded here. In Our Bizarre System of Copyright Infringement, Mark Lemley argues that copyright law is exactly backwards: we should allow the jury to decide whether a defendant has copied the plaintiff’s work as a factual matter, and leave the question of improper appropriation to experts.[FN1] Expert testimony on substantial similarity would, at the least, clear judicial fog at this stage of a copyright infringement analysis: courts could abandon the fiction of an objective, “ordinary observer” perspective – the controlling test for substantial similarity – and allow specialists to conduct what is in fact a highly technical analysis.  But Lemley overlooks two realities of our copyright system.  First, the court – not the jury – most often has the final word on substantial similarity.  If a defendant loses at trial, she can seek de novo review of this issue.[FN2] Second, courts’ decisions on substantial similarity are much less technical than their elaborate rhetoric would suggest.  Despite the myriad judicial tests that courts employ – from “ordinary observer” to “more discerning ordinary observer,” from “filtration” to “total concept and feel” – their decisions ultimately stampede a formal analytical framework in favor of a basic “we know it when we see it” approach. Part I of this paper gives a brief overview of the Second Circuit’s substantial similarity doctrine.  Part II examines application of this doctrine at the district court level, where summary judgment opinions from 2008 to 2010 display wide judicial latitude in the framing of the test.  In Part III, I propose an alternative.  Rather than allow expert testimony at this stage of an infringement analysis, copyright law should discourage summary judgment on and de novo review of substantial similarity.  By empowering the jury on this inherently subjective question, courts would free themselves of what has become an unworkable doctrine. I.  Substantial Similarity in the Second Circuit A. The Ordinary Observer In Arnstein v. Porter, a 1946 case that remains good law today, Judge Frank held that the test for substantial similarity “is the response of the ordinary lay hearer.”[FN3] Plaintiff Arnstein, a serial litigant, had accused Cole Porter of stealing his songs.  The Court heard expert testimony on whether Porter, as a factual matter, copied Arnstein’s works.[FN4] But as to whether such copying touched the protectable elements of Arnstein’s expression, and therefore rose to improper appropriation, it deemed expert testimony inapplicable.[FN5] “The question…is whether defendant took from plaintiff’s work so much of what is pleasing to the ears of lay listeners, who comprise the audience for whom such popular music is composed, that defendant wrongfully appropriated something that belongs to plaintiff.”[FN6] The perspective of this lay observer remains the primary lens through which courts examine substantial similarity.  The contemporary framing of this test asks “whether ‘the ordinary observer,’ unless he set out to detect the disparities [between the parties’ works], would be disposed to overlook them, and regard their aesthetic appeal as the same.”[FN7] When the allegedly infringed work contains both protectable and unprotectable expression, the Second Circuit uses a “more discerning ordinary observer” test.[FN8] Under this heightened level of scrutiny, a court “must attempt to extract the unprotectable elements from…consideration and ask whether the protectable elementsstanding alone, are substantially similar.”[FN9] Unfortunately, the central assumption of this test – that certain works contain unprotectable expression, and others do not – creates a problem.  In a literal sense, every work incorporates unprotectable expression, if a court only examines the work at a sufficiently high level of detail.  Even though the substance of Starry Night is “original” to van Gogh, for example, he could not claim protection in the blue-white swirl of brushstrokes used to depict the Milky Way.  This element is an “idea,” not “expression,” and therefore unprotectable.   But should its presence in the painting, all other factors aside, require a court to view the work with a “more discerning” eye?  Whether the “more discerning” test should apply begs the very question that the substantial similarity test purports to address.  It forces a game of line drawing between idea and expression, but rehashes the analysis as a threshold inquiry. Two examples illustrate the problem.  In Knitwaves, Inc. v. Lollytogs Ltd. (Inc.),[FN10] the defendant urged the Court to apply the “more discerning” test to plaintiff’s designs for children’s sweaters, which “incorporated design elements intended to express a ‘fall’ motif, such as leaves, acorns, squirrels, and the like.”[FN11] Though these elements, standing alone, are unprotectable, the Court applied only the “ordinary observer” test because the plaintiff had claimed protection in the combination of these elements, which in fact was protectable.[FN12] The Court distinguished Folio Impressions, Inc. v. Byer California, a previous Second Circuit decision and the origin of the “more discerning” language.[FN13] Folio Impressions concerned fabric designs of stylized roses on a complex background that the designer had photocopied from a document in the public domain.[FN14] The Folio Court “extracted” this photocopied background and compared only the remaining elements of the plaintiff’s work to the defendant’s, concluding that the two works were not substantially similar.[FN15] The plaintiff’s sweater designs in Knitwaves, on the other hand, contained no such wholesale appropriation of unprotected expression.[FN16] Knitwaves, then, suggests that the “more discerning” test only applies where (i) plaintiff has appropriated expression verbatim from the public domain and (ii) plaintiff claims protection in the elements themselves, not in their selection and arrangement. In contrast, the Court in Laureyssens v. Idea Group, Inc.[FN17] interpreted Folio Impressions as requiring the “more discerning” test where functional considerations lead designers to certain inevitable choices.  These choices result in design elements that the “more discerning” observer must overlook – here, the shapes of plaintiff’s three-dimensional puzzles.  The Court wrote, “[I]n order to express the idea of a perfect hollow cube puzzle that can also be assembled in flat form, a designer must use pieces that interlock through fingers and notches cut at right angles.”[FN18] Applying the “more discerning” test, the Court found no substantial similarity.  Yet the rationale at work in this decision – that the “more discerning” test applies when the plaintiff claims protection in functional elements of a chosen subject – sits uneasily alongside that of Knitwaves.  Starry Night once again illustrates the tension.  The Knitwaves Court would deem the “more discerning” test inappropriate; though van Gogh’s use of a blue-white swirl to depict the Milky Way is unprotectable, he did not “extract” this expression wholesale from the public domain.  The Laureyssens Court, however, would interpret this same element as necessary to van Gogh’s choice of subject matter – an impressionistic rendition of a starry sky.  The “more discerning” test would therefore apply. B. Filtration Regardless of whether a court adopts the “ordinary observer” or “more discerning” perspective, the mandate of copyright law – to protect original expression, but not ideas[FN19] – requires the factfinder to compare only the protectable elements of plaintiff’s expression to the defendant’s alleged copy.  “Filtration,” or the process of separating protectable from unprotectable expression, and has its roots in a 1930 opinion from Judge Hand:
Upon any work…a great number of patterns of increasing generality will fit equally well, as more and more of the incident is left out.  The last may perhaps be no more than the more general statement of what the [work] is about, and at times might consist only of its title; but there is a point in this series of abstractions where they are no longer protected, since otherwise the [author] could prevent the use of his “ideas,” to which, apart from their expression, his property is never extended.[FN20]
The modern incarnation of Judge Hand’s abstractions formula is more technically refined but no less arbitrary.  Williams v. Crichton, a literary infringement case, typifies the analysis.  After the release of the film Jurassic Park, Williams sued a host of defendants for infringing his copyright in several fictional children’s books.[FN21] With titles like Dinosaur World and Lost in Dinosaur World, the plaintiff’s books described the adventures of Young Tim in “an imaginary present day man-made animal park for dinosaurs.”[FN22] The district court awarded summary judgment for defendants, and Williams appealed. After referencing Judge Hand’s “abstractions” formula, the Court identified the proper level of “generality” from which to analyze the works.  Though the works seemed analogous at first blush, the Court overlooked broad similarities and focused on discrete elements – theme, characters, plot, sequence, pace, and setting – and filtered unprotected expression from the plaintiff’s works at each turn.  It dismissed any similarity between the works’ themes, for example, because the similarities related only to the “unprotectable idea of a dinosaur zoo.”[FN23] It dismissed similarities in settings with equal brevity, based on the somewhat arbitrary level of abstraction at which it chose to examine to examine this element: “While both the Dinosaur World books and the Jurassic Park works share a setting of a dinosaur zoo or adventure park, with electrified fences, automated tours, dinosaur nurseries, and uniformed workers, these settings are classic scenes à faire that flow from the unprotectable concept of a dinosaur zoo.”[FN24] The Court arrived at similar conclusions as regards characters and plots.[FN25] At each stage in its analysis, then, the Court first determined which level of “abstraction” should govern, and this decision itself controlled its finding on substantial similarity. Returning once more to Starry Night, we can draw two conclusions.  First, as a practical matter, the distinction between the “ordinary observer” and “more discerning” perspective matters little to the ultimate conclusion of fact, provided a court incorporates some variation of the filtration process.  If a court were to follow Knitwaves and consider Starry Night from the less exacting “ordinary observer” perspective, it would still, as part of the filtration process, exclude van Gogh’s blue-white swirl of brush strokes before comparing his work to the defendant’s.  As such, the “more discerning” test is largely a judicial fiction, in that a court should arrive at the same result regardless of which perspective it adopts.  Second, the amount of protection available to van Gogh depends entirely on an “arbitrary” exercise of judicial discretion.  A court might define the level of generality appropriate to Starry Night broadly – as a painting of Saint-Rémy, at night, in heavy brush strokes – and thereby award van Gogh a virtual monopoly over the subject matter.  More likely, of course, the court would define the level of generality in narrower terms, and compare Starry Night to an alleged infringement in such details as van Gogh’s precise framing of the town, his inclusion of a cypress tree in the foreground, the number of homes that appear in the work, etc.  The Second Circuit’s filtration doctrine provides no guidance as to where, between these extremes of generality, a court should situate the analysis. C. Total Concept and Feel In 1970, Roth Greeting Cards accused the United Card Company of copying seven of its greeting card designs.[FN1] The district court found that Roth’s designs lacked copyrightable expression, and dismissed.[FN26] The Ninth Circuit reversed, and in its opinion devised a tool for substantial similarity analysis that runs contrary to that most basic tenet of copyright law – that copyright does not protect ideas.  Ever since, the “total concept and feel” test (“TC&F”), as it is known, has allowed courts in certain circumstances to avoid the difficult line drawing between expression and idea. The Roth Court first admitted that the actual text of plaintiff’s greeting cards – “common and ordinary English words and phrases” – was in the public domain prior to plaintiff’s use and thus not original expression.[FN27] Roth, however, did not seek protection in the phrases themselves, but rather in the “arrangement of the words, their combination and plan, together with the appropriate art work” contained therein.[FN28] After agreeing with the district court that the specific elements of Roth’s cards, taken alone, were unprotectable,[FN29] the Court nonetheless held for the plaintiff on account of the cards’ overall similarities: “It appears to us that in total concept and feel the cards of United are the same as the copyrighted cards of Roth…[T]he characters depicted in the art work, the mood they portrayed, the combination of artwork conveying a particular mood with a particular message, and the arrangement of the words on the greeting card are substantially the same as in Roth’s cards.”[FN30] The filtration test would have required the Court to overlook each of these discrete elements in comparing the parties’ works.  Indeed, the “total concept and feel” of Roth’s greeting cards would have struck Judge Hand as an untenably “high” level of generality at which to compare the designs.  TC&F, by contrast, allowed the Ninth Circuit to sidestep the strictures of filtration and reach what it viewed as an equitable decision – but a decision precluded by copyright doctrine to date.  In essence, its TC&F analysis took to an extreme the Arnstein proposition that substantial similarity should be judged from the perspective of a lay observer. Professor Nimmer traces the Second Circuit’s first use of TC&F to a 1976 case involving a children’s book.[FN31] Plaintiff, author of My Mother Is the Most Beautiful Woman in the World, claimed that the producers of Sesame Street had copied her book in a televised skit.[FN32] Both parties’ works, it turns out, were based on an underlying story in the public domain.[FN33] But the Court’s substantial similarity analysis mirrored that in Roth: “We must first note that both stories, intended for children, are necessarily less complex than some other works submitted to the pattern analysis [from Nichols]…Therefore, in addition to the essential sequence of events, we might properly consider the ‘total concept and feel’ of the works in question.”[FN34] The Court then examined the TC&F of each party’s work, despite its previous determination that the underlying public domain story was unprotectable.  Unlike in Roth, where filtration and TC&F led to contradictory results, both tests in Reyher pointed toward non-infringement.[FN35] Nonetheless, the Court managed to reincorporate unprotectable expression into its substantial similarity analysis by way of TC&F – this time, under the rationale that the works at issue appealed to children, who might be less likely to pick out subtle variations. Whereas Roth and Reyher demonstrate a “pure” application of TC&F, under which a court compares the entirety of the plaintiff’s work to defendant’s, the test also appears, somewhat illogically, in combination with filtration.   Most often in the context of literary works, a court will include TC&F as an “element” alongside other variables (e.g. plot, character) in its substantial similarity analysis.  In Williams, as we have seen, the Court filtered unprotectable elements from plaintiff’s work before comparing it to defendant’s.[FN36] But it included TC&F within the context of this filtration framework: “[W]e examine the similarities in such aspects as the total concept and feel, theme, characters, plot, sequence, pace and setting of the Dinosaur World books and the Jurassic Park works.”[FN37] Its conclusion on the issue of TC&F is striking:
[T]he total concept and feel of the two works differ substantially.  The Jurassic Park works are high-tech horror stories with villainous characters and gruesome bloodshed.  Books II and III of Dinosaur World series, by contrast, are adventure stories and, although suspenseful in places, have happy endings…The total concept and feel of the Jurassic Park works is of a world out of control, while Williams’s Dinosaur World is well under control.[FN38]
Such elements as “adventure,” “suspense,” a “happy ending” and a “world under control” are unprotectable elements of plaintiff’s Dinosaur World books.  In Judge Hand’s abstractions rhetoric, these levels are too “general” to constitute original expression.  TC&F, however, allowed the Court to adopt a birds-eye view of the plaintiff’s works; it nudged the Court away from the technical rhetoric of filtration, and toward the truly lay perspective that Judge Frank envisioned in Arnstein. II.  District Court Application of Second Circuit Law Not surprisingly, district court application of the Second Circuit substantial similarity “test” is a mess.  A court may use the “ordinary observer” or “more discerning” test, and cherry pick among Second Circuit doctrine to support either choice in almost any circumstance.  Under either rubric, it may further choose between filtration, “pure” TC&F, or filtration that incorporates TC&F as an “element” of the broader test.  Summary judgments opinions at the district court level from 2008 to 2010 display at least seven permutations of these factors.[FN39] In sum, despite the Second Circuit’s attempt to objectify the question of substantial similarity, district courts ultimately manipulate the test to reach the conclusion they feel is most equitable.  Their analyses stampede any formal analytical framework, and their conclusions reflect the true perspective of a lay observer.  They are, in a word, using common sense. The following sections highlight the more common approaches to substantial similarity among the opinions studied.  I argue that each example demonstrates the practical failure a cohesive “substantial similarity” doctrine, and the common-sense approach behind courts’ analyses on this issue. A. Category 1:  Ordinary Observer – Filtration Four cases[FN40] combined the Arnstein ordinary observer test with filtration.  Each case merely cites the Arnstein standard in passing without first explaining why the “more discerning” test does not apply,[FN41] even though works at issue – architectural plans, song lyrics, and a work of fiction – admittedly contained “unprotectable expression.”  Because each court incorporates filtration, however, the cases establish a formal framework identical to the “more discerning ” test.  In each instance, the court found no substantial similarity and awarded summary judgment to defendant. This category of analysis – ordinary observer combined with filtration – takes its cue from the Nichols-Arnstein line of Second Circuit doctrine.  Though the analyses appears straightforward, we must ask why these courts chose not to apply the “more discerning” test, “pure” TC&F, or TC&F as an “element” of the broader filtration analysis.  The answer to the first question seems clear: a “more discerning” perspective would only have favored the defendant by heightening the level of scrutiny applied to the plaintiffs’ works, thus complicating the analysis without altering the result.  An application of TC&F, however, might very well have materially affected the outcomes.  Though one case, Blakeman, cited Williams for the proposition that a court may consider TC&F alongside other variables in the substantial similarity analysis of a literary work,[FN42] its actual application of the test was silent on this issue. One possible explanation is that the inclusion of TC&F would have run contrary to the merits, which, according to the Blakeman Court, favored the defendant.  It noted at the outset that the “ideas” of the works are “entirely different.”[FN43] Of course, a difference of underlying ideas will not save a defendant from liability if it otherwise appropriates the plaintiff’s protected expression.  But the Court’s instinctual response to the parties’ works – “They’re just too different!” – is reflected in its construction of the substantial similarity test, a construction that allows it to easily reach the conclusion it feels is most logical. B. Category 2:  Ordinary Observer – Total Concept and Feel (“Pure”) Two cases[FN44] combined the Arnstein ordinary observer test with “pure” TC&F.  The first, R.F.M.A.S., Inc. v. Mimo So, concerned jewelry designs, and the Court explicitly found the “more discerning” perspective inapplicable:
The combinations of common elements have resulted in designs that are original and protectable in their entirety.  It makes no sense…to look at the designs by excluding elements such as cable and gemstones and consider what is left.  Consequently, plaintiffs would only have to satisfy the ordinary observer test and show that the ordinary observer would tend to overlook the similarities between the plaintiff’s and defendant’s jewelry designs.[FN45]
The second, Axelrod & Cherveny, Architects v. T.& S. Builders, Inc., involved architectural plans, and the Court did not explicate its reason for avoiding the “more discerning” perspective.  Neither court granted summary judgment. In both opinions, application of “pure” TC&F resulted in relatively brief substantial similarity analyses.  In R.F.M.A.S., for example, the Court compared the works in a single paragraph.  It concluded, “While the…Defendants point to discrepancies between the two works, the jewelry designs need not be absolutely identical [to be substantially similar].”[FN46] Since neither court felt able or compelled to filter protectable expression, their decisions included straightforward and sweeping comparisons of the parties’ works. C. Category 3:  Ordinary Observer – Filtration – Total Concept and Feel as “Element” Four cases[FN47] combined the ordinary observer test with filtration, but included TC&F as an “element” of the analysis.  Not surprisingly, three of these cases concerned novels or screenplays.  Each drew heavily on Williams for the proposition that courts should consider TC&F alongside other elements in the filtration analysis of a literary work.[FN48] All three courts dismissed plaintiff’s claims. In Cabell, for example, the plaintiff claimed that the defendant, producer of You Don’t Mess with the Zohan, had copied its comic books about the escapades of Jayms Blonde, a “gay former U.S. Navy SEAL who divides his time between work as a hairdresser and service as a secret agent.”[FN49] The Court conducted a traditional filtration analysis, then turned to TC&F: “[T]he total concept and feel of the Blonde Works are distinct from the Zohan films.  The Jayms Blonde stories are parodies of the James Bond stories, and much of the humor is double entendre and innuendo.  In contrast, You Don’t Mess With The Zohan derives much of its humor by exaggerating Arab and Israeli stereotypes.”[FN50] These broad generalities – the use of double entendre and innuendo, the status of a work as a parody – are certainly not copyrightable elements of Cabell’s work, nor did Cabell claim that the defendant had unlawfully copied them.  The Court’s use of TC&F as an “element” in its filtration analysis, therefore, focused its attention on the works’ broad ideas rather than on plaintiff’s protectable expression, even though it had already determined that the defendant had not improperly appropriated the plaintiff’s protected expression. D. Category 4: More Discerning Ordinary Observer Two cases[FN51] used the “more discerning ordinary observer” test without any reference to TC&F.  Recognizing at the outset that the works at issue contained both protectable and unprotectable expression, the Court in these cases “ignor[ed] those aspects of the work that are unprotectible” in making the substantial similarity comparison.[FN52] Since the “more discerning” perspective implies filtration, the analyses in this category closely mirror those in Category 1 (ordinary observer combined with filtration). E. Category 5:  More Discerning Ordinary Observer – Total Concept and Feel as “Element” Five cases[FN53] used “more discerning” perspective, but included TC&F as an “element” of the filtration test.  Since the “more discerning” perspective mirrors the “ordinary observer” test combined with filtration, the analyses in this category closely resemble those in Category 3. Porto v. Guirgis is typical of this category.  Plaintiff, author of Judas on Appeal, accused the defendant of improperly appropriating his novel into a play entitled The Last Days of Judas Iscariot. Both works envisioned Judas’ trial, at which a wide variety of commentators debated his forgiveness.[FN54] The Court initiated its substantial similarity analysis by filtering unprotectable elements from plaintiff’s novel.  It found the theme of “Judas standing trial” to be “a highly general description of both works, but…[not to] cover the protectable expression in each work.”[FN55] It next filtered characters common to both works – Satan, Caiaphas, Pontius Pilate, and Peter[FN56] – as unprotectable scenes à faire that “necessarily result from the choices of a setting or situation.”[FN57] The Court further filtered themes such as “predestination” and “forgiveness” as “stock themes in Christian theology.”[FN58] Ditto for setting, plot and language.[FN59] After filtration, no alleged similarities remained: “Stripped of unprotectible elements – such as the biblical characters and the biblical story – the works are not substantially similar.”[FN60] But before reaching this conclusion, the Court reincorporated certain unprotectable elements into its discussion.  Under the heading of “Overall Thrust, Mood and Feel,” it noted that the “substantial similarity test is ‘guided by comparing the total concept and feel of the contested works,’”[FN61] and for a moment, left filtration by the wayside:
The overall feel of both works is so distinct that an ordinary observer would not regard the defendants’ play as substantially similar to the plaintiff’s novel.  One particularly striking point that underscores the substantially different feel between the two works is the differences between the endings of the works.  The plaintiff’s novel ends in a practicable, straight-forward manner…The defendant’s play, on the other hand, ends in an entirely different and very powerful manner.[FN62]
In a strict application of the filtration test, such broad references to “overall feel,” or the fact that an ending is “predictable and straight-forward,” would be immaterial. F. Categories 6 and 7:  No Observer Three cases[FN63] dove into the substantial similarity analysis without establishing either an “ordinary observer” or a “more discerning ordinary observer” framework.  The lack of a defined perspective in these cases is likely a factor of the highly technical nature of the works at issue: an historical novel based on the death of Pope John Paul I,[FN64] software code,[FN65] and classified advertisements.[FN66] Plaintiffs’ copyrights in all three instances were extremely “thin”; the perspective of a lay observer – more discerning or otherwise – seems logically less applicable.  As regards the classified advertisements, for example, the Court had to decide whether the font size, bolding of certain text, and use of certain categories in plaintiff’s publication gave rise to copyright protection at all.[FN67] The analysis in each of these cases, notwithstanding the lack of an “observer,” follows the traditional filtration approach.  Citing Williams, the Court faced with the historical novel further integrated TC&F as an “element” of its broader filtration analysis. G. Analysis The above seven categories demonstrate wide judicial discretion in the framing of the substantial similarity inquiry.  The flowchart below simplifies the distinctions between each category.  Most striking is the lack of any relationship between subject matter and analytical framework.  Literary works appear in Categories 2, 3, 4, and 5 – and Categories 6 and 7 if one considers computer code a “literary work.”  Jewelry designs appear in Categories 1 and 4.  Architectural plans appear in Categories 1, 3 and 5.  Even the relatively few summary judgment opinions studied display a diversity of approaches to a given subject matter. In addition, the formal rhetoric of each category bears little relationship to the actual application of the substantial similarity test therein.  The analysis of a court under Category 2 (“ordinary observer” plus filtration, with TC&F as an “element” of the test) is, in practice, indistinguishable from that of a court in Category 4 (“more discerning” observer, with TC&F as an element of the test).  Category 3 is likewise indistinguishable from Category 5.  Category 1 – “ordinary observer” plus “pure” TC&F – stands out as on the only truly unique substantial similarity test.  But this test is unique less for what it includes – an examination of the plaintiff’s work writ large – than for what it omits: filtration.  In this category, the Arnstein “ordinary observer” approaches the works as a truly lay member of the public, and just as Judge Frank envisioned in Arnstein, bases its finding of improper appropriation on its “response.”  Though judicial discretion in the framing of the analysis means that courts in every category are, in reality, conducting this very same “lay” investigation, only Category 1 courts match word to deed.
Substantial Similarity Analysis Flowchart
III. Conclusion Lemley responds to judicial confusion on the issue of substantial similarity by proposing that courts allow expert testimony on improper appropriation.[FN68] This would solve the problem of juries misunderstanding the distinction between protectable and unprotectable expression.[FN69] Alternatively, he proposes that the dissection of the unprotectable elements of a copyrighted work, and therefore the assessment of whether the defendant copied protectable expression, become a question of law rather than fact.[FN70] This, Lemley concludes, would “result in greater attention to the limiting doctrines of copyright law.”[FN71] Lemley’s proposal overlooks the reality of analytic chaos on the issue of substantial similarity described in Section II.  If the substantial similarity “test” were less subject to judicial discretion, the inclusion of experts would indeed help both courts and juries parse protectable from unprotectable expression.  But as the law stands, application of the test is less responsible for judicial disarray than the number of analytic variations available.  Even assuming that a court allowed expert testimony on this issue, the court – not the experts – would continue to frame the inquiry, and in so doing, direct the outcome.  Further, because the procedural aspects of summary judgment and de novo appellate review most often place the court in the position of final arbiter on substantial similarity, our prime concern should not be jury confusion.  Rather, we should ask why our copyright system has placed the lay judgment of improper appropriation in the hands of the court at all. As an alternative to expert testimony, we should discourage summary judgment and de novo review of substantial similarity.  This proposal is not as radical as it might first appear.  Because a plaintiff must demonstrate that its work is (i) original and (ii) contains some minimal degree of creativity before the court even reaches the issue of copying,[FN72] the system would continue to prevent plaintiffs from claiming protection in uncopyrightable material.  District courts could dismiss frivolous suits under this preliminary analysis.  Further, expert evidence on the issue of factual copying would provide the fact-finder with an objective perspective on the amount of material that the defendant appropriated from the plaintiff.  Though this perspective would not distinguish protectable from unprotectable expression – at least under the “probative” rubric that currently holds sway in the Second Circuit – it would nonetheless give the fact-finder a relative measure of the works’ similarities for use in its improper appropriation analysis. Judge Frank intended his “ordinary observer” to be just that – ordinary.  The Circuit’s continued attempt to objectify the substantial similarity analysis has led to a variety of intellectually incompatible tests that remain as “arbitrary” as Judge Hand’s abstraction formula from 1930.  In the interest of calling a spade a spade, copyright law would be well served by re-empowering the jury on this inherently subjective inquiry, and freeing litigants of what has become a confused, unworkable and dishonest judicial doctrine.  
* J.D. candidate, NYU School of Law, 2011; B.A., University of Chicago, 2006.  Graham will join the Corporate Department at Proskauer Rose, LLP in the fall of 2011. [FN1] Mark Lemley, Our Bizarre System of Copyright Infringement, Stanford Public Law Working Paper No. 1661434, 3 Intellectual Prop. L. eJournal 105 (2010). [FN2] Seee.g., Hamil America, Inc. v. GFI, 193 F.3d 92, 97 (2d Cir. 1999) and Folio Impressions Inc. v. Byer California, 937 F.2d 759, 766 (2d Cir. 1991) (“In considering substantial similarity between two items, we review the district court’s findings de novo – not on the clearly erroneous standard – because what is required is only a visual comparison of the works, rather than credibility, which we are in as good a position to decide as was the district court”).  Though the Second Circuit has more recently showed greater deference to a jury’s substantial similarity findings, see Yurman Design, Inc. v. PAJ, Inc., 262 F.3d 101, 111 (2d Cir. 2001), it continues to review bench decisions on substantial similarity de novo.  Seee.g., Boisson v. Banian, Ltd, 273 F.3d 262, 272 (2d Cir. 2001). [FN3] Arnstein v. Porter, 154 F.2d 464, 468 (2d Cir. 1946). [FN4] Id. at 468. [FN5] Id. [FN6] Id. at 473 (emphasis added). [FN7] Peter Pan Fabrics, Inc. v. Martin Weiner Corp., 274 F.2d 487, 489 (2d Cir. 1960) (L. Hand, J.). [FN8] Seee.g., Knitwaves Inc. v. Lollytogs Ltd., 71 F.3d 996, 1002 (2d Cir. 1995) (“[W]here we compare products that contain both protectible and unprotectible elements, our inspection must be ‘more discerning’”). [FN9] Id. [FN10] Id. [FN11] Knitwaves at 1000. [FN12] Knitwaves at 1004. [FN13] See Folio Impressions, Inc. v. Byer California, 937 F.2d 759, 765-66 (2d Cir. 1991) (“Of course, the ordinary observer would compare the finished product that the fabric designs were intended to grace…and would be inclined to view the entire [work] – consisting of protectible and unprotectible elements – as one whole. Here, since only some of the design enjoys copyright protection, the observer’s inspection must be more discerning”). [FN14] Id.at 766. [FN15] Id. [FN16] Knitwaves at 1004n3. [FN17] Laureyssens v. Idea Group, Inc., 964 F.2d 131 (2d Cir. 1992). [FN18] Id. at 141 (emphasis added). [FN19] Seee.g., Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 350 (1991) (“No author may copyright facts or ideas”) (citations omitted). [FN20] Nichols v. Universal Pictures Corp., 45 F.2d 119, 121 (2d Cir. 1930). [FN21] See generally Williams v. Crichton, 84 F.3d 581 (2d Cir. 1996). [FN22] Id. at 583. [FN23] Id. at 589. [FN24] Id.; copyright protection does not extend to scene à faire – that is, to scenes or other elements of a work that necessarily result from the choice of a setting or situation. See, e.g., Walker v. Time Life Films, Inc., 784 F.2d 44, 50 (2d Cir. 1986) and Reyher v. Children’s Television Workshop, 533 F.2d 87, 92 (2d Cir. 1976). [FN25] Id. at 589-90. [FN26] See Roth Greeting Cards v. United Card Co., 429 F.2d 1106 (9th Cir. 1970). [FN27] Id. at 1108. [FN28] Id. at 1109. [FN29] Id. [FN30] Id. at 1109. [FN31] Id. at 1110. [FN32] Reyhersupra, at 87. [FN33] Id. at 88. [FN34] Id. at 92-93. [FN35] Id. at 91. [FN36] Id. at 92. [FN37] See Section 1(b)(ii), supra. [FN38] Williams at 588. [FN39] Id. at 589. [FN40] A Lexis search for “substantial similarity” among district court cases in the Second Circuit between 2008 and 2010 returned ninety-seven results, roughly thirty-five of which turned on the issue of improper appropriation.  A third of this subset does not fit cleanly into any of the seven categories described below.  As such, the data from this period is insufficient to support statistically significant conclusions as to whether certain variations of the test lead to findings of non-infringement more frequently than others.  A further study might attempt to code a larger sample set and plot test variations against outcomes. [FN41] Blakeman v. Walt Disney Co., 613 F. Supp. 2d 288 (E.D.N.Y. 2009); Currin v. Arista Records, Inc., 2010 U.S. Dist. LEXIS 37575 (D. Conn. Feb. 25, 2010); Oldham v. Universal Music Group, 2010 U.S. Dist LEXIS 126697 (S.D.N.Y. Nov. 29, 2010); Peter F. Gaito Architecture, LLC v. Simone Dev. Corp., 2009 U.S. Dist. LEXIS 53253 (S.D.N.Y. May 22, 2009). [FN42] Blakeman at 305; Peter F. Gaito Architecture at 14; Currin at 6; Oldhamat 6. [FN43] Blakeman at 305. [FN44] Blakeman at 306. [FN45] R.F.M.A.S., Inc. v. Mimo So, 619 F. Supp. 2d 39 (S.D.N.Y. 2009); Axelrod & Cherveny, Architects, P.C. v. T. & S. Builders Inc., 2008 U.S. Dist. LEXIS 60212 (E.D.N.Y. Aug. 6, 2008). [FN46] R.F.M.A.S. at 65 (quoting Yurman Design, Inc. v. Golden Treasure Imps., Inc., 275 F. Supp. 2d 506, 517 (S.D.N.Y. 2007)). [FN47] Id. at 66. [FN48] Flaherty v. Filardi, 2009 U.S. Dist. LEXIS 22641 (S.D.N.Y. 2009);Lapinesupra; Cabell v. Sony Pictures Entm’t, 714 F. Supp. 2d 452 (S.D.N.Y. 2010); Telebrands Corp. v. Del Laboratories, Inc., 719 F. Supp. 2d 283 (S.D.N.Y. 2010). [FN49] See Section 2(b)(iii), supra. [FN50] Cabell at 454. [FN51] Id. at 461. [FN52] North Forest Development, LLC v. Walden Ave Realty Assocs., LLC, 2009 U.S. Dist. LEXIS 125331 (W.D.N.Y. July 22, 2009); Bus. Mgmt. Int’l, Inc. v. Labyrinth Bus. Solutions, LLC, 2009 U.S Dist. LEXIS 24900 (S.D.N.Y. March 24, 2009). [FN53] North Forest Dev., LLC at *12 (quoting Laureyssens). [FN54] Lewison v. Henry Holt & Co., 659 F. Supp. 2d 547 (S.D.N.Y. 2009); Porto v. Guirgis, 659 F. Supp. 2d 597 (S.D.N.Y. 2009); Sheldon Abend Revocable Trust v. Spielberg, 2010 U.S. Dist. LEXIS 99080 (S.D.N.Y. Sept. 21, 2010); City Merchandise, Inc. v. Broadway Gifts, Inc., 2009 U.S. Dist. LEXIS 5629 (S.D.N.Y. 2009); Lombardi v. Whitehall, 2010 U.S. Dist. LEXIS 19288 (S.D.N.Y. March 3, 2010). [FN55] Porto at 604. [FN56] Id. at 597. [FN57] Id. at 611-12. [FN58] Id. at 612. [FN59] Id. at 611 (quoting Williams at 587). [FN60] Id. at 614. [FN61] Id. [FN62] Id. at 597. [FN63] Id. at 615 (quoting Lapine). [FN64] Id. at 615-16. [FN65] Crane v. Poetic Prods. Ltd., 593 F. Supp. 2d 585 (S.D.N.Y. 2009); Want Ad Digest, Inc. v. Display Adver., Inc., 653 F. Supp. 2d 171 (N.D.N.Y. 2009); Ebsin & Alter, LLP v. Zappier, 2010 U.S. Dist. LEXIS 9487 (S.D.N.Y. Feb. 3, 2010). [FN66] See generally Crane. [FN67] See generally Esbin & Alter. [FN68] See generally Want Ad Digest. [FN69] Id. at 179. [FN70] Lemley, supra note 1, at 29. [FN71] Id. [FN72] Id. at 31. [FN73] Id. at 30. [FN74] Seee.g.Feist, 499 U.S. at 345.

Fasten Your Seatbelts, It’s Going to Be a Bumpy Night: The Implications of Recent Delaware Case Law on the Film Industry

By Jason Tyler* A pdf version of this article may be downloaded here. I. Introduction Applying general corporate law principles to Hollywood is challenging because the film industry is unique.  This article attempts to offer some preliminary analysis of two recent Delaware [FN1] Court of Chancery cases dealing with contests for corporate control in light of Hollywood’s unique qualities.  Recently, the Court of Chancery in eBay v. Newmark doubted the ability of firms to cite a threat to corporate culture as legitimate grounds for implementing a takeover defense.[FN2] Just over a year ago, the Court in Amylin expressed doubt about a firm’s ability to impede changes of control by embedding financial penalties, for lack of a better word, in otherwise ordinary business transactions.[FN3] In both cases, the final analysis proceeded naturally from a central tenet of Delaware’s corporate law jurisprudence: ultimate authority to elect corporate directors rests in the hands of the shareholders as the principals of their agent-directors. This article expresses no opinion on the ultimate dispositions of those cases in their respective factual contexts or on the merits of the particular litigants’ arguments.  Rather, this article argues that Hollywood presents an exceptional context, or, to put it another way, that the economic reality of movie studios pushes at the logical assumptions that underlie the eBay and Amylin holdings.  Accordingly, if applied broadly, eBay and Amylin may threaten movie studios in particular.  Where possible, this article further offers a preliminary attempt to interpret eBay and Amylin in a way that would militate such a threat. II. “All right, Mr. DeMille, I’m ready for my close-up”: Moviemaking Microeconomics While the film industry is unique in numerous ways of course, two of its characteristics are often underemphasized.  First, movie studios enjoy only nominal brand identification.  To be sure, the public recognizes the names of the Big Six studios (Disney, Fox, Paramount, Sony, Warner Brothers, and Universal) and often so-called “mini-majors” (e.g., Lionsgate, MGM, The Weinstein Company/Dimension Films).  Yet, perhaps with the exception of Disney (and its subsidiary Pixar), the public rarely goes to a movie because it is produced or distributed by a certain studio.  Instead, audiences decide to see one movie or another because of factors germane to the particular movie itself, such as what it’s about, who’s in it, who directed it, how well it’s been reviewed, etc.  Accordingly, studios’ market share greatly fluctuates from year-to-year and is attributable more to that year’s slate of releases than to the established brand of the studio.[FN4] Second, and correlatively, a movie studio’s financial success thus depends largely on the qualitative taste of key production executives, often including the studio’s chief executive officer, who “green light” or acquire prospective projects for production and distribution.  That is, if the studio’s market share and revenue derive afresh each year from the public’s appetite for particular releases, then the executives who decide what to release bear significant responsibility for ensuring the studio’s success.[FN5] Consequently, one may assume stakeholders – i.e., equity and debt investors – are relatively more concerned with preserving extant corporate culture and retaining key employees when investing in a movie studio than when investing in any other going concern.  This, too, is a unique aspect of the film industry, but one which Delaware corporate law apparently does not recognize. III. “You are not a beautiful and unique snowflake”: eBay v. Newmark eBay v. Newmark concerned eBay’s star-crossed investment in craigslist, a relationship that Chancellor Chandler described as “oil and water.”[FN6] Craig Newmark and Jim Buckmaster – the founder and CEO of craigslist, respectively, and its controlling shareholders, collectively – wanted to continue operating their business as a community service.[FN7] In contrast, eBay – the third, minority shareholder – wanted to monetize the service as soon as its investment was finalized.[FN8] Thus, a culture clash: “It might be said that ‘eBay’ is a moniker for monetization, and that ‘craigslist’ is anything but.”[FN9] Driving the dispute more specifically, Newmark and Buckmaster retaliated against eBay for launching a competitive online classified service (“Kijiji”) by, inter alia, implementing a stockholder rights plan (more commonly known as a “poison pill”) that restricted eBay’s ability to sell its craigslist shares to third parties.[FN10] As a takeover defense, the rights plan was subject to the Unocal standard, which requires the company to show (1) a reasonably perceived threat to corporate policy and effectiveness and (2) that the defensive tactic is a reasonable response to that threat.[FN11] In Paramount Communications, Inc. v. Time Inc. (hereinafter “Time-Warner”),[FN12] the Delaware Supreme Court famously held that defensive action to protect a target’s corporate “culture” could satisfy the first Unocal prong.  In eBay, however, Chancellor Chandler cabined craigslist’s ability to rely on the “amorphous purpose of ‘cultural protection’ as a justification for defensive action…”[FN13] Indeed, he found nothing unique to craigslist’s community-service-oriented operation:
“Giving away services to attract business is a sales tactic, however, not a corporate culture. … To the extent business measures like loss-leading products, money-back coupons, or putting products on sale are cultural artifacts, they reflect the American capitalist culture, not something unique to craigslist.”[FN14]
Accordingly, with nothing unique about craigslist’s culture, there could be no reasonably perceived threat to it under Unocal.[FN15] What makes eBay troubling for a movie studio looking to implement a takeover defense is the Court’s use of the word “unique.”  The Chancellor found craigslist’s culture was not unique and, therefore, its controlling shareholders could not rely on corporate culture as grounds for implementing a takeover defense.  But exactly how unique must a business be?  On the one hand, it could be argued that a movie studio derives its market edge from a unique corporate culture in which key employees put their qualitative taste to task.  Change the corporate culture to one where those same employees cannot similarly employ their qualitative taste and presumably there will be a change to the studio’s financial performance.  Thus, stakeholders looking to maximize their returns might very well want to preserve their investment’s corporate culture.  On the other hand, it could be argued that all movie studios rely on a culture in which qualitative decision-making on matters of taste are encouraged.  Thus, there would be nothing unique about any one studio’s corporate culture. Time-Warner itself offers little guidance.  There, Time sought to preserve its “journalistic integrity,” a quality that perhaps all news organizations share, because “Time’s management made a studious effort to refrain from involvement in Time’s editorial policy,” a quality that may be unique to Time even within the industry.  Moreover, there is an inter-industry component that complicates the Time-Warner analysis: Time feared its focus on journalism was threatened by a merger with an entertainment company (either Paramount, a hostile bidder, or Warner Bros., a friendly bidder that had promised to preserve Time’s journalistic integrity).[FN17] In summary, Time tried to preserve a culture that may have been unique to it and, even if that culture were ubiquitous in the news industry, would be unique in the entertainment industry.  In either case, the facts of Time-Warner do not on their own delineate the bounds of what precisely satisfies a reasonable threat to corporate culture under Unocal’s first prong. For the avoidance of doubt, it is not inconceivable for an acquiror (hostile or friendly) to seek control of an entertainment company despite failing to have prior experience in the industry.  Indeed, one could seek control of an entertainment company precisely to diversify extant investments.  For example, of the Big Six studios, Fox, Paramount, and Warner Brothers are subsidiaries of journalism/media conglomerates (News Corp, Viacom, and Time-Warner, respectively), Sony is a subsidiary of an electronics manufacturer, and Universal is a subsidiary of General Electric, which deals in energy, consumer and industrial manufacturing, and capital finance.  (Disney, meanwhile, has become a parent conglomerate that owns various media, theme park, and other diverse subsidiaries.)  Moreover, Carl Icahn, whose self-stated expertise is in shrewd investing and increasing management accountability,[FN17] has in the last two years twice launched hostile takeover bids for Lionsgate[FN18] and has recently offered to buy MGM’s debt before its imminent Chapter 11 bankruptcy.[FN19] Given this state of affairs, the viability of satisfying Unocal’s first prong by citing a threat to corporate culture is indeed relevant to studios wishing to maintain their corporate independence. IV. “Carpe diem.  Seize the day, boys.  Make your lives extraordinary”: Amylin Because movie studios rely so heavily on the taste of current employees, stakeholders who believe in extant operations have an interest in ensuring that the studio retains key employees.  A change of control, however, usually ends top executives’ employment.[FN20] Ordinary takeover defenses may satisfy such stakeholders’ concerns, but they are not the only means of doing so.  Debt investors, for example, are equally satisfied by “change of control provisions,” covenants that accelerate the repayment of principal in the event of a change of control.  Indeed, change of control provisions are relatively common in the film industry.  For example, when Carl Icahn attempted to takeover Lionsgate in the spring of 2009 and again in the spring of 2010, Lionsgate cited change of control provisions in its revolving credit facility with JP Morgan Chase as a principal reason why Icahn’s takeover would harm the company.[FN21] Moreover, with a higher degree of certainty as to the future operations of an otherwise unstable studio, creditors are willing in turn to offer the studio more favorable financial terms in the debt agreement, thus introducing an element of bilateral exchange into the equation.  Accordingly, Change of control provisions are not obviously takeover defenses, because the process occurs as part of a seemingly ordinary business transaction.  Of course, the effect on takeovers is the same: the studio derives a financial benefit precisely because of the impediment to changes of control the provisions by definition engender.  In this sense, a change of control provision is an example of what may be called generally an “embedded defense.”[FN22] The Delaware courts have never ruled directly on the legality of embedded defenses, however the Court of Chancery did suggest last year how it might address an embedded defense challenge in San Antonio Fire & Police Pension Fund v. Amylin Pharm., Inc.[FN23] In Amylin, the company had issued bonds under an indenture that included a change of control provision prohibiting a turnover of the majority of the board, unless the outgoing board “approved” newly elected directors.[FN24] When two dissident shareholders launched proxy contests, the incumbent board “approved” the dissident slates for purposes of the indenture while running its own opposing slate in the same election.[FN25] The noteholders’ trustee brought suit, claiming that the plain meaning of “approve” should have precluded Amylin from “approving” directors of whom it necessarily disapproved via the voting franchise.[FN26] Vice Chancellor Lamb upheld the board’s actions and disagreed with the trustee’s interpretation because such a reading would render the change of control provision an “entrenchment mechanism . . . prohibit[ing] any change in the majority of the board as a result of any number of contested elections, for the entire life of the notes.”[FN27] Other facts surrounding the negotiation of the indenture undermined such a reading.[FN28] The Vice Chancellor then added in dicta that
“[a] provision in an indenture with such an eviscerating effect on the stockholder franchise would raise grave concerns…  The court would want, at a minimum, to see evidence that the board believed in good faith that, in accepting such a provision, it was obtaining in return extraordinarily valuable economic benefits for the corporation that would not otherwise be available to it.  Additionally, the court would have to closely consider the degree to which such a provision might be unenforceable as against public policy.”[FN29]
Perhaps complicating the court’s reasoning, it is important to keep in mind that Vice Chancellor Lamb did not invalidate the change of control provision itself, only the trustee’s interpretation of it.  Moreover, the Court upheld a second change of control provision in another debt agreement in that same case.[FN30] It appears that neither the Delaware courts nor corporate law scholars have come to a consensus on the meaning of Amylin.  So far it has been cited in subsequent case law only for certain contract law authority and a cursory search on Westlaw and SSRN produced no commentary.  Amylin’s implication seems daunting, however: a change of control provision triggered by a change in the composition of the board would be considered invalid under Delaware corporate law except, perhaps, if the company received “extraordinarily valuable economic benefits” in exchange. Inherently unstable operations like movie studios might be best able to exploit the exception since, as discussed above, they receive more favorable financial terms in exchange for the covenant.  Nevertheless, the studio would have to show “extraordinarily valuable economic benefits,” not simply some economic benefit, in order to satisfy Amylin’s standard.  I can only speculate as to the meaning of “extraordinary” in this context, however I doubt Vice Chancellor Lamb would have gone to such extremes if a mere reduction of the applicable interest rate would suffice. Despite the seemingly high standard Vice Chancellor Lamb would require, the case is susceptible to a more nuanced interpretation than it would seem at first glance.  In California Public Employees’ Retirement System v. Coulter,[FN31] for example, Vice Chancellor Noble noted that parties employing a continuing director provision, like the one involved here, bargain for the right, “as a matter of contract, to allow the incumbent directors…to determine [that] there had not been a change of control.”  In Amylin, Vice Chancellor Lamb similarly observed in a footnote that the directors possessed only a contractual right and were “under absolutely no obligation to consider the interests of the noteholders in [exercising that right.]”[FN32] Synthesizing this language, a reasonable interpretation of Amylin is that the trustee’s contractual reading would have violated Delaware public policy not because all change of control provisions are impermissible per se, but because the trustee’s interpretation would transform a contractual term generally interpreted as conferring a discretionary right to be exercised in accordance with directors’ fiduciary duties into a committed obligation notwithstanding any adverse effects on shareholders.  That is, a change of control provision intended to allay creditors’ concerns may be enforceable where it confers a benefit on shareholders (e.g., by reducing the company’s cost of capital), but not where it is contrary to shareholders’ best interests (e.g., by impeding the voting franchise).  Concededly, this interpretation derives from a close, subtle reading of the Vice Chancellor’s language, however it would permit studios – and all businesses – both (1) to agree to change of control provisions that reduce the studio’s cost of capital at the inception of the agreement and (2) to refuse to exercise that contractual right (i.e., to permit acceleration to occur) as a way to discourage a hostile takeover when the board believes in good faith that the change of control would not be in shareholders’ best interests (i.e., consistent with its fiduciary duties under Unocal). V. “Good Night, and Good Luck”: Conclusion eBay and Amylin are troubling cases for movie studios because both undermine extant Hollywood practices: after eBay, it is increasingly difficult for movie studios to rely on threats to corporate culture as reasonable grounds for implementing a takeover defense; after Amylin, it may be harder to allay creditors’ fears of volatility by offering common change of control provisions as an escape mechanism from the investment in the event of volatility.  But these practices make business sense for movie studios in a way that might not for other industries: corporate culture is salient where revenue depends on taste; change of control provisions are beneficial where the risks of key executive turnover would otherwise make capital prohibitively expensive. “What we’ve got here is a failure to communicate.”  
* J.D. candidate, NYU School of Law, 2011; B.A., The Johns Hopkins University, 2005. [FN1] Nearly one million business entities and more than half of the corporations making up the Fortune 500 list were incorporated in Delaware as of 2007.  Lewis B. Black, Jr., Why Corporations Choose Delaware 1 (2007), available at Delaware Department of State, Division of Corporations, http://corp.delaware.gov/default.shtml. For each of these Delaware-chartered entities, Delaware corporate law applies.  See 18 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Corporations §43.72 (perm. ed., rev. vol. 2007) (Defining “Internal Affairs” doctrine).  Accordingly, referring to Delaware common law – as opposed to a 50-state survey ­– is convenient shorthand applicable to most businesses. [FN2] Civ. No. 3705-CC, 2010 WL 3516473 (Del. Ch. Sept. 9, 2010). [FN3] 983 A.2d 304 (Del. Ch. 2009), aff’d 981 A.2d 1173 (Del. 2009). [FN4] Harold L. Vogel, Entertainment Industry Economics: A Guide for Financial Analysis 57 (6th ed. 2004). [FN5] I realize it is naïve to assume a studio’s financial health derives solely from production, acquisition, and direct distribution of film and television projects.  Studios derive considerable financial benefit as well by, inter alia, exploiting libraries of past film properties, entering into favorable co-financing agreements that reduce costs of capital, and acting as sales agents or performing other services within the industry.  Nevertheless, I ignore these aspects of a studio’s business for the sake of simplicity. [FN6] eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473, at *2 (Del. Ch. Sept. 9, 2010). [FN7] Id. (“Though a for-profit concern, craigslist largely operates its business as a community service.  Nearly all classified advertisements are placed on craigslist free of charge.  Moreover, craigslist does not sell advertising space on its website to third parties.  Nor does craigslist advertise or otherwise market its services.  craigslist’s revenue stream consists solely of fees for online job postings in certain cities and apartment listings in New York City.”) [FN8] Id. at *7. [FN9] Id. at *3. [FN10] Id. at *9-15. [FN11] Id. at *21; Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954-55 (Del. 1985) [FN12] 571 A.2d 1140 (Del. 1990) [hereinafter “Time-Warner”]. [FN13] eBay, 2010 WL 3516473, at *21. [FN14] Id. at *22. [FN15] Chancellor Chandler’s ruling further turned on the legal ability to assert a corporate culture of eschewing shareholder wealth maximization altogether: “Time[-Warner] did not hold that corporate culture, standing alone, is worthy of protection as an end in itself,” rather a protectable corporate culture “must lead at some point to value for stockholders.”  Id. at *21.  Whatever beliefs Newmark and Buckmaster might have had about community service, they “opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound…to promote the value of the corporation for the benefit of its stockholders. … Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders…” Id. at *23 (emphasis in original).  This line of reasoning, however, is not relevant to this article, because most movie studios are interested in profit maximization and are thus easily distinguishable from craigslist. [FN16] Time-Warner, 571 A.2d at 1144 n.4. [FN17] See Barbara Kiviat, 10 Questions for Carl Icahn, Time, Feb. 15, 2007, available at http://www.time.com/time/magazine/article/0,9171,1590446-1,00.html. [FN18] See, e.g., Andrew Ross Sorkin, Lions Gate Rejects Latest Icahn Offer, N.Y. Times, Mar. 23, 2010, available at http://dealbook.blogs.nytimes.com/2010/03/23/lions-gate-rejects-latest-icahn-offer/ (regarding Icahn’s March 2010 takeover attempt); Lions Gate Entertainment Corp., General Statement of Acquisition of Beneficial Ownership (Schedule 13D/A) (Mar. 12, 2009) (disclosing Icahn’s March 2009 takeover attempt). [FN19] See, e.g., Michael Speier, Icahn Makes Offer to Buy More MGM Debt to Expedite Merger, Deadline Hollywood, Oct. 21, 2010, available at http://www.deadline.com/2010/10/icahn-makes-offer-to-buy-more-mgm-debt-to-expedite-merger/. [FN20] See William J. Carney, Mergers & Acquisitions: Cases and Materials 307 (2d ed. 2007) (citing empirical evidence that 50% of top executives leave their employment within three years of a change of control); cf.,  e.g., James F. Cotter & Marc Zenner, How Managerial Wealth Affects the Tender Offer Process, 35 J. Fin. Econ. 63, 88-94 (1994) (offering empirical support that managerial resistance to tender offers appears driven by self-interest); Kenneth J. Martin & John J. McConnell, Corporate Performance, Corporate Takeovers, and Management Turnover, 46 J. Fin. 671, 677 (1991) (“The dramatic increase in the turnover rate of top managers following takeovers…indicates that takeovers are an important device for altering the top management of target firms.”). [FN21] See, e.g., Press Release, Lions Gate Entertainment Corp., Lionsgate Board of Directors Expresses No Opinion and Remains Neutral Toward Icahn’s Unsolicited Debt Tender Offer, Strongly Urges Noteholders to Consider All Aspects of Icahn’s Offer Carefully (Mar. 26, 2009), available at http://investors.lionsgate.com/ (follow hyperlink to Press Releases, News Releases; then follow hyperlink to New Release of 3/26/2009). [FN22] Professors Arlen and Talley coined the term “embedded defenses” in Jennifer Arlen & Eric Talley, Unregulable Defenses and the Perils of Shareholder Choice, 152 U. Pa. L. Rev. 577, 583 (2003). [FN23] 983 A.2d 304 (Del. Ch. 2009), aff’d 981 A.2d 1173 (Del. 2009). [FN24] Id. at 307-308. [FN25] Id. at 312-13. [FN26] Id. at 314. [FN27] Id. at 315 (emphasis in original). [FN28] In particular, the court focused on a second credit agreement with a bank, conceded by all parties to be more restrictive than the indenture, but not susceptible to a similar interpretation as the trustee’s interpretation of the indenture.  Id. [FN29] Id. (internal citations omitted). [FN30] Id. [FN31] No. Civ.A. 19191, 2005 WL 1074354, at *4 (Del. Ch. 2005). [FN32] Amylin, 983 A.2d at 316 n.37 (emphasis in original).

How to Protect Against a Licensing Partner’s Bankruptcy: Patent Licenses and the Bankruptcy Code

By Jordan Markham* A pdf version of this article may be downloaded here. I.  Introduction In uncertain times, or when dealing with uncertain partners, planning for the possibility of bankruptcy ex ante can provide a very real benefit to a party contemplating a patent licensing agreement.  Since the financial crisis of 2008, many contractual partners who formerly looked rock solid have experienced major cash-flow problems.  In addition, it has always been the case that in some fields of technology, such as biotech, a significant number of businesses are expected to fail.  Thus, it is important to think through at the outset how a license might be treated by a bankruptcy court, and where possible, to structure the agreement accordingly.  How to best do this will depend primarily on whether a party is the patentee or the licensee, and on the extent to which rights are transferred (i.e. whether the transaction results in a sale or merely a license agreement).  As we shall see, in the context of a bankruptcy proceeding, the patentee is generally better served by a greater, and a licensee by a lesser, transfer of rights. This article will explore these dynamics in detail.   It will first consider the effects of a bankruptcy court’s categorization of a patent rights transfer agreement as either an executory contract or a completed sale, and then it will consider how courts make this categorization.  In particular, it will begin by describing the provisions in the Bankruptcy Code that deal with executory contracts and how the parties’ rights depend on whether the debtor is the licensor or the licensee.  It will then consider, from the view of patent law, the difference between assignments and licenses.  It will move on to explore how courts in bankruptcy categorize assignments and different types of license agreements as either executory contracts or completed sales.  Finally, it will conclude with practical suggestions that flow from the preceding analysis. II.  The Treatment of Executory Contracts Under the Bankruptcy Code A.  Section 365(a) and the Power to Accept or Reject an Executory Contract Under the bankruptcy code, a transfer of intellectual property rights is either a completed sale or an executory contract.  But agreements respecting patent rights do not naturally present themselves as one or the other.  Transactional intellectual property lawyers usually speak of transfers of patent rights in terms of assignments and licenses.  For present purposes, the following simplifications are useful.  An assignment is a transfer of all significant rights under a patent, including the right to sue.  For bankruptcy purposes, an assignment is usually treated as a completed sale.  A license is an agreement whereby a patentee agrees to refrain from enforcing her right to exclude the licensee from exploiting her invention in some way.  The vast majority of effective license agreements are considered executory contracts for bankruptcy purposes. Assignments result in fewer complications than licenses under bankruptcy law.  If the bankrupt party is the buyer/assignee and the assignment does indeed amount to a completed sale, the rights under the assignment become property of the bankruptcy estate and may be disposed of accordingly.[FN1]Meanwhile, the seller/patentee need have no dealings with the bankruptcy proceeding except insofar as she is owed compensation by the bankrupt party (in which case her claims will be treated as any other prepetition claim of like kind).[FN2] Where the nondebtor is the buyer/assignee, unless the assignment amounts to a fraudulent transfer,[FN3] it is similarly free from entanglements with the bankruptcy proceeding since the bankrupt seller has already assigned over its rights.[FN4] In contrast to the simplicity of completed sales, executory contracts are governed by the complex provisions of section 365 of the Bankruptcy Code[FN5] and are the subject of considerable controversy in bankruptcy courts.  Section 365(a) permits “the trustee [or debtor in possession[FN6]], subject to the court’s approval, [to] assume or reject any executory contract or unexpired lease of the debtor.”[FN7] Note that section 365(a) pertains to executory contracts, as do the other subsections of section 365.  These provisions, therefore, govern the vast majority of license agreements.[FN8] The effect of 365(a) is to allow the debtor[FN9] to assume or reject a contract depending on whether, from the debtor’s perspective, the net gain outweighs the liabilities under the contract. The power placed in the hands of the debtor by section 365(a) to accept or reject a contract without regard to the preferences of the opposite party is considerably limited by protections built into the remainder of the section or read into it by courts that serve that party’s interests.  Courts have held that the debtor must have some minimal business justification for its choice[FN10] and may not, for example, reject a contract for the sole purpose of harming a competitor.[FN11] Further, if the debtor chooses to assume a contract under 365(a), it must assume the entire contract with all of its burdens.[FN12] To comply with section 365(b), the debtor must cure any prior defaults and provide adequate assurance of future performance.[FN13] In the event that the debtor rejects an executory contract, under subsection 365(g), the nondebtor is entitled to a prepetition unsecured damages claim for breach of that contract.[FN14] Finally, as will be discussed below, the power granted to the debtor under 365(a) is further limited by the carve-outs described in 365(c) and 365(n), which apply when the debtor is the licensee and licensor, respectively. B.  When the Nondebtor is Licensee: Section 365(n) Section 365(n)[FN15] provides an important protection to a licensee from the potentially severe consequences of having rights for which it contracted and on which it may depend suddenly yanked away by an insolvent licensor.  The protection of section 365(n) was added relatively recently as part of the Intellectual Property Bankruptcy Protection Act of 1988 in response to a particularly alarming decision by the Fourth Circuit Court of Appeals.[FN16] In Lubrizol, the debtor licensor sought to reject its non-exclusive license agreement with Lubrizol for no other reason than that its “continued obligation to Lubrizol under the agreement would hinder [its] capability to sell or license the technology on more advantageous terms to other potential licensees.”[FN17] Meanwhile, Lubrizol argued that it would be seriously damaged by having to renegotiate with the debtor at this juncture.  The Fourth Circuit was not unsympathetic, stating that “allowing rejection of such contracts … imposes serious burdens upon contracting parties such as Lubrizol.”[FN18] It was further concerned that such a result would “have a general chilling effect upon the willingness of such parties to contract at all with businesses in possible financial difficulty.”[FN19] However, when a statute enacted by Congress is clear, courts will usually apply it literally, regardless of its results or questionable policy.  This is what the Fourth Circuit did with section 365(a), allowing the debtor to reject the contract and leaving Lubrizol in a difficult position. Congress could do nothing for Lubrizol, but it did mitigate the problem for future licensees in Lubrizol’s position.  Section 365(n) allows a licensee of “intellectual property”[FN20] to retain its rights under the license, at least to the extent that they do not require specific performance of affirmative obligations of the debtor.[FN21] Exclusive licenses remain exclusive, confidentiality agreements remain in effect, and licensees even retain any option to extend the license built into the agreement.[FN22] In exchange, of course, licensees must continue to pay any royalties due under the agreement.[FN23] Or, alternatively, if the licensee prefers to accept the debtor’s rejection, it has the usual option of treating the rejection as a breach giving rise to prepetition unsecured damages claim under section 365(g).[FN24] C.  When the Nondebtor is the Licensor: Section 365(c) Section 365(c) is an extraordinary provision which, when read literally, in most cases gives a licensor of patented technology the ability to refuse to honor a contract with a licensee in bankruptcy.  Section 365(c) provides:
The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if— (1)(A)  applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (B) such party does not consent to such assumption or assignment…[FN25]
The provision would more readily make sense if it read, “the trustee may not assume and assign any executory contract….”  In that case, the licensor would simply be extended the same right under bankruptcy law – to refuse performance from a party with whom it did not contract – that it had prior to the bankruptcy (assuming it had that right).  But the statute reads otherwise.  It says that if the nondebtor licensor objects to the assumption of the contract by the debtor, and if non-bankruptcy law excuses that licensor from accepting performance from some other (hypothetical) third-party, the debtor itself may not assume the license. This is a severe limitation on the rights granted to the debtor under section 365(a).  The pertinent non-bankruptcy “applicable law” for patent licenses is federal common law.[FN26] It is a well-established principle under this law that unless the terms of the agreement provide otherwise, a non-exclusive patent license is personal in nature and therefore not freely assignable.[FN27] This rule has been extended to exclusive licenses by at least one lower court,[FN28] and that court was almost certainly correct in its decision.[FN29] Although an exclusive license represents a more complete transfer of rights, it is still personal in nature.  It would be a serious and unjustifiable burden to ask a patentee to accept performance on an exclusive license from a competitor who sought to suppress rather than exploit the invention.  Of course, the code is correct to honor this right under federal common law.  But it does not follow that patentees should be free to reject performance from the debtor itself.  The terms of section 365(c)(1) allows a licensor, at its whim, to force a renegotiation of terms of access to patented technology to which the debtor had already secured a right.  This flies in the face of the core bankruptcy policy in favor of maximizing the value of the estate.  Nevertheless, many courts have felt constrained to follow this “plain meaning” of the statute. This literal interpretation of section 365(c) is usually called the “hypothetical test.”  The test asks whether the licensor would be excused from doing one thing (acquiescing to assignment to a hypothetical third party) in order to determine whether it is excused from doing another (acquiescing to assumption).  The Third, Fourth, Ninth, and Eleventh Circuits take the “hypothetical test” approach.[FN30] This approach has the merits of leaving lawmaking to a representative elected body and of holding Congress to its words.[FN31] Plain meaning dogmatists would also claim that it has the advantage of predictability since anyone can read the statute and know what it means without delving deep into the case law or engaging in some kind of mystical divination of Congressional purpose.[FN32] Such a divination was attempted by the First Circuit Court of Appeals in Summit Inv. & Dev. Corp. v. Leroux.[FN33] The court in this case looked to two pieces of statutory history[FN34] to justify the conclusion that subsection 365(c) – and, more to the point in Leroux, 365(e) as well[FN35]– contemplates a “case-by-case inquiry” into whether the nondebtor party was actually being forced to accept performance under its executory contract from someone other than the debtor party with whom it originally contracted.[FN36] This approach is referred to as the “actual test.” Before looking to statutory history, the court in Leroux concluded that 365(c) is ambiguous and capable of alternative readings.[FN37] It is not true that 365(c) alone is ambiguous.  It speaks clearly.  However, as has been noted by advocates and courts, section 365(f) conflicts with section 365(c).[FN38]Section 365(f)(1) provides: Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.[FN39] That 365(f) allows the assignment of contracts notwithstanding applicable law indicates a drafting error.  Section 365(f)(1) is conditioned on 365(c), and 365(c) expressly prohibits both assumptions and assignments when they are excused by applicable law.  Thus, 365(f)(1), by way of 365(c)(1), renders itself superfluous.[FN40] One or the other provision is in error.  But the way the statute conflicts does not lead logically to the conclusion that the “actual test” is correct.  Policy intuition, on the other hand, does lead to this conclusion.  The actual test does not unduly burden the estate by permitting a hold-up style renegotiation, and it also does not force a patentee to accept performance from a third party where federal common law would excuse it.  It is in keeping with sound bankruptcy policy and, not surprisingly, it is the test favored by respected commentators and academics.[FN41] Of course, from a licensor’s point of view, the hypothetical test is preferable to the actual test.  It has the virtue of insuring the nondebtor against being locked into an agreement with a partner who is only marginally viable, or whose management or ownership has changed in a way that is disagreeable to the licensor.[FN42] Particularly for a patentee who has granted an exclusive license, and thereby promised not to license the technology to another party, the burden of having to accept performance from a defunct partner is substantial.[FN43] That these burdens probably do not justify the terms of 365(c) as Congress drafted it,[FN44] and that not all courts apply the hypothetical test, should give pause to a potential licensor.  The area of law is unstable and probably not to be depended upon. In fact, at least one court in a “hypothetical test” jurisdiction has allowed a work-around solution to the debtor’s 365(c) problem.  In In re Hernandez,[FN45] the court permitted the debtor to intentionally neglect to accept or reject an exclusive license agreement under 365(a) so that the license would simply “ride through” the bankruptcy unaffected.[FN46] The so called “ride through” doctrine has been approved by courts of appeals in other contexts[FN47] and could provide an effective shield for debtor licensees against 365(c).  The major drawback from the debtor’s perspective is that since the contracts are not accepted under 365(a), the protection against ipso facto clauses in 365(e) does not apply.[FN48] III.  Conclusion What lessons can we learn from the material just surveyed?  As a nondebtor licensee, it would be helpful to structure an agreement as an assignment when possible, since an assignee is beyond the reach of the bankruptcy court.  However, when this is not a realistic option, the licensee’s rights are reasonably well protected by section 365(n).  The only further precaution that might be helpful is to provide for the option to extend the length of the agreement, since these options will be honored by a bankruptcy court. As a licensor, it is advantageous to have the agreement in the form of an executory contract.  This is because section 365(c) allows for at least some continuing control over the technology.  In a jurisdiction where the “actual test” is followed, the licensee will be prevented from assigning the license without the licensor’s consent.  In a “hypothetical test” jurisdiction, the licensor will have the right to refuse performance even from the licensee.  Executory contracts include practically all licenses agreements in most jurisdictions, but it would be helpful to have at least some of the licensee’s payments in the form of royalties, rather than a single lump sum.  Specifying any other significant ongoing obligations imposed on the licensor would also be helpful.  Finally, in order to avoid a “ride-through” situation, a licensor should include an ipso facto clause in the contract.  
* Jordan Markham earned his J.D. from NYU Law School in May of 2010. He will be joining Milbank Tweed LLP as an associate in January of 2011, and in the interim has been working at the White Plains IP boutique, Leason Ellis LLP. [FN1] See 11 U.S.C. § 541(a)(1) (2000) (defining the property of a bankruptcy estate as including “all legal or equitable interest of the debtor in property…”). [FN2] See 11 U.S.C. § 507 (2000) (establishing claim priorities). [FN3] See id. § 548. [FN4] Of course, if the buyer has not completed its obligations under conditions of the sale (for example, the buyer owes cash payments), these will remain owed to the estate. [FN5] 11 U.S.C. § 365 (2000). [FN6] See id. § 1107 (2000). [FN7] Id. § 365. [FN8] For the sake of readability this paper shall speak of licenses rather than patent rights transfers in the context of executory contracts.  Similarly, it shall speak of licensees and licensors rather than transferees and transferors. This simplification is justified by the extreme rarity of patent rights transfers that are not licenses but are treated as executory contracts. [FN9] A debtor in possession, as a general rule, has the same rights and duties as a trustee under the bankruptcy code.  See 11 U.S.C. § 1107.  For the purpose of readability, this paper shall use the term debtor rather than trustee or debtor in possession. [FN10] See Johnson v. Fairco Corp. (In re Johnson), 61 B.R. 317, 320 (Bankr. N.D. Ill. 1986) (describing the business judgment standard as a “lax standard” that disturbs a debtor’s actions “[o]nly where [such actions] are in bad faith or in gross abuse of its managerial discretion.”). [FN11] See In re Petur U.S.A. Instrument Co., 35 B.R. 561, 563 (Bankr. W.D. Wash. 1983); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1047 (4th Cir. 1985) (the question is  “whether the decision of the debtor that rejection will be advantageous is so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice.”). [FN12] 3 Collier on Bankruptcy ¶ 365.03[1] (15th ed. rev. 2006). [FN13] 11 U.S.C. § 365(b). [FN14] However, even if specific performance would ordinarily be available (which is unlikely in an intellectual property licensing context), it is not available with respect to a party in bankruptcy.  Lubrizol, 756 F.2d at 1048 (citing H.R. Rep. No. 95-595, at 349 (1978), reprinted in 1978 U.S.C.C.A.N. 5963, 6305) (“Under 11 U.S.C. § 365(g), [the licensee] would be entitled to treat rejection as a breach and seek a money damages remedy; however, it could not seek to retain its contract rights in the technology by specific performance even if that remedy would ordinarily be available upon breach of this type of contract.”). [FN15] 11 U.S.C. § 365(n). [FN16] 3 Collier on Bankruptcy P 365.14 (“In enacting section 365(n), Congress effectively overruled the decision of the Court of Appeals for the Fourth Circuit in Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. (In re Richmond Metal Finishers, Inc.), which had permitted a debtor in possession to reject a technology licensing agreement and terminate the licensee’s right to use the license.”). [FN17] 756 F.2d at 1047. [FN18] Id. at 1048. [FN19] Id. [FN20] Intellectual property under the code includes patent, copyright and trade secret rights but, notably, excludes trademark rights.  11 U.S.C. § 101(35A) provides: The term “intellectual property” means— (A) trade secret; (B) invention, process, design, or plant protected under title 35; (C) patent application; (D) plant variety; (E) work of authorship protected under title 17; or (F) mask work protected under chapter 9 of title 17; to the extent protected by applicable nonbankruptcy law. [FN21] 11 U.S.C. § 365(n)(1)(B). [FN22] Id. § 365(n)(1)(B)(ii). [FN23] Id. § 365(n)(2)(B). [FN24] Id. § 365(n)(1)(A). [FN25] § 365(c) (emphasis added). [FN26] Everex Sys., Inc. v. Cadtrak Corp. (In re CFLC, Inc.), 89 F.3d 673, 679-80 (9th Cir. 1996) (holding, after lengthy analysis, that the statutory “applicable law” is federal law, and that federal law does not permit free assignment of patent licenses); Institut Pasteur v. Cambridge Biotech Corp., 14 F.3d 489, 492 (1st Cir. 1997) (same conclusion). [FN27] Troy Iron & Nail Factory v. Corning, 55 U.S. (14 How.) 193, 216 (1852) (“A mere license to a party, without having his assigns or equivalent words to them, showing that it was meant to be assignable, is only the grant of a personal power to the licensees, and it is not transferable by him to another.”); Lane & Boley Co. v. Locke, 150 U.S. 193, 195-96 (1883) (holding that patent licenses, as a form of personal property, are not assignable unless expressly made so); In re CFLC, Inc., 89 F.3d at 679-80; Institut Pasteur, 14 F.3d at 492. [FN28] In re Hernandez, 285 B.R. 435 (Bankr. D. Ariz. 2002). [FN29] See Peter S. Menell, Bankruptcy Treatment of Intellectual Property Assets: An Economic Analysis, 22 Berkeley Tech. L.J. 733, 798 (2007) (“Unless the patentee has transferred so much of the patent bundle to an exclusive licensee as to constitute an assignment, it seems appropriate for a bankruptcy court to read the non-assignability of patent license rule to apply whether or not the license agreement granted exclusive or nonexclusive rights.”). [FN30] Third Circuit:  In re W. Elec., Inc., 852 F.2d 79 (3d Cir. 1988); see also In re Access Beyond Techs., Inc., 237 B.R. 32 (Bankr. D. Del. 1999). Fourth Circuit: RCI Tech. Corp. v. Sunterra Corp. (In re Sunterra Corp.), 361 F.3d 257, 262 n.9 (4th Cir. 2004); see also In re Travelot Co., 286 B.R. 447 (Bankr. S.D. Ga. 2002). Ninth Circuit:  Perlman v. Catapult Entm’t (In re Catapult Entm’t), 165 F.3d 747, 747 (9th Cir. 1999). Eleventh Circuit:  City of Jamestown v. James Cable Partners, L.P. (In re James Cable Partners, L.P.), 27 F.3d 534, 537, reh’g denied, 38 F.3d 575 (11th Cir. 1994). [FN31] See In re Catapult Entm’t, 165 F.3d at 754. [FN32] It is the view of this author that the rigid application of statutory nonsense is more likely to result in outrage and confusion than comfortable predictability. [FN33] 69 F.3d 608 (1st Cir. 1995). [FN34] S. Rep. No. 95-989, at 59 (1978), reprinted in 1980 U.S.C.C.A.N. 5787, 5845 (“This section will require the courts to be sensitive to the rights of the nondebtor party to executory contracts and unexpired leases.  If the trustee is to assume a contract or a lease, the court will have to ensure that the trustee’s performance under the contract or lease gives the other contracting party the full benefit of his bargain.”); H.R. Rep. No. 95-1195, at § 27(b) (1980) (“This amendment makes it clear that the prohibition against the trustee’s power to assume an executory contract does not apply where it is the debtor that is in possession and the performance to be given or received under a personal service contract will be the same as if no petition had been filed because of the personal nature of the contract.”). [FN35] Section 365(e) mirrors 365(c): (e) … (2)      Paragraph (1) of this subsection does not apply to an executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties, if— (A) (i)      applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to the trustee or to an assignee of such contract or lease, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and (ii)      such party does not consent to such assumption or assignment; … [FN36] 69 F.3d at 612-13; see also Institut Pasteur v. Cambridge Biotech Corp., 104 F.3d 489 (1st Cir. 1997), cert. denied, 521 U.S. 1120 (1997) (following and applying the Leroux interpretation of 365(c) with respect to an executory nonexclusive patent license). [FN37] 69 F.3d at 612-13. [FN38] Perlman v. Catapult Entm’t (In re Catapult Entm’t), 165 F.3d 747, 751 (9th Cir. 1999); In re Catron, 158 B.R. 629, 636 (E.D. Va. 1993), aff’d, 25 F.3d 1038 (4th Cir. 1994); In re Cardinal Indus., Inc., 116 B.R. 964, 976-77 (Bankr. S.D. Ohio 1990). [FN39] 11 U.S.C. § 365(f)(1) (emphasis added). [FN40] Attempts to reconcile the provisions are thoroughly unconvincing.  See In re Catapult Entm’t, 165 F.3d at 751, and cases cited therein. [FN41] See David G. Epstein, Steve H. Nickles & James J. White, Bankruptcy § 5-15, at 258-59 (1993) (advocating that “Congress should amend section 365(c)(1) to make clear that ‘applicable law’ prohibitions on assignment do not preclude assumption in bankruptcy” and urging courts to permit a trustee or debtor to assume a contract notwithstanding a prohibition on assignment in the “applicable law” so as to ensure a harmony between subsections (c) and (f) of section 365); 3 Collier on Bankruptcy ¶ 365.06[1][d][iii]; Daniel J. Bussel & Edward A. Friedler, The Limits on Assuming and Assigning Executory Contracts, 74 Am. Bankr. L.J. 321, 322 n.6 (2000) (arguing that the “’actual test’ yields correct results from the point of view of bankruptcy policy and allows results in bankruptcy to effectively mirror the results outside of bankruptcy”). [FN42] For example, a provision in the non-exclusive license in Institute Pasteur allowed a competitor of the patentee to gain access to the patentee’s coveted technology by acquiring the debtor. 104 F.3d at 494-95. [FN43] A patentee has limited time to commercially exploit her patent.  Section 154(c)(2) of the Patent Act provides that the patent term begins when the patent is issued and ends 20 years from the date that the patent application was filed.  Since it take years to procure a patent from an overburdened patent office, patent terms are typically considerably fewer than 20 years. [FN44] Congress, in overriding ipso facto clauses in section 365(e), has expressed the view that, in general, the burden to a nondebtor party of having to accept performance from or render performance to a party in bankruptcy is outweighed by the need to maximize the value of the estate and to rehabilitate the debtor. [FN45] 287 B.R. 795 (Bankr. D. Ariz. 2002). [FN46] Id. [FN47] See, e.g., Stumpf v. McGee (In re O’Connor), 258 F.3d 392 (5th Cir. 2001), and cases cited therein. [FN48] See 11 U.S.C. § 365(e)(1).

Student Speech in Online Social Networking Sites: Where to Draw the Line

By Michael J. Kasdan* A pdf version of this article may be downloaded here. Introduction The move toward online communication has the potential to throw off the historically careful balance that has been struck regarding First Amendment issues in the realm of “student speech.”  In a seminal trilogy of cases, the Supreme Court balanced the free speech rights of students with school districts’ ability – and even responsibility – to regulate student speech that disrupts the learning environment.  Before the proliferation of instant messaging, SMS texts, and social networking sites, the Court allowed schools to regulate on-campus speech in limited circumstances (i.e., when the speech disrupts the learning environment) but did not extend the school’s authority to regulate speech that occurs off-campus (i.e., speech subject to traditional First Amendment protection).  Electronic communication blurs the boundary between on- and off-campus speech.  While a student may post a Facebook message from the seeming privacy of his or her own home, that message is widely accessible and could have a potentially disruptive effect on campus. Because the Supreme Court has not yet addressed this particular issue, courts are struggling to define the proper place of so-called “student internet speech.”  Indeed, two different Third Circuit panels recently came to exactly opposite conclusions on the very same day about the ability of schools to regulate student internet speech: in one, the Third Circuit upheld a school’s ability to discipline a student for creating a fake MySpace profile mocking the school’s principal; in the other, the Third Circuit held the school could not regulate conduct (again, creation of a fake MySpace profile about the school’s principal) that occurred within the student’s home.  Both opinions have since been vacated pending a consolidated rehearing en banc, but the message is clear: courts throughout the country require guidance on the appropriate legal principles applicable to student internet speech. The remainder of this Article introduces the relevant Supreme Court precedent, explores in greater depth the two contradictory Third Circuit opinions, and offers some preliminary analysis as to how the Third Circuit (and perhaps ultimately the Supreme Court) may clarify the law in the pending en banc decision. Background – Supreme Court Precedent The Supreme Court’s seminal pronouncement that set the limits of a school’s ability to regulate student speech came down in 1969.  In Tinker v. Des Moines Independent Community School District, the Supreme Court addressed the issue of “First Amendment rights, applied in light of the special characteristics of the school environment.” [FN1] The Court reasoned that while students do not “shed their constitutional rights to freedom of speech or expression at the schoolhouse gate,” the right to free speech must be balanced against the interest in allowing “[s]tates and of school officials, consistent with fundamental constitutional safeguards, to prescribe and control conduct in the schools.”[FN2] The so-called Tinker rule holds that in order for a school district to suppress student speech (by issuing a punishment or discipline relating to that speech), the speech must materially disrupt the school, involve substantial disorder, or invade the rights of others: “conduct by the student, in class or out of it, which for any reason — whether it stems from time, place, or type of behavior — materially disrupts class work or involves substantial disorder or invasion of the rights of others is, of course, not immunized by the constitutional guarantee of freedom of speech.”[FN3] Since Tinker, the Supreme Court has addressed free speech issues in the context of schools in several cases.  In each case, the Court addressed the tension between the students’ right to free expression and the schools’ need to regulate school conduct in favor of the schools.  In Bethel School District v. Fraser[FN4] the Court distinguished Tinker and found that a school’s discipline of a student for his sexual-innuendo-charged assembly speech was not a violation of the student’s First Amendment rights. [FN5] More recently, in Morse v. Frederick, the Court held that the First Amendment does not prevent school officials from suppressing student speech that was reasonably viewed as promoting illegal drug use at a school-supervised event.[FN6] Today’s Online Student Speech Cases The degree to which student online speech may be regulated is an increasingly significant issue.  As stated in a recent New York Times article, “the Internet is where children are growing up.  The average young person spends seven and a half hours a day with a computer, television, or smart phone . . . suggesting that almost every extra curricular hour is devoted to online life.” [FN7] And today’s online speech has some distinguishing characteristics from “ordinary speech.”  It is extremely public.  It may be rapidly distributed to a wide group of people extremely quickly.  And it may potentially be saved forever. A recent series of cases demonstrate that courts are grappling with how to apply the Supreme Court free-speech precedent to student speech that has moved to online mediums such as the now-ubiquitous Facebook or Twitter.  None of the triumvirate of Supreme Court student speech cases maps easily to the arena of online student speech.  As one state supreme court noted,
“[u]nfortunately, the United States Supreme Court has not revisited this area [of the First Amendment rights of public school students] for fifteen years.  Thus, the breadth and contour of these cases and their application to differing circumstances continues to evolve.  Moreover, the advent of the Internet has complicated analysis of restrictions on speech.  Indeed, Tinker’s simple armband, worn silently and brought into a Des Moines, Iowa classroom, has been replaced by [today’s student’s] complex multi-media website, accessible to fellow students, teachers, and the world.” [FN8]
A recent series of cases from the Third Circuit demonstrates the complexities raised by these cases.  In one case, a Third Circuit panel found a school’s discipline of a student for his online speech to be a violation of the First Amendment and that the school’s authority could not extend to such off-campus behavior.  That very same day, a different Third Circuit panel addressing an almost identical fact pattern came to the opposite conclusion, finding no First Amendment violation when a school district punished a student for online speech. Recent Online Student speech Cases J.S. ex rel. Snyder v. Blue Mountain School District In J.S., the Third Circuit affirmed a district court ruling that a school district had acted within its authority in disciplining a student for creating an online profile on her MySpace page that alluded to “sexually inappropriate behavior and illegal conduct” by her principal. [FN9] The student was a 14-year-old eighth-grader who, along with a friend, had been disciplined by the principal for a dress code violation.  A month later, the students created a fictitious profile for the principal from a home computer on MySpace.  The MySpace profile, which included a picture of the principal taken from the school’s website, described him as a pedophile and a sex addict whose interests included “being a tight ass,” “[having sex] in my office,” and “hitting on students and their parents.”  Word of the MySpace profile soon spread around school.  Eventually, the principal found out about it.  In response, the principal issued the students a ten-day suspension for violating the school’s rule against making false accusations against members of the school staff. [FN10] The students’ parents sued the school district, claiming that the suspension was a violation of their children’s First Amendment rights.  The district court disagreed and found for the school board, concluding that the school had acted properly in suspending the students and that their First Amendment rights had not been violated.[FN11] On appeal, the Third Circuit affirmed.  The Panel majority noted that although the Supreme Court “has not yet spoken on the relatively new area of student internet speech,” courts can derive the relevant legal principles from traditional student speech cases, such as Tinker, Bethel, and Morse[FN12] Drawing from the Tinker standard that a school may discipline students for speech that “create[s] a significant threat of substantial disruption” within the school, [FN13]the Third Circuit found that discipline was appropriate and permissible based primarily on the fact that the profile targeted the principal in a manner that could have undermined his authority by referencing “activities clearly inappropriate for a Middle School principal and illegal for any adult.” [FN14]The court also found that the online context of the speech, which allowed for quick and widespread distribution, exacerbated the situation and increased the likelihood of “substantial disruption.” [FN15] In a strongly written dissent, one of the panel Judges concluded that the Tinker standard had not been met: Tinker requires a showing of “specific and significant fear of disruption, not just some remote apprehension of disturbance.” [FN16] While acknowledging the general power of school officials to regulate conduct at schools, the dissent concluded that the majority decision vests school officials with dangerously over-broad censorship authority in that it “adopt[s] a rule that allows school officials to punish any speech by a student that takes place anywhere, at any time, as long as it is about the school or a school official . . . and is deemed ‘offensive’ by the prevailing authority.” [FN17] The dissent further noted that “[n]either the Supreme Court nor this Court has ever allowed schools to punish students for off-campus speech that is not school-sponsored and that caused no substantial disruption at school.” [FN18] Layshock v. Hermitage School District Curiously, a different panel of Judges of the Third Circuit reached the opposite conclusion on the very same day in a similar case, Layshock v. Hermitage School District.[FN19] In Layshock, the Third Circuit panel affirmed a district court ruling that Hermitage School District’s suspension of high school student Justin Layshock for his “parody profile” of the high school principal on his MySpace page was improper.  The Layshock panel concluded that the high school’s discipline of the student for his online behavior violated his First Amendment free speech rights and that the school’s authority did not reach such off-campus behavior.[FN20] The student, a 17-year-old high school senior, created a fake MySpace profile in the name of his principal, using a picture of the principal from the school’s website.  The profile mocked the principal, indicating that he was a “big steroid freak,” a “big hard ass” and a “big whore” who smoked a “big blunt.”  When the principal learned of the profile, he issued a ten-day suspension and barred Justin from extracurricular activities for disruption of school activities, harassment of a school administrator over the Internet, and computer policy violations.[FN21] Layshock’s parents sued the school district and the principal, asserting violations of the First and Fourteenth Amendments.  The district court ruled in their favor on the First Amendment claim, concluding that the school was unable to establish “a sufficient nexus between Justin’s speech and a substantial disruption of the school environment, which is necessary to suppress students’ speech per Tinker.” [FN22] On appeal, the Third Circuit agreed that “it would be an unseemly and dangerous precedent to allow the state in the guise of school authorities to reach into a child’s home and control his/her actions there to the same extent that they can control that child when he/she participates in school sponsored activities.” [FN23] The court refused to allow the School District to exercise authority over a student “while he is sitting in his grandmother’s home after school.” [FN24] On April 9, 2010, shortly after issuing the seemingly contradictory rulings in J.S. and Layshock, the Third Circuit agreed to rehear the two cases en banc.  Given the factually similar circumstances of the two cases and their opposite results, it is not surprising that the Third Circuit found it necessary to provide clear guidance delineating what type of speech may be punished and how far school districts may go in punishing online speech.  Argument was heard by the full court on June 3, 2010, and a ruling is expected sometime this year.  The Third Circuit en banc review of the J.S. and Layshock cases may also be a precursor to a Supreme Court pronouncement on the topic of School regulation of online student speech. Clarifying The Law? One key issue raised in these en banc appeals – and in other cases around the country addressing similar issues [FN25] – is whether online speech by a student that is generated off school property and not during school hours, but is nonetheless directed at the school, can be regulated by a school district at all.  That is, is such speech “student speech” that may be regulated under appropriate circumstances or is it “off-campus speech” that is out of the reach of school regulation under Tinker, Bethel, and Morse? In the en banc appeals, the school districts argued in their briefing papers and at oral argument that the Supreme Court’s reasoning in Bethel regarding the ability of schools to regulate disruptive student speech should likewise apply to online speech that is directed at school faculty.  They argued that although such “speech” may be created outside of school, it is student speech, because it is specifically aimed at the school or a school administrator.  Further, they argued that such speech may be restricted because it has a sufficient impact on the proper functioning of the school. [FN26] The districts reason that because students today create, send, and access communication using multiple methods including online social media sites, email, and text messaging, the proper focus is not where the speech was made, but whether its impact is felt in school.[FN27] On the other hand, the students argued that a school district’s ability to regulate disruptive student speech should not extend to speech outside of school and that the curtailment of students’ off-campus speech is doctrinally indefensible.[FN28] In my view, extending school districts’ intentionally limited authority to off-campus speech — whether online or otherwise — would set a dangerous precedent.  Indeed, during oral argument of the en banc appeals in June, Chief Judge McKee of the Third Circuit asked if a group of students could be punished if they were overheard in a baseball stadium calling their principal a “douchebag.”  The clear answer is no.  Judge Rendell similarly noted that “the First Amendment allows people to say things that aren’t nice.” [FN29] These seem to be the right points to be making.  In other words, how are the online profiles in the J.S. and Layshock cases any different than distasteful jokes or mocking speech about school officials made outside of school?  TheTinkerBethelMorse trilogy of cases allows for limited regulation of speech in school; they simply do not contemplate otherwise limiting speech outside of school.  While online speech undoubtedly has some characteristics that distinguish it from Judge McKee’s example — i.e., a mocking online profile can be rapidly accessed by a wide group of students and lasts longer than the spoken word — these differences do not justify redrawing the line in order to allow a school to regulate a student’s out-of-school online speech. A second key issue is, if schools were allowed to regulate such speech, how substantial must a disruption be to be considered a “substantial disruption” for which discipline is permitted?  Is a school district’s judgment that there is potential to cause disruption enough, or should more be required? The school districts argue that they should have the authority to regulate speech when it is reasonably foreseeable that it would cause a substantial disruption in school.[FN30] But the students argue that if a school district is authorized to punish students’ off-campus online speech based on a presumed “reasonable possibility” of future disruption, this would eviscerate the careful balance drawn in Tinker. In my view, if schools are allowed to regulate online off-campus speech merely because it is directed towards school officials (a dubious proposition under Supreme Court First Amendment precedents), it is critical that this authority remain as limited as possible.  One way to do that is to tie the school’s authority to the presence of an in-school disruption.  Giving schools the authority to determine that, in their view, there is a “reasonable potential” for a future disruption, even if there is no evidence of any disruption, seems to give them too much power.  For instance, in the Third Circuit cases discussed above, it seems likely that anyone who viewed the fake MySpace profile would know it was intended as a joke.  And there was no evidence of any disruption at all.  Still, the school district punished the speech.  This gives the school district too much power to discipline speech that occurs off-campus. The principles set forth in the seminal Supreme Court student speech cases should favor the students in online speech cases – unless the courts adopt the view that online speech as inherently different from traditional speech.  If so, then the rules regarding school regulation of student speech will change in turn.  The Third Circuit en banc cases ­ and perhaps one day the Supreme Court – must now grapple with that issue.[FN31]  
* Michael Kasdan is an associate at Amster, Rothstein & Ebenstein LLP and is a 2001 graduate of NYU School of Law.  The views and opinions expressed in this article are his own. [FN1] 393 U.S. 503, 506 (1969).  Tinker involved an in-school passive display of political “speech,” students wearing black armbands in school to protest the Vietnam War.  The Court found that while there is a need to provide for authority to regulate disruptive speech in schools, in this case the speech was silent and passive, and there was no “evidence that the authorities had reason to anticipate that the wearing of the armbands would substantially interfere with the work of the school or impinge upon the rights of other students.”  Id. at 509.  Accordingly, the discipline was found to be a violation of the First Amendment.  Id. at 510-11. [FN2] Id. at 506-07. [FN3] Id. at 513. [FN4] 478 U.S. 675 (1986). [FN5] Bethel, unlike Tinker, did not involve political speech, nor was it of the silent variety.  In Bethel, a student delivered a speech at a school event that was based wholly on “explicit sexual metaphor.”  Id. at 676.  The speech, supporting the candidacy of the speaker’s friend for student counsel, used repeated sexual innuendo to comic effect.  In finding that the First Amendment did not prevent the school from disciplining the student for the speech, the Court remarked that it was “perfectly appropriate for the school to . . . make the point to pupils that vulgar speech and lewd conduct is wholly inconsistent with the ‘fundamental values’ of public school education.”  Id. at 685-86.  The in-school nature of the speech was central to this case.  Indeed, Justice Brennan was careful to note in his concurrence that the holding should be narrowly limited to in-school circumstances.  Brennan argued that under applicable Supreme Court precedent, if the same speech had been given “outside of the school environment, he could not be penalized simply because government officials considered his language to be inappropriate” because the speech was far removed from the category of “obscene” speech that is unprotected by the First Amendment.  Id. at 688.  Moreover, the discipline was not based on the fact that the school district disagreed with the political viewpoint of the speech; rather, the basis for the discipline was the school’s interest in ensuring that a school event proceeded in an orderly manner.  Accordingly, Justice Brennan cast the Court’s holding narrowly: “the Court’s holding concerns only the authority that school officials have to restrict a high school student’s use of disruptive language in a speech given at a high school assembly.”  Id. at 689. [FN6] Morse v. Frederick, 551 U.S. 393 (2007).  In Morse, the Court found that a school district may discipline a student for speech at a school event that was regarded as encouraging illegal drug use without running afoul of the First Amendment.  Id. at 408.  There, a student was suspended from school after refusing to take down a banner stating “BONG HiTS 4 JESUS” that he unfurled at a school event.  Id. at 393.  Under these circumstances, the Court found that even though there was no “substantial disruption” caused, id., the discipline by the school was nevertheless appropriate in view of “the special characteristics of the school environment,” id. (quoting Tinker), because schools are entitled to take steps to safeguard the students entrusted into their care from speech that could be reasonably regarded as encouraging illegal drug use. [FN7] Stephanie Clifford, Teaching About Web Includes Troublesome Parts, N.Y. Times, Apr. 8, 2010, at A15. [FN8] J.S. ex rel. H.S. v. Bethlehem Area School Dist., 807 A.2d 847, 863-64 (Pa. 2002). [FN9] J.S. ex rel. Snyder v. Blue Mountain Sch. Dist., 593 F.3d 286, 308 (3rd Cir. 2010). [FN10] Id. at 291-93. [FN11] Id. at 290-95. [FN12] Id. at 295-97. [FN13] Id. at 298. [FN14] Id. at 300. [FN15] Id. [FN16] Id. at 312 (Chagares, J. concurring in part and dissenting in part). [FN17] Id. at 318. [FN18] Id. at 308. [FN19] 593 F.3d 249 (3rd Cir. 2010). [FN20] Id. at 252-54. [FN21] Id. [FN22] Id. at 259-60. [FN23] Id. at 260. [FN24] Id. [FN25] The Third Circuit cases discussed in depth in this article are merely illustrative of the differing results courts addressing this issue have reached.  Similar cases have arisen across the country.  See, e.g., Evans v. Bayer, 684 F.Supp.2d 1365 (S.D. Fl. 2010) (holding, where student created fake and harassing Facebook profile of teacher, school districts may discipline off-campus speech only where such speech “raises on-campus concerns”). [FN26] See J.S., 593 F.3d at 298 n.6 (“Electronic communication allows students to cause a substantial disruption to a school’s learning environment even without being physically present.  We decline to say that simply because the disruption to the learning environment originates from a computer off-campus, the school should be left powerless to discipline the student.”). [FN27] The District also noted that several other appellate courts have held that online speech created by a student at their home computer constitutes “student speech” for First Amendment purposes.  See, e.g., J.S. v. Bethlehem Area Sch. Dist., 807 A.2d 847 (Pa. 2002); Wisniewski v. Bd. of Educ. of Weedsport Cent. Sch. Dist., 494 F.3d 34 (2d Cir. 2007); Doninger v. Niehoff, 527 F.3d 41 (2d Cir. 2008).  In each of those cases, the speech at issue was created at the students’ home outside the physical presence of the schools they attended. [FN28] See J.S., 593 F.3d at 318 n.23 (explaining that Pennsylvania state law clearly intended Bethel to apply only to in-school speech). [FN29] Shannon P. Duffy, 3rd Circuit Mulls Student Suspensions for MySpace Postings, Law.Com, June 4, 2010, available at http://www.law.com/jsp/article.jsp?id=1202459201824. [FN30] “[B]oth the United States Supreme Court and this Court have held that a school district can act to restrict student speech based on a reasonable belief the speech would, in the foreseeable future, substantially disrupt or materially interfere with school activities.  See Tinker, 393 U.S. at 514 (“the record does not demonstrate any facts which might reasonably have led school authorities to forecast substantial disruption of or material interference with school activities”) (emphasis added); Morse, 551 U.S. at 403 (“Tinker held that student expression may not be suppressed unless school officials reasonablyconclude that it will materially and substantially disrupt the work and discipline of the school”) (emphasis added) (internal quotations omitted).

Regulating the Film Industry in China: A New Approach

By Brian R. Byrne* A pdf version of this article may be downloaded here. I.  Introduction For U.S. filmmakers, the People’s Republic of China represents a prodigious market opportunity.[FN1] As the Chinese middle-class expands,[FN2] enjoying an increase in disposable income,[FN3] the thirst for quality entertainment intensifies.[FN4] Cinema construction rampages across the mainland in an effort to satisfy demand for theatrical releases.[FN5] Yet despite this consumer demand,[FN6] supply methodology remains a perplexing phenomenon. True exploitation of the market is simply chimerical due to an obstinate web of import quotas, censorship, and government intervention, all founded upon a guise of cultural protectionism.[FN7] However, notwithstanding the obstacles to legitimate distribution, the channels of illegitimate distribution remain relatively unencumbered. Piracy is rampant throughout China[FN8] and high quality copies of pirated films are widely available, often before the film in question has even been released through lawful channels. Moreover, in contrast to lawful distribution, pirates are subject to neither an import quota nor the rigorous censorship regime that would otherwise apply.[FN9] Thus, China appears to offer a distinct advantage to illegitimate market players. Unsurprisingly, this regime has caused diplomatic unrest,[FN10] souring, in particular, China’s relationship with the United States. In 2007, the U.S. initiated two WTO proceedings against China, one regarding insufficient protection of intellectual property,[FN11] and the other complaining of insufficient market access.[FN12] In both instances, the Panels made rulings adverse to China. In the aftermath of these decisions, China faces deep scrutiny from the international community and an expectation that the necessary reforms will be implemented. This paper will not serve to deconstruct the WTO rulings. Rather, I will argue that: (i) China’s authoritarian approach to film distribution, coupled with its deficient intellectual property regime, actually promotes the dissemination of Western culture within its borders – a direct perversion of its intentions; and (ii) in order to achieve its cultural objectives, China must undertake a number of key reforms. II. Film Distribution in China and the Control of Culture Before proposing a new market structure, I will examine the structure currently in place, emphasizing the market valves and barriers that China has implemented to maintain cultural oversight. The system for distributing U.S. films in China has been described as “among the most burdensome and restrictive in the world.”[FN13] In order to release a film in Chinese theaters, foreign studios must overcome a number of significant obstacles, each one carrying the potential to reduce or even eviscerate potential profits. After analyzing each of these impediments, I will turn to the perverse result of this structure. (a) Importation and Distribution The theatrical release of foreign films in China is heavily restricted and state-governed. Regulatory oversight is vested in China’s State Administration on Radio, Film and Television (the SARFT).[FN14] Only twenty foreign films – both U.S. and non – may be imported into China annually,[FN15] and importation can only be conducted by film import enterprises designated or approved by the SARFT.[FN16] Currently, there is only one entity approved to import films: the China Film Import and Export Corporation, a wholly state-owned entity.[FN17] Following importation of their films, U.S. studios must secure a distributor. In its submissions to the WTO, the U.S. made the following allegations about the system of distributing films for theatrical release in China: distribution can only occur through one of two Chinese state-controlled distributors;[FN18] both members of the distribution duopoly[FN19] use identical form contracts and do not permit negotiation of key terms;[FN20] China Film Group actually decides on the distributor and distribution conditions for all imported films;[FN21] this distribution regime facing U.S. films contrasts starkly with the open distribution system available for domestic films, as Chinese films may be distributed by their production studios, or a full range of film distributors in China, with terms being negotiated commercially and competitively.[FN22] Thus, China maintains a high barrier for the importation and distribution of foreign films. It intends this barrier to facilitate trade protectionism and function as a cultural filtration device, limiting the number of foreign films to which Chinese citizens are exposed. (b) Censorship Censorship in China is extensive and disquieting.[FN23] The current Internet crisis serves as a cautionary tale for both free speech advocates and expansionist capitalists.[FN24] For the U.S. film industry, the ominous specter of Chinese censorship is just as perturbing and no less commercially disruptive.[FN25] All films imported into China must pass the strict scrutiny of censors,[FN26] but because the country lacks a film rating system and censors can interpret the censorship guidelines in a number of different ways, the process is very unpredictable.[FN27] This creates problems for U.S. studios that would like to pre-censor their films to avoid delays.[FN28] A lamentable dilemma faces U.S. film executives in this regard. To ensure a quicker grant of censorship approval, the studios could adopt an overly cautious approach and remove all potentially condemnable material. This approach, however, may unnecessarily reduce the artistic quality and commercial appeal of the picture if, in reality, censors would not have objected to the removed content. On the other hand, the studios could take a less cautious approach and remove only that material that the censors are most likely to flag. The risk associated with this strategy is that censors may object to content “left in,” causing censorship delays and resulting in significant commercial harm to the film.[FN29] China’s rigorous system of censorship unquestionably highlights the government’s commitment to control the flow of cultural inputs in the market. Essentially, a censorship wall has been created to act as a second barrier to the entry of foreign films. However, a key difference between censorship and the import quota is that both the U.S. film industry and the Chinese film industry must overcome the censorship barrier. (c) Blackout Periods Periodically, China institutes cultural “blackout” periods, during which foreign films cannot be shown in theaters.[FN30] Asian media reports that imported films are subject to removal at any time the government decides to hold an “impromptu film festival.”[FN31] Although this indicates a lack of predictability, reports suggest that there is one annual period during which foreign films are “routinely barred from screening.”[FN32] This period occurs during July, coinciding with the school summer holidays. Naturally, this inflicts significant losses on summer blockbusters.[FN33] It would be naïve to disregard the protectionist nature of blackout periods, considering the boost given to domestic films at the expense of American films. They are certainly designed to “make room for domestic Chinese films during peak summer viewing days.”[FN34] However, they are not confined to summer and may occur numerous times during the year, spontaneously and suddenly.[FN35] For this reason it has been suggested that the Chinese authorities pull films that do “too well” at the box office.[FN36] In addition to economic concerns, blackout dates are heavily focused – ostensibly, at least – on cultural management. The Chinese government is attempting to fence out the Hollywood influence at key times of the year – most notably, at those times when the malleability of youth is exposed and vulnerable. III.  Insufficient IP Enforcement and the Dissemination of Western Culture Within China Piracy is pervasive throughout China.[FN37] IP enforcement is so deficient that some U.S. studios see only two options for commercial viability: compete with pirates on price, or convert pirates to legitimate retailers.[FN38] However, underlying the pervasiveness of piracy is a relatively straightforward market dynamic: because lawful supply cannot meet demand, unlawful supply takes its place.[FN39] The Motion Picture Association of America enunciates fiercely that the current import quota of twenty films per year falls far short of market demand for “primarily American films.”[FN40] Many commentators argue that when consumers are unable to purchase products in the open market, they “may settle for black market products or pirated goods.”[FN41] Thus, in the “large and hungry”[FN42] Chinese market, consumers who wish to see certain movies that are unavailable through legitimate channels have little choice but to purchase unlicensed copies.[FN43] Those unlicensed copies are facilitated by the lack of robust IP enforcement. We can assume that the import quota serves two goals: limiting the influx of Western culture presented in U.S. films, and protecting the domestic film industry.[FN44] Aside from the economic objective associated with the latter goal, both goals share the same underlying cultural objective: preserve and promote Chinese culture at the expense of Western culture. Yet the import quota, without adequate IP enforcement, is producing a result that is directly perverse to this purpose. Uncensored, pirated copies of U.S. films are widely available on the streets of China at a price far lower than the admission to a movie theater.[FN45] This is without question a widespread dissemination of Western culture, fostered by a lack of commitment on the part of the Chinese government to eradicate piracy. If the Chinese government increased the number of foreign films imported into China, it would satisfy some of the market demand for U.S. films and reduce some of the demand for pirated films, thereby limiting the dissemination of Western culture and helping China achieve its cultural objectives. Analyzing the intersection between piracy and inadequate lawful supply necessarily encompasses more than a mere discussion of the import quota. Censorship also plays three fundamental roles in fostering piracy. Firstly, Chinese censorship authorities are often slow in approving U.S. films, and this can give pirates a significant head start on reaching the market.[FN46]Secondly, Chinese legislation denies copyright protection to films that have not yet been approved by censors.[FN47] Thus, while a film is awaiting approval, pirates can operate without fear of legal sanction. Finally, the content of pirated films has typically not been subjected to censorship.[FN48]Therefore, pirates are actually in a position to offer a product, which may be more desirable to consumers than a legitimate copy. The cultural blackout periods referred to earlier also act as an acute constraint on lawful supply, creating a void for pirates to fill. During these periods, pirates operate without competition, which inflicts a particularly severe commercial detriment to U.S. film studios, especially in light of their tendency to release summer blockbusters simultaneously across the globe.[FN49] Thus, rampant piracy of U.S. films in China clearly nullifies the government’s cultural input barriers. The import quota, censorship and blackout dates actually provoke an injection of U.S. culture into the market. IV.  Reform Proposal In light of the foregoing, China should implement the following reforms in order to achieve its cultural objectives. A consequential benefit will accrue insofar as these reforms may help remedy some of the complaints raised by the U.S. at the WTO.[FN50] Although the reforms outlined below may not offer a complete formalistic resolve to China’s WTO obligations, the reforms will benefit U.S. filmmakers, and this should help mitigate the current adversarial guise of U.S.-Sino relations. (a) Strengthen IP Enforcement By eradicating piracy to the greatest extent possible, China will limit the dissemination of uncensored U.S. films and thereby further its cultural objectives. Furthermore, China’s own film industry will benefit from increased revenues, and this is especially important for domestic films, which have enjoyed extensive government promotion.[FN51] Typically, piracy diverts these government funds away from the official channel of revenue receipt. Without piracy, however, the funds would remain in official channels and could thus be used to strengthen the domestic film industry in a manner consistent with the government’s desired cultural trajectory. (b) Increase the Import Quota Increasing lawful supply is a necessary corollary to eradicating piracy. It is essential that China reduce incentives to pirate by the greatest degree possible. If consumers have greater lawful access to U.S. films, they may be dissuaded from purchasing pirated DVDs of the same films. If, simultaneously, punishment for piracy is real and exorbitant, the risk-reward ratio of piracy may become so high as to act as a substantial deterrent. In addition to helping reduce piracy, increasing the import quota may lead to increased domestic cinema construction, which itself may benefit the domestic film industry.[FN52] Naturally, China should strive for a balance between the number of films imported, piracy reduction, and benefits to the domestic industry. After all, flooding the market with U.S. films would not achieve its cultural objectives.  However, increasing the number of imports would.  The benefit of legitimate importation over piracy is that China retains censorship control. (c) Reduce Censorship Delays As I have already discussed, delays in censorship approval can give pirates a significant lead-time to reach the market. Thus, in conjunction with an increased import quota, China should invest in its censorship infrastructure in two ways: firstly, it must increase efficiency by decreasing the processing time for approval of imported films; secondly, it must increase transparency so that U.S. film companies can pre-censor their material. Releasing a film on the same date globally is an effective means of limiting piracy. It is therefore vital to China’s interests that its censors are not the weak link in an otherwise industrious chain of effort that makes the simultaneous release possible. Censorship will be the most fundamental valve for China to control cultural direction, and it is also the least destructive to the commercial interests of U.S. filmmakers. However, China should strive to keep the level of censorship within the bounds of consumer acceptability. Otherwise, pirates may be inspired to capitalize on consumer demand for uncensored versions of the films. (d) Relax Restrictions on the Domestic Film Industry Ultimately, as China’s middle class grows, entertainment will only increase in importance. The demand for foreign films is currently fuelled, in part, by the perceived superiority of U.S. filmmakers and their ability to entertain an audience.[FN53] Although the Chinese film industry has made great advances, government authorities must allow Chinese artists greater freedom[FN54] to promote greater competition between domestic artists and the cultural influences of imported entertainment. Similar to import quotas, Chinese authorities must strive to achieve the optimum balance between fostering a competitive domestic industry and not sacrificing their fundamental cultural objectives. In other words, the government need not lift all restrictions currently placed on Chinese filmmakers. Instead, it must only relax restrictions to the point that the cultural benefits of a truly competitive domestic industry outweigh the perceived negative cultural effects of forfeiting a degree of control over the industry. V.  Current Market Structure On the left side of the chart above, I have depicted China’s barriers intended to control cultural inputs. The U.S. film industry must overcome two barriers to entry: the import quota and censorship. Only some U.S. films pass through both barriers and reach the Chinese market. Naturally, China’s own film industry must not overcome the import quota; however, it must still contend with censorship. Although China seems concerned with filtering cultural inputs on the left side of the chart, the right side of the chart shows the glaring deficiency due to insufficient IP enforcement. Piracy allows vast quantities of uncensored U.S. culture into the market, while extracting significant revenue owed to the U.S. industry (leading to political and legal tensions). Piracy of Chinese films extracts revenue from the market that would otherwise strengthen the Chinese film industry. VI.  Proposed Market Structure The chart above represents the proposed market structure.  Allowing more U.S. films to legitimately enter the market would increase U.S. cultural input; however, China could still rely on the censorship barrier as a cultural valve. Relaxing censorship constraints on the Chinese film industry would strengthen the industry and increase its cultural input. On the right side of the chart is a representation of increased IP enforcement. China benefits in two ways: first, there is a reduction in uncensored U.S. films entering the market, and therefore a reduction in uncontrolled cultural input; second, revenue owed to the Chinese film industry stays within official channels, which strengthens the domestic industry. VII.  Conclusion The U.S.-China acrimony, engendered by China’s current state-of-play for intellectual property holders, has attracted a saturating volume of legal scholarship. Understandably, the majority of this commentary[FN55] champions Western pressure on China, via the WTO and other channels. Clearly, this approach has proved extremely fruitful recently, in light of U.S. success at the WTO. Without question, these rulings provide a platform to reform the status quo in China. However, I propose that the U.S. should seek to supplement the WTO rulings with Chinese-orientated incentives that simultaneously benefit U.S. interests.[FN56] In order for China to achieve its cultural objectives, it must reform its current regime. One might contend that this argument, taken to the extreme, would simply result in China banning the import of all foreign films, while simultaneously cracking down on piracy. Yet this would not be in China’s best interests. Due to its regulatory control of the revenue sharing mechanism, China stands to profit greatly from the legitimate exhibition of foreign films. Also, it is arguable that China’s economic success heavily depends on at least a modicum of contentment among the middle class workforce. Given the high demand for U.S. films from this constituency, a total ban on foreign imports may be a treacherous move for the government. My proposals reflect an endorsement of cultural regulation; if implemented, the new market structure would inevitably restrict the dissemination of information throughout China. In light of this, the U.S. film industry may be hesitant to pursue the type of argument presented in this paper, for fear of allegations of cynicism. Nonetheless, I believe my position can be defended on two fundamental grounds. The first ground concerns the issue of sovereignty. Put simply, China has a right to define the contours of its culture. As recognized by the WTO, “the protection of public morals is a highly important governmental interest.”[FN57] Therefore, in seeking to resolve their grievances, U.S. IP holders cannot, and should not, interfere with China’s cultural progression, other than to monetize their creative output and vigorously enforce their property rights. U.S. filmmakers need not be expected to sustain altruistically the plight of piracy in order to maintain a cultural interchange, which is contrary to the policy of a sovereign nation. The second ground of defense centers directly on property rights. Respect for the ownership of private property is a bedrock principle of U.S. policy. Meanwhile, the current regime in China evidences disregard for the property rights of U.S. copyright holders. It may be true that a beneficial side effect of this market structure is that Chinese citizens enjoy greater exposure to unfiltered expression. However, this exposure comes at great cost. The foundations of this cultural influence rest on piracy, an enterprise that flies in the face of private property rights. In persuading the Chinese authorities to exercise greater control of cultural influence, the U.S. film industry would be indirectly raising the status of private property ownership throughout China. From a U.S. perspective, the idea of private property ownership is arguably a cultural export of at least equal significance to free speech. Therefore, I believe that it is thoroughly appropriate to advance the market reforms proposed herein, as the result will accord with U.S. policy. In summation, the adage of “change must come from within” is robust and time honored for a reason. If Chinese authorities are not ready to embrace the trappings of Western culture, then so be it. The pursuit of free expression does not necessarily correlate to the interests of intellectual property holders.[FN58]Nonetheless this should not deter filmmakers from pursuing legitimate revenue that stands to be extracted from the market. The U.S. film industry can increase its profits in China without demanding that Chinese authorities cease their control of cultural development. Each objective can co-exist and the reforms mentioned above should help satisfy both parties. All that remains now is to convince China. * Brian R. Byrne practices EU competition law in Brussels. He is a graduate of University College Dublin (B.C.L. 2007) and New York University School of Law (LL.M. 2010). He is a member of the New York Bar and an Irish solicitor. [FN1] Chinese box office sales reached $907 million in 2009, representing a 42 percent growth in the sector.  See Zhang Yimou: China Needs More Cinemas, Beijing Review, Mar. 8 2010, available at http://www.bjreview.com.cn/movies/txt/2010-03/08/content_252286.htm. [FN2] See Wayne M. Morrison, Cong. Research Serv., RL 33536, China-US Trade Issues 1 (2009). [FN3] For a detailed economic analysis of the Chinese middle class’ spending power, see Diana Farrell et al, The Value of China’s Emerging Middle Class,McKinsey Quarterly, Spec. Ed. 2006, at 60, 69. [FN4] See Patrick H. Hu, Mickey Mouse in China: Legal and Cultural Implications in Protecting U.S. Copyrights, 14 B.U. Int’l L.J. 81, 92 (1996). [FN5] It has been reported that 626 screens were added last year bringing China’s screen total to 4,723 by the end of 2009. This represents an increase of 13 percent. Ding Wenlei, Building China’s Hollywood, Beijing Review, Feb. 18, 2010, available at http://www.bjreview.com.cn/business/txt/2010-02/11/content_246761.htm. [FN6] Acclaimed Chinese director Zhang Yimou recently proposed to the Chinese People’s Political Consultative Conference (CPPCC) that more cinemas should be built in smaller towns and cities to satisfy demand.  Zhang Yimou: China Needs More Cinemassupra note 1. [FN7] See Panel Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, ¶ 7.709, WT/DS363/R (Aug. 12, 2009). [FN8] Some reports indicate that 95 percent of all movies sold in China are pirated. See Frank Lin, Piracy in China: Identifying the Problem and Implementing Solutions, 14 Currents: Int’l Trade L. J. 83, 89 (2005). Others indicate a rate of 90 percent. See Kevin Lee, The Little State Department: Hollywood and the MPAA’s Influence on U.S. Trade Relations, 28. Nw. J. Int’l L. & Bus. 371, 389 (2008). [FN9] See Paula M. Miller, Reeling in China’s Movie Fans, China Business Review, Mar./Apr. 2007 35, 37. [FN10] Senator Chuck Schumer blasted China in the media in 2007 and hailed the WTO complaints, saying, “China has no excuse to allow American intellectual property to be ripped off without any consequences. I hope this is just the beginning of a much stronger Administration stance on China’s nonstop violations of free trade rules.” See Eric Bangeman, US Says China Isn’t Doing Enough About Piracy, Files Complaint with WTO, Ars Technica (Apr. 10, 2007), http://arstechnica.com/tech-policy/news/2007/04/us-says-china-isnt-doing-enough-about-piracy-files-complaint-with-wto.ars. [FN11] See Panel Report, China – Measures Affecting the Protection and Enforcement of Intellectual Property Rights, WT/DS362/R (Jan. 26, 2009). [FN12] See China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, supra note 7. [FN13] Bradley S. Klapper, WTO Win Could Open China’s Doors to US Companies, Arizona Daily Sun, Aug. 12, 2009, available at http://azdailysun.com/news/article_80c41a2e-f8ce-50cd-8b7f-141ff30a9aa3.html (quoting Dan Glickman, MPAA Chairman). [FN14] See China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, supra note 7, at 84. [FN15] Lee, supra note 8, at 389. [FN16] See China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, supra note 7, at 85. [FN17] Id. at ¶ 7.575. [FN18] Id. at ¶ 7.1660. [FN19] Although the WTO Panel rejected the U.S. argument that China’s rulescreated the duopoly (either de jure or de facto), a duopoly exists in fact nonetheless. For a detailed discussion of the duopoly argument, see id. at 451-58. [FN20] Id. at ¶ 4.24. [FN21] Id. at ¶ 4.30. [FN22] Id. at ¶ 4.24, ¶ 4.30. Regarding these obstacles to distribution I have purposefully referred to the U.S. arguments, rather than the Panel Report, simply because the Panel rejected the claim of a de facto distribution duopoly. However, that rejection was founded merely upon a deficiency of evidence submitted, and does not alter the pragmatic obstacles faced by U.S. films studios seeking to release their films in Chinese cinemas. [FN23] “Virtually all print and broadcast media are government-run or supervised, and subject to censorship by Communist Party propaganda officials.” China and the WTO: Let Me Entertain You, Economist, Aug. 15, 2009, at 7. [FN24] See Google Ponders Leaving China: Failed Search, Economist, Mar. 20, 2010, at 79. Chinese authorities have also been actively shutting down websites, and blocking the registration of new domain names. See Fredrik Erixon and Hosuk Lee-Makiyama, Chinese Censorship Equals Chinese Protectionism, Wall St. J., Jan. 6, 2010, available at http://online.wsj.com/article/SB10001424052748704842604574641620942668590.html. [FN25] See Vivien Cui, Mainland release of Mission Impossible Possible, South China Morning Post, May 16, 2006, at 1. [FN26] Gerardo Lara, The Piracy of American Films in China: Why the U.S. Art Form is Not Protected by Copyright Laws in the People’s Republic of China, 2 UCLA J. Int’l L. & Foreign Aff. 343, 356 (1997-98). [FN27] See Miller, supra note 9, at 37. [FN28] Id. [FN29] The relationship between piracy and censorship delays will be examined in greater detail below. [FN30] See Lee, supra note 8, at 389. [FN31] Aventurina King, Curtains For Foreign Cinemas?, Asia Times Online, Dec. 2, 2006, available at http://www.atimes.com/atimes/China_Business/HL02Cb02.html. [FN32] Cuisupra note 25. [FN33] For example, China refused to screen Spider-Man 2Harry Potter and the Prisoner of Azkaban, and Shrek 2 in July 2004 due to a blackout period carrying the supposed aim of encouraging  “more upright pursuits” among the nation’s youth. See Carl Erik Heiberg, American Films in China: An Analysis of China’s Intellectual Property Record and Reconsideration of Cultural Trade Exceptions Amidst Rampant Piracy, 15 Minn. J. Int’l L. 219, 237 (2006). [FN34] Miller, supra note 9, at 37. [FN35] King, supra note 31. [FN36] Miller, supra note 9, at 37. One U.S. film with respect to which this allegation has been levied is The Da Vinci Code, which was scheduled for a three-week run but was pulled after it made more than $13 million dollars in China. [FN37] It is reported that 90% of all DVDs sold in China are pirated. SeeMichael C. Ellis, Report, The Cost of Motion Picture Piracy – To China, Asia and the Worldavailable at http://www.mpaa.org/press_releases/leksummarympa.pdf (last visited Nov. 8, 2010). In 2005, the US film industry lost an estimated $2.1 billion to piracy in China. See Jordana Cornish, Cracks in the Great Wall: Why China’s Copyright Law Has Failed to Prevent Piracy of American Movies Within Its Borders, 9 Vand. J. Ent. & Tech. L. 405, 411 (2006). It is worth noting that the value of lost revenue to piracy varies according to method of calculation and figures differ. See generally Aaron Schwabach, Intellectual Property Piracy: Perception and Reality in China, The United States and Elsewhere, 2 J. Int’l Media & Ent. L. 65 (2008). [FN38] CAV Warner Home Video has started to treat pirates as competitors by lowering prices and shortening the window between theatrical release and DVD release. It also attempts “to convert stores that sell counterfeit goods into sellers of licensed DVDs.” Miller, supra note 9, at 38. [FN39] See Lara, supra note 26, at 355. [FN40] Heiberg, supra note 33, at 236 (citing testimony of Fritz E. Attaway, Executive Vice President and Wash. General Counsel, MPAA). [FN41] Peter K. Yu, Piracy, Prejudice and Perspectives: An Attempt to Use Shakespeare to Reconfigure the US-China Intellectual Property Debate, 19 B.U. Int’l L. J. 1, 31 (2001). See also Derek Dessler, China’s Intellectual Property Protection: Prospects for Achieving International Standards, 19 Fordham Int’l L. J. 181, 232 (1995) (“Commentators argue that these market access barriers facilitate intellectual property piracy”). [FN42] Heiberg, supra note 33, at 236 [FN43] Schwabach, supra note 37, at 75 n.49. [FN44] Carl Erik Heiberg makes a similar suggestion, supra note 33, at 256. [FN45] “The latest Hollywood movies are on DVDs on street corners across China within days of their release, at a cost of $1 or less.” Keith Bradsher, WTO Rules Against China’s Limits on Imports, N.Y. Times, Aug. 12, 2009, at A1. [FN46] Mission Impossible III serves as a suitable illustration of this point. The film was originally scheduled for a simultaneous release in the U.S. and China. However, because censors opined that the film depicted Shanghai as “run down” and the police force as “clumsy,” the release was, at the time, “indefinitely postponed.” Upon learning of the censorship controversy, interested moviegoers allegedly turned to illegitimate copies, which were already available on the market, rather than wait for the official outcome. Cui, supra note 25. See also Miller, supra note 9, at 37. [FN47] Morrison, supra note 2, at 18. [FN48] Miller, supra note 9, at 37. [FN49] Exploitation of such releases in China is extremely difficult because potential audiences may have had access to the pirated copy months prior to the film actually being released in theaters. [FN50] I refer to the complaints made by the U.S. against China in Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R (Dec. 21, 2009). [FN51] Examples of movies, heavily supported by the Chinese government include The Founding of a Republic and Confucius. The latter is a biopic of the ancient philosopher while the former celebrates 60 years of the People’s Republic of China and features 120 top Chinese actors. For further information on these movies, including how they were received by audiences, see Sharon LaFraniere, China’s Zeal for Avatar Crowds Out Confucius, N.Y. Times, Jan. 30, 2010, at A4 and Steven Schwankert, China Reiterates Screen Limits for Foreign Films, Film Journal International, Jan. 27, 2010, available at http://www.filmjournal.com/filmjournal/content_display/esearch/e3if8d7feafe64b6fb76023a4453148d396. [FN52] Although certainly a biased commentator, James Cameron’s recent remarks in Beijing seem logical: “opening the doors in China… will raise the entire film industry [and] raise the “Chinese filmmakers’ ability to play their films.” Gillian Wong, James Cameron: China Should Let More Movies In, ABC News Online Dec. 23, 2009, available at http://abcnews.go.com/Entertainment/wireStory?id=9407012. [FN53] See Juliet Ye, China’s Avatar Restrictions Cause a Stir, Wall St. J., Jan. 20, 2010, available at http://blogs.wsj.com/chinarealtime/2010/01/20/china%E2%80%99s-avatar-restrictions-cause-a-stir/. [FN54] In China, artistic freedom in domestic film production is severely restrained and this impacts upon the ability of domestic film producers to compete vigorously with Hollywood movies. See Louisa Lim, Film Director Battles for Soul of Chinese Cinema, NPR.org, Jan. 4, 2010, available at http://www.npr.org/templates/story/story.php?storyId=121570362&ft=1&f=1004. [FN55] In U.S. law journals. [FN56] A similar power struggle is occurring between the U.S. and China over allegations that China is not allowing the yuan to appreciate in value. Similar to the film debate, the power of external influence vs. internal incentive has arisen. It has been suggested that “foreign cajoling may not do the trick. But inflation might.” Chinese Foreign Policy: Not Pointing or Wagging, But Beckoning, Economist, Mar. 20, 2010, at 5. [FN57] China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Productssupra note 7, at ¶ 7.868. [FN58] Jing Zhang argues that because China has no freedom of speech, “a hasty drive for copyright enforcement may pose a threat to the already terribly meager freedom Chinese people enjoy.” Jing Zhang, Pushing Copyright Law in China: A Double Edged Sword, 18 DePaul-LCA J. Art & Ent. L. 27, 76 (1997).

Student-Athletes and the NCAA: Playing by the Rules

By Steven Olenick* A pdf version of this article may be downloaded here. Prized basketball recruit Renaldo Sidney has yet to step foot on the court for the Mississippi State Bulldogs.   His eligibility status remains uncertain due to an ongoing investigation by the National Collegiate Athletic Association (NCAA) into his amateurism status regarding receiving improper benefits.[FN1]Oklahoma State star wide receiver, Dez Bryant, was ruled ineligible by the NCAA this past season for lying about a meeting with NFL great Deion Sanders.[FN2] Major League Baseball prospect Andrew Oliver was suspended by Oklahoma State University because he had violated Bylaw 12.3.1 by allowing his former attorney to contact a Major League club and by having his former attorney present when a Major League Baseball club tendered him a contract.[FN3] Recently, another Major League Baseball prospect, James Paxton, had his eligibility questioned for his dealings with a Major League Baseball club.[FN4] One theme remains constant in all of these aforementioned matters: student-athlete amateurism status.   Under the NCAA Bylaw’s, any student-athlete will be ruled ineligible in any collegiate sports if he or she has committed themselves verbally or in writing to be represented by an agent.[FN5] The NCAA furthers their stance by not allowing a student-athlete to enter into a representation agreement verbally or in writing until after the student-athlete has completed their eligibility.[FN6] The NCAA’s position is intended to keep professionals away from student-athletes.[FN7] The NCAA is not directly prohibiting student-athletes from engaging professionals, such as attorneys, so long as they do not have direct contact with professional teams.[FN8] The NCAA carries out these bylaws by requiring student-athletes to sign a non-negotiable waiver which bars them from competing in intercollegiate sports in the event that they do not sign the form.  Although this may appear to be a constitutional violation, depriving a student-athlete of his or her Fourteenth Amendment due process right, the NCAA’s conduct is not actionable under state law when a private organization does not adopt state rules, but, rather, holds collective membership within a private organization.[FN9] So where does this leave potential professional prospects needing proper guidance in the agent selection process and player contract negotiation?  The NCAA does not prohibit hiring an attorney or business manager; however, neither can represent the student-athlete openly during negotiations with a professional team. [FN10] Attorneys and business managers can discuss the merits of a deal with a student-athlete and guide him or her  appropriately throughout the agent selection process, however, at no time may they initiate discussions between the team and player, nor directly contact the team on the player’s behalf.[FN11] This anachronistic approach by the NCAA may appear to monopolize student-athletes.  History suggests that the NCAA does not want anyone to challenge its loosely worded bylaws pertaining to agent legislation.[FN12] Additionally, the paucity of case law suggests that the NCAA is very sensitive in resolving any matter attacking these specific bylaws to uphold its existing form. One possible panacea would be to strongly encourage the NCAA to work in concert with all governing professional sports leagues to ensure that student-athletes who have  the ability to play post-college have access to a checks and balance system that would provide them with proper guidance in evaluating a post-collegiate career.  The NCAA determines whether schools have proper oversight and compliance, but it can be argued that their bylaws may be widely interpreted.  The NCAA is intended to protect student-athletes and provide them the best opportunity to succeed both on and off the court.  Unfortunately, however, for the few select student-athletes that have the ability to extend their career beyond the collegiate ranks, the NCAA could be limiting their ability to obtain proper guidance and receive credible information that could sway their decision making process.  By modifying the NCAA bylaws to allow for the NCAA to become the mediator between the potential professional prospect and the professional team, the NCAA could monitor the discussions and obtain the proper information to pass along to the student-athlete for him or her to decide on his or her potential professional future.  Additionally, implementing an effective checks and balance approach would allow student-athletes to receive proper oversight during the decision making process and allow for the NCAA to provide the much needed oversight currently lacking in student-athlete decision making.  Until the NCAA introduces alternative measures to minimize the lack of oversight and information relayed to student-athletes, student-athletes will not be able to obtain proper guidance to help them through the difficult decision making process of declaring for professional drafts or foregoing collegiate eligibility. *** * Steven Olenick is an Associate in the Entertainment, Media & Publishing, Advertising, Marketing & Promotions and Intellectual Property Groups of Davis & Gilbert. He counsels individuals, entertainers, current and retired professional athletes, coaches, start-ups, sports agencies, marketing companies, advertising companies and digital media companies in connection with all aspects of advertising, marketing, digital technology and sports and entertainment. In addition, Mr. Olenick counsels and provides strategic business advice to current and retired professional athletes and sports agencies all over the world. Prior to joining the firm, Mr. Olenick worked for Entersport Management, Inc, an agency that specializes in the representation of professional basketball players internationally.  Mr. Olenick began his legal career at Paul, Weiss, Rifkind, Wharton & Garrison LLP, a firm widely recognized as a leader in litigation and corporate transactions.
[FN1] Mike DeCourcy, Attorney: Mississippi State Mishandling Renardo Sidney’s Eligibility, Sporting News, Jan. 8, 2010. http://www.sportingnews.com/college-basketball/article/2010-01-08/attorney-mississippi-state-mishandling-renardo-sidneys-eligibi. [FN2] Thayer Evans, Oklahoma State Declares Star Receiver Bryant Ineligible, N.Y. Times, Oct. 8, 2009 at B17, also available at http://www.nytimes.com/2009/10/08/sports/ncaafootball/08bryant.html. [FN3] Division I Agents, Amateurism and Elite Student-Athletes, http://web1.ncaa.org/web_files/regional_seminars/2009/DI/Outlines/DI%20Agents,%20Ama%20and%20ESA%20OL.pdf (Last visited Mar. 25, 2010). See also http://www.ncaa.org/wps/wcm/connect/34a376804e0b88ef937ef31ad6fc8b25/AgentBrochure.pdf?MOD=AJPERES&CACHEID=34a376804e0b88ef937ef31ad6fc8b25 (Last visited Mar. 25, 2010). [FN4] See id. [FN5] See id. [FN6] See id. [FN7] See id. [FN8] See id. [FN9] See NCAA v. Tarkanian, 488 U.S. 179 (1988). [FN10] See idSee also Pitt’s Blair Declares for NBA Draft, http://sports.espn.go.com/nba/draft2009/news/story?id=4052755 (last visited Mar. 26, 2010). [FN11] Id. [FN12] Rendall Rogers, Report: Kentucky Ace Pitcher James Paxton Sues School, Destination: Omaha, Dec. 3, 2009, http://rivals.yahoo.com/ncaa/baseball/blog/ncaabb_experts/post/Report-Kentucky-ace-pitcher-James-Paxton-sues-s?urn=ncaabb,206373See also Liz Mullen, OSU P Andy Oliver Files Suit Against NCAA, Former Advisor, SportsBusiness Journal, July 2, 2008, http://www.sportsbusinessdaily.com/article/122046.