27th Annual Entertainment Law Issue
May 2011 /$4
EARN MCLE CREDIT PLUS Inverse Ratio Rule Studio in Copyright Self-Dealing page 29 page 36
Net Neutrality page 9 Joint-Work Copyrights page 14
Rights of Publicity in Video Games page 17 STARSTAR POWERPOWER
Los Angeles lawyers Bradford S. Cohen and Kyle R. Neal offer advice on structuring charitable activities by entertainers page 22 SOUTHWESTERN LAW SCHOOL
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The Drawing on the resources of the DONALD E. BIEDERMAN ENTERTAINMENT AND MEDIA LAW INSTITUTE, Southwestern’s exciting LL.M. Program in Entertainment and Media Law features a broad range of over 45 entertainment, media, sports and intellectual property law courses and seminars taught by leading legal experts in these areas. With the launch of the online version in partnership with Kaplan Legal Education, students have the option of attending classes on campus in Los Angeles or online from anywhere in the world. For the CAMPUS!BASED option, contact: For the ONLINE option, contact: Tamara Moore Professor Bridgette de Gyarfas Associate Director of the Biederman Institute Director of the Online LL.M. in Entertainment and Media Law Program Tel: (213) 738-6602 Tel: (213) 738-5790; (888) 729-9950 (outside the United States) Email: [email protected] Email: [email protected] Southwestern Law School 3050 Wilshire Blvd. Los Angeles, CA 90010 www.swlaw.edu/academics/llm EXCLUSIVELY F A M I L Y L A W Walzer & Melcher LLP is known for its expertise in handling complex divorce cases and premarital agreements. The firm is committed to resolving contested cases by settlement. Where that cannot be achieved, the firm provides strong and effective representation in litigation. Peter M. Walzer Christopher C. Melcher Leena S. Hingnikar Jennifer L. Musika Woodland Hills, California (818) 591-3700 www.walzermelcher.com www.drprenup.com FEATURES 22 Star Power BY BRADFORD S. COHEN AND KYLE R. NEAL Celebrities can choose from among a variety of vehicles, including private foundations and donor-advised funds, to realize their philanthropic goals 29 More or Less BY LEE S. BRENNER AND SARAH L. CRONIN In copyright infringement analyses only an original work’s protectible elements should be included Plus: Earn MCLE credit. MCLE Test No. 203 appears on page 31. 36 The Red and the Black BY ROMAN M. SILBERFELD AND BERNICE CONN Media consolidations since the repeal of the Fin-Syn rules have heated the controversy over profit participation agreements Los Angeles Lawyer DEPARTMENTS the magazine of the Los Angeles County 8 Barristers Tips 17 Practice Tips Bar Association If you have to ask if it’s insider trading, it Defining liability for likeness of athlete probably is avatars in video games May 2011 BY PATRICK HUNNIUS BY JAMES J. S. HOLMES AND KANIKA D. CORLEY Volume 34, No 3 9 Practice Tips 44 Closing Argument COVER PHOTO: TOM KELLER The Comcast case and the fight for Net Is a ZIP code really personal neutrality identification information? BY PATRIC M. VERRONE BY SCOTT BARLOW 14 Practice Tips 42 Classifieds Requirements for finding a joint work under the Copyright Act 43 CLE Preview BY CHRISTOPHER RITTER LOS ANGELES LAWYER (ISSN 0162-2900) is published monthly, except for a combined issue in July/August, by the Los Angeles County Bar Association, 1055 West 7th Street, Suite 2700, Los Angeles, CA 90017 (213) 896-6503. Periodicals postage paid at Los Angeles, CA and additional mailing offices. Annual sub- scription price of $14 included in the Association membership dues. Nonmember subscriptions: $28 annually; single copy price: $4 plus handling. Address changes must be submitted six weeks in advance of next issue date. POSTMASTER: Address Service Requested. Send address changes to Los Angeles Lawyer, P. O. Box 55020, Los Angeles CA 90055. 05.11 LEGISLATIVE INTENT–STATUTORY CONSTRUCTION Plain Meaning Rule | Latin & English Maxims | Legislative History VISIT US ON THE INTERNET AT www.lacba.org/lalawyer E-MAIL CAN BE SENT TO [email protected] Help with Argument and Points and Authorities EDITORIAL BOARD Opinion Declarations and Expert Witness Testimony Chair MICHAEL A. GEIBELSON Founder and Former Director, Legislative Intent Service Articles Coordinator Opinion Testimony Given in over 45 State, Federal and Administrative Actions KENNETH W. SWENSON JERROLD ABELES (PAST CHAIR) ETHEL W. BENNETT William H. Keller 310.343.9893 ERIC BROWN CAROLINE BUSSIN [email protected] • www.Calcodes.com PATRICIA H. COMBS CHAD C. COOMBS (PAST CHAIR) ELIZABETH L. CROOKE BEN M. DAVIDSON ANGELA J. DAVIS (PAST CHAIR) PANKIT J. DOSHI GORDON ENG DONNA FORD STUART R. FRAENKEL GABRIEL G. GREEN TED HANDEL JEFFREY A. HARTWICK STEVEN HECHT (PAST CHAIR) LAURENCE L. HUMMER AMY K. JENSEN GREGORY JONES MARY E. KELLY JOHN P. LECRONE KENNETH K. LEE A. J. Hazarabedian Artin N. Shaverdian JONATHAN D. LIBBY Glenn L. Block Bernadette M. Duran PAUL MARKS AMY MESSIGIAN MICHELLE MICHAELS COMM. ELIZABETH MUNISOGLU RICHARD H. NAKAMURA JR. (PAST CHAIR) CARMELA PAGAY DENNIS PEREZ ADAM J. POST GARY RASKIN (PAST CHAIR) JACQUELINE M. REAL-SALAS (PAST CHAIR) DAVID A. SCHNIDER (PAST CHAIR) STEVEN SCHWARTZ MAYA SHULMAN THOMAS J. SPEISS III ALYSON SPRAFKIN HEATHER STERN THOMAS H. VIDAL JEFFREY D. WOLF KOREN WONG-ERVIN STAFF Publisher and Editor SAMUEL LIPSMAN Senior Editor LAUREN MILICOV Senior Editor ERIC HOWARD Art Director LES SECHLER Director of Design and Production PATRICE HUGHES Advertising Director LINDA LONERO BEKAS Sales and Marketing Coordinator AARON J. ESTRADA Administrative Coordinator MATTY JALLOW BABY Copyright © 2011 by the Los Angeles County Bar Association. All rights reserved. Reproduction in whole or in part without permission is pro- hibited. Printed by R. R. Donnelley, Liberty, MO. Member Business Publications Audit of Circulation (BPA). The opinions and positions stated in signed material are those of the authors and not by the fact of publication necessarily those of the Association or its members. All manuscripts are carefully considered by the Editorial Board. Letters to the editor are subject to editing. 4 Los Angeles Lawyer May 2011 LOS ANGELES LAWYER IS THE OFFICIAL PUBLICATION OF THE LOS ANGELES COUNTY BAR ASSOCIATION 1055 West 7th Street, Suite 2700, Los Angeles CA 90017-2548 Telephone 213.627.2727 / www.lacba.org ASSOCIATION OFFICERS President ALAN K. STEINBRECHER President-Elect ERIC A. WEBBER Senior Vice President RICHARD J. BURDGE JR. Vice President PATRICIA EGAN DAEHNKE Treasurer MARGARET P. STEVENS Assistant Vice President PAUL R. KIESEL Assistant Vice President HELEN B. KIM Assistant Vice President ELLEN A. PANSKY Immediate Past President DON MIKE ANTHONY Executive Director SALLY SUCHIL Associate Executive Director/Chief Financial Officer BRUCE BERRA Associate Executive Director/General Counsel W. CLARK BROWN It’s More Than Just a Referral BOARD OF TRUSTEES CHRISTOPHER C. CHANEY It’s Your Reputation MARRIAN S. CHANG BRIAN S. CURREY LINDA L. CURTIS Make the Right Choice JEFFERY J. DAAR ANTHONY PAUL DIAZ LOUIS R. DIENES Personal Injury • Products Liability BEATRIZ D. DIERINGER DANA M. DOUGLAS Medical Malpractice • Insurance Bad Faith MIGUEL T. ESPINOZA TANYA L. FORSHEIT CHRISTINE C. GOODMAN Referral Fees per State Bar Rules JOSHUA G. HAMILTON JACQUELINE J. HARDING ANGELA S. HASKINS BRIAN D. HUBEN www.cdrb-law.com TAMILA C. JENSEN 310.277.4857 DIANE L. KARPMAN SAJAN KASHYAP MICHAEL K. LINDSEY SARAH E. LUPPEN The More You Know About Us, HON. RICHARD C. NEAL (RET.) ANNALUISA PADILLA The Better Choice You Will Make ANN I. PARK THOM H. PETERS DAVID K. REINERT DEBORAH C. SAXE BRUCE IRA SULTAN JULIE K. XANDERS AFFILIATED BAR ASSOCIATIONS BEVERLY HILLS BAR ASSOCIATION BLACK WOMEN LAWYERS ASSOCIATION OF LOS ANGELES, INC. CENTURY CITY BAR ASSOCIATION CULVER-MARINA BAR ASSOCIATION EASTERN BAR ASSOCIATION OF LOS ANGELES COUNTY GLENDALE BAR ASSOCIATION IRANIAN AMERICAN LAWYERS ASSOCIATION ITALIAN AMERICAN LAWYERS ASSOCIATION JAPANESE AMERICAN BAR ASSOCIATION OF GREATER LOS ANGELES JOHN M. LANGSTON BAR ASSOCIATION KOREAN AMERICAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA LESBIAN AND GAY LAWYERS ASSOCIATION OF LOS ANGELES MEXICAN AMERICAN BAR ASSOCIATION PASADENA BAR ASSOCIATION SAN FERNANDO VALLEY BAR ASSOCIATION SAN GABRIEL VALLEY BAR ASSOCIATION SANTA CLARITA BAR ASSOCIATION SANTA MONICA BAR ASSOCIATION SOUTH ASIAN BAR ASSOCIATION OF SOUTHERN CALIFORNIA 10100 Santa Monica Blvd., Suite 2460, Los Angeles, California 90067 SOUTH BAY BAR ASSOCIATION OF LOS ANGELES COUNTY, INC. I SOUTHEAST DISTRICT BAR ASSOCIATION 310.277.4857 office 310.277.5254 fax SOUTHERN CALIFORNIA CHINESE LAWYERS ASSOCIATION www.cdrb-law.com WHITTIER BAR ASSOCIATION WOMEN LAWYERS ASSOCIATION OF LOS ANGELES Los Angeles Lawyer May 2011 5 JUDGE LAWRENCE W. CRISPO (RETIRED) unaway production is not a new issue in California. Los Angeles Lawyer has published articles on this R topic in previous Entertainment Law special issues. For many years various groups urged the California Legislature to enact tax incentives in an effort to stem run- away produciton. In Febuary 2009, the legislature adopted its first film and televi- sion tax incentive program. Administered by the California Film Commission, the program provides for up to $500 million in production tax incentives to be allocated from July 1, 2009, through June 30, 2014. In theory, the program provides $100 million in tax incentives each year for five years. California’s tax incentive program differs from the programs in many other states. The program contains significant limitations on the types of expenditures that Mediator Arbitrator qualify for incentives. For example, almost all above-the-line expenditures for a film or television project do not qualify. Moreover, the production budget maximum for motion pictures is $75 million. As a result, a significant portion of the overall costs of a production does not qualify for any of the incentives—including costs for Referee actors, directors, and producers. In addition, films with an extremely high budget do not qualify at all. Film and television projects produced in other U.S. jurisdic- 213.926.6665 tions qualify for far greater tax incentives than those produced in California. www.judgecrispo.com The California program is based on a first-come-first-served application process, which often is referred to as a lottery. Starting at 9 A.M. each June 1, the California Film Commission accepts applications for its pool of tax incentives for the next fis- cal year. The applications are numbered and prioritized based upon the date received. The commission allocates the tax incentives for the fiscal year by the numbers assigned to the applications until the full allocation for that year has been exhausted. ERISA The effect of this process is that it encourages, or even requires, producers who LAWYERS have projects not ready for production to apply for the tax incentives on June 1 each year. Not surprisingly, many of the productions that have been allocated tax incen- tives were never produced, and the incentives were not reissued. (Although the com- LONG TERM DISABILITY, LONG TERM CARE, HEALTH, mission may carry over the unused tax incentives into the following year, the likely EATING DISORDER, AND LIFE result is that after five years a significant portion of the $500 million will not be used.) INSURANCE CLAIMS Although California’s program is a step in the right direction, it should be mod- ified and expanded. If the legislature believes that production tax incentives are a ERISA & BAD FAITH benefit to California taxpayers, which appears to be the case, it should enact a pro- MATTERS gram that simplifies the application and approval process and expands the expen- ditures and productions that qualify for incentives. A good next move by the legis- lature would involve eliminating the lottery application process, including some portion California state and federal courts of the above-the-line costs as qualifying expenditures, and eliminating or significantly More than 20 years experience increasing the budget maximums for projects seeking to qualify for the program. Settlements, trials and appeals The entertainment industry wants to produce more of its projects within Califor- nia. Tax incentives play a major, if not primary, role in determining the location for Referral fees as allowed by State Bar of California productions. California cannot afford to continue with a tax incentive program that is not competitive with those offered in other jurisdictions. I Kantor & Kantor LLP 818.886.2525 TOLL FREE 877.783.8686 www.kantorlaw.net Caroline Y. Bussin, an associate in the Intellectual Property and the Entertainment, Media, and Sports Law Departments at Sedgwick LLP, focuses on intellectual property litigation, prosecution, and enforcement. Gary S. Raskin is a member of Raskin Ritter, LLP, where his practice involves entertainment transactions with an emphasis on motion pictures and finance. Thomas H. Vidal is an entertainment litigator and transactional attorney with Abrams Garfinkel Margolis Bergson, LLP. Bussin, Raskin, and Vidal are coordinating editors of this special issue. 6 Los Angeles Lawyer May 2011 barristers tips BY PATRICK HUNNIUS If You Have to Ask If It’s Insider Trading, It Probably Is A FEW YEARS AGO, A COLLEAGUE who knew I used to be an enforce- more than $1.1 million. In addition, he consented to the entry of an ment attorney with the SEC asked for my opinion on whether he could order denying him “the privilege of appearing or practicing before the legally trade on information he gained about Company A during his SEC as an accountant.” This was essentially a death knell for his pro- representation of Company B. I remember that the story about how fessional career as an accountant.6 Another Big Four partner is he had come to learn what he knew about Company A was somewhat alleged to have, with his wife’s assistance, tipped family members complicated and that my short answer was that were he to trade on regarding at least seven acquisitions planned by clients of his firm and the information, it would not clearly be a violation of the federal insider to have netted millions of dollars from the tips.7 trading regulations. At the same time, I thought that it was also not The government’s pursuit of gatekeepers is not limited to insider clear that he would not be committing insider trading. trading. For example, the SEC recently brought an action against a That lack of clarity can have consequences. If he were to trade on Los Angeles-based partner of a major firm.8 The SEC alleges that this the information—and if his trade were to come to the attention of the attorney altered documents requested by the SEC in conjunction SEC—he and his firm could be facing months of investigation, testimony, with an examination. In 2009, the SEC obtained an order permanently document requests, and other intrusions. Rather than list all the pros barring a securities lawyer from practicing before it based on alle- (minimal) and cons (severe), however, I simply told him that it is prob- gations that the attorney attempted to influence an SEC administra- ably safer to assume that any scenario that leads a person to ask a lawyer tive proceeding. Specifically, the attorney—who represented a witness if an act qualifies as insider trading is probably close enough to insider in the proceeding, which was brought by the SEC against the witness’s trading that the best course would simply be to not make the trade. former employer—allegedly contacted counsel for the witness’s If that conversation with my colleague happened today, I would employer and “offered to have his client act in ways that would thwart likely cut off his narrative a lot sooner, tell him unequivocally that what the Commission’s prosecutorial activities in exchange for benefits for he was thinking about was a bad idea (and potential career suicide), his client.” After a hearing, an administrative law judge concluded, and head back to my office to memorialize my advice to him (to pre- “By seeking benefits for a client in exchange for behavior and/or tes- sent to the SEC or other relevant regulator should one come calling). timony by the client that would adversely impact a Commission Recent enforcement actions by the SEC and the U.S. Department administrative proceeding, [the attorney] engaged in conduct that of Justice confirm that the U.S. government is reemphasizing prosecu- involved dishonesty, fraud, deceit, and misrepresentation.”9 tions of insider trading and of individuals in gatekeeper positions, The SEC “has long recognized that many securities law violations including attorneys and accountants. In the Galleon insider trading mat- could not occur without the participation of lawyers.”10 The com- ter, for example, the SEC has charged at least 27 defendants.1 This new mission is acting on that recognition with renewed fervor. I wave of insider trading prosecutions shows no signs of abating. According to Robert Khuzami, the SEC’s director of enforcement, 1 Press Release, SEC Charges New York Hedge Fund and Wall Street Professionals “Prosecutors will continue using undercover techniques including in Galleon-Related Enforcement Action, available at http://www.sec.gov/news informants and front businesses to attract wrongdoing and wiretaps /press/2011/2011-6.htm. 2 Joshua Gallu, Inside Trading Becomes ‘“Systemic” at Hedge Funds, Khuzami Says, to ‘ferret out’ misconduct.”2 available at http://www.bloomberg.com. In one case, at least four associates from major firms (including 3 Mark Hamblett, Former Paul Hastings Tax Associate Spared Prison for Insider two prosecuted in connection with the Galleon case) have pleaded Trading, N.Y. L. J., available at http://www.law.com. guilty to felonies stemming from insider trading. One of these asso- 4 Bruce Carton, A Zero Percent Chance of Success, available at http://www ciates was described by his criminal defense lawyer as “‘a star tax .complianceweek.com/a-zero-percent-chance-of-success/article/188105. 5 lawyer,’ the ‘person other associates went to’ for help, and ‘a sure thing New York Lawyer Pleads Guilty to Making a False Statement in Connection with Securities Fraud Investigation, available at http://www.justice.gov/usao 3 for partner.’” Instead, he was disbarred upon being sentenced to nine /dc/Press_Releases/2010%20Archives/January/10004.pdf. months in a halfway house. In a second case, an associate allegedly 6 SEC Charges Former Deloitte Partner and Son with Insider Trading, available at bought 10,000 shares of her client’s stock 15 minutes after the client http://www.sec.gov/news/press/2010/2010-140.htm. asked her to draft a letter of intent regarding a potential merger.4 She 7 SEC Charges Former Deloitte Partner and Wife in International Insider Trading not only traded on information she received in confidence from a client Scheme, available at http://www.sec.gov/news/press/2010/2010-234.htm. 8 In the Matter of David M. Tamman, Esq., available at http://www.sec.gov but also lied to SEC attorneys about it. This conduct exposed her to /litigation/admin/2011/34-63785.pdf. a five-year prison sentence. When she sold her shares, she “realized 9 In the Matter of Steven Altman, Esq., available at http://www.sec.gov a gain of approximately $5,800.”5 /litigation/opinions/2010/34-63306.pdf. In addition, two partners of Big Four accounting firms have 10 Remarks before the Spring Meeting of the Association of General Counsel by recently been charged with insider trading. One allegedly “commit- Giovanni P. Prezioso, General Counsel, Apr. 28, 2005, available at http://www.sec .gov/news/speech/spch042805gpp.htm. ted insider trading on nine occasions between 2005 and 2008 by trad- ing in the securities of multiple [firm] clients.” He settled the case with- Patrick Hunnius is senior counsel to DLA Piper’s securities litigation practice out admitting or denying the SEC’s allegations and agreeing to pay in Century City. 8 Los Angeles Lawyer May 2011 BY AUTHOR practice tips BY PATRIC M. VERRONE The Comcast Case and the Fight for Net Neutrality ROBB TOPOLSKI IS A FAN OF BARBERSHOP QUARTETS. In February 2007, the Oregon engineer, while on disability leave from Intel, tried to upload public domain, Tin Pan Alley-era barbershop harmonies using peer-to-peer file sharing. His anemia was surpassed by the anemic pace at which the files were being exchanged. After weeks of technical experimentation, he discovered that his Internet service provider, Comcast, was interfering with his transmissions.1 Topolski posted his findings on DSL Reports,2 a “bulletin board service shared by broadband enthusiasts.”3 His post incited indignant discussion among enthusiasts but no response from Comcast. Over the next several months, the Associated Press did similar tests of Comcast’s broadband network, trying to perform peer-to-peer file sharing of the King James Bible. On October 19, 2007, corre- spondent Peter Svensson reported that Comcast was interfering with high-speed Internet traffic to provide preferential treatment to fee-based data or data that Comcast owned or controlled.4 In response, Comcast stated only that its network management practices required keeping “[n]et connections running smoothly.”5 Two nonprofit advocacy organizations—Free Press and Public Knowledge—along with a consortium of public interest groups and law professors filed a complaint with the Federal Communications Commission. The complaint asked for a declaratory ruling that Comcast was in violation of the FCC’s 2005 Internet Policy Statement.6 That policy statement had adopted principles prohibiting practices that interfered with lawful consumer Internet access.7 After a period of public comment, the FCC issued an order on August 1, 2008, finding that Comcast’s bandwidth management methods contravened federal policy by “significantly imped[ing] cates generally want net neutrality. Internet service providers do not. consumers’ ability to access the content and use the applications of The FCC (under the watchful eye of Congress and two presidential their choice.”8 By the time the order was issued, Comcast had administrations) has been at the center of the debate, most recently adopted new management methods. As a result, the order effectively issuing a December 2010 report and order to preserve open Internet required only that Comcast disclose the details of those new meth- broadband industry practices.13 How, and even if, it can enforce ods and their implementation.9 Comcast agreed to comply with the that order in light of the Comcast case goes to the core of the FCC’s order but also filed for review in the D.C. Circuit of the U.S. Court rule-making authority over the Internet. of Appeals, claiming (among other things) that the FCC did not The FCC have jurisdiction over its network management methods.10 In an April 2010 opinion that sent shockwaves through the The FCC was created by the Communications Act of 1934.14 The act Internet broadband industry and policy communities (not to mention empowers the FCC “to make available…to all people of the United the blogosphere and the FCC), the court vacated the FCC’s order. The States…a rapid, efficient, Nation-wide, and world-wide wire and radio court held that the FCC had no authority over Comcast’s Internet ser- communication service with adequate facilities at reasonable charges, vice because “the Commission had failed to tie its assertion of ancil- for the purpose of the national defense, [and] for the purpose of pro- lary authority over Comcast’s Internet service to any ‘statutorily moting safety of life and property through the use of wire and radio mandated responsibility.’”11 communication.”15 Title I of the act gives the FCC authority to Comcast Corporation v. Federal Communications Commission12 “make such rules and regulations, and issue such orders, not incon- is an important case in the struggle between federal government reg- sistent with this Act, as may be necessary in the execution of its func- ulators acting on behalf of Internet consumers and telecommunica- tions.”16 Despite the very broad nature of this language, these pow- tion providers intent to limit regulation. The public policy at issue is commonly known as net neutrality. The fundamental precept of net Patric M. Verrone, a member of the California Bar, is a writer and producer of neutrality is that control of Internet data dissemination should not Fox Television’s Futurama and immediate past president of the Writers Guild RICHARD EWING be based on the content of that data. Internet users and their advo- of America, West. Los Angeles Lawyer May 2011 9 ers have come to be known as the “ancillary ISPs did not own telecom facilities.26 Four nouncement on net neutrality and contained authority” of the FCC. years later, the FCC applied the same classi- four principles that would guide its policy. The Alternatively, the FCC’s “express author- fication to suppliers of broadband Internet statement declared that “to encourage broad- ity” has been limited to “wire and radio com- access through cable transmission in its 2002 band deployment and preserve and promote munication services” specifically provided Cable Modem Order.27 There, the FCC held the open and interconnected nature of the for under Title II (Common Carriers)17 and that cable Internet providers (like the ISPs of public Internet, consumers are entitled to Title III (Provisions Relating to Radio).18 the Stevens Report) did not offer “telecom- access the lawful Internet content of their Over the years, these two titles were expanded munications service to the end user, but choice,…run applications and use services to apply Title II “common carrier” jurisdic- rather…merely us[e] telecommunications to of their choice,…[and] connect their choice of tion to all telecommunication services deliv- provide end users with cable modem ser- legal devices that do not harm the network.” ered through landline wired telephony and vice.”28 This ruling was substantially vacated The policy statement goes on to assert that Title III radio authority to broadcast televi- by the Ninth Circuit when it held that the consumers are entitled to “competition among sion and cellular telephones.19 FCC could not exempt cable companies from network providers, application and service Before cable television came under express Title II common carrier coverage.29 However, providers, and content providers.”36 FCC authority through the 1984 enactment in National Cable & Telecommunications Broadband cable Internet providers largely of Title VI, which covers cable communica- Associates v. Brand X Internet Services30 the followed these principles, although there were tions,20 three U.S. Supreme Court opinions U.S. Supreme Court reversed the lower court still isolated examples of interference.37 Then, considered the FCC’s Title I ancillary author- and reinstated the ruling. with the development of filtering technologies ity over what was then called community In Brand X, the Court held that the FCC’s like deep packet inspection, concern built antenna television (CATV).21 In two of the classification of cable broadband Internet that ISPs could secretly and consistently three cases, the Court held that the FCC did providers as information services was a rea- review, speed up, slow down, and even block have authority to control specific cable com- sonable construction of the Communications Internet communications. As a result, the pany practices when it was “reasonably ancil- Act under its test for evaluating agency FCC considered rules to enforce net neutral- lary to the effective performance of [its] var- actions. The test consists of interpreting the ity principles under its Title I ancillary author- ious responsibilities for the regulation of Administrative Procedures Act and Chevron ity.38 television broadcasting.”22 U.S.A. Inc. v. Natural Resources Defense Before the rules were promulgated, how- The CATV cases would have created a rea- Council, Inc.31 The Court’s opinion relied ever, Topolski uncovered Comcast’s interfer- sonable precedent for FCC ancillary author- on the act’s use of the phrase “offering of ence, and Free Press and Public Knowledge ity over broadband Internet service but for an telecommunications” in its definition of filed a complaint with the FCC, which ordered action taken by the FCC in 1980. In devel- “telecommunications service” to have been Comcast to disclose its amended methods. oping rules to regulate data-processing ser- reasonably interpreted by the FCC to exclude Comcast asked the D.C. Circuit Court of vices offered through telephone lines, the broadband Internet service providers who Appeals to review the order, which the court FCC drew a distinction between “basic” and “offer telecommunications” as a means to vacated, taking with it the FCC’s authority to “enhanced” services. “Basic services” were deliver Internet access, but not as a stand- enforce net neutrality under Title I. those services that involved no computer alone service.32 In Comcast, the FCC admitted that it had processing and were to be regulated as Title no express authority over ISPs because of its The Brand X Decision II common carrier telephone services. previous classification of them outside of its Alternatively, “enhanced services” (which Brand X includes a colorful dissent by Justice Title II common carrier designation. Instead, required “computer processing applications” Antonin Scalia (joined by Justices David the FCC argued that it could bar Comcast for transmission) were exempted from Title Souter and Ruth Bader Ginsburg) that opines from interfering with its customers’ use of II jurisdiction for the stated purpose of not that the only reasonable interpretation of the peer-to-peer networking applications through inhibiting a “fast-moving, competitive mar- act requires the FCC to classify cable Internet ancillary authority under Title I. Such author- ketplace.”23 This classification distinction providers under Title II as common carriers. ity, the FCC asserted, met the test created in was codified in the 1996 Telecommunications The dissent drew analogies to pizza deliv- 2005 by the D.C. Circuit Court in American Act under two new names. Basic services ery, car dealerships, and pet shops; criticized Library Association v. FCC.39 That test was became “telecommunication services.” These the “Möbius-strip reasoning” by the FCC; a “distillation” of the three Supreme Court were designated “pure” or “transparent” and concluded by expressing “sadness that the opinions from the CATV era. It stated that the transmissions between users, unaltered by Court should go so far out of its way to FCC “may exercise ancillary jurisdiction only computer applications. These basic services make bad law.”33 when two conditions are satisfied: (1) the were subject to Title II common carrier reg- While the Brand X Court held that the Commission’s general jurisdictional grant ulations.24 “Information services” took the FCC’s classification decision “was a reason- under Title I covers the regulated subject, place of enhanced services and included trans- able policy choice” under Chevron U.S.A., it and (2) the regulations are reasonably ancil- formed or processed transmissions, outside also stated that “the Commission remains lary to the Commission’s effective perfor- the Title II purview.25 free to impose special regulatory duties on mance of its statutorily mandated responsi- The FCC applied the information service facilities-based ISPs under its Title I ancil- bilities.”40 Comcast stipulated that the FCC classification to Internet service providers lary jurisdiction.”34 Citing that language, less met the first condition of the test, so the (thus exempting them from Title II authority) than two months after Brand X was pub- court only had to decide if it met the second. in 1998. In its so-called Stevens Report, the lished, the FCC issued its September 2005 The court found that it did not. FCC evaluated typical dial-up ISPs of the Internet Policy Statement, asserting that it The Comcast court rejected the FCC’s day (America Online, Earthlink, Microsoft held the “jurisdiction necessary to ensure reliance on the language in two sections of the Network, etc.) for the purposes of deciding that providers of telecommunications for Communications Act, holding that they were whether to require them to contribute to the Internet access…services are operated in a merely statements of Congressional policy Universal Service Fund and held that they neutral manner.”35 (as distinguished from mandated responsi- were merely information services because the This was the FCC’s most provocative pro- bilities)41 and five other sections that, though 10 Los Angeles Lawyer May 2011 IS YOUR WEALTH UNIQUE? Could you benefit from a wealth specialist who understands the legal landscape? Our Legal Specialty Group is dedicated to advising law firms, partners and associates. Gerald Hollins Jr., Vice President, Legal Specialty Group, 213-236-5489 ©2011 Union Bank, N.A. unionbank.com/private UBBP0102_LALawyer_Tree_Ad_em0.indd 1 3/9/11 4:12 PM client: Union Bank prepared by: Dentsu America description: LA Lawyer/Legal Specialty Tree creative director: proofreader ______P 4C B art director: art director ______number: UBBP0102 copywriter: copywriter ______Bleed: 8.625" x 11.125" studio: S. Meineke Trim: 8.375" x 10.875" production manager: studio ______Live: 7" x 10" traffi c manager: account exe. ______publication: Los Angeles Lawyer account sup. ______management sup. ______issue date: April product specialist ______material close: 3/10/11 OK TO RELEASE ______RECEIPT OF THIS ADVERTISING MATERIAL DOES NOT CONSTITUTE A SPACE ORDER. arguably delegations of authority, were found Angeles Congressman Henry Waxman came a large role in litigation to come. by the court not to be delegations of the kind close to achieving bipartisan support for a bill The FCC has a stated mandate to be the of authority the FCC was trying to exercise in the weeks before the November 2010 policing authority over communications in the over Comcast’s network management prac- midterm Congressional elections, but the United States. FCC chairs of both political tices.42 Not finding a legislative hook on process derailed when stakeholders on both parties have tried to enforce net neutrality which to hang its ancillary authority hat, the sides of the issue withheld their support.51 over the evolving broadband Internet deliv- FCC also made a judicial estoppel argument On December 21, 2010, the FCC voted 3- ery system and will likely continue to do so (based on a Comcast admission in a prior 2 (along political party lines) to promulgate as part of that mandate. The 2010 Open California lawsuit that the FCC had subject net neutrality rules. Two days later, it issued Internet rules are yet another step in that matter jurisdiction over Comcast’s network a report and order titled “In the Matter of direction. management practices) and invoked Brand X Preserving the Open Internet Broadband There is also a parallel history of evolving dicta to assert that it had Title I ancillary Industry Practices.”52 According to the report but powerful industries pushing back. No authority over ISPs. The Comcast court dis- and order, “To preserve the Internet’s open- matter what the FCC does, there will be legal counted both arguments by stating that the ness and broadband providers’ ability to wrangling. It is hard to imagine that any- FCC may indeed have some ancillary author- manage and expand their networks, we adopt thing will be resolved other than through ity (and subject matter jurisdiction) over cable high-level rules embodying four core princi- court opinions—even with industrial con- Internet providers, just not the kind the FCC ples: transparency, no blocking, no unrea- sent decrees, settlements, or even legislation. attempted to enforce against Comcast.43 sonable discrimination, and reasonable net- What does not always exist are vigilant pub- work management.”53 lic interest spokespersons and consumer advo- Comcast and Net Neutrality The FCC was especially mindful of the cates playing a proactive role. But with the The Comcast decision was a crushing blow potential for litigation. Part IV of the report stakes as high as Topolski’s freedom to share to the FCC, its enforcement of net neutrality and order is devoted to the FCC’s authority to barbershop harmonies, the Internet age may rules, and its larger agenda to expand broad- adopt open Internet rules.54 The report and be different than the past, and the fight for net band access throughout America. (Its Joint order does not use the term “third way” and neutrality will continue. I Statement on Broadband had been released relies very little on Brand X dicta. Still, it only days before the opinion was issued.)44 declines to reclassify broadband as a Title II 1 Daniel Roth, The Dark Lord of Broadband Tries to Most observers presumed that the FCC had telecommunications service and, instead, bases Fix Comcast’s Image, available at http://www .wired.com. two options to pursue while petitioning FCC authority on specific sections of Titles II, 2 Comcast is using Sandvine to manage P2P Con- 55 Congress to codify more direct authority. III, and IV (forbearing others) as well as on nections, available at http://www.dslreports.com One was to continue to rely on ancillary Section 706 of the 1996 Telecommunications /forum/r18323368-Comcast-is-using-Sandvine-to authority to govern precise aspects of ISP Act.56 This latter section, in which Congress -manage-P2P-Connections. behavior.45 The other was to reclassify cable authorized the FCC to “encourage the deploy- 3 Testimony of Robb Topolski before the Federal Internet providers as Title II telecommuni- ment…of advanced telecommunications capa- Communications Commission, Apr. 17, 2008, available at http://www.youtube.com/watch?v=FrmS19ej73E. cation services and claim jurisdiction over bility,” receives the most attention. The report 4 See, e.g., Peter Svensson, Comcast Blocks Some 46 them as common carriers. Instead, less than and order may be read as a direct response to Internet Traffic, WASHINGTON POST, Oct. 19, 2007. a month after the Comcast decision was the Comcast opinion,57 citing or referring to 5 Id. handed down, the FCC advocated for what the case many times. 6 Complaint of Free Press and Public Knowledge against it called the third way,47 which would only The report and order was met with imme- Comcast Corp., File No. EB-08-IH-1518 (2007), Petition of Free Press et al. for Declaratory Ruling, WC reclassify the “retransmission component” diate criticism from both sides of the net neu- Docket No. 07-52 (Nov. 1, 2007). 58 of broadband providers’ service under Title trality debate. The only thing about which 7 In re Appropriate Framework for Broadband Access II and, even then, forbear from applying all the analysts agreed was that a court chal- to the Internet over Wireline Facilities, 20 F.C.C.R. but six of the sections of that title.48 The lenge seemed inevitable.59 That prediction 14,986 (2005). 8 legal foundation for the approach relied heav- proved accurate in 2011 when Verizon filed In re Formal Complaint of Free Press & Public Knowledge Against Comcast Corporation for Secretly ily on Justice Scalia’s dissent (as well as the a lawsuit that sought to abolish the rules.60 Degrading Peer-to-Peer Applications, 23 F.C.C.R. majority opinion) in Brand X to give the Two facts about the case are noteworthy. 13,028 at 13,054 (2008). FCC its reclassification authority.49 First, the rules that Verizon sought to over- 9 Id. at 13,059-60. While the FCC again invited public com- turn were nearly identical to ones it had sup- 10 Comcast also claimed that the FCC’s adjudicatory ment, concerns about a court challenge to ported a few months earlier following nego- procedure circumvented the rule-making process requirements of the Administrative Procedures Act whatever authority the FCC might exercise led tiations with the FCC. Second, just two days and violated due process, and that the order was arbi- to calls for legislation. Such efforts had been before, the FCC had voted to approve a trary and capricious. The court only ruled on the juris- in the works for years but the process always merger between Comcast and NBC-Universal, dictional challenge. Comcast Corp. v. FCC, 600 F. 3d broke down along party lines, with subject to a list of conditions that included 642, 645 (2010). Republicans favoring the cable industry’s adherence to the net neutrality rules it had just 11 Id. at 661. 12 desire for limited regulation in the interest of promulgated. Verizon’s suit (which was fol- Id. at 642. 13 In the Matter of Preserving the Open Internet 61 encouraging innovation, and Democrats sid- lowed by a similar one by Metro PCS) Broadband Industry Practices, FCC 10-201 (Dec. 23, ing with public interest organizations, unions, relied heavily on Comcast not only for its legal 2010). and consumer advocates pushing for codified theory but also its forum. Verizon filed the 14 47 U.S.C. §§151 et seq. FCC authority to regulate. Opponents of case in the D.C. Circuit and requested that it 15 Id. 16 greater FCC powers characterized net neu- be heard by the same three-judge panel that 47 U.S.C. §154(i). 17 47 U.S.C. §§201-276. Comcast trality rules as a “government takeover of the issued the ruling. Although the court 18 47 U.S.C. §§301-399B. 50 62 Internet,” which proponents consider tan- quickly rejected the latter request and may 19 Comcast Corp. v. FCC, 600 F. 3d 642, 644 (2010). tamount to characterizing speed limits, traf- even reject the appeals outright on proce- 20 47 U.S.C. §§601-653. fic lights, and a highway patrol as a govern- dural grounds (as moved for by the FCC),63 21 United States v. Southwestern Cable Co., 392 U.S. ment takeover of Route 66. Longtime Los it is clear that Comcast will continue to play 157 (1968); United States v. Midwest Video Corp., 406 12 Los Angeles Lawyer May 2011 U.S. 649 (1972) (Midwest Video I); FCC v. Midwest common carrier regulations), and §623 (cable rates). Video Corp., 440 U.S. 689 (1979) (Midwest Video II). 43 Comcast Corp., 600 F. 3d at 647-51. Private Justice 22 Southwestern Cable Co., 392 U.S. at 178 (finding 44 In the Matter of Joint Statement on Broadband, ancillary authority for the FCC to limit a cable com- FCC 10-42 (Mar. 16, 2010). pany’s retransmission range). In Midwest Video I, the 45 Christopher S. Yoo, Broadband for America, at 9, for the World’s Court found ancillary authority to allow the FCC to available at http://www.broadbandforamerica.com/sites require cable companies to create new programming. /default/themes/broadband/reclass_broadband.pdf. Midwest Video I, 406 U.S. at 670. But in Midwest II, This is the option generally favored by the cable broad- Most Intractable the Court denied the FCC’s assertion of ancillary band industry, as it gives the FCC the least explicit authority to require cable companies to make certain power and allows for greater influence on legislation Disputes channels available for public use. Midwest Video II, 440 through its political lobbying efforts. U.S. at 708-09. 46 A thorough discussion of the legality of this approach 23 In re Amendment of Section 64.702 of the Com- can be found in Lee L. Selwyn & Helen E. Golding, The Business • Intellectual Property • Franchise mission’s Rules and Regulations (Second Computer Comcast Decision and the Case for Reclassification and Employment • International Inquiry), 77 F.C.C. 2d 384, 417-23 (1980). Re-Regulation of Broadband Internet Access as a Title 24 “The term ‘telecommunications service’ means the II Telecommunications Service, ICARUS (ABA, Fall 2010). 47 offering of telecommunications for a fee directly to the Julius Genachowski, The Third Way: A Narrowly FIERCELY Fair And Impartial public, or to such classes of users as to be effectively Tailored Broadband Framework, May 6, 2010, avail- available directly to the public, regardless of the facil- able at http://www.broadband.gov/the-third-way SUPERB Judicial Temperament ities used.” 47 U.S.C. §153(46). -narrowly-tailored-broadband-framework-chairman 25 “The term ‘information service’ means the offering -julius-genachowski.html (hereinafter Genachowski); DEEP Subject Matter Knowledge of a capability for generating, acquiring, storing, trans- Austin Schlick, A Third-Way Legal Framework for ORDERLY Party Driven Process forming, processing, retrieving, utilizing, or making Addressing the Comcast Dilemma, May 6, 2010, avail- available information via telecommunications, and able at http://www.broadband.gov/third-way-legal- includes electronic publishing, but does not include any frame-work-for-addressing-the-comcast-dilemma.html use of any such capability for the management, control, (hereinafter Schlick). or operation of a telecommunications system or the 48 Genachowski, supra note 47, at 5. management of a telecommunications service.” 47 49 Schlick, supra note 47, at 6-7. U.S.C. §153(20). 50 The phrase was attributed to Speaker of the House 26 In the Matter of Federal-State Joint Board on John Boehner in Tony Romm, Boehner Slams FCC for Universal Service, Report to Congress, 13 F.C.C.R. “Takeover of Internet,” THE HILL, May 6, 2010. 11501 (1998). 51 Draft of Waxman’s Net-Neutrality Legislation 27 In re Inquiry Concerning High-Speed Access to the Leaked Amid Talks, THE HILL, Sept. 27, 2010. Internet over Cable and Other Facilities, 17 F.C.C.R. 52 In the Matter of Preserving the Open Internet 4798 (2002). Broadband Industry Practices, FCC 10-201 (Dec. 23, 28 Id. at 4824. 2010). 29 Brand X Internet Servs. v. FCC, 345 F. 3d 1120 (9th 53 Id. at 27. Cir. 2003). 54 Id. at 62-82. 30 National Cable & Telecommc’ns Assoc. v. Brand X 55 Id. at 68-76. Internet Servs., 545 U.S. 967 (2005). 56 Id. at 62-68. 31 Chevron U.S.A. Inc. v. Natural Resources Def. 57 The FCC had raised 47 U.S.C. §706 in its argument Council, Inc., 467 U.S. 837 (1984). before the Comcast court, and the court devoted a 32 Brand X Internet Servs., 545 U.S. at 988-89. segment of its opinion to dismissing that portion of the 33 Id. at 1020. argument. Comcast Corp. v. FCC, 600 F. 3d 642, “… Holmes is unsurpassed at customizing 34 Id. at 996. 658-59 (2010). the parties chosen resolution process to 35 In the Matters of Appropriate Framework for 58 See, e.g., Making Hash of Net Rules, BOSTON ensure speed, economy and justice” Broadband Access to the Internet over Wireline Facilities HERALD, Dec. 26, 2010, available at http://news et al., FCC 05-151 (Sept. 23, 2005). .bostonherald.com. The biggest complaint was that Russell Frandsen, Esq. 36 Id. at 3. the rules only governed wired Internet service and not The Business Legal Group 37 Examples include alleged blocking of e-mails by wireless providers. See, e.g., Troy Wolverton, New — National and International Panel, AOL in 2006, AT&T’s censorship of lyrics critical of “Net Neutrality” Rules Don’t Go Far Enough, SAN JOSE American Arbitration Association President George W. Bush made by Eddie Vedder dur- MERCURY NEWS, Dec. 27, 2010, available at http://www ing an August 2007 Pearl Jam concert, and Verizon .mercurynews.com. — Fellow, College of Commercial Wireless’s denial of access to a text-messaging program 59 Grant Goss, What’s Next for the FCC and Net Arbitrators by NARAL in late 2007. American Civil Liberties Neutrality? PC WORLD, available at http://www.pcworld — Fellow, National Academy of Union, Network Neutrality 101: Why the Government .com/businesscenter/article/214936/whats_next_for Distinguished Neutrals Must Act to Preserve the Free and Open Internet, at 9- _the_fcc_and_net_neutrality.html. 11 (Oct. 19, 2010). 60 Verizon v. FCC, No. 11-1014, D.C. Court of — Association for International 38 Two additional principles were presented in 2009 as Appeals, filed Jan. 20, 2011. Arbitration 61 part of a Notice of Proposed Rulemaking: 1) Broadband MetroPCS Commc’ns, Inc. v. FCC, No. 11-1016, — Director, CDRC (California Dispute providers cannot discriminate against particular Internet D.C. Court of Appeals, filed Jan. 24, 2011. The filing Resolution Council) content or applications, and 2) providers must be came only days after Free Press publicly claimed that transparent about their network management prac- MetroPCS was in violation of the new net neutrality tices. In re Preserving the Open Internet; Broadband rules in its latest service plans. See http://www Industry Practices, 24 F.C.C.R. 13064 (2009). .freepress.net/press-release/2011/1/4/free-press-urges THE HOLMES LAW FIRM 39 American Library Ass’n v. FCC, 406 F. 3d 689 -fcc-investigate-metropcs-4g-service-plans. (2005). 62 Larry Downes, Verizon Loses Early Skirmish in Net To schedule your matter: 40 Id. at 691-92. Neutrality Litigation, Feb. 3, 2011, available at Contact us at 41 Comcast Corp. v. FCC, 600 F. 3d 642, 651-52 http://news.cnet.com. 1.877.FAIR.ADR (2010). See also 47 U.S.C. §230(b), Protection for pri- 63 Both lawsuits claim to be “license modification” vate blocking and screening of offensive material, and appeals, which must be filed in the D.C. Circuit. The (877.324.7237) §1, mission statement. FCC responded to each with two ripeness arguments. or 42 Id. at 658-61. See also 47 U.S.C. §706 (deployment Motions of the FCC to Dismiss, Verizon v. FCC, No. rholmes@theholmeslawfirm.com of advanced services), §256 (oversight of coordinated 11-1014, MetroPCS v. FCC, No. 11-1016, filed Jan. network planning), §257 (identifying and eliminat- 28, 2011, available at http://www.fcc.gov/ogc www.theholmeslawfirm.com ing…market entry barriers), §201 (just and reasonable /archivedfilings.html. Los Angeles Lawyer May 2011 13 practice tips BY CHRISTOPHER RITTER Requirements for Finding a Joint Work under the Copyright Act COLLABORATORS OFTEN FIND THEMSELVES at odds over whether the words and music of a song.”14 Establishing coauthorship in each of them has the right to exploit the work they have created other circumstances requires far more than demonstrating mere col- together, or whether that right belongs only to one of them. laboration.15 Consequently, courts have imposed a number of require- Collaboration is common in many industries and is a driving force ments that are not readily apparent from the statutory language in the field of entertainment. The production of motion pictures, music used to define a “joint work.” videos, plays, musical recordings, and other artistic endeavors involves For example, for a finding of a joint work, courts have held that the creative contributions of many people. Before they begin their each author must make an independently copyrightable contribution efforts, wise collaborators will take the precaution to state clearly in to the work.16 Indeed, the contribution must “stand on its own as the a signed written agreement whether they intend to be coauthors of subject matter of copyright.”17 Courts have read this requirement into the finished work and to account for who will own the copyright. In the statute to comport with the fundamental tenet of copyright law the absence of an agreement, a dispute over who owns the copyright that ideas are not copyrightable.18 is likely to follow. Moreover, the requirement is supported by policy considera- Resolution of the dispute often depends on whether the work is tions, including 1) the ability of parties to predict whether their con- considered a “joint work” under the Copyright Act. A determination tributions to a work will entitle them to copyright protection as a joint that a work is a joint work often will be dispositive of a copyright author, 2) a goal of avoiding postcontribution disputes concerning infringement claim among collaborators, because the authors of a joint coauthorship, and 3) allowing parties to protect themselves by con- work are co-owners of the copyright in the work,1 and a co-owner tract if it appears they may not qualify as coauthors under the cannot be sued for copyright infringement.2 Copyright Act.19 Therefore, to be a coauthor of a joint work, one must Coauthors are tenants in common.3 Each automatically acquires supply more than the mere direction or ideas; an author must “trans- an undivided ownership interest in the entire work.4 Even if a per- late an idea into a fixed, tangible expression entitled to copyright pro- son’s contribution is minor, once that person is accorded joint author- tection.”20 ship status, he or she enjoys all benefits of joint authorship.5 These Consequently, unless a coauthorship claimant can establish as a include an independent right to use or license the use of a work,6 sub- preliminary matter that his or her contribution would be entitled to ject only to a duty to account to the other co-owners for any profits copyright protection separate and apart from the work as a whole, earned on the work.7 As a consequence, establishing coauthorship can the claimant will not be accorded coauthor status. While the contri- mean the difference between having the unfettered right to exploit the bution does not have to be substantial to satisfy this requirement, an work without the consent of the other collaborators and being held author still must provide more than a de minimus addition to the liable for copyright infringement. work21—and the addition must be independently created and involve The Copyright Act of 1976 defines a “joint work” as “a work pre- some minimal degree of creativity.22 pared by two or more authors with the intention that their contri- Nevertheless, a person may make an independently copyrightable butions be merged into inseparable or interdependent parts of a uni- contribution to a work and still not be considered a coauthor of the tary whole.”8 This language defining a “joint work” also defines “joint entire work.23 For example, in Aalmuhammed v. Lee,24 the Ninth authorship” or “coauthorship” as well; courts and commentators have Circuit held that a consultant who had rewritten passages of dialogue found the terms to be interchangeable.9 The statutory definition and scenes for the movie Malcolm X had made an independently copy- does not require collaborators to work in close physical proximity to rightable contribution but was not a joint author of the film. Therefore, each other during the creative process. Nor is there any requirement a person claiming coauthorship status also must establish that he or that they make their contributions at the same time or in an equal or she is an author of the joint work as a whole.25 qualitative manner.10 Each author, however, must intend that his or This requirement is grounded, in part, in the statutory definition her contribution, at the time of its creation, will be part of an indi- that requires a joint work to have “two or more authors.”26 Because visible whole.11 the Copyright Act does not define “author,” courts have had to fash- A classic example of coauthors of a joint work, according to the ion tests for determining when someone is a coauthor of a joint Ninth Circuit, is W.S. Gilbert and Arthur Sullivan, the lyricist and com- work. poser of many works, including the song “I Am the Very Model of Second Circuit’s Mutual Intent Standard a Modern Major General.” The Ninth Circuit deemed that song’s words and tune “inseparable.”12 Other examples include the innu- In addressing this issue in Childress,27 the Second Circuit acknowl- merable works of Richard Rodgers and Oscar Hammerstein and edged that the Copyright Act states only that coauthors must intend John Lennon and Paul McCartney—but these joint works are easy to discern. As the Second Circuit noted in Childress v. Taylor,13 a find- Christopher Ritter is a partner in the Los Angeles law firm Raskin Ritter, ing of coauthorship intent requires “less exacting consideration in the LLP, where he specializes in entertainment, intellectual property, and context of traditional forms of collaboration, such as the creators of complex commercial litigation. 14 Los Angeles Lawyer May 2011 that their contributions “be merged into superintending author generally is “the inven- appeal of the video was most likely based on inseparable or interdependent parts of a uni- tive or mastermind who creates, or gives the audience’s ability to view images of a tary whole.” The statutory definition makes effect to the idea.” The issue of control is con- younger Corgan.47 Therefore, the court found no explicit reference to any other intention. sidered the most important factor and is often the video was a joint work because the audi- However, if the statute’s threshold of coau- dispositive38—and the essence of control is the ence appeal rested both on the video’s visual thorship merely requires an intention for the ability to accept or reject the contributions of aspects and on the composition and perfor- contributions to be merged into a unitary the other contributors. For example, in mance of the music. whole, then, for example, a novelist’s editor, Aalmuhammed, the court noted that while a A contributor who is unable to establish as well as any overreaching contributors, consultant could make “extremely helpful coauthorship has only a glimmer of hope for plus current and former spouses, lovers, and recommendations,” the director of Malcolm relief. If he or she has made an independently friends, “would endanger authors who talked X, Spike Lee, was not bound to accept any of copyrightable contribution to the work, the with people about what they were doing.”28 them.39 contributor may claim rights as sole author Anyone making even a minimal contribu- Second, coauthors must make objective of the portion he or she contributed on the tion to the writing of a work would be con- manifestations of a shared intent to be coau- grounds that under the Copyright Act, copy- sidered a coauthor as long as both parties thors.40 A contract stating the parties intend right vests initially in the author or authors intended their contributions to be merged to be coauthors is considered the best objec- of the work.48 This type of claim emerged in into a unitary whole.29 tive manifestation of a shared intent.41 In Thomson v. Larson,49 a case that involved The Second Circuit held that in the the absence of a written agreement, other the musical Rent; however, the Second Circuit absence of a more stringent requirement, the relevant indicators of intent come into play. did not reach the issue because it was first statute would accord coauthor status to indi- Key among these is how the parties credit raised on appeal.50 The court noted that the viduals that Congress did not contemplate as themselves (for example, if they identify them- claimant, a dramaturge, had sought relief joint owners.30 To avoid this result, the court selves as authors), because this presentation based solely on her alleged coauthorship of held that in addition to making an indepen- of their role in the creation of the work Rent and had not brought suit for infringe- dently copyrightable contribution to the work, reflects how the parties regard their under- ment or an injunction in the district court a coauthorship claimant must establish that taking.42 A collaborator’s self-styled manner based on use of her allegedly copyrighted each putative coauthor fully intended to be of billing or credit has been called a “window material.51 coauthors.31 This requirement recognizes that on the mind.”43 Similarly, any agreements Whether a contributor not found to be a coauthors are afforded equal rights in the between the contributors—particularly those coauthor still has a copyright interest in the coauthored work and ensures that an equal with any bearing on who would have ultimate material he or she has contributed to the sharing of rights is reserved for collaborations decision-making authority regarding the final work—and whether by the act of collabo- in which all participants fully intend to be content of the work—and between a con- rating the contributor has granted a license to joint authors.32 tributor and a third party also may provide use the contributed material—are open issues. The Ninth Circuit incorporated the Second objective manifestations of a shared intent to However, Nimmer on Copyright states that Circuit’s requirement of mutual intent into its be coauthors.44 the implied license doctrine may preclude a own test for determining when someone is a Third, a coauthorship claimant must show suit for infringement by one collaborator coauthor of a joint work. However, the Ninth that the audience appeal of the work turns on against the other.52 Moreover, according to Circuit made clear that the mutual intent to the contributions of the coauthors—and each Nimmer, since a collaborator’s contribution be coauthors must be established by “objec- individual’s share in the work’s success can- may be inextricably intertwined with por- tive manifestations”—not the subjective intent not be separately appraised.45 Courts of tions of a work he or she does not own, a col- of the parties.33 This requirement will prevent appeal have not yet explained how to deter- laborator may be unable to exploit his or putative coauthors from perpetrating a fraud mine each of these elements. This is most her work without the consent of the other col- by hiding their true intent to take sole credit likely due to the fact that most coauthorship laborator—making the contribution of no for the work.34 cases have been decided on preliminary issues, practical value during the copyright term of In Aalmuhammed, the Ninth Circuit noted such as whether the parties intended to be the work.53 that the word “author” connotes a tradi- coauthors. Practitioners should bear this in mind tional concept of one person writing at a However, in Morrill v. The Smashing when advising clients who are planning to col- desk with pen and paper, composing a work Pumpkins,46 a district court addressed the laborate. A written agreement that states the for publication. It is relatively easy to apply issue of audience appeal. The case involved parties’ intention to be coauthors is the eas- the word, and the concept, to a novel, but the a music video, titled View Marked, of a band iest way to avoid a dispute. Without a writ- task becomes more difficult for works involv- known as the Marked. The director of the ten agreement, the parties will be left with ing an increasing number of contributors.35 video, who also produced and edited it, uncertainty about their rights and with lim- For a music video, the authors may include claimed he was the video’s sole author. One ited or no remedies. I the performers and the producer;36 for a of the original members of the Marked, Billy movie, the authors could include the director, Corgan, later formed the Smashing Pumpkins 1 17 U.S.C. §201(a). the star, and the cinematographer or an ani- and used excerpts of Video Marked in a new 2 Oddo v. Ries, 743 F. 2d 630, 632-33 (9th Cir. 1984). mator.37 video, Vieuphoria. 3 Community for Creative Non-Violence v. Reid, 846 F. 2d 1485, 1498 (D.C. Cir. 1988). The court noted that music was “the cen- Ninth Circuit’s Three-Part Test 4 Weissman v. Freeman, 868 F. 2d 1313, 1318 (2d Cir. tral component” of the completed work, and 1989). Against this backdrop, the Ninth Circuit when the video was first displayed where the 5 Erickson v. Trinity Theatre, Inc., 13 F. 3d 1061, devised a three-part test to determine whether, Marked was playing, the video’s appeal pre- 1068 (7th Cir. 1994). in the absence of a contract, a contributor is sumably was based on the audience’s ability 6 Id. at 1065 n 2. 7 an author for the purpose of joint authorship. to hear more of the band’s performances. Id.; 17 U.S.C. §§201(a), 106(1)-(3); Pye v. Mitchell, 574 F. 2d 476, 480 (9th Cir. 1978). First, a putative coauthor must “superin- However, the court found that after the 8 17 U.S.C. §101. tend” the work by exercising control. A Smashing Pumpkins gained success, the 9 Childress v. Taylor, 945 F. 2d 500, 505 (2d Cir. Los Angeles Lawyer May 2011 15 1991); see also 1 MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT §6.01, at 3 (2003). There is no substitute for experience. 10 1 MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT §6.03, at 7 (2003). I Daily Journal Top Neutral 2008 & 2009 11 Edward B. Marks Music Corp. v. Jerry Vogel Music Co., 140 F. 2d 266 (2d Cir.1944). I Over 1,500 successful mediations 12 Aalmuhammed v. Lee, 202 F. 3d 1227, 1232 (9th I 17 years as a full-time mediator Cir. 1999). 13 I Director, Pepperdine’s “Mediating the Litigated Childress v. Taylor, 945 F. 2d 500 (2d Cir. 1991). 14 Id. at 508. Case” program 2002-2009 15 Erickson v. Trinity Theatre, Inc., 13 F. 3d 1061, 1068-69 (7th Cir. 1994); Childress, 945 F. 2d at 507; Janky v. Lake County Convention & Visitors Bureau, LEE JAY BERMAN, Mediator 576 F. 3d 356, 363 (7th Cir. 2009) (“Ideas, refinements, and suggestions” are insufficient to establish joint 213.383.0438 www.LeeJayBerman.com authorship.). 16 Richlin v. MGM Pictures, Inc., 531 F. 3d 962, 968 (9th Cir. 2008); Ashton-Tate Corp. v. Ross, 916 F. 2d 516, 521 (9th Cir. 1990). 17 Erickson, 13 F. 3d at 1070. 18 17 U.S.C. §102(b). HELPING CLIENTS AND LAWYERS FOR 40 YEARS 19 S.O.S., Inc. v. Payday, Inc., 886 F. 2d 1081, 1087 (9th Cir. 1989); Erickson, 13 F. 3d at 1071. Civil Litigation and Appeals, Intellectual Property, 20 S.O.S., 886 F. 2d at 1087 (citing Community for Defamation, Invasion of Privacy, Anti-SLAPP Motions, Creative Non-Violence v. Reid, 490 U.S. 730, 109 S. Ct. 2166, 2171 (1989)). Entertainment Disputes, Civil Rights, First Amendment, 21 Baker v. Robert I. Lappin Charitable Found., 415 F. Constitutional, Tenure and Academic Freedom Issues Supp. 473, 487 (S.D. N.Y. 2006). 22 Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. Experienced at co-counseling and consulting with attorneys 340, 345 (1991). 23 Aalmuhammed v. Lee, 202 F. 3d 1227, 1232 (9th STEPHEN F. ROHDE Cir. 1999). 24 Id. ROHDE & VICTOROFF 25 Id. at 1235-36; Thomson v. Larson, 147 F. 3d 195, 200 (2d Cir. 1998). 310.277.1482 • [email protected] 26 Aalmuhammed, 202 F. 3d at 1232. 27 Childress v. Taylor, 945 F. 2d 500, 507 (2d Cir. 1991). 28 Aalmuhammed, 202 F. 3d at 1235-36. 29 Childress, 945 F. 2d at 507. 30 Id. 31 Id. at 507-08. 32 Id. at 509. 33 Aalmuhammed, 202 F. 3d at 1234. 34 Id. 35 Id. at 1232. DixonQ.Dern 36 Morrill v. The Smashing Pumpkins, 157 F. Supp. 1120, 1124 (C.D. Cal. 2001). ARBITRATOR AND MEDIATOR 37 Aalmuhammed, 202 F. 3d at 1232. 38 Id. (“The absence of control is strong evidence of the absence of co-authorship.”). 39 Id. at 1235; see also Thomson v. Larson, 147 F. 3d 195, 203 (2d Cir. 1998) (“An important indicator of One of the better known authorship is a contributor’s decisionmaking author- attorneys, arbitrators, and mediators ity over what changes are made and what is included in a work.”); Erickson v. Trinity Theatre, Inc., 13 F. in the entertainment field 3d 1061, 1071-72 (7th Cir. 1994) (An actor’s sugges- tion of text does not support a claim of coauthorship if the sole author determined whether and where these Available for entertainment-related matters as contributions were included in the work.). 40 Aalmuhammed, 202 F. 3d at 1234. an arbitrator, mediator or for early neutral 41 Id. evaluation. 42 Thomson, 147 F. 3d at 203. 43 Id. 44 Id. at 203-04. 45 Aalmuhammed, 202 F. 3d at 1234. 46 Morrill v. The Smashing Pumpkins, 157 F. Supp. 310.275.2003 / [email protected] 1120, 1124 (C.D. Cal. 2001). 47 Id. at 1124-25. 48 17 U.S.C. §201(a). See www.dixlaw.com for bio 49 Thomson, 147 F. 3d 195. www.dixlaw.com 50 Id. at 206. 51 Id. 52 1 MELVILLE B. NIMMER & DAVID NIMMER, NIMMER EXPERIENCE + KNOWLEDGE = “DERN” GOOD RESULTS! ON COPYRIGHT §6.07, at 27 (2003). 53 Id. at n.32. 16 Los Angeles Lawyer May 2011 practice tips BY JAMES J. S. HOLMES AND KANIKA D. CORLEY Defining Liability for Likeness of Athlete Avatars in Video Games EA SPORTS, a video game developer, provides consumers with a ficient to establish liability for misappropriation of likeness because level of realism that has led to legal challenges by former student ath- the student athletes did not consent and were not compensated for letes for misappropriation of likeness. One suit was initiated after Ed the use of their likenesses in the video games. O’Bannon, star of UCLA’s 1995 championship basketball team, Before being allowed to perform each academic year, all Division watched a friend’s child playing a video game featuring the team. I NCAA athletes must sign Form 08-3a-Student Athlete Statement. O’Bannon soon recognized himself in the avatar that the child was By signing, student athletes affirm that they understand that they are playing in the game. O’Bannon observed of the avatar, “It didn’t have prohibited from profiting from the commercial use of their names, pic- my name, but it had my number, left handed, it looked like me. It was tures, or likenesses. In Part IV of the form, student athletes expressly everything but the name. My friend kind of looked at me and said, authorize the NCAA and the CLC to use their names or pictures in ‘You know what’s sad about this whole thing? You’re not getting paid accordance with Bylaw 12.5, including to promote NCAA champi- for it.’ I was just like, ‘Wow, you’re right.’”1 The many similarities that exist between the former student athletes who have filed suit The right of publicity has proven particularly difficult to reconcile and EA’s digital avatars, however, are not nec- essarily sufficient to establish liability. The facts standing in the way of liability are that nei- with free speech concerns. ther O’Bannon’s photographic image nor his name was used in the video games. Instead of the photographic images of college athletes, the video games have animated characters running plays in scenarios as onships or other NCAA events, activities, or programs. Bylaw 12.5 created by EA. In addition, EA can argue that the games are consti- expressly limits the NCAA’s right to use the names or pictures of tutionally protected free speech. enrolled students.8 However, this bylaw does not place a time limit In 2009, O’Bannon filed his suit against the National Collegiate on the NCAA’s right to use names or pictures. The NCAA and the Athletic Association (NCAA) and its licensing arm, the Collegiate CLC have cited this bylaw in response to the lawsuits. Licensing Company (CLC), whose exclusive agreement with EA According to the NCAA, likenesses captured during college are makes that studio the only one publishing NCAA sports games.2 The subject to NCAA rules, which prohibit student commercial gain and O’Bannon suit claims the use of student athlete images by EA violates permit the NCAA to license the use of likenesses to entertainment out- the Sherman Antitrust Act.3 That same year, Sam Keller (a former start- lets. The video game lawsuits that O’Bannon and others initiated, on ing quarterback for Arizona State University and the University of the other hand, raise the issue of the right of publicity. Nebraska) filed a class action suit against EA and the NCAA, accus- Right of Publicity ing the organizations of using the likenesses of college student athletes in video games without player permission.4 Former Rutgers University The common law right of publicity derives from privacy law, which quarterback Ryan Hart, joined by former University of California quar- may be traced to the 1890 Harvard Law Review article by Samuel terback Troy Taylor, also filed suit against EA, the CLC, and the D. Warren and Louis D. Brandeis that argues that people should have NCAA alleging similar violations.5 In 2010, the right of publicity claim some protection from media invasions into their private lives.9 In the in the Hart suit was dismissed without prejudice.6 In another action, 1928 U.S. Supreme Court case Olmstead v. United States,10 Justice former University of North Carolina football player Byron Bishop filed Brandeis articulated a general constitutional right “to be let alone,” a class action suit against EA, the CLC, and the NCAA, charging that which he described as the most comprehensive and valued right of the defendants conspired to violate the NCAA’s bylaws prohibiting the civilized people. Since then, the right to privacy has continued to for-profit use of amateur athletes when they included likenesses—but develop, and every jurisdiction in the country recognizes some form not names—of current athletes in NCAA-branded games.7 of constitutional, common law, or statutory right to privacy. With the slight variation of the O’Bannon suit’s antitrust allega- The current formulation of privacy law has been influenced to a large tions, the fact patterns of the former student athlete lawsuits and legal degree by William L. Prosser, who further outlined the appropriation arguments are very similar. The complaints allege that (with the of a person’s name or likeness for commercial purposes.11 Prosser exception of personal names and photographic images) the EA video wrote that the law of privacy comprises four different interests that are games precisely replicate each NCAA team—including logos, uniforms, tied together by the common name. Each interest represents a part of mascots, and stadiums. The lawsuits also allege that EA’s games depict distinctive equipment preferences of NCAA athletes, includ- Partner James J. S. Holmes is the chair, and Kanika D. Corley an associate mem- ing wristbands, headbands, face masks, visors, back plates, arm ber, of the Media, Entertainment & Sports Law practice group in the Los sleeves, and armbands. The plaintiffs conclude that these facts are suf- Angeles office of Sedgwick LLP. Los Angeles Lawyer May 2011 17 the right to be let alone, and violation of that In the sports game cases, the plaintiffs be successful in defending against liability. right is a tort.12 According to Prosser, the four often can be identified from the game details. Two other cases may also apply to EA’s privacy torts are: 1) intrusion upon the plain- In one case, in opposition to a motion to dis- possible liability. The Ninth Circuit has con- tiff’s seclusion or solitude, or into the plaintiff’s miss, Hart produced a declaration stating: sidered whether the use of robots depicting private affairs, 2) public disclosure of embar- I was listed as standing six…feet and celebrities or the characters played by celebri- rassing private facts about the plaintiff, 3) two…inches tall, the same height as the ties violates California Civil Code Section publicity that places the plaintiff in a false “virtual” Rutgers QB in the NCAA 3344 or the celebrities’ common law right of light in the public eye, and 4) appropriation, Football game versions in question; I publicity.23 for the defendant’s advantage, of the plaintiff’s weighed [197] pounds…the same In White v. Samsung Electronics America, name or likeness.13 This characterization of the weight as the “virtual” Rutgers QB in Inc., the court held that because the defen- privacy torts was adopted by the Restatement the NCAA Football game versions in dants used a “robot with mechanical fea- (Second) of Torts14 as well as by a number of question; [m]y [j]ersey number was tures” as opposed to a “manikin molded to states.15 13, the same as the “virtual” Rutgers (plaintiff) White’s precise features,” the robot In 1953, the U.S. Court of Appeals for the QB in the NCAA Football game ver- at issue did not use plaintiff White’s likeness Second Circuit, in a case involving baseball sions in question; I wore a left wrist within the meaning of Section 3344.24 trading cards, articulated the modern, assign- band, the same as the “virtual” Rutgers However, the court in Wendt based its hold- able right of publicity, which descends from QB in the NCAA Football game ver- ing on whether the the identities of the plain- the right of privacy.16 The newly christened sions in question; and I wore a helmet tiff celebrities had been evoked, regardless of right of publicity did not immediately become visor, the same as the “virtual” Rutgers whether their names or likenesses were used.25 the dominant model, but by the late 1970s it QB in the NCAA Football game ver- Applied to the student athlete cases, White had gained footing in courts and legislatures sions in question. would likely require that the plaintiffs show around the country. The right of publicity has In addition, Hart averred that the NCAA that EA’s digital images bear a sufficiently essentially expanded since then to apply when- Football 2006 game’s virtual quarterback similar resemblance to their physical features ever a monetary value exists. In California, had the same speed and agility rating, pass- to establish a Section 3344 claim. However, the right of publicity is a statutory and a com- ing accuracy, and arm strength as could be the student athletes stand a greater chance at mon law right. The statutory right originat- inferred from actual footage. Similarly, the maintaining a right of publicity claim by fol- ed in 1971 in Civil Code Section 3344, which game shows the virtual quarterback’s con- lowing Wendt, because the individual players’ authorizes recovery of damages by any living tribution to the team’s overall success as iden- background information contained in the person whose name, photograph, or likeness tical to those of Hart in the actual season. video games can reasonably be said to impli- has been used for commercial purposes with- Finally, Hart averred that actual video footage cate their identities. out his or her consent. of him is used in promotion material for EA’s Misappropriation NCAA game. Each of the former athlete Identifiable Likenesses claimants can recite similar experiences. If While the defendants in the video game law- Courts and legislatures have struggled to more than a de minimis number of people are suits emphasize that actual images are not define the likeness of a person. A likeness able to attribute such characteristics to Hart, used, the plaintiffs emphasize that the games has been found to include one’s name and bio- then the identifiability element of a misap- use identifiable likenesses. The characters in graphical information, persona, and voice. propriation of likeness claim may be satisfied. the games bear resemblances to former stu- The essential aspect of any part of one’s like- On the other hand, while details such as dent athletes, so the video game makers must ness is that it makes the person identifiable. those listed in Hart’s declaration may serve to have assigned a value to the likenesses, which The identifiability of the image or other aspect identify him, the digital images in the games are protected by a right. Similar arguments of the plaintiff is an essential element of a do not match the claimants. The plaintiffs in have met with success. In 2007, EA paid the claim for misappropriation.17 Few cases define each case concede that their names are not National Football League Players Association “identifiability.” The Restatement and a few used and that the game images do not resem- (NFLPA) more than $35 million for the use courts have offered some insight.18 The test ble them closely. Claims of use of image like- of the names and likenesses of the players.26 that seems most appropriate is one that ness pertain to allegations that, in nongame In 2008, a federal jury in San Francisco requires the plaintiff to demonstrate that his imagery, EA used stills and video of student awarded $28 million to a group of 2,062 or her image is identifiable in the defendant’s athletes recorded while they played in NCAA retired professional football players in a class use by more than a de minimis number of peo- championship games. But the driving force action suit against the NFLPA. The jury ple.19 One court has held that a plaintiff did behind the suits is the avatar—for example, the returned a $7 million verdict against the not establish identifiability when only 6 per- one that O’Bannon saw in a game—not NFLPA, plus $21 million in punitive dam- cent of 306 video game users could identify the images that appear for a few seconds when the ages.27 Although EA was not a party in that plaintiff as the character in the video game.20 game is loaded. Hart’s idiosyncratic manner- case, the NFLPA’s negotiations with EA over A person’s rights may be violated by the isms and style do appear in the game, but his licensing the images of retired NFL players use of the person’s name or biographical image does not. Since it is the digital image that were central to the plaintiffs’ case in chief. information.21 However, there needs to be is the basis for the complaints of Hart and the During discovery, lawyers for the retired some similarity of details that creates the others, and digital images must be manufac- players uncovered several e-mail messages association to the plaintiff from the use by the tured, the images are subject to a transfor- indicating that the NFLPA sold rights to use defendant.22 The similarity may be as slight mative use defense, despite the commercial the likenesses of retired players, although the as referencing the subject matter under which nature of EA’s use. Since EA has not animated plan was to shield the use. Those critical the person is known. In many other situations, the actual photographic images of former stu- communications included a message from a more will be required. The key is whether the dent athletes, and since the characterizations former NFLPA executive to an EA game pro- plaintiff can be identified from the defen- (including those Hart described) are based ducer insisting that the identities of retired dant’s use by more than a de minimis num- on information made public while the former players be altered so that they were not rec- ber of people. student athletes played their sports, EA may ognizable. As a result, jersey numbers were 18 Los Angeles Lawyer May 2011 scrambled for the video games. Lead plaintiff ing or message.”29 If the expression is new, the a case involving major league baseball play- Herb Adderley said, “If you look at the 1967 use is transformative and is more likely to be ers, the First Amendment was held to protect Green Bay Packers, you’ll know that the only held protected. a producer of fantasy baseball games who left cornerback that year had to be [me], but In a 1990 Harvard Law Review article, used the names of, and statistical information they scrambled my face and took the number Judge Pierre N. Leval renamed the concept of regarding, major league baseball players.43 off of my jersey. Yet, they had my correct productive use as transformative use.30 Judge The ruling was based in large part on the fact height, weight, and years of experience.” Leval argued that if the appropriated expres- that the information used was all readily Following an appeal, the retirees accepted a sion “is used as raw material, transformed available in the public domain.44 Likewise, in $26.25 million settlement. in the creation of new information, new aes- Romantics v. Activision Publishing, Inc., the thetics, new insights and understandings— court found that a video game allowing play- The First Amendment and that is the type of activity that the fair use ers to pretend to be playing guitar in a rock Transformative Use doctrine intends to protect for the enrich- band was an expressive artistic work entitled Although misappropriation was found with ment of society.”31 The newly labeled trans- to First Amendment protection.45 The factors respect to former football players, it may not formative use doctrine was embraced by the that weighed in favor of protection were that be as clear in the case of former student ath- Supreme Court in 1994 in Campbell v. Acuff- the game allowed players to select characters, letes. As intellectual property rights have Rose Music.32 That case involved the notori- costumes, and guitar models to be used by expanded, defendants are increasingly invok- ous rap group 2 Live Crew and its appropri- characters onscreen; one mode of the game ing the First Amendment as a defense against ation of portions of the Roy Orbison hit “Oh, reflected the progression of up-and-coming those who attempt to limit use by the exer- Pretty Woman.” The Court, citing Judge bands; and creation of the game took approx- cise of a right of publicity claim. In the Keller Leval, defined transformative uses as those imately six months to one year and involved case, EA argued in support of a motion to dis- which take an earlier work and add “new 1) the selection of a theme, 2) designing of miss that the information contained in the expression, meaning, or message.”33 Although graphic characters, locations, and instru- video game about the digital avatars simply the Court did not definitively rule that the rap ments, and 3) the selection of songs and their reflected statistics about the players that were group’s appropriation was transformative, it synchronization to enable game play.46 already in the public record, which should stated in dicta that it might be.34 The Court Recently, the California Court of Appeal shield EA from liability. The court rejected this deployed the transformative use doctrine pri- in No Doubt v. Activision, Inc., found that the argument, ruling that “EA’s game provides marily through the view of purpose and char- band No Doubt was not precluded from more than just the players’ names and sta- acter of the use.35 maintaining a misappropriation of likeness tistics; it offers a depiction of the student Justice Brandeis stated that the First claim because the video game at issue fea- athletes’ physical characteristics and enables Amendment has three purposes: 1) enlight- turing the band did not transform the band consumers to control the virtual players on a enment—political, social, and scientific news members into anything more than literal, simulated football field.” and entertainment, 2) self-fulfillment—human fungible reproductions of their likenesses.47 In February 2011, the Ninth Circuit heard self-expression in all forms, and 3) the safety The court further reasoned that video games EA’s appeal to this ruling, which stressed the valve—society’s need for free expression as an generally are considered expressive works sub- transformative character of the video games alternative to violence.36 The First Amendment ject to First Amendment protections.48 How- in which the likenesses of Keller and other col- has been held to protect certain types of ever, Activision’s right of free expression is in lege athletes appear. EA urged the court to speech, with “commercial speech” receiving tension with the rights of No Doubt to con- look beyond its accurate portrayal of players the lowest level of protection.37 Any speech trol the commercial exploitation of its mem- and instead consider the player avatars in that focuses on imploring the audience to buy bers’ likenesses. the overall context of the video game medium. a product or service is labeled commercial Liability in this instance can be deciphered In response, the student athletes cited Zacchini speech for First Amendment purposes.38 In by analyzing whether the student athlete like- v. Scripps-Howard Broadcasting,28 arguing cases in which the speech is purely commer- ness is one of the raw materials from which that the First Amendment does not provide cial, the right of publicity will often trump any the video games’ digital avatars are synthe- a limitless defense against financial exploita- free speech claim the defendant may make.39 sized, or whether the depiction or imitation tion without consent. Under California law, application of the of the student athlete likenesses is the sum and The intersection of intellectual property transformative use defense in an action for substance of the work in question. In other law (including rights of publicity) and the misappropriation of the right of publicity words, can it be affirmatively stated that the First Amendment has become increasingly depends upon whether the likeness appro- digital avatars created by EA are so trans- contested. As intellectual property rights have priated is one of the raw materials from formative that the avatars have become pri- expanded, defining the zone of protected which an original work is synthesized or marily EA’s own expression rather than the speech has become progressively more com- whether the depiction or imitation of the likenesses of student athletes? plex. The branch of intellectual property law celebrity is the very sum and substance of the This has yet to be seen, but the California known as the right of publicity has proven work in question.40 In Kirby v. Sega of Amer- Supreme Court has held that in determining particularly difficult to reconcile with free ica, Inc., another case concerning video whether a work is transformative, courts are speech concerns. Recently, some courts have games, the court found that a character in the not to be concerned with the quality of the begun importing a transformative use game was transformative and protected by the artistic contribution. Vulgar forms of expres- approach from copyright law to reconcile First Amendment, notwithstanding similari- sion fully qualify for First Amendment pro- tensions between publicity rights and con- ties between the character and a celebrity tection.49 On the other hand, a literal depic- stitutionally protected free expression. This who alleged infringement.41 The court held tion of a celebrity, even if accomplished with approach—focusing on transformative use that the First Amendment afforded distribu- great skill, may still be subject to a right of as applied in copyright fair use—asks whether tors a complete defense because the game publicity challenge. The inquiry is in a sense a putative fair user has simply used copy- character contained sufficient expressive dis- more quantitative than qualitative, asking righted expression in a more or less verbatim similar content.42 whether the literal and imitative or the creative fashion or has added “new expression, mean- Other jurisdictions have followed suit. In elements predominate in the work. What is Los Angeles Lawyer May 2011 19 clear is that transformative elements or creative Producing a New Motion contributions that require First Amendment Picture or Documentary? protection are not confined to parody and can take many forms, including factual report- Why not create the new company as a ing,50 fictionalized portrayal,51 heavy-handed Delaware Corporation or LLC? lampooning,52 and subtle social criticism.53 Delaware is the “incorporation capital of the world” The motto of EA once was, “If it’s in the and offers a favorable tax structure and climate for the Entertainment Industry and Asset Protection. game, it’s in the game.” This later changed to A Delaware corporation or LLC offers you: “It’s in the game!” It seems ludicrous to ques- • Asset protection • Privacy • Tax savings tion whether video game consumers enjoy 800.219.9359 | 561.968.6611 and, as a result, purchase more EA-produced [email protected] video games as a result of the heightened www.global-inter.net realism associated with actual players. It is reasonable to claim that EA’s economic goal 704 North King Street • Suite 500 • Wilmington • DE 19801 has been to adopt as many characteristics as possible from known commodities and to make its games imaginative. Whether, in effecting this goal, there has been a misap- propriation of likeness or a transformative use will have to be decided in court. I 1 Dan Wetzel, Making NCAA pay?, available at http://rivals.yahoo.com (last visited Mar. 9, 2011). See also Katie Thomas, Ex-Players Join Suit vs. N.C.A.A., N.Y. TIMES, http://www.nytimes.com/2010 /03/11/sports/ncaabasketball/11colleges.html (Mar. 10, 2010). 2 O’Bannon v. NCAA, No. CV 09-3329 (N.D. Cal. July 21, 2009). 3 Id; Sherman Act, 15 U.S.C. §§1–7. 4 Keller v. Electronic Arts, Inc., 4:09-cv-09-1967-CW (N. D. Cal. May 5, 2009). 5 Ryan Hart v. Electronic Arts, Inc., No. 3:09-cv- 05990-FLW-LHG (2010). 6 Id. at Court Document 23. 7 Byron Bishop v. Electronic Arts, Inc., No. 4:09-cv- 04128-CW (2009). 8 See NCAA Bylaw 12.5.1.1.1., available at http: //www.ncaapublications.com. 9 Samuel D. Warren & Louis D. Brandeis, The Right to Privacy, 4 HARV. L. REV. 193 (1890). 10 Olmstead v. United States, 277 U.S. 438 (1928). 11 See William L. Prosser, Privacy, 48 CAL. L. REV. 383 (1960). 12 Id. at 389. 13 See id. 14 RESTATEMENT (SECOND) OF TORTS §§652A-652E (1977). 15 See, e.g., Corcoran v. Southwestern Bell Tel. Co., 572 S.W. 2d 212, 214 (Mo. Ct. App. 1978); McCormack v. Oklahoma Publ’g Co., 613 P. 2d 737, 740 (Okla. 1980); Harris ex rel. Harris v. Easton Publ’g Co., 335 Pa. Super. 141 (1984). But see Cain v. Hearst Corp., 878 S. W. 2d 577, 578 (Tex. 1994). 16 Haelan Labs., Inc. v. Topps Chewing Gum, Inc., 202 F. 2d 866, 868 (2d Cir. 1953). 17 Waits v. Frito-Lay, Inc., 978 F. 2d 1093 (9th Cir. 1992); RESTATEMENT (THIRD) OF UNFAIR COMPETITION §46 cmt. d. 18 See RESTATEMENT (THIRD) OF UNFAIR COMPETITION §46 cmt. d; Hirsch v. S.C. Johnson & Son, Inc., 90 Wis. 2d 379 (1979); Negri v. Schering Corp., 333 F. Supp. 101 (1971); Henley v. Dillard Dep’t Stores, 46 F. Supp. 2d 587 (1999). 19 MCCARTHY, THE RIGHTS OF PUBLICITY AND PRIVACY §3:18. 20 Pesina v. Midway Mfg. Co., 948 F. Supp. 40 (1996). 21 See Palmer v. Schonhorn Enters., Inc., 96 N.J. Super. 72 (1967); Hillerich & Bradsby Co. v. Christian Bros., Inc., 943 F. Supp. 1136, 1140 (1996); Uhlaender v. Henricksen, 316 F. Supp. 1277 (1970); C.B.C. Distrib. & Mktg., Inc. v. Major League Baseball Advanced 20 Los Angeles Lawyer May 2011 Media, L.P., 505 F. 3d 818 (2007), cert. denied, 128 S. Ct. 2872 (2008). 22 Cohen v. Herbal Concepts, Inc., 63 N.Y. 2d 379 (1984). 23 White v. Samsung Elec. Am., Inc., 971 F. 2d 1395, 1397 (9th Cir. 1992); Wendt v. Host Int'l, Inc., 125 F. 3d 806, 810 (9th Cir. 1997). 24 White, 971 F. 2d at 1397. 25 Wendt, 125 F. 3d at 810. 26 supnik.com See the NFLPA’s 2007 FORM LM-2 LAB. ORG. ANN. REP. 27 A U.S. district judge dismissed a malpractice case brought by retired NFL players who claimed their attorneys did not do a good enough job representing them in a case against their union. Parish v. Manatt, Phelps & Phillips and McKool Smith, No. 10-03200 copyright, trademark and entertainment law (N.D. Cal. Dec. 13, 2010). 28 Zacchini v. Scripps-Howard Broad., 433 U.S. 562 (1977). 29 Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994). 30 Pierre N. Leval, Commentary, Toward a Fair Use Standard, 103 HARV. L. REV. 1105 (1990). 31 Id. at 1111. RECEIVERSHIP SPECIALISTS 32 Campbell, 510 U.S. 569. Court Appointed Receivers and Referees 33 Id. at 579 (quoting Leval, supra note 30, at 1111). 34 Id. at 582–83. 19 Years of Serving the Insolvency Community 35 Id. at 582–92. 36 MCCARTHY, THE RIGHTS OF PUBLICITY AND PRIVACY §8:2 (2d ed. 2008) (citing Whitney v. California, 274 U.S. 357, 375 (1927), overruled in part by Brandenburg v. Ohio, 395 U.S. 444 (1969) (Brandeis, J., concurring)). “Committed to improving the value of your client’s assets, 37 Pallas v. Crowley, Milner & Co., 322 Mich. 411, 33 N.W. 2d 911 (1948); Hoffman v. Capital Cities/ABC, at the lowest cost, while disputes are resolved.” Inc., 255 F. 3d 1180 (9th Cir. 2001). 38 MCCARTHY, THE RIGHTS OF PUBLICITY AND PRIVACY §§7:3, 8:16, 8:18 (2d ed. 2008). 39 Comedy III Prods., Inc. v. Gary Saderup, Inc., 25 Cal. 4th 387 (2001); Winter v. DC Comics, 30 Cal. 4th 881 (2003); Virginia State Bd. of Pharm. v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748 (1976). 40 Hilton v. Hallmark Cards, 599 F. 3d 894 (2010); Miller v. Glenn Miller Prods., Inc., 454 F. 3d 975 (2006) (both applying California law). 41 Kirby v. Sega of Am., Inc., 144 Cal. App. 4th 47 (2006). 42 Id. KEVIN SINGER JOHN RACHLIN 43 C.B.C. Distrib. & Mktg., Inc. v. Major League Real Estate & Business Expert Attorney At Law Baseball Advanced Media, L.P., 505 F. 3d 818 (2007), cert. denied, 128 S. Ct. 2872 (2008). 44 Id. 45 U.S. CONST. amend. I.; Romantics v. Activision s Receivership, Referee & Partition Assignments Publ’g, Inc., 574 F. Supp. 2d 758 (2008). 46 Id. Real Estate Management & Sales 47 No Doubt v. Activision Publ’g, Inc., Case No. Business Management & Sales B223996 (Cal. App. 4th 2011). 48 Kirby v. Sega of Am., Inc., 144 Cal. App. 4th 47, 58 Family Estate Management & Sales (2006); see Video Software Dealers Ass’n v. Schwar- zenegger, 556 F. 3d 950, 958 (9th Cir. 2009), cert. Real Estate & Business Evaluations granted sub nom Schwarzenegger v. Entertainment Merchants Ass’n, 130 S. Ct. 2398 (2010); Romantics, s 574 F. Supp. 2d at 765-66 (The Guitar Hero video game is “an expressive artistic work that is entitled to First Amendment protection.”). SOUTHERN NORTHERN NEVADA ARIZONA 49 See, e.g., Hustler Magazine v. Falwell, 485 U.S. 46 CALIFORNIA CALIFORNIA OFFICE OFFICE (1988); Campbell v. Acuff-Rose Music, Inc., 510 U.S. OFFICE OFFICE 7251 W. Lake Mead Blvd. 40 N. Central Avenue 569, 582 (1994). 11400 W. Olympic Blvd. 795 Folsom Street Suite 300 Suite 1400 50 See, e.g., Rosemont Enters., Inc. v. Random House, Suite 200 1st Floor Las Vegas, NV 89128 Phoenix, AZ 85004 Inc., 294 N.Y.S. 2d 122, 129 (1968), aff’d mem., 301 Los Angeles, CA 90064 San Francisco, CA 94107 Tel 702.562.4230 Tel 602.343.1889 N.Y.S. 2d 948 (1969). Tel 310.552.9064 Tel 415.848.2984 51 Guglielmi v. Spelling-Goldberg Prods., 25 Cal. 3d 860, 871-72 (1979); Parks v. Laface Records, 76 F. Supp. 2d 775, 779-82 (1999) (The use of civil rights figure Rosa Parks in a song title is protected.). 52 See Hustler Magazine, 485 U.S. 46. www.ReceivershipSpecialists.com 53 See COPLANS ET AL., ANDY WARHOL 50-52 (1970). Los Angeles Lawyer May 2011 21 ENTERTAINM ENT LAW by Bradford S. Cohen and Kyle R. Neal STAR POWER Celebrity involvement in charitable causes raises both tax and business affairs issues THE PARTICIPATION OF CELEBRITIES the Boston Red Sox, worked behind the scenes in charitable causes is rooted in tradition and for years on behalf of the Dana Farber Cancer increasingly apparent in a variety of venues. Institute’s Jimmy Fund, making unannounced When those who are famous for their achieve- (and unreported) visits to children and pay- ments in the arts, entertainment, media, or ing their hospital bills.1 sports decide to become involved in charities, Celebrities often respond when a natural they are undertaking a complex endeavor, disaster strikes or when they are asked to with a wide variety of legal and business chal- raise public awareness for a worthy cause. lenges involving many parties. They are One example is Farm Aid, organized by Willie becoming “charitable actors,” with many Nelson, John Mellencamp, and Neil Young in attendant rewards but also a number of 1985. Sometimes a charitable event becomes responsibilities. The close relationship between entertain- Bradford S. Cohen is a partner at Venable LLP in Los ment and sports celebrities and charities has Angeles, and Kyle R. Neal is of counsel to the firm. a long lineage. In the entertainment world, Cohen’s practice focuses on business and tax Bob Hope’s decades-long support of the USO advice for clients in the motion picture, televi- by performing for U.S. troops throughout sion, music, emerging media, and sports indus- the world led Congress to name him an hon- tries. He also facilitates relationships among non- orary veteran. At last year’s Emmy Awards profit organizations and individuals and entities ceremony, George Clooney received the Bob in entertainment and advertising. Neal advises Hope Humanitarian Award for his fundrais- individuals regarding estate planning and non- ing contributions. In the sports arena, Ted profit organizations regarding their formation and MICHAEL CALLOWAY Williams, the legendary baseball player with operation. 22 Los Angeles Lawyer May 2011 an annual tradition, such as the Jerry Lewis first to the charity for a term of years, with the istrative expenses exceeding charitable spend- MDA Telethon, which has taken place every remainder to the celebrity’s family members ing. A private foundation’s good works could Labor Day weekend since 1966. In response after the charity’s term interest. If the asset to be overshadowed if its missteps are on display to a crisis, celebrities plan and present one- be donated is something other than publicly for all the world to see in publicly available time fundraisers in a matter of days, such as traded stock, the celebrity should carefully filings.14 the Hope for Haiti event organized by George choose a trustee. Practitioners can help with Private foundations have special rules Clooney and Wyclef Jean in 2010. this as well as advise the celebrity on manag- against self-dealing to prevent the founder, Whatever the circumstance, a legal team ing expectations for investments. The celebrity family members, related business interests, or needs to oversee the formation of the chari- donor also must be alerted to avoid the pitfall otherwise disqualified persons from taking table program. Attorneys provide direction in that occurs when the donor enters into a con- advantage of their position to engage in trans- working with personal and business man- tract for sale of the asset prior to contributing actions with the private foundation, regard- agers, public relations teams, agents, in-house the asset to the charitable remainder trust. If less of whether the transaction might benefit counsel, corporate advisers, and nonprofit the trustee of the trust later sells the asset, the foundation. Acts of self-dealing are sub- directors to ensure strict compliance with all what would have been a tax-free sale instead ject to penalties in the form of additional applicable laws. They also monitor the pro- becomes a taxable sale followed by the dona- taxes. A celebrity who establishes a private ceedings so that all the participants’ objectives tion of the after-tax proceeds.5 foundation needs to be well advised on what are met. can and cannot be done with the funds he or Private Foundations This process actually begins before any she has contributed to the foundation. Even specific charitable need or involvement is For some celebrities with a considerable a seemingly insignificant act, such as distrib- even considered. Successful young entertain- record of charitable giving and adequate uting tickets purchased by the foundation ment or sports stars soon realize that the rap resources to continue doing so,6 the use of a for a gala dinner, must be carefully scrutinized lyric distilling their lives to “mo money, mo private foundation may be the best means of with an eye toward the self-dealing rules.15 problems”2 also includes “mo” people: sustaining the individual’s philanthropy in Celebrities may appoint family members lawyers, publicists, tax and wealth advisers, the future. A private foundation allows as salaried officers to the foundation. business managers, and CPAs. At some point, celebrities to channel their charitable giving Reasonable salaries will not violate the self- the young stars will usually have a conver- through an organization under their control. dealing rules, but the board must demon- sation with one or more of these advisers This type of foundation can be formed fairly strate how it arrived at its determination of about personal wealth planning. That con- quickly by, for example, establishing a Cal- reasonableness. In addition, California rules versation should include a discussion about ifornia or Delaware nonprofit public benefit provide that no more than 49 percent of the charitable giving as a way to accomplish per- corporation. A trust may be used instead directors of a foundation may be “interested sonal and financial goals. of a corporation, but a trust is a less flexible persons.” An “interested person” is defined A simple, direct gift to a charity results in structure than a corporation and tends to be as any person other than the director who is a charitable income tax deduction in the year used infrequently. compensated for services rendered to the of the gift.3 The gift can be cash, or securities, A California corporation may have as foundation during the previous 12 months, or some other property. A gift that is not a few as one director,7 is not required to have including brothers, sisters, spouses, parents, readily valued asset (such as cash or pub- voting members, and is allowed to have hon- descendants, and in-laws of interested per- licly traded securities) requires an appraisal, orary members if it so chooses.8 The corpo- sons.16 The self-dealing rules prevent any and an attorney is needed to sort through the ration applies to the Internal Revenue Service sale, exchange, license, or lease of property sometimes confusing rules on deductions for (and to California’s Franchise Tax Board) between the foundation and the celebrity or appreciated property. The deduction can for recognition as a tax-exempt organiza- his or her family members, unless the lease is depend on the type of property contributed, tion.9 Once this status is granted, tax exemp- without charge.17 the holding period, who the donee charity is, tion is generally retroactive to the date of Celebrities who created private founda- what the donee does with the gift, if there incorporation. tions include actor and director Matthew were large gifts in prior years, and the num- A celebrity or an authorized agent uses a Modine, who formed Bicycle for a Day ber of elections that the donor and his or private foundation to grant money to estab- (BFAD), a nonprofit organization dedicated her CPA may choose to make. lished charities. By law, a private foundation to educating individuals about environmen- If a celebrity wishes to make a gift of must make an annual minimum distribution tal and health issues and encouraging students assets but still retain some ongoing benefit of 5 percent of the average fair market value to ride their bicycles to school. BFAD’s first from the assets, he or she may consider a of its assets, as determined by periodic event attracted approximately 14,000 bicy- charitable remainder unitrust, which pro- appraisals.10 clists to lower Manhattan. Modine himself vides for a continuing income stream to the A private foundation allows a celebrity to has used a bicycle as his primary form of celebrity for life or a term of years, with the put his or her name on a charitable organi- transportation since moving to New York remainder passing to the charity at the celebri- zation and to directly manage how the funds City in 1980. Modine also serves on the ty’s death or the end of a predetermined will be distributed. However, there are draw- board of New York City’s Transportation time.4 If the celebrity creates a charitable backs to this approach. The deductibility Alternatives, Madison Square Garden’s remainder trust, he or she can provide for limitations are lower than they would be if the Garden of Dreams Foundation, the Lustgarten family members, such as a spouse and chil- celebrity contributed directly to a charity or Pancreatic Cancer Foundation, and the Van dren, to be beneficiaries of the trust as well, to a fund that the celebrity established at the Cortlandt Park Conservancy. To advise a but this type of trust requires careful planning charity.11 Moreover, private foundations have strong charitable actor like Matthew Modine, regarding the type of asset contributed, the special excise taxes on net investment practitioners must understand the complex length of the trust term, the annual payout income.12 In addition, private foundations rules applicable to founders and directors of amount, and investment of trust assets. with gross revenues exceeding $2 million charitable organizations. Alternatively, the trust could be a charita- must prepare audited financial statements.13 Another example of a celebrity involved ble lead trust, which provides an income stream Celebrities also must guard against admin- with a private foundation is musician Jack 24 Los Angeles Lawyer May 2011 Johnson, who created the Kokua celebrities manage their philan- Hawai’i Foundation to support envi- thropy. For example, the Giving ronmental education in the schools Back Fund, a 501(c)(3) organiza- and communities of Hawaii. The tion, provides philanthropic con- foundation raises money through sulting and foundation manage- an annual music and environmental ment to high-profile individuals festival and continues to grow and committed to philanthropy. The expand. As it does so, it takes on the Giving Back Fund can establish a characteristics of any other busi- DAF for the individual or provide ness and must address issues relat- consulting regarding a private foun- ing to employment, real estate, and dation.19 Athletes for Hope, a intellectual property (including the 501(c)(3) charitable organization, protection of trademarks and logos). was founded by a group of suc- Moreover, it must ensure compli- cessful athletes20 to inspire and fos- ance with the relevant laws to main- ter a commitment to charitable and tain its tax-exempt status. community causes in the next gen- Artists for Peace and Justice, eration of athletes and in the fans formed by film director Paul Haggis who support them. in 2009, has long-term plans to sup- Another advisory organization is port a host of social projects, but its Global Philanthropy Group, whose immediate goal is to serve children founder, Trevor Neilson, has been in the poorest areas of Haiti by dubbed a “Charity Fixer to the building schools and providing Stars.”21 The company currently meals, clean drinking water, and advises 20 clients, with some pay- regular medical treatment. Prac- ing $150,000 to $200,000 a year titioners advising charitable organ- for consulting services. These izations with overseas operations include research, education, and must determine whether the U.S. strategic design to ensure that a charity will establish its own pro- celebrity’s philanthropy will have gram in a foreign country or will operate by banks and trust companies. However, the the intended impact. supporting an existing foreign charity. This donor does not have as much control as in a Celebrities must understand that donating decision may affect the deductibility of dona- private foundation, because the celebrity their considerable and valuable time and tions made by U.S. taxpayers. donor acts only as the adviser to the DAF, and energy to a cause they believe in does not pay the fund’s administrator legally must have off with an income tax deduction. The con- Donor-Advised Fund the final say on where to allocate the grant tribution of services cannot be deducted.22 An alternative to a private foundation is a funds. Still, a celebrity donor working closely Celebrities must contribute money or prop- donor-advised fund (DAF), a kind of “mini with a DAF customarily will find that his or erty to charity to receive an income tax deduc- foundation” that offers many benefits of a pri- her wishes will be fulfilled. According to tion. However, a celebrity’s endorsement or vate foundation but without some of the pit- Carol Bradford, senior counsel and charita- link to a charitable cause can increase the falls. A DAF is a giving vehicle that provides ble advisor of the California Community celebrity’s value to a sponsor or marketer— an individual with immediate tax benefits. At Foundation, “Donor-advised funds are a pop- and this, in turn, may increase the individu- the same time, individuals forming a DAF ular way for celebrities or anyone to make al’s bottom line more than a charitable income may support the charities of their choice charitable contributions easily, quickly, and tax deduction. through grant recommendations—and may even anonymously. CCF can set up a fund The 2010 Cone Cause Evolution Study, a do so on timetables of their choosing. within 36 hours, handle all sorts of contri- 17-year benchmark study of cause marketing DAFs are efficient, cost-effective alterna- butions to the fund, and ensure that grants attitudes and behaviors, found that 83 percent tives to private foundations. Unlike a pri- from the fund, whether large or small, are of consumers want more of the products, vate foundation, there is no annual mini- made efficiently and effectively.” services, and retailers that they use to bene- mum gifting amount. The donor making a gift Some celebrities have a natural affinity fit causes. According to the study, 88 per- to the DAF is allowed the higher deduction for certain charities based on family circum- cent of consumers say it is acceptable for limits that are provided to donors to a pub- stances or personal passions. For others, sort- companies to involve a cause or issue in their lic charity. The donations may be made ing through the many charities seeking sup- marketing, 85 percent have a more positive anonymously, unlike a private foundation port can be daunting. There is so much need image of a product or a company when it sup- that must make its records available to the and so many good causes that finding a way ports a cause they care about, and 80 percent public. The paperwork of the DAF, such as to make each dollar count requires time and are likely to switch brands, similar in price tax returns and informational reporting, is due diligence. Organizations have emerged to and quality, to one that supports a cause.23 handled by the fund’s administrator, so the help donors with these decisions. For exam- Cause-Related Marketing Campaigns celebrity is only responsible for advising on ple, Charity Navigator is an independent the grant recipients. charity evaluator that assesses the financial Celebrities who are publicly identified with a A DAF can be formed swiftly and without health of more than 5,500 charitable organ- particular cause can align with a company as difficulty, and many organizations are set up izations. Its Web site has a page that allows a partner in an effort to market a product that to facilitate their creation. These include the users to search charities based on which will benefit that cause. The celebrity, the California Community Foundation, the celebrities support the charity.18 developers of the product, and the charity all Jewish Community Foundation, and many Some organizations specialize in helping must make careful choices in taking this Los Angeles Lawyer May 2011 25 approach.24 Moreover, a celebrity presence to take advantage of this provision. However, or comparative language; price information, does not guarantee that a charity will see an music publishers and record companies gen- or other indications of savings or value; increase in donations. According to a 2006 erally are supportive of the songwriter’s dona- endorsements; or inducements to purchase, Cone study, Americans rank celebrity involve- tion, since it expands public awareness of sell, or use the payor’s products or services. ment as one of the least effective methods for the song and potentially increases the over- There is a safe harbor for an arrangement that nonprofits to gain attention, placing it ninth all revenue from the song at no additional cost designates a corporate sponsor as the exclu- on a list of 10 marketing methods to gain con- to them. Indeed, the charity steps in as a sive sponsor of an event, as long as the des- sumer support (just edging out telemarket- marketing and distribution partner for the ignation does not result in a substantial return ing).25 The right combination, however, can song, so everyone wins. benefit to the sponsor. If, however, the char- be extremely effective—for example, Sheryl ity agrees with the sponsor that it can be the Qualified Sponsorship Payment Crow’s 2008 concert for the Susan G. Komen sole provider of a product or service at the Breast Cancer Foundation, with admission Two main umbrella nonprofit organizations event, then the transaction may be taxable, consisting of 10 specially designed lids from serve the charitable needs of the entertain- because the sponsor is receiving a significant Yoplait products.26 ment industry, but in very different ways: the benefit.31 In creating a cause-related marketing cam- Motion Picture and Television Fund (MPTF) The Treasury Regulations provide an paign involving a concert and a product tie- and the Entertainment Industry Foundation example of a qualified sponsorship payment: in, numerous legal issues emerge. If the con- (EIF). The MPTF was created in 1921 by M, a local charity, organizes a marathon and cert is filmed, a determination of who will Charlie Chaplin and Mary Pickford, among walkathon at which it serves drinks and other own the film rights and any music recordings others. Its mission statement is “We Take refreshments provided free of charge by a must be made. For liability purposes, the Care of Our Own.” The MPTF recognizes national corporation. The corporation also organizers must decide whether a separate that the vast majority of persons who work gives M prizes to be awarded to winners. M entity from the charity should be used or in entertainment are not the people whose recognizes the assistance of the corporation established to produce the show. If the price familiar faces line the magazine racks at by listing the corporation’s name in promo- of the ticket is an actual dollar amount supermarket checkout counters. What started tional fliers, in newspaper advertisements of (instead of the proof of purchase of a prod- as coin boxes for Hollywood workers to the event, and on T-shirts worn by partici- uct), concertgoers need to be informed that donate change to help their fellow workers pants. M changes the name of its event to they are not entitled to a charitable deduction has evolved into a comprehensive organiza- include the name of the corporation. M’s for the portion of their ticket that represents tion offering health-related and financial ser- activities constitute acknowledgment of the the usual cost of attending the show. vices for needy members of the entertainment sponsorship. The drinks, refreshments, and Normally, the concertgoer would be allowed industry. prizes provided by the corporation qualify as to deduct any premium that was charged The mission of EIF28 is to harness the col- a nontaxable sponsorship payment rather and was intended to be a charitable gift. For lective power of the entertainment indus- than as income from an unrelated trade or example, when a $50 ticket is sold for $75 on try—including artists and celebrities, film business.32 A charity such as EIF may provide the night of a gala, $25 of the ticket price is and television executives, guild members, tal- a link on the charity’s Web site to the spon- deductible.27 The legal team should consider ent agencies, and employees—to raise aware- sor’s Web site—and this is a permissible how the event can be structured to best ness and funds for critical health, educa- acknowledgement, not advertising. However, enhance the ability of donors and sponsors to tional, and social issues. EIF has created a the charity should not endorse the sponsor’s receive income tax deductions. Attention to series of initiatives to address specific issues products in connection with this link on the the charitable solicitation registration require- and has developed a fundraising plan for charity’s Web site,33 because that can change ments for all applicable jurisdictions is key. A each initiative. Often these plans involve one the link from permissible acknowledgement well-coordinated effort to comply with all or more key celebrities who become the face to taxable advertising. state and local registration requirements will of the cause. Responding to Crises prevent penalties and fines. EIF is a charitable organization with its The tax code provides a new, albeit under- own donors and sponsors. A tax-deductible A celebrity may have established a private used, provision that could be a boon to cause- payment by an EIF sponsor to a charity must foundation or a DAF, and may be working related marketing. Under Internal Revenue be distinguished from a payment for a service, with an advisory organization, business man- Code Section 170(m), a songwriter may such as an advertisement for goods. Under the ager, or lawyer to structure his or her appear- donate a song to a charity, providing signif- IRC, a “qualified sponsorship payment” is ances, sponsorships, and charitable gifts. At icant benefits to both the songwriter and the any payment made by any person engaged in times, the celebrity seeks to join forces with charity. The songwriter can donate all or a a trade or business to which there is no expec- others in response to an urgent natural or portion of the writer’s and/or publisher’s tation that the person will receive any sub- man-made crisis. Celebrities may decide to share of a copyright to a charity, avoid the stantial benefit other than the use or acknowl- become involved in immediate action or set income tax on the income from the exploita- edgment of the name, logo, or product lines in motion a “spread the word” campaign. tion of the copyright, and receive a significant of the person’s trade or business in connec- An example of the acute response is the income tax charitable deduction over a 10- to tion with the activities of the recipient exempt Hope for Haiti Now telethon. A telethon 12-year period, based upon the revenue organization.29 The tax code provides that the generally has celebrity hosts and perform- received by the charity. The song can be either solicitation and receipt of qualified sponsor- ers, all donating their time and services, as specifically written for the charity or an exist- ship payments does not constitute an “unre- well as celebrities operating the phone banks ing song from the songwriter’s catalogue. No lated trade or business” that would cause to receive pledges of support from viewers. In appraisals are required; the deduction is the charity to receive unrelated business the case of the Hope for Haiti Now telethon, instead based on the income received by the income and incur tax.30 EIF processed the donations and distributed charity during the applicable period. Music A sponsorship message crosses the line the funds to seven identified charitable recip- publishers and record companies do not have from mere acknowledgment to impermissible ients. Celebrities produced a top-selling album to participate for the songwriter and charity advertising if the message contains qualitative and video, with the proceeds benefiting the 26 Los Angeles Lawyer May 2011 charity. The preparations for the telethon involved determining whether intellectual Judge Michael D. Marcus (Ret.) property rights were donated or licensed as appropriate. Mediator • Arbitrator • Discovery Referee Examples of a “spread the word” response include Stand Up to Cancer (SU2C) and the EXPERIENCED • PERSUASIVE • EFFECTIVE RED Campaign. SU2C is an initiative formed Daily Journal Top Neutral 2007, 2009 & 2010 by EIF to raise funds for ground-breaking Super Lawyer, Dispute Resolution 2008-2011 research in the fight against cancer and bring- • Employment • Legal Malpractice ing new treatments to patients as quickly as • Business/Commercial • Real Property possible. The initiative involved a team of Personal Injury Intellectual Property film, television, music, and sports stars appear- • • ing on all the major broadcast networks in a Century City Downtown Los Angeles Orange County one-hour commercial-free program. It also tel: 310.201.0010 www.marcusmediation.com Available exclusively at included 30 online streaming partners as well. email: [email protected] The Red Campaign—with its tag line “Buy (Red), Save Lives”—focuses on stopping the spread of HIV/AIDS in Africa. A company pays a fee for permission to market a prod- uct under the Red logo. Then, when a con- Anita Rae Shapiro sumer buys a Red product, the seller donates SUPERIOR COURT COMMISSIONER, RET. a percentage of the sale to the Global Fund, which invests 100 percent from the sale to PRIVATE DISPUTE RESOLUTION HIV/AIDS programs in Africa.34 The wide PROBATE, CIVIL, FAMILY LAW array of Red products allows celebrities a PROBATE EXPERT WITNESS way to simultaneously associate with a brand and with the charitable campaign. Moreover, TEL/FAX: (714) 529-0415 CELL/PAGER: (714) 606-2649 special edition products are being created for E-MAIL: [email protected] the campaign. http://adr-shapiro.com One of the next major collaborations between the charitable world and the enter- tainment industry will be a telethon this year on Veterans Day to provide support for the needs of U.S. veterans. The plan is to trans- form Veterans Day, November 11, into a participatory national holiday of major importance similar to July 4. EIF is develop- ing an event that will be broadcast nationally Nothing speaks more clearly than results. with the Alliance for Veterans (AV), a tax- exempt organization. The broadcast will fea- Huron law group is a business and entertainment litigation ture performances by acclaimed concert artists law firm with the motivation, talent and experience to win. interspersed with testimonials from veterans We aggressively prepare cases for trial – not settlement. Our and their families. track record, proven experience and thorough preparation For a celebrity, living a life in the public provide optimal results for our clients. eye may be measured by a list of credits and sometimes awards. But for many who have found fame, their resumes now include char- itable work. Stepping into the role of chari- table actor may begin as a way to save on taxes, but it can end as defining a celebrity’s true legacy. I 1 For years, Williams encouraged people who wanted his autograph to make out checks to “Ted Williams for the Jimmy Fund.” Williams would then endorse the Use the QR Code check and send it to the charity. The Jimmy Fund Reader on your smart would get the donation, and the check writers would phone to hear a word get valuable Ted Williams autographs on the back of from our clients. their canceled checks. See http://www.jimmyfund.org. 2 NOTORIOUS B.I.G., Mo Money Mo Problems, on LIFE AFTER DEATH (July 15, 1997). 3 I.R.C. §170. 4 I.R.C. §664(d)(2). Alternatively, a charitable lead trust provides for payment to a charity for a term of huronlaw.com | 310.284.3400 years, with the remainder passing typically to the donor’s children at the end of the term. I.R.C. Los Angeles Lawyer May 2011 27 §170(f)(2)(B). GREG DAVID DERIN - MEDIATOR & ARBITRATOR 5 Rev. Rul. 78-197, 1978-1 C.B. 83; I.R.S. Priv. Ltr. Rul. 200321010 (Feb. 13, 2003). 6 Because of the costs of formation and the annual HONESTY • FAIRNESS • COMMITMENT • CREATIVITY • EXCELLENCE costs of upkeep, a minimum of $1 million is usually rec- ommended to fund a private foundation. AREAS OF EXPERTISE: 7 CORP. CODE §5151(a). 8 • Entertainment and • Contract and Business Torts CORP. CODE §5132(c)(1). 9 Intellectual Property • Real Property IRS Form 1023 must be filed within 15 months of the close of the month the private foundation corporation • Employment • Corporate and Partnership is formed. An automatic 12-month extension of the time to file is available. Treas. Regs. §§1.508-1(a)(2)(i), “POWER MEDIATOR”, The Hollywood Reporter, ADR SuperLawyerTM (iii), 301.9100-2. FACULTY, Harvard Negotiation Institute 10 I.R.C. §4942. 11 A contribution to a public charity is deductible up 310.552.1062 I www.derin.com to 50 percent of adjusted gross income (AGI), whereas 1925 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067 the same contribution to a private foundation is deductible up to 30 percent of AGI. Each would have a five-year carryover for excess contribution. 12 I.R.C. §4940. 13 See GOV’T CODE §12586(e)(1). 14 A private foundation must file an annual informa- tion return, a 990-PF. It must be available for public inspection, and the public can search a foundation’s financial history online at http://www.guidestar.org. 15 In a private letter ruling, the IRS held that a private foundation could not split the cost of a charitable event ticket with a for-profit corporation that was a dis- qualified person under circumstances in which the for- profit corporation would pay the cost of the ticket attributable to the dinner and entertainment and its rep- resentatives would attend the event. I.R.S. Priv. Ltr. Rul. 9021066 (Mar. 1, 1990). 16 CORP. CODE §5227. 17 I.R.C §§4941(d)(1)(A), (d)(2)(C). 18 See http://www.charitynavigator.org/index.cfm?bay =content.view&cpid=949. 19 See http://www.givingback.org. 20 The founders include Andre Agassi, Muhammad Ali, Lance Armstrong, Warrick Dunn, Jeff Gordon, Mia Hamm, Tony Hawk, Andrea Jaeger, Jackie Joyner- Kersee, Mario Lemieux, Alonzo Mourning, and Cal Ripken Jr. See http://www.athletesforhope.org. 21 Charity Fixer to the Stars, N.Y. TIMES, Dec. 3, 2010. 22 Treas. Regs. §1.170A-1(g) (as amended, Apr. 9, 2008). 23 See 2010 Cone Cause Evolution Study, available at http://www.coneinc.com. 24 The Susan G. Komen Breast Cancer Foundation, Inc., faced criticism for its Buckets for the Cure partnership with Kentucky Fried Chicken, based on National Cancer Institute statistics indicating that obesity increases the risk for developing breast cancer in post- menopausal women by 50 percent. See http://www .nydailynews.com (Apr. 22, 2010). However, the cam- paign resulted in the largest single contribution in the organization’s history. See http://ww5.komen.org /KomenNewsArticle.aspx?id=6442452377. 25 See the 2006 Cone Nonprofit Research Fact Sheet, available at http://www.coneinc.com. 26 See http://www.coneinc.com/yoplait-save-lids-to -save-lives-10th-anniversary-c. 27 Treas. Regs. §1.170A-1(h) (as amended, Apr. 9, 2008). 28 EIF was created in 1942 as the Permanent Charities Committee. See http://www.eifoundation.org. 29 I.R.C. §513(i)(2)(A). 30 I.R.C. §513(i)(1). 31 Treas. Regs. §1.513-4(c)(2)(vi)(B) (Apr. 25, 2002). 32 Treas. Regs. §1.513-4(f), Exs. 1 (Apr. 25, 2002). 33 Treas. Regs. §1.513-4(f), Exs. 11, 12 (Apr. 25, 2002). 34 Some Red partners donate a dollar amount per pur- chase, rather than a percentage. For example, Starbucks donates $1 to the Global Fund for each sale of one of its Red products. See http://www.joinred.com/aboutred. 28 Los Angeles Lawyer May 2011 E N T E R T A I N M E N T L A W MCLE ARTICLE AND SELF-ASSESSMENT TEST By reading this article and answering the accompanying test questions, you can earn one MCLE credit. To apply for credit, please follow the instructions on the test answer sheet on page 31. by Lee S. Brenner and Sarah L. Cronin MORE LESSor The Ninth Circuit, unlike the Second, has refrained from discarding the inverse ratio rule in determining copyright infringement COPYRIGHT INFRINGEMENT CLAIMS it. Moreover, it is unclear what the precise role the two works.2 Establishing access requires require courts and juries to compare the sim- of the inverse ratio rule is, if any, in a copy- the plaintiff to prove that the defendant had ilarity of the works created by the plaintiff and right infringement case in the Ninth Circuit. a reasonable opportunity to view the plain- the defendant to determine whether infringe- A review of the leading cases in the Ninth tiff’s work.3 A “bare possibility” of viewing ment occurred. One issue with which courts Circuit and Second Circuit makes clear that the plaintiff’s work is insufficient.4 have grappled is whether the extent of the the degree of access should be irrelevant to the Substantial similarity is determined under defendant’s access to the plaintiff’s work is rel- degree of similarity required to establish an “extrinsic test” and an “intrinsic test.”5 evant to the level of similarity required to infringement. The extrinsic test “focuses on ‘articulable establish infringement. Under the so-called To establish copyright infringement in the similarities between the plot, themes, dia- inverse ratio rule, if the plaintiff establishes Ninth Circuit, the plaintiff bears the burden logue, mood, setting, pace, characters, and a high degree of access to its work by the of proving that he or she is the owner of a sequence of events’ in the two works”6 and defendant, a finding of infringement may be valid copyright, and the defendant copied is objective.7 When the extrinsic test is applied, based upon a lesser degree of similarity. The elements of the plaintiff’s work that are sub- unprotectible elements—such as basic, stock inverse ratio rule is rooted in case law from ject to copyright protection.1 Copying is ideas and concepts, and situations and inci- the 1930s through the 1950s. It is long past rarely established by direct evidence. Instead, time for the Ninth Circuit to abandon it. plaintiffs typically attempt to establish copy- Lee S. Brenner is a partner, and Sarah L. Cronin is In 1961, the Second Circuit considered the ing through circumstantial evidence: The an associate, at Kelley Drye/White O’Connor. rule and rejected it. While some courts in defendant who created the allegedly infring- Brenner’s practice includes all forms of entertain- the Ninth Circuit have embraced or at least ing work had access to the plaintiff’s mater- ment litigation and business disputes. Cronin liti- acknowledged the rule, others have ignored ial, and substantial similarity exists between gates copyright, trademark, and contract matters. Los Angeles Lawyer May 2011 29 dents that flow naturally from generic plot to be given to the similarities. In particular, The Golding court addressed the issue of lines (referred to as scenes a faire)—are dis- the court explained that when there is an access in its determination of whether there regarded.8 The fact finder then “must take admission of access, there is a high proba- had been actual copying, not whether the care to inquire only whether ‘the protectible bility—indeed a presumption—that the sim- two works were substantially similar. Indeed, elements, standing alone, are substantially ilarities are the result of copying.19 Neverthe- to find liability for damages, the court noted similar.’”9 Once the extrinsic test has been less, the Shipman court concluded that its that the plaintiffs must also show “substan- met, a plaintiff must also satisfy the intrinsic presumption of copying could not overcome tial evidence of similarity between plaintiffs’ test, which is “a subjective comparison that the numerous differences between the two literary property and the moving picture pro- focuses on ‘whether the ordinary, reasonable works and thus found no infringement. duced by defendants.”27 The court then audience’ would find the works substantially In 1942, in O’Rourke v. R.K.O. Radio compared the two works in order to deter- similar in the ‘total concept and feel of the Pictures, Inc.,20 a case before a U.S. district mine whether there was substantial similar- works.’”10 court in Massachusetts, the defendant admit- ity between the plaintiffs’ play and the defen- Courts in the Ninth Circuit often fail to dis- ted he had access to the plaintiff’s script but dants’ motion picture regarding the protectible cuss the difference between actual, in-fact denied that he copied any part of it. The features of the plaintiffs’ play.28 In this part copying and unlawful copying. Proving that court ostensibly rejected the “presumption of the analysis, the court did not even discuss a defendant actually copied the plaintiff’s theory” set forth in Shipman but nevertheless the issue of access. work is not the ultimate test for copyright stated, inexplicably, that “in the face of a Ultimately, the Golding court found the infringement. Indeed, the U.S. Supreme Court showing of access strong proof from the evidence sufficient for the jury to find that the has instructed that “[n]ot all copying… defendant is required that its material is from two works were substantially similar and is copyright infringement.”11 Thus, if a defen- an independent source.”21 Ultimately, the held the defendants liable for infringing on the dant actually has copied the plaintiff’s work, court held that even if some of the changes in plaintiffs’ protectible property rights.29 Still, the plaintiff still must establish that the works the defendant’s work had been “suggested” it remained unclear whether federal courts are substantially similar in terms of protectible by the plaintiff’s work, this only showed, at would adopt any of the statements made by expression—that is, unlawful copying.12 best, a use of such a small fraction of the the Golding court. Unlike the Ninth Circuit, Second Circuit plaintiff’s ideas that it did not rise to the level Four years after the Golding decision, in courts explicitly distinguish between actual, of copyright infringement. 1954, a U.S. district court in the Southern in-fact copying and unlawful copying. In In Golding v. R.K.O. Pictures, Inc.,22 the District of New York issued a ruling in Morse particular, in the Second Circuit, the second California Supreme Court in 1950 addres- v. Fields, a copyright infringement case.30 In prong of the infringement test (copying) is sed state common law copyright infringe- the court’s determination of whether actual itself separated into two elements: A plain- ment. The defendants in the case, who were copying had taken place, the court distin- tiff must show that 1) the defendant actually producers of a motion picture, appealed a guished between the similarity necessary to copied the plaintiff’s work, and 2) the copy- judgment against them, arguing that there show actual copying and the similarity nec- ing is unlawful because a substantial simi- was insufficient evidence to support a judg- essary to show actionable copying. The court larity exists between the defendant’s work ment that they plagiarized the plaintiffs’ analyzed the actual, in-fact copying element and the protectible elements of the plain- play. The defendants admitted access,23 and by looking to the evidence of access and sim- tiff’s work.13 the court noted that the defendants also ilarity. Regarding access, the plaintiff showed In the Second Circuit, a plaintiff may demonstrated an inclination to pirate the that his article had appeared in a national establish actual copying circumstantially by plaintiffs’ work.24 publication. Nevertheless, the court found, demonstrating that the defendant had access In discussing whether the defendants had “With the evidence so posited, the plaintiff is to the plaintiff’s work and similarities exist engaged in unauthorized copying, the supreme entitled to little benefit from the ‘inverse between the works that are “probative of court looked to the decisions in both Shipman ratio’ rule to the effect that when access is copying.”14 This level of similarity has been and O’Rourke. After reviewing these cases, established a lesser degree of similarity is coined “probative similarity,” and it should the court concluded, “An inference of copy- required.”31 The Morse court never reached not be confused with the term “substantial ing may arise when there is proof of access the issue of actionable copying. similarity” of protectible expression necessary coupled with a showing of similarity.”25 In 1961, the Second Circuit expressly to show that actual copying is unlawful.15 Then, without citing any authority, the court rejected the inverse ratio rule in Arc Music Thus, even if a defendant does not contest stated: Corporation v. Lee.32 On appeal, the plain- access and actual copying, courts within the Where there is strong evidence of tiff argued that the lower court had com- Second Circuit reject claims for copyright access, less proof of similarity may mitted an error by not accepting the rule. In infringement on the basis of lack of sub- suffice. Conversely, if the evidence response, the court held that nothing like the stantial similarity of protectible expression.16 of access is uncertain, strong proof of inverse ratio rule even existed with respect to similarity should be shown before federal copyright claims: History of the Rule the inference of copying may be In the federal copyright law we find no One of the earliest invocations of the inverse indulged.26 such principle. The evidence for [the ratio rule was the Second Circuit’s 1938 hold- The California Supreme Court did not inverse ratio rule’s] existence is mea- ing in Shipman v. R.K.O. Radio Pictures, announce in Golding that it was making a ger in any event; it is asserted to be Inc.17 According to the court, “[I]f there is new rule of federal copyright law (nor did it contained in generalized statements in access, the probability that the similarities have the authority to do so). Nevertheless, its a state decision dealing with appropri- are the result of copying, intentional or unin- seemingly innocuous statement—“Where ation of literary property. The court [in tentional, is so high that there is only one per- there is strong evidence of access, less proof Golding]…did not assume, however, tinent question: are the similarities of matters of similarity may suffice”—has become the to be erecting a new principle of law, but which justify the infringement claimed?”18 basis and oft-quoted language for those par- only to justify the sufficiency of the evi- The court also noted in dictum that the defen- ties seeking to apply the inverse ratio rule in dence to support a jury verdict.…We dant’s admission of access affected the weight federal copyright infringement cases. fear that counsel with that semantic 30 Los Angeles Lawyer May 2011 MCLE Answer Sheet #203 MCLE Test No. 203 MORE OR LESS The Los Angeles County Bar Association certifies that this activity has been approved for Minimum Name Continuing Legal Education credit by the State Bar of California in the amount of 1 hour. Law Firm/Organization 1. In Sid and Marty Krofft Television Productions, Inc. True. Address v. McDonald’s Corporation, McDonald’s commercials False. City were alleged to have infringed upon the characters 11. In Benay v. Warner Bros. Entertainment, Inc., the State/Zip appearing in which children’s television series? Ninth Circuit held that the plaintiffs did not show suf- E-mail A. Dr. Shrinker. ficient similarity to maintain their claim, in spite of Phone B. Sigmund and the Sea Monsters. the lower standard that applied because of the inverse C. H.R. Pufnstuf. ratio rule. State Bar # D. Land of the Lost. True. 2. When a plaintiff has established that a defendant False. INSTRUCTIONS FOR OBTAINING MCLE CREDITS has actually copied his or her work, the plaintiff does 12. If the inverse ratio rule is applied in a given copy- 1. Study the MCLE article in this issue. not need to show that the defendant’s work is sub- right case, it follows that the plaintiff’s copyright claim 2. Answer the test questions opposite by marking stantially similar to the plaintiff’s work with regard to will survive summary judgment. the appropriate boxes below. Each question protectible expression. True. has only one answer. Photocopies of this True. False. answer sheet may be submitted; however, this False. 13. What television show appeared in a Ninth Circuit form should not be enlarged or reduced. 3. In Golding v. R.K.O. Pictures, Inc., the Ninth Circuit copyright case because it allegedly infringed on the 3. Mail the answer sheet and the $20 testing fee held that when the evidence of access is strong, less plaintiff’s screenplay, The Funk Parlor? ($25 for non-LACBA members) to: proof of similarity may suffice to uphold a judgment of A. The Sopranos. Los Angeles Lawyer copyright infringement. B. Six Feet Under. MCLE Test True. C. Sex and the City. P.O. Box 55020 Los Angeles, CA 90055 False. D. Dexter. 4. In applying the extrinsic test, unprotectible ele- 14. In Metcalf v. Bochco , the Ninth Circuit expressly Make checks payable to Los Angeles Lawyer. ments are generally disregarded. referred to the phrase “inverse ratio rule.” 4. Within six weeks, Los Angeles Lawyer will True. True. return your test with the correct answers, a False. False. rationale for the correct answers, and a 5. 15. certificate verifying the MCLE credit you earned In 1961, the Second Circuit in Arc Music Corporation In Funky Films, Inc. v. Time Warner Entertainment through this self-assessment activity. v. Lee stated that: Company, L.P., the Ninth Circuit held that general plot 5. For future reference, please retain the MCLE A. The inverse ratio rule is helpful in the right similarities are protected under copyright law. test materials returned to you. context. True. B. The inverse ratio rule’s roots stem from the False. ANSWERS comments of Judge Learned Hand. 16. The court in Morse v. Fields held that the plaintiff Mark your answers to the test by checking the C. The inverse ratio rule should be applied in all was not entitled to the benefit of the inverse ratio rule, appropriate boxes below. Each question has only copyright cases in which access has been even though the plaintiff made a showing that his arti- one answer. shown. cle appeared in a national publication. D. None of the above. True. 1. I A I B I C I D 6. Copying can be established by circumstantial evi- False. 2. I True I False dence. 17. No amount of proof of access will suffice to show 3. I True I False True. copying if there are no similarities between the pro- I I False. tected expressions in the two works. 4. True False 7. Proof of access alone may sometimes establish True. 5. I A I B I C I D actual copying. False. 6. I True I False 18. True. In 1968, Nimmer on Copyright followed the Second 7. I True I False False. Circuit’s lead by expressly rejecting the inverse ratio 8. I A I B I C I D 8. In 1968, Nimmer on Copyright noted that: rule. A. The inverse ratio rule was completely rejected True. 9. I True I False by one court. False. 10. I True I False 19. B. A very high degree of similarity is required to The Ninth Circuit questioned the viability of the 11. I True I False dispense with proof of access. inverse ratio rule in: 12. I True I False C. Clear and convincing evidence of access will A. Novak v. Warner Bros. Pictures, LLC. not avoid the necessity of also proving B. Aliotti v. R. Dakin & Company. 13. I A I B I C I D substantial similarity. C. Arc Music Corporation v. Lee. 14. I True I False D. All of the above. D. Shaw v. Lindheim. 15. I True I False 9. In R ice v. Fox Broadcasting Company, the Ninth 20. The inverse ratio rule may have some limited via- 16. I True I False Circuit found that the plaintiff’s evidence of access bility in the Second Circuit. was strong enough to trigger the inverse ratio rule. True. 17. I True I False True. False. 18. I True I False False. 19. I A I B I C I D 10. A “bare possibility” of viewing the plaintiff’s work 20. I True I False is insufficient to establish access. Los Angeles Lawyer May 2011 31 proclivity natural to our profession in support of the notion that the inverse ratio The Ninth Circuit did not address the have allowed themselves to be seduced rule lowered the quantum of proof neces- inverse ratio rule again for approximately by a superficially attractive apophthegm sary to show substantial similarity. 10 years. While the Ninth Circuit in 1987 which upon examination confuses questioned the viability of the inverse ratio Later Developments in the Ninth Circuit more than it clarifies. rule in Aliotti v. R. Dakin & Company,43 According to Arc Music Corporation, Then the Ninth Circuit, in 1977, offered its three years later it held in Shaw v. Lindheim access will not make up for a lack of simi- version of the rule in Sid and Marty Krofft that the rule was still alive.44 Nevertheless, larity, “and an undue stress upon that one fea- Television Productions, Inc. v. McDonald’s although the Shaw court stated that the ture can only confuse and even conceal this Corporation.36 In this case, plaintiffs Sid and inverse ratio rule was germane and cited to basic requirement.”33 Thus, within the Second Marty Krofft alleged that McDonald’s Krofft, the court never explained how the Circuit, the inverse ratio rule as a mecha- McDonaldland commercials infringed the rule actually should be applied.45 nism for finding infringement was dealt a copyright in the characters appearing in the The Ninth Circuit appeared to apply a dif- The plaintiff argued that she should have been given an opportunity to satisfy a lower burden of proof under the inverse ratio rule. But the Ninth Circuit did not agree that the plaintiff’s invocation of the inverse ratio rule required the district court’s decision to be reversed. Borrowing a line from Krofft, the court reasoned that “[n]o amount of proof of access will suffice to show copying if there are no similarities.” seemingly fatal blow.34 H.R. Pufnstuf children’s television series. The ferent version of the inverse ratio rule in Nevertheless, the life of the inverse ratio defendants admitted that they copied the Metcalf v. Bochco, a 2002 decision. The rule was not completely extinguished. For idea of the plaintiffs’ television series but plaintiffs sued for copyright infringement, example, it appeared to be resuscitated in the argued that the expression of the idea was too alleging that the defendants’ television show 1968 edition of Nimmer on Copyright— dissimilar for a finding of infringement.37 infringed their treatment for a motion pic- one of the leading copyright law treatises After reviewing representative samples of the ture.46 The court commented that the plain- since its initial publication in 1963. In “The defendants’ and the plaintiffs’ work, the tiffs’ case was “strengthened considerably Effect of Access upon the Determination of Krofft court held that the two works were by [the defendants’] concession of access to Substantial Similarity,” a section of the 1968 substantially similar.38 their works”—a concession that had been edition, author Melville B. Nimmer wrote: Surprisingly, only after finding that the made for purposes of the defendants’ sum- It has been noted in a prior section two works were substantially similar did the mary judgment motion.47 In light of the evi- that evidence of striking similarity will court address the issue of access, which was dence of access, the court held that a trier of sometimes permit a finding of copying undisputed as a matter of fact. Notably, the fact “could easily infer that the many simi- without proof of access. It is obvious court stated, “No amount of proof of access larities between plaintiffs’ scripts and defen- that the converse proposition is not will suffice to show copying if there are no dants’ work were the result of copying, not equally valid. That is, clear and con- similarities.”39 mere coincidence.” Notably, the Metcalf court vincing evidence of access will not The court then proceeded to set forth its never used the phrase “inverse ratio rule” avoid the necessity of also proving version of the inverse ratio rule as a means or otherwise set forth the specifics of the substantial similarity since access with- for lowering the threshold of proof required rule—namely, that strong evidence of access out similarity cannot create an infer- to show substantial similarity. The court can lower the quantity of proof required for ence of copying. However, this so- noted that, in doing so, “This is not to say, substantial similarity. called “Inverse Ratio Rule” although however, that where clear and convincing Since Metcalf, the inverse ratio rule has completely rejected by one court, evidence of access is presented, the quan- enjoyed little success in the Ninth Circuit. would seem to have some limited valid- tum of proof required to show substantial Indeed, post-Metcalf, the Ninth Circuit has ity. That is, since a very high degree of similarity may not be lower than when access not relied upon the inverse ratio rule as a basis similarity is required in order to dis- is shown merely by a preponderance of the for finding that infringement occurred based pense with proof of access, it must evidence.”40 upon some lower measure of similarity. logically follow that where proof of The Krofft court cited Nimmer in support For example, in Rice v. Fox Broadcasting access is offered, the required degree of of its formulation of the inverse ratio rule.41 Company, the Ninth Circuit found that the similarity may be somewhat less than Ultimately, the court concluded that the degree plaintiff’s evidence of access was not strong would be necessary in the absence of of access present in the case justified a lower enough to trigger application of the inverse such proof. This is not to say that a standard of proof to show substantial simi- ratio rule.48 The Rice court noted that in showing of substantial similarity may larity—but the court candidly admitted that cases applying the inverse ratio rule, the fact ever be avoided.35 the lowered standard was “impossible to that the defendants had conceded access to the Nimmer did not cite Golding, or any case, quantify.”42 plaintiff’s copyrighted work was a promi- 32 Los Angeles Lawyer May 2011 nent factor in the court’s analysis.49 EXPERT WITNESS CONSTRUCTION In 2006, the plaintiff in Funky Films, Inc. v. Time Warner Entertainment Company, YEARS L.P., alleged that the HBO television series Six 41 CONSTRUCTION Feet Under infringed her screenplay The Funk EXPERIENCE Parlor.50 The Ninth Circuit concluded that, while the two works shared certain plot sim- SPECIALTIES: ilarities, these were not protected under copy- • Lawsuit Preparation/Residential right law. Notably, for purposes of the sum- % APR* Construction • Single and Multi-family, mary judgment motion, the district court Hillside Construction • Foundations • Vibration Trespass • Concrete • Floors assumed that the defendants had access to the • Tile • Stone • Retaining Walls • plaintiff’s script.51 Waterproofing • Water Damages • Roofing The plaintiff argued that she should have • Sheet Metal • Carpentry/Rough Framing 3 been given an opportunity to satisfy a lower • Stairs • Materials/Costs • Building Codes • Construction Contracts burden of proof under the inverse ratio rule. But the Ninth Circuit did not agree that the CIVIL EXPERIENCE: plaintiff’s invocation of the inverse ratio rule Construction defect cases for insurance required the district court’s decision to be companies and attorneys since 1992 reversed. Borrowing a line from Krofft, the court reasoned that “[n]o amount of proof of access will suffice to show copying if there are COOK no similarities.”52 The court must have been CONSTRUCTION referring to the lack of protectible similarities, COMPANY Stephen M. Cook because the court’s opinion is littered with California Contractors License B431852 numerous examples of nonprotectible simi- Nevada Contractors License B0070588 larities between the two works at issue. Graduate study in Construction Later in 2010, the Ninth Circuit in Benay L.A. Business College, 1972 v. Warner Bros. Entertainment, Inc., assumed TEL 818.438.4535 FAX 818.595.0028 for the purpose of its analysis of a claim of EMAIL [email protected] copyright infringement that the inverse ratio rule applied to lower the burden on the plain- 7131 Owensmouth Ave., Canoga Park, CA 91303 tiffs to show similarity. In spite of the lower standard, the court held that the plaintiffs still did not show sufficient similarity to maintain their claim.53 In Novak v. Warner Bros. Pictures, LLC, an unpublished opinion also issued last year, the Ninth Circuit once again held that the inverse ratio rule did not help the plaintiffs because there were no similarities of pro- tected expression in the two works.54 More- over, the court explained that even under a relaxed standard, the requisite similarities must be “concrete and or articulable” to sat- isfy the extrinsic test. Ultimately, the court rejected the plaintiffs’ copyright infringement claim, finding that the only articulable simi- larities between the two works consisted of unprotected elements.55 The Second Circuit got it right. The Ninth Circuit appears to be struggling to get rid of the inverse ratio rule once and for all. Courts within the Second Circuit have made clear that the inverse ratio rule has no bearing upon the determination of whether or not two works are substantially similar in protectible expression.56 Indeed, the Second Circuit has maintained its rejection of the inverse ratio rule with respect to substantial similarity of protectible expression.57 Thus, when actual copying is either admitted or assumed, the inverse ratio rule “is irrelevant.”58 As the Second Circuit has noted, the level of access a defendant may have had to the Los Angeles Lawyer May 2011 33 VIGOROUS plaintiff’s work can have no logical effect on whether two works—compared side by side— STATE BAR DEFENSE “Industry Specialists For Over 23 Years” are substantially similar in their protectible tWitkin & Eisinger we specialize in the Non-Judicial elements. This is because no amount of access JAMES R. DIFRANK Foreclosure of obligations secured by real property can make nonprotectible elements magically A PROFESSIONAL LAW CORP. A or real and personal property (mixed collateral). become protectible. TEL 562.789.7734 When your client needs a foreclosure done profession- The Ninth Circuit recognized this princi- ally and at the lowest possible cost, please call us at: www.BarDefense.net ple in 2010, albeit in the unpublished Novak E-MAIL [email protected] opinion. It also appears to have implicitly recognized this principle in Funky Films and • Disciplinary Defense Benay, in which the court assumed access • Reinstatements yet found no substantial similarity between • Bar Admissions the works at issue—notwithstanding the numerous, nonprotectible elements shared • Moral Character by those works. • Criminal Defense Even if the Ninth Circuit were to employ • Representation within the PROBATE LITIGATION CASES the inverse ratio rule, that decision would State of California not necessarily make the rule any more mean- TTrust/Estaterust/Estate Contests ingful than it is now. To date, it is not clear FORMER: Fiduciary Accounting Contests how much access is required to trigger the State Bar Sr. Prosecutor Conservatorship Contests application of the rule in the first instance. Sr. State Bar Court Counsel Elder Financial Abuse Does the evidence have to be “strong,” or does it need to be “clear and convincing,” as • Petitioner or Respondent (Plaintiff or Defense) the Krofft court suggested in 1977? • Hourly or Contingency Moreover, as recently recognized by a dis- • Referral Fees Paid As Permitted by RPC trict court in the Central District of California, W. Todd Stevenson, Esq. Stevenson Law Office | even when a high degree of access is shown, PHONE 818.784.5404 FAX 818.784.5405 | [email protected] “[I]t is not clear just how much less the show- Home of Sir Winston 59 14156 MAGNOLIA BLVD., SUITE 200, SHERMAN OAKS CA 91423 ing of substantial similarity need be.” Pictured Above www.stevensonlawoffice.com Assuming a high degree of access, how much similarity would the plaintiff need to show under the inverse ratio rule? Is it still sub- stantial similarity, or something less? At bottom, there is no logical role for the inverse ratio rule in the Ninth Circuit’s extrinsic test. Moreover, the Ninth Circuit Sell for the “Most Admired,” already has recognized that the inverse ratio rule has no role in the intrinsic test. The Second Circuit was correct 50 years ago and you’ll be the “Most when it bluntly stated that the inverse ratio rule is irrelevant to the question of whether Likely to Succeed.” two works are substantially similar in their protectible elements. It is time for the Ninth Circuit to catch up. I A career as a !nancial representative with Northwestern Mutual is a career with the only company to be named FORTUNE ® magazine’s “Most Admired” in its industry 1 Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 25 times. It’s the kind of reputation that helps professionals like you build successful 361 (1991); Kouf v. Walt Disney Pictures Television, 16 careers. F. 3d 1042, 1044 n.2 (9th Cir. 1994). 2 Funky Films, Inc. v. Time Warner Entm’t Co., L.P., 462 F. 3d 1072, 1076 (9th Cir. 2006) (citations omitted). 3 Three Boys Music Corp. v. Bolton, 212 F. 3d 477, 482 (9th Cir. 2000). 4 Merrill v. Paramount Pictures Corp., No. 05-CV- e Beer Financial Group 1150, 2005 U.S. Dist. LEXIS 45401, at *20 (C.D. Cal. Dec. 19, 2005) (citations omitted); see also Jason Woodland Hills - Encino v. Fonda, 526 F. Supp. 774, 776-77 (C.D. Cal. 1981). Santa Barbara - Bakers!eld 5 Funky Films, 462 F. 3d at 1077. (818) 887 - 9191 6 Id. (citing Kouf, 16 F. 3d at 1045). www.northwesternmutual.com 7 Id. www.beer!nancialgroup.com 8 Id.; Zella v. E.W. Scripps Co., 529 F. Supp. 2d 1124, 1129, 1133-34 (C.D. Cal. 2007); Cavalier v. Random House, Inc., 297 F. 3d 815, 823 (9th Cir. 2002). 9 Cavalier, 297 F. 3d at 822 (quoting Williams v. 05-2781 The Northwestern Mutual Life Insurance Company, Milwaukee, WI (Northwestern Mutual). Mitchell Craig Beer is a Crichton, 84 F. 3d 581, 588 (2d Cir. 1996)). General Agent of Northwestern Mutual (life and disability insurance, annuities) and a Registered Representative and Investment 10 Adviser Representative of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of Northwestern Mutual, broker- Id. (quoting Kouf, 16 F. 3d at 1045). dealer, registered Investment adviser and member FINRA and SIPC. Certified Financial Planner Board of Standards Inc. owns the 11 certification marks CFP, Certified Financial Planner and CFP (with flame logo)®, which it awards to individuals who successfully Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. complete initial and ongoing certification requirements. FORTUNE® magazine, March, 2008. 340, 361 (1991). 34 Los Angeles Lawyer May 2011 12 See Narell v. Freeman, 872 F. 2d 907, 910-13 (9th (1950). Todman Enters., Ltd., 9 Cal. App. 3d 996, 1013 Cir. 1989) (Despite the defendant’s admission of copy- 23 Id. at 693. (1970). ing, “no reasonable reader could conclude that the 24 Id. at 698. 42 Sid & Marty Krofft, 562 F. 2d at 1172. works are substantially similar.”); Idema v. 25 Id. at 695 (citing Shipman v. R.K.O. Radio Pictures, 43 Aliotti v. R. Dakin & Co., 831 F. 2d 898, 902 (9th Dreamworks, Inc., 162 F. Supp. 2d 1129, 1143, 1171 Inc., 100 F. 2d 533, 538 (2d Cir. 1938), and O’Rourke, Cir. 1987) (citing Arc Music Corp. v. Lee, 296 F. 2d n.44, 1174-87 (C.D. Cal. 2001) (Even assuming the 44 F. Supp. at 482). 186, 187-88 (2d Cir. 1961)). defendants “made ‘use’ of Plaintiffs’ works as source 26 Id. 44 Shaw v. Lindheim, 919 F. 2d 1353 (9th Cir. 1990). materials,” there was no substantial similarity as a 27 Id. at 698. 45 Id. at 1362. matter of law.); Bensbargains.net, LLC v. 28 Id. at 699. 46 Metcalf v. Bochco, 294 F. 3d 1069 (9th Cir. 2002). XPBargains.com, No. 06-CV-1445, 2007 U.S. Dist. 29 Id. at 701. 47 Id. at 1075 (citing Shaw, 919 F. 2d at 1361). LEXIS 60544, at *9 (S.D. Cal. Aug. 16, 2007) (The 30 Morse v. Fields, 127 F. Supp. 63 (S.D. N.Y. 1954). 48 Rice v. Fox Broad. Co., 330 F. 3d 1170 (9th Cir. plaintiff must still prove substantial similarity “regard- 31 Id. at 66 (citing Golding, 35 Cal. 2d at 695). 2003). less of how strong its evidence is that Defendants in- 32 Arc Music Corp. v. Lee, 296 F. 2d 186 (2d Cir. 49 Id. (citing Shaw, 919 F. 2d at 1361-62; Metcalf, 294 fact copied from [the plaintiff’s work].”); See v. Durang, 1961). F. 3d at 1075). 711 F. 2d 141, 142-43 (9th Cir. 1983) (Even actual 33 Id. at 188 (citations omitted). 50 Funky Films, Inc. v. Time Warner Entm’t Co., L.P., copying is irrelevant where no reasonable person could 34 However, the inverse ratio rule may have some lim- 462 F. 3d 1072, 1074 (9th Cir. 2006). find any substantial similarity between the plaintiff’s ited viability in the Second Circuit. It may apply to the 51 Id. at 1081. and the defendant’s works.). separate inquiry of whether or not there has been 52 Id. (citing Sid & Marty Krofft Television Prods., Inc. 13 Laureyssens v. Idea Group, Inc., 964 F. 2d 131, actual copying, as opposed to the question of whether v. McDonald’s Corp., 562 F. 2d 1157, 1172 (9th Cir. 140 (2d Cir. 1992). or not two works are substantially similar in pro- 1977)). 14 Jorgensen v. Epic/Sony Records, 351 F. 3d 46, 51 (2d tectible expression. See The Sheldon Abend Revocable 53 Benay v. Warner Bros. Entm’t, Inc., 607 F. 3d 620, Cir. 2003). Trust v. Spielberg, No. 08 Civ. 7810, 2010 U.S. Dist. 625 (9th Cir. 2010). 15 Tienshan, Inc. v. C.C.A. Int’l (N.J.), Inc., 895 F. Supp. LEXIS 99080, at *8 n.3 (S.D. N.Y. Sept. 21, 2010); see 54 Novak v. Warner Bros. Pictures, LLC, No. 08- 651, 656 & n.3 (S.D. N.Y. 1995). also Green v. Lindsey, 885 F. Supp. 469, 480 (S.D. N.Y. 56957, 2010 U.S. App. LEXIS 14549 (9th Cir. July 15, 16 Walker v. Time Life Films, Inc., 784 F. 2d 44, 52 (2d 1992). 2010) (unpublished). Cir. 1986); Arden v. Columbia Pictures Indus., Inc., 908 35 2 MELVILLE B. NIMMER, NIMMER ON COPYRIGHT 55 Id. at *5-6. F. Supp. 1248, 1258 (S.D. N.Y. 1995); Denker v. §143.4, at 634 (1968). 56 The Sheldon Abend Revocable Trust v. Spielberg, No. Uhry, 820 F. Supp. 722, 728 (S.D. N.Y. 1992); Williams 36 Sid & Marty Krofft Television Prods., Inc. v. 08 Civ. 7810, 2010 U.S. Dist. LEXIS 99080, at *8 n.3 v. Crichton, 84 F. 3d 581, 587 (2d Cir. 1996). McDonald’s Corp., 562 F. 2d 1157 (9th Cir. 1977). (S.D. N.Y. Sept. 21, 2010). 17 Shipman v. R.K.O. Radio Pictures, Inc., 100 F. 2d 37 Id. at 1165. 57 A Slice of Pie Prods., LLC v. Wayans Bros. Entm’t, 533 (2d Cir. 1938). 38 Id. at 1167. 487 F. Supp. 2d 41, 47 n.4 (D. Conn. 2007) (citing Arc 18 Id. at 537. 39 Id. at 1172 (citing Williams v. Kaag Mfrs., Inc., Music Corp. v. Lee, 296 F. 2d 186 (2d Cir. 1961)). 19 Id. at 538 (citations omitted). 338 F. 2d 949, 951 (9th Cir. 1964), and Arnstein v. 58 Green v. Lindsey, 885 F. Supp. 469, 480 (S.D. N.Y. 20 O’Rourke v. R.K.O. Radio Pictures, Inc., 44 F. Porter, 154 F. 2d 464, 468 (2d Cir. 1946)). 1992). Supp. 480 (D. Mass. 1942). 40 Id. 59 Gable v. National Broad. Co., No. 08-CV-4013, 21 Id. 41 Id. (citing 2 MELVILLE B. NIMMER, NIMMER ON 2010 U.S. Dist. LEXIS 77772, at *19 n.3 (C.D. Cal. 22 Golding v. R.K.O. Pictures, Inc., 35 Cal. 2d 690 COPYRIGHT §143.4, at 634); accord Fink v. Goodson- Feb. 22, 2010). Member Benet Provider T rust your transactions to the only merchant account recommended by over 60 bar associations! Get Paid Increase Business Control Cash Flow Reduce Collections Lower Fees up to 25% 866.376.0950 a niscape.com/lacba A!niPay is a registered ISO/MSP of Harris, N.A., Chicago, IL Los Angeles Lawyer May 2011 35 ENTERTAINM ENT LAW by Roman M. Silberfeld and Bernice Conn The REDand the BLACK Studios have suffered recent court setbacks in their efforts to defend Hollywood accounting HOLLYWOOD CONTRACTS ARE It often is the case that the contracts other industry. Challenges to these improb- complicated and convoluted, especially when between studios or networks and the parties able accountings, however, have done little to it comes to profit participation provisions. who provide intellectual property to them, effect any change in the way studios and net- Thanks to a trio of recent cases that exposed such as producers, writers, directors and works do business. the arcane world of Hollywood deal making actors, include provisions under which the Hollywood contracts generally are as inco- and studio accounting, profit participation profits derived from distribution of the com- herent as the tax code. Because of the im- provisions are once again in the spotlight’s pleted content are to be shared among the par- mense inequality in bargaining power that glare. The jury verdicts in Celador Inter- ties to the contract. However, as a result of exists between today’s media conglomerates national, Ltd. v. The Walt Disney Company,1 the opaque accounting methods used in (which own the major studios and networks) Don Johnson Productions, Inc. v. Rysher Hollywood—often referred to as Hollywood and talent and small production companies, Entertainment, Inc.,2 and Alan Ladd, Jr. v. accounting4—profit participants typically do studios and networks usually dictate contract Warner Bros. Entertainment, Inc.,3 dealt not receive any share of the promised prof- Hollywood’s media conglomerates unantici- its, even for successful projects. In fact, the Roman M. Silberfeld and Bernice Conn are partners pated and unwelcome setbacks. In each case, accountings generated by studios and net- in the Los Angeles office of Robins, Kaplan, Miller the plaintiff successfully sued to enforce a works typically reflect that popular, highly & Ciresi, L.L.P., practicing complex business liti- contractual profit participation right and successful films and long-running television gation. They represent Celador International, Ltd., challenged some of Hollywood’s most con- series produce financial returns for their own- and tried Celador International, Ltd. v. The Walt troversial accounting and financial practices. ers that would be considered ruinous in any Disney Company. KEN CORRAL 36 Los Angeles Lawyer May 2011 terms. As a result, contracts typically are a attempted to justify to the courts and to juries ment with Rysher Entertainment, Inc. Due to mélange of vague terms, conflicting refer- the sweetheart deals and self-dealing that the success of his earlier series, Miami Vice, ences, and provisions that have been copied goes on behind the success of popular films Johnson enjoyed tremendous leverage in the from other contracts, resulting in documents and television shows. Their efforts failed. entertainment industry at the time he nego- that are needlessly long, disjointed, and unin- tiated his contract with Rysher. As a result, Recent Cases telligible, and that require years of costly lit- he was able to negotiate a deal with Rysher igation to interpret. Only experienced lawyers In 1998, a British company, Celador Inter- by which his production company would whose clients have tremendous leverage in the national, Ltd., developed a unique concept for acquire a 50 percent ownership of the series’ entertainment community are able to nego- prime time television: a game show in which copyright if it was bought for 66 episodes and tiate provisions that better protect their clients’ the contestants, who played for ever-increas- became eligible for syndication. profit participation rights. ing amounts of money, could ask for help. The Notwithstanding the success of the series, The accountings that studios and net- show premiered in the United Kingdom and and after delivering 122 completed episodes works provide to profit participants often was an overnight sensation. Soon, the show of Nash Bridges for distribution, Don Johnson are confusing, vague, and difficult to recon- was being licensed worldwide, and ABC Productions had been paid nothing as co- cile. Challenging studio accountings either aggressively negotiated to obtain the North owner of the copyright. Although the network through audits or litigation is time-consum- American rights to what became Who Wants accountings for the series reflected that Nash ing and expensive and may be beyond the to Be a Millionaire? Bridges had generated hundreds of millions financial means of the profit participant. On The contract that Celador signed with in gross revenues, according to the network occasion, however, lawsuits are prosecuted by ABC and its affiliate Buena Vista Television it allegedly still was running at a deficit of profit participants who have the means and provided that Celador was entitled to 50 per- about $150 million in 2009. clout to do so. cent of the “defined contingent compensa- Johnson sued to affirm his 50 percent Typically, these lawsuits include allega- tion” derived by ABC and Buena Vista co-ownership of the copyright in the Nash tions that, to some degree or another, media Television from the exploitation of any pilot Bridges television series and his right to 50 conglomerates are vertically integrated. and series produced under the contract.8 percent of the show’s profits.10 The jury Vertical integration allows affiliated entities Who Wants to Be a Millionaire? debuted found in his favor and awarded him $23.2 to participate in self-dealing, which precludes on ABC in August 1999 and, as in Europe, million in damages owed to date. The show profit participants from sharing in a proj- was a runaway success. The show was cred- continues to run in syndication. In September ect’s success. Vertical integration is a phe- ited with taking ABC from fourth to first 2010, the trial judge awarded Johnson an nomenon resulting from the 1995 repeal5 of in network rankings and for reigniting additional $28 million in prejudgment inter- the Network Financial Interest and Synd- the prime-time game show and reality show est, bringing the total judgment to $51.2 ication Rules, popularly known as the Fin-Syn genres. Yet, after three years on ABC and million. rules.6 The Fin-Syn rules were an attempt to years in syndication, and after generating In a suit filed against Warner Bros., Alan prevent studios and networks from consoli- hundreds of millions of dollars in revenue Ladd Jr. and several production companies dating their control over the ownership, pro- for ABC and Buena Vista Television, the challenged the industry’s practice of “straight- duction, broadcast, distribution, syndication, show—according to accountings given to lining,” by which studios license film packages licensing, and merchandising of the proper- Celador—was running at a loss. At the time to broadcasters or cable companies, valuing ties they acquired. of trial, 11 years after the show’s debut, every feature film in the package the same, After the repeal of the Fin-Syn rules, large Celador had not received any profit partic- regardless of the value of the film to the media conglomerates were formed, through ipation payments other than the initial, non- broadcaster or channel.11 The suit followed which networks and studios now control the recoupable advances against contingent com- an audit that Ladd initiated when he learned creative process from development through pensation that ABC and Buena Vista that a coinvestor in the film Blade Runner was distribution. Vertical integration also allows Television had agreed to pay when the con- receiving payments from Warner Bros., even conglomerates to engage in accounting prac- tract was signed. though Warner Bros. had told Ladd the movie tices by which a property’s revenues may be Celador sued the Walt Disney Company, was unprofitable. manipulated to ensure that the property never ABC, Buena Vista Television, and Valleycrest Ladd sued to collect his share of licensing generates profits that must be shared out- Productions, Ltd. (collectively Disney) to col- fees that would have been generated if his side the conglomerate. For example, a studio lect 50 percent of the profits that would have films had been properly valued. Evidence at or network that has contractual profit par- been generated if a fair-market license fee trial disclosed that, although Warner Bros. ticipation obligations may license a motion had been paid for the network broadcast of assigned each movie in a licensing package a picture project or television show to its affil- the long-running television game show. grade of A, B, or C, the studio allocated the iated cable network at a below-market license Celador also challenged the expense deduc- same proportion of the license fee to each title fee so that the cable network receives most of tions taken against the show’s merchandising in the package, irrespective of the film’s let- the revenue (which it is not required to share revenue. On Celador’s claims for breach of ter grade.12 The jury found that during the with profit participants), thus reducing or contract and breach of the implied covenant four years preceding the filing of the suit, eliminating entirely any distribution revenue of good faith and fair dealing, the jury Warner Bros. had thereby undervalued Ladd’s to be shared by the studio or network with awarded damages of over $269 million.9 In films, which were all rated either A or B. the profit participant. September 2010, an additional $50 million in Based on Ladd’s contracts, the jury concluded Historically, Hollywood has chosen to prejudgment interest was assessed, for a total that Ladd should have received an additional settle profit participation disputes rather than judgment of $319 million. $3,190,625 in profit participation payments. divulge to the public (or, more importantly, The television series Nash Bridges aired on On May 25, 2010, the California Court to a jury) the inner workings of the con- CBS from 1996 through 2001. It was a highly of Appeal affirmed the jury’s verdict.13 In glomerates that control the media.7 But in rated series and entered syndication in 1999. doing so, the appellate court rejected as mer- Celador, Johnson, and Ladd, the studios and Actor Don Johnson co-conceived, starred in, itless the attempts of Warner Bros. to justify networks abandoned this strategy and instead and produced the series pursuant to an agree- straight-lining, which it characterized as “the 38 Los Angeles Lawyer May 2011 buyer made me do it” monly referred to “defined defense.14 The court also contingent compensation” as rejected the argument of profits.19 Warner Bros. that because Understandably, much of straight-lining was a common the evidence presented at industry practice, it could not trial was aimed at discerning constitute a breach of the the intentions of the parties implied covenant of good at the time of contracting, faith and fair dealing. The understanding what “defined court held that “even if contingent compensation” straight-lining were a com- encompassed, and determin- mon practice, it would not ing how that compensation absolve Warner of its duty to was supposed to be calcu- Ladd, as a profit participant, lated. Ultimately, it was left up to fairly allocate fees derived to the jury to interpret the from licensing packages.”15 contract, and the outcome did not favor Disney.20 Contract Language Similarly, in Johnson, the The outcome of these disputes contract provided that Don was attributable, in part, to Johnson Productions was the cryptic and confusing entitled to 50 percent of “all language used in studio and gross receipts,” which was network contracts. Indeed, defined as receipts to Rysher these days, the word “profit” and its affiliates after deduc- rarely appears in profit par- tions for distribution fees, ticipation agreements. Instead, distribution costs, direct pro- the contracts employ terms duction costs, and interest such as “contingent compen- “on the net deficited portion sation,” “defined contingent of the direct production compensation,” “adjusted de- costs.” Johnson alleged that fined receipts,” or some other this contract provision was similar phrase.16 The amounts designed to make it impossi- owed pursuant to these vague ble for a show ever to turn a terms are calculated by equal- net profit. ly obscure accounting methods, with a typi- ings thereof, which may be associ- The confusion created by the use of uncer- cal result being that hugely successful shows ated with the practices of account- tain terminology and vague definitions in inexplicably generate large deficits year after ing or auditing.17 profit participation contracts is compounded year, leaving profit participants with no prof- So, according to the contract, the words by the obscurity of the accounting methods its. Vertically integrated media conglomer- used to describe Celador’s right to receive used to calculate what is owed to a profit par- ates own most of the entities involved in the “defined contingent compensation” were not ticipant. As one industry insider has stated, production, distribution, and merchandising to be understood to mean what they gener- Hollywood accounting can generate different of properties, so it is not difficult for them to ally do mean, either in the ordinary sense or results “depending on who’s asking,” and manipulate the accountings to ensure that no in a financial context. What then was “defined accounting methods differ depending on contingent compensation ever will be shared contingent compensation” supposed to mean? the result sought.21 For example, one method with profit participants. According to Disney, it was not supposed to may be used to calculate profits when For example, in the Celador trial, an mean profit. accounting to profit participants and another incomplete, two-page exhibit describes Disney filed a motion in limine to preclude when accounting for tax purposes. Not sur- “defined contingent compensation” in the Celador from using the term “profits” at trial prisingly, when calculating a project’s profits contract among Celador, ABC, and Buena and from contending that it was entitled to for the purpose of paying profit participants, Vista Television. The description states, in share in Disney’s “profits.” Disney argued the goal often is to report reduced profits or part: that “profit” was a financial term that had a no profits whatsoever.22 For purposes of Defined Contingent specific meaning and that because Disney did Profit participants also typically allege Compensation, Participant agrees that not calculate Celador’s share of “defined con- that in addition to improper accounting words and phrases used in connection tingent contribution” according to generally methods, the television distribution deals with Participant’s contingent partici- accepted accounting principles, Celador’s struck by the studios and networks are the pation, if any, are…not intended to right to share in “defined contingent com- result of self-dealing and sweetheart deals correspond to any conventional under- pensation” could not be referred to as a right between affiliated entities. These deals often standing or dictionary definition of to share in profits. Disney also contended involve preferential and greatly diminished such words and terms, whether used in that the use of the word “profits” by Celador license fees being charged for the broadcast the entertainment industry or any other at trial would be inaccurate, prejudicial, con- and syndication of the acquired properties— industry or business and are not fusing, and misleading to the jury.18 The thus reducing, if not eliminating altogether, intended to correspond in any way to motion was denied after Celador presented the profits to be shared with profit partici- generally accepted accounting prin- evidence that Disney’s current and former pants. The deals also may involve redistrib- ciples (“GAAP”), or any other mean- employees, as well as its own expert, com- uting contract rights among affiliated entities, Los Angeles Lawyer May 2011 39 thus diverting revenue from the profit par- Frequently, audits create more questions than pation cases will be heading for the courts. ticipation calculations. The evidence pre- they answer. In recent years, studios and networks have sented at the Celador trial is illustrative of the There are exceptional cases in which required arbitration clauses in most of their type of intracompany dealings that can lawyers negotiate language that anticipates contracts in recognition of the potential lia- deprive a profit participant from sharing in and protects against these types of studio bility to which they are exposed if cases like a project’s success. and network maneuvers. As an example, these do make it to trial. It may be that, as In the 1999 contract with Celador, ABC the contract between Alan Alda and Twen- with clauses deeming self-dealing to be pre- and Buena Vista Television jointly acquired tieth Century Fox contained the following sumptively fair, the arbitration clauses in all rights to Who Wants to Be a Millionaire? provision: “If and to the extent Fox makes these contracts are susceptible to attack The two acquired the rights to produce, agreements in respect of exploitation of given the disparity in power between the broadcast, and syndicate the show through- [M*A*S*H*] with any affiliated entity which negotiating parties, but only time will tell. out North America. Yet, shortly after the is a so-called ‘end user’ such as, by way of Since both the Celador and Johnson cases contract was signed, ABC, Buena Vista, and example only, [Fox Broadcasting Company] appear headed for the appellate courts, a wholly owned production company called or the Fox television stations, the income of today’s media conglomerates may find them- Valleycrest Productions, Ltd., engaged in a such end user shall not be deemed gross selves bound in the future by standards of series of partially documented, unsigned, or receipts hereunder, but Fox shall establish fairness and equity imposed by the courts on allegedly oral assignments among themselves fair, just and equitable market rates, arms- the entertainment industry. Perhaps one day, that were not disclosed to Celador. Through length prices in such dealings, which shall be successful films and television shows actu- these assignments, ABC and Buena Vista created on a reasonable and empirically jus- ally will produce a profit. I Television supposedly transferred all the con- tifiable basis.”24 tract rights they acquired from Celador to a In response to the vertical integration 1 Celador Int’l, Ltd. v. The Walt Disney Co., No. third-party affiliate, either Valleycrest claims, some studios and networks include CV04-3541 (Nov. 23, 2004), 347 F. Supp. 2d 846 Productions or another affiliate, Buena Vista contract provisions that characterize trans- (C.D. Cal. 2004). 2 Don Johnson Prods., Inc. v. Rysher Entm’t, Inc., No. Productions. actions with affiliates as presumptively fair. BC407796 (L.A. Super. Ct. Feb. 17, 2009). After that initial transfer, further assign- For example, a Disney provision allows 3 Ladd v. Warner Bros. Entm’t, Inc., 184 Cal. App. 4th ments allegedly occurred among these affili- Disney affiliates to self-deal, requires the 1298 (2010). ates, resulting in a perpetual network license owner of the property being sold to prove that 4 See, e.g., http://www.en.wikipedia.org/wiki/Hollywood being issued back to ABC—even though ABC a specific deal is unfair, and, if the owner _accounting. 5 originally had acquired the right to broadcast succeeds in doing so, limits the owner’s dam- 60 Fed. Reg. 48,907. 6 47 C.F.R. §73.658(j) (1970). the series on the network through its contract ages. The provision further reads: 7 See, e.g., PIERCE O’DONNELL, FATAL SUBTRACTION with Celador. The network license supposedly In addition, Owner acknowledges and (1992) (Paramount settled with Art Buchwald for issued to ABC by one of these affiliates pro- agrees that any agreement or other undisclosed terms.). vided that the fee paid by ABC to Buena arrangement by ABC/BVT with an 8 Celador Int’l, Ltd. v. The Walt Disney Co., No. Vista Television for the broadcast rights to Affiliate or Related Party regarding CV04-3541 (Nov. 23, 2004), Trial Exhibit 1A, ¶3(B)(1). Who Wants to Be a Millionaire? always the Exploitation Rights shall be con- 9 The jury awarded Celador $260,238,024 on its net- would be equal to Buena Vista Television’s clusively presumed to be fair, reason- work license fee claim and $9,193,774 on its mer- costs of producing the show. Disney also able and unobjectionable unless Owner chandising claim. contended that “defined contingent com- shall establish that such agreement or 10 Paramount took over the management of Rysher pensation,” as used in the contract, only other arrangement is on non-unique Entertainment in 1999. 11 Ladd v. Warner Bros. Entm’t, Inc., 184 Cal. App. 4th referred to Buena Vista Television’s revenues financial terms which, taken as a 1298, 1302 (2010). and not ABC’s. whole, are materially less favorable 12 Id. at 1307. All this maneuvering deprived Celador economically to ABC/BVT than the 13 Id. at 1298. of its share of the immense revenue that the terms of Similar Transactions generally 14 Id. at 1308. show generated. According to Disney’s entered into by ABC/BVT with Affil- 15 Id. Industry custom and practice is one of the primary defenses asserted by studios and networks in profit par- accountings, although the show has been on iates and Related Parties….Owner fur- ticipation cases. As the Ladd court obliquely observed, the air continuously in the United States ther agrees that if there is a final, non- however, just because studios and networks follow since 1999 and has generated hundreds of appealable determination that ABC/ certain practices does not make those practices legal. millions of dollars of revenue for ABC and BVT has entered into a Less Favorable 16 See, e.g., Celador Int’l, Ltd. v. The Walt Disney Buena Vista Television, Who Wants to Be a Arrangement with an Affiliated or Co., No. CV04-3541 (Nov. 23, 2004), Trial Exhibit 1A; Millionaire? has produced $70 million in Related party, Owner’s sole and exclu- Don Johnson Prods., Inc. v. Rysher Entm’t, Inc., No. BC407796 (L.A. Super. Ct. Feb. 17, 2009), Complaint losses, continues to go deeper and deeper sive remedy shall be the right to receive at 8. into the red with each episode and, so far, no an adjusted accounting statement, 17 Celador Int’l, No. CV04-3541, Trial Exhibit 1A, B “defined contingent compensation” is owed including any additional payments that at 2. to Celador.23 may be required.25 18 Id., Docket #366 at 2-3. 19 The Celador and Johnson verdicts make If the verdicts in the recent cases are any Id., Docket #421. 20 Id., Special Verdict Form No. 2. clear that juries find it difficult to believe gauge of the public’s perception of Hollywood 21 SCHULYER M. MOORE, THE BIZ: THE BASIC BUSINESS, that long-running, successful television shows deal making, studios should be wary of urg- LEGAL AND FINANCIAL ASPECTS OF THE FILM INDUSTRY generate nothing but losses for their owners. ing the legitimacy of such contract provi- 123 (3d ed. 2007). The studios’ traditional unwillingness to sions on courts or juries. 22 Id. at 121, 125. explain their accounting methods, and the Ultimately, however, while the verdicts in 23 Celador did receive approximately $5 million in mandated, nonrecoupable advances against contin- costly, lengthy, difficult, and frustrating the Celador, Johnson, and Ladd cases are gent compensation that never materialized. process of auditing participation statements, encouraging indicators that studios are not 24 See Stanton L. Stein & Marcia J. Harris, Vertically further escalates the general skepticism sur- invulnerable, the unfortunate reality is that Challenged, LOS ANGELES LAWYER, May 2003, at 30. rounding studio and network accountings. it is unlikely that a wave of profit partici- 25 Celador Int’l, No. CV04-3541, Trial Exhibit No. 33. 40 Los Angeles Lawyer May 2011 JACK TRIMARCO & ASSOCIATES www.jacktrimarco.com A proud member of the Los Angeles County Bar Association Business Opportunities harassment, custody evaluations, retirement individuals and fiduciaries. Strong referral base. defense, testamentary capacity, and probate conser- Call (800) 837-5880. vatorship. Call (949) 462-9114. WANT TO PURCHASE MINERALS and other oil/gas S ELLING OR BUYING A LAW PRACTICE? Call Ed Poll. interests. Send details to: P.O. Box 13557, Denver, LITIGATION CONSULTANT/EXPERT WITNESS WITH See www.lawbiz.com or call (800) 837-5880. CO 80201. 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Speaker Jennifer Mardosz will identify the laws affecting employee and consumer Jacob Stein will teach those who attend use of social media, analyze recent guidance from the FTC, discuss everything they need to know about proposed legislation on online behavioral marketing, cover practical strategies for organizations to mitigate the risks associated with social protecting assets from plaintiffs and media, outline key components of effective social media policies, and creditors. Topics will include specific explore a hypothetical situation. The program will begin at noon at the Los planning solutions, community property, Angeles County Bar Association, 1055 West 7th Street, 27th floor, business entities, and domestic and Downtown. Parking is available at 1055 West 7th and nearby parking lots. foreign trusts. Special emphasis will be This program is also available as a live Webcast. The registration code placed on protecting assets in a troubled number is 011237. The prices below include the meal. economy, including protection from $20—CLE+PLUS member lenders holding personal guarantees. $55—Small and Solo Division member The seminar will cover common $75—LACBA member assets, including houses, bank and $105—all others brokerage accounts, rental real estate, 2 CLE hours businesses, professional practices, and retirement plans. Course materials serve as a treatise on asset protection as well as 43rd Annual Family Law Symposium an exhaustive reference source. The ON SATURDAY, MAY 7, the Family Law Section and the Los Angeles Superior program will take place at the Los Angeles Court will host the 43rd Annual Family Law Symposium. Family law judicial County Bar Association, 1055 West 7th officers and attorneys will offer a comprehensive update on topics relevant to Street, 27th floor, Downtown. Parking is the practice of family law. Areas under discussion will include due process, available at 1055 West 7th and nearby the testimony of children, social networking sites, Elkins and evolving parking lots. On-site registration will procedures, how to streamline cases, and recent developments and opinions. begin at 4 P.M., with the program Registration and continental breakfast will begin at 8 A.M., with the program continuing from 4:30 to 8:15. This seminar beginning at 8:30. The registration code number is 010977. The prices below is also available as a live Webcast. The include the meals. registration code number is 011245. $105—CLE+PLUS member $160—Barristers $65—CLE+PLUS member $210—Family Law Section member $80—Small and Solo Division member $235—LACBA member $105—LACBA member $270—at-the-door registrant $135—all others 6.25 CLE hours, with family law legal specialization credit 3.5 CLE hours The Los Angeles County Bar Association is a State Bar of California MCLE approved provider. To register for the programs listed on this page, please call the Member Service Department at (213) 896-6560 or visit the Association Web site at http://calendar.lacba.org/where you will find a full listing of this month’s Association programs. Los Angeles Lawyer May 2011 43 closing argument BY SCOTT BARLOW Is a ZIP Code Really Personal Identification Information? THROUGH A CREATIVE BUT TORTURED ANALYSIS, the California court also concluded that the creation of the statute was motivated Supreme Court recently ruled in Pineda v. Williams-Sonoma Stores, by retailers acquiring unnecessary PII to build in-house marketing Inc.,1 that a ZIP code constitutes “personal identification informa- lists or sell the information to third parties. tion” (PII) under the state’s Song-Beverly Credit Card Act of 1971.2 In fact, prohibiting the collection of ZIP codes may actually The act defines PII as “information concerning the cardholder, other lessen consumer privacy and protection. The court failed to consider than information set forth on the credit card, and including, but not the less nefarious—and very beneficial—uses of a consumer’s ZIP limited to, the card holder’s address and telephone number.” Based code, such as security and fraud prevention. While there is a general upon that definition, the court concluded that “requesting and reference to “positive identification” under the “exceptions” section recording a cardholder’s ZIP code” as part of a credit card transac- of the act, the act does not clearly and directly delineate the para- tion is generally prohibited. Although well intentioned, this flawed meters of permissible uses of PII (assuming arguendo that ZIP code ruling could lead to unintended and odious consequences, including invasions of privacy and a loss of consumer protection that the act Although well intentioned, this flawed ruling could lead to was originally intended to prevent. In Pineda, a cashier at a Williams-Sonoma store in California asked for the plaintiff’s unintended and odious consequences. ZIP code during a credit card transaction. Pineda provided her ZIP code assuming it was necessary to complete the transaction. Unknown to Pineda, Williams-Sonoma used her name and zip code information is PII) for security purposes. In Saulic v. Symantec,5 the to conduct a reverse lookup in a third-party database and stored the Central District of California recently held that the act does not apply resulting address for later use in direct marketing. Pineda learned what to online transactions because it is necessary to collect PII for secu- occurred and filed a class action lawsuit, alleging a violation of the rity purposes. However, the federal district court opinion is not Song-Beverly Act and California’s Unfair Competition law.3 binding on the California courts. Before Pineda, ZIP codes were not considered to be PII. In fact, As a result, numerous California retailers, including thousands the California Court of Appeal in Party City Corporation v. Superior of gas stations that request and record consumer ZIP code information Court held that a “five-digit ZIP code is not, as a matter of law, that for security purposes, are violating the act and are already being sued kind of personalized or individual identification information” that in class action lawsuits. Also troubling is the strict liability the act the statute was intended to protect.4 imposes and the lack of analysis of exactly how the collection of ZIP But in Pineda, the supreme court rejected Party City and inter- codes is of potential harm to the consumer. Moreover, the opinion preted PII in an overly broad way to include any information con- fails to explain how marketing to a publicly available address is an cerning the cardholder. The court reasoned that since a cardholder’s egregious breach of privacy or even a cause for concern. ZIP code refers to the area where a cardholder lives or works, it would Businesses that collect and record ZIP codes are now subject to qualify as information that relates to the cardholder. The court fur- a fine of $250 for the first violation and up to $1,000 for each sub- ther concluded—and this is where the court takes a leap in logic of sequent violation. Not surprisingly, within days of the court’s ruling, Olympic proportions—that since a ZIP code is a part of the address, dozens of class action lawsuits were filed. This decision will cost busi- the statute “should be construed as encompassing not only a com- nesses millions of dollars in litigation costs and may end up hurting plete address but also its components.” Using this same logic, it could consumers by weakening security and fraud prevention measures. be argued that asking for and recording the cardholder’s state or coun- There is an ongoing debate concerning what constitutes PII in the try of residence should be considered PII as well. online world. For example, should completely anonymous infor- That is just part of the slippery slope created by Pineda. Lost in mation such as a computer’s IP address be considered PII? The all the legal gymnastics is the undeniable fact that knowing a per- holding in Pineda is likely to skew that privacy debate as well. I son’s ZIP code, without more, does not in any significant way iden- tify that person. Simply put, a ZIP code by itself is neither an address 1 Pineda v. Williams-Sonoma Stores, Inc., 2011 WL 446921 (Cal Feb. 11, 2011). nor PII. 2 CIVIL CODE §§1747 et seq. In reaching its conclusions, the court relied heavily on its review 3 BUS. & PROF. CODE §§17200 et seq 4 Party City Corp. v. Superior Court, 169 Cal. App. 4th 497 (2008). of the legislative history of the act. The court found that the California 5 Saulic v. Symantec, 596 F. Supp. 2d 1323 (C.D. Cal. 2009). Legislature “intended to provide robust consumer protections by pro- hibiting retailers from soliciting and recording information about the Scott Barlow is the vice president and general counsel of ValueClick, Inc., and cardholder that is unnecessary to the credit card transaction.” The a former trial lawyer. 44 Los Angeles Lawyer May 2011 LTWC2011_8.375x10.875.qxp:Layout 1 3/31/11 3:11 PM Page 1 Take Advantage of YourLACBA Discount & RegisterT o Attend OurMCLE Eligible Sessions Eligible to earn up to 12 CLE credits, including 1 ethics credit, and 3 complimentary credits THE MOST IMPORTANT LEGAL TECHNOLOGY EVENT ON THE WEST COAST! May 17-18, 2011 The Westin Bonaventure Hotel, Los Angeles MAY 17, 2011 CLE Social Media & the Law Eligible RegisterT oday fora cutting-edge look fl at the future of legal technology, plus: • Unparalleled networking opportunities • Expansive Exhibit Hall David Pashman • Must-attend keynote presentations Legal Team Leader Meetup, Inc. • CLE accreditation opportunities MAY 18, 2011 CLE Trial by Sound Byte: Eligible Law in the New Millennium Download the LegalTech Mobile Planner/ Apple App at www.legaltechmobile.com Manny Medrano and now available at Trial Attorney/ TV Broadcaster KEYNOTEADDRESSES Medrano & Carlton Follow us on Twitter # LTWC and join the LegalTech Linkedin Group www.legaltechshow.com | 212.457.7905 For sponsorship opportunities please contact Henry P. Dicker at 212-457-7902 / [email protected] EDUCATIONAL SPONSOR: SUPPORTED BY: IN ASSOCIATION WITH: Internet For Lawyers www.netforlawyers.com CLE Seminars Scan this code and register today! 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