Category Archives: Licensing

First Circuit: Copyright Act does not preempt termination of license under NY contract law

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Shourin Sen - 2 February 2010 – 9:00 am
Filed under Licensing, Music, Preemption, Termination

Latin American Music Co. v. American Society Of Composers Authors And Publishers, 2010 WL 324526 (1st Cir. 2010)

The First Circuit (Torruella, Baldock, Howard writing) addressed what is to my knowledge a novel issue concerning the requirement that a transfer of ownership must be in writing. Caballo Viejo, which translates to “Old Horse,” is a popular folk song in Venezuela. In September 1981, the composer of Caballo Viejo granted exclusive rights in the song to a predecessor of a predecessor of ASCAP. A predecessor of ASCAP (which obtained the rights from the predecessor of the predecessor, got that?) transferred exclusive rights in the song to a predecessor of Latin American Music Company in 1982. The contract between the predecessor of ASCAP and the predecessor of Latin American Music Company, which was formed in New York, did not specify a termination date, the conditions under which the exclusive license could be terminated, or the manner in which the license could be terminated.

A dispute arose between ASCAP and Latin American Music Company over copyright ownership. ASCAP claimed that it was the actual owner of the song because its predecessor had terminated the 1982 contract granting exclusive rights to Latin American Music Company. The only testimony presented at trial on the issue was a deposition of the president of ASCAP’s predecessor, stating that he had terminated the 1982 agreement with Latin American Music Company’s predecessor during a conversation with the counterparty’s president.

The First Circuit stated that New York law provides that  an agreement of this type “remains in force for a reasonable time and is subject to termination upon reasonable notice. Italian & French Wine Co. of Buffalo, Inc. v. Negociants U.S.A., Inc., 842 F.Supp. 693, 699 (W.D.N.Y.1993) (“[W]ell-settled New York law [ ] provides that a contract with no stated duration is terminable only after a reasonable duration and after reasonable notice is given.”); see also Laugh Factory, Inc. v. Basciano, 608 F.Supp.2d 549, 556 (S.D.N.Y.2009); Rogers v. HSN Direct Joint Venture, 1999 U.S. Dist. LEXIS 12111, at * 3 (S.D .N.Y. Aug. 6, 1999).”

On appeal, Latin American Music Company argued that the Copyright Act preempted (conflict preemption) the New York State contract law default rule of termination; that the termination had to be in writing. Title 17 Section 204 of the Copyright Act provides:

(a) A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent.

Latin American Music Company argued that since it had owned exclusive rights in the song, the termination of the agreement, without a writing, was an invalid transfer of ownership. Since there was no writing, according to Latin American Music Company, there was no transfer.

The Court found that Section 204 did not apply to terminations of copyright ownership under New York State Law:

Section 204, which requires a writing signed by the transferor, however, applies to the transfer or grant of copyright ownership, not to the termination of such a transfer or grant. [Latin American Music Company] cites no case suggesting otherwise, nor are we are aware of any such case. Moreover, extending-204 to the termination of copyright interests would lead to untenable results. A transferee of a copyright interest could effectively veto a lawful termination of that interest by refusing to reconvey that interest to the terminating party under-204. For example, in this case, [Latin American Music Company], the transferee, could have prevented [ASCAP's predecessor in interest] from terminating the exclusive license by simply choosing not to reconvey the license to West Side through either an instrument of conveyance, or a note or memorandum of transfer.
The First Circuit also found that 17 U.S.C. 203 did not preempt the transfer. The Court found that the section only applied to situations where an author or an author’s statutory heirs are terminating a grant.

Third Circuit provides gloss on Warner-Lambert

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Shourin Sen - 3 September 2009 – 9:00 am
Filed under License v. Contract, Licensing, Trade Secret

Nova Chemicals, Inc. v. Sekisui Plastics Co., Ltd., 2009 WL 2634762 (3d Cir. 2009)

There was an interesting decision from the Third Circuit last week (Jordan, Nygaard, Fuentes writing) that addressed what types of provisions in a trade secret licensing agreement are binding after the trade secret is no longer confidential. To briefly review, if you enter an agreement to license a copyright or patent and the term in the intellectual property right expires, you’re no longer obligated to continue to make royalty payments. The licensing agreement would terminate with the expiration of the exclusive rights in the underlying patent or copyright. See, e.g., Brulotte v. Thys Co., 379 U.S. 29 (1964) (finding that the obligation to pay  royalties in return for the use of a patented device may not extend beyond the life of the patent.)

Things aren’t as simple in the context of trade secret, which has a potentially indefinite term. The landmark case in this area is Warner-Lambert Pharm. Co. v. John J. Reynolds, Inc., 178 F.Supp. 655, 665-66 (S.D.N.Y.1959), aff’d 280 F.2d 197 (2d Cir.1960) (per curiam) (adopting District Court opinion), where a company licensed the secret formula for Listerine for seventy-five years. After the formula was disclosed to the public, the licensor refused to make additional payments for the former trade secret. The S.D.N.Y. held that the licensor was still obligated to pay for the license, finding that “one who acquires a secret formula or a trade secret through a valid and binding contract … [may not] escape from an obligation to which he bound himself simply because the secret is discovered by a third party or by the general public.”

In Nova Chemicals, inc. v. Sekisui Plastics, Inc., a company agreed to license proprietary technology to produce a Styrofoam product. The propreitary technology was protected by patent and trade secret, both of which expired during the course of the agreement; the patent via term, the trade secret via disclosure. 

The licensing agreement between the two parties stated that the licensor couldn’t market the Styrofoam products derived from the trade secret in Asia. The Licensor brought suit seeking a declaratory judgment that it could market in the region. 

The Third Circuit found that, unlike in Warner-Lambert and Aronson v. Quick Point Pencil Co, the “language of the License Agreement, and its surrounding circumstances” showed that the parties didn’t intend the Asia provision “to survive the expiration of Sekisui’s intellectual property.” The Court instead read the provision as a limitation on the scope of the license, and not as bargained for consideration for disclosure.  As such, the Court found that NOVA chemicals could market products that incorporated the disclosed trade secret in Asia.

In both Aronson and Warner-Lambert, the courts focused on aspects of the agreements that evinced an intent to create ongoing obligations after the life of the relevant intellectual property. In Aronson, the parties understood that the relevant trade secrets would be destroyed as soon as the product was manufactured. 440 U.S. at 259. Nevertheless, the parties explicitly agreed to ongoing royalty payments even if a pending patent application failed. Id. Further, the parties clearly delineated the consideration applicable to the patent-license portion of the agreement and the trade-secret license portion of the agreement. Id. In Warner-Lambert, Warner-Lambert agreed
to ongoing royalty payments as long as it continued to manufacture Listerine, instead of setting a fixed end date or otherwise limiting its obligation to continue paying. 178 F.Supp. at 660. In both cases, the Court found that the licensor agreed to disclose secret information to a manufacturer in exchange for ongoing consideration.

Here, in contrast, nothing in the License Agreement suggests that the parties intended any ongoing obligations with respect to trade secrets after the 1995 termination of NOVA’s obligation to maintain the secrecy of Sekisui’s technical information. While Sekisui argues that it only agreed to disclose its trade secrets and to train NOVA personnel in exchange for NOVA’s ongoing promise to stay out of Asia (in addition to lump sum and royalty payments), the terms of the License Agreement belie this argument. The Asia exception appears as a limitation on the scope of NOVA’s rights under Sekisui’s intellectual property, rather than as an independent restriction or as consideration for trade secret disclosures.FN13

Further, Sekisui disclosed its trade secrets during the option period. If NOVA had chosen not to exercise its option to acquire a ten-year license to manufacture Piocelan products, Sekisui’s trade secrets would have been protected for only five years after NOVA rejected the license. In this circumstance, the Asia exception never would have come into force at all; NOVA would have been undisputably free to make use of Sekisui’s trade secrets after five years and to market Piocelan products anywhere in the world as soon as Sekisui’s patents expired. Thus, if it was intended as consideration at all, the Asia exception could only have been consideration for a license under Sekisui’s patent rights and to use Sekisui’s trade secrets during the period they remained protected, rather than for the initial disclosure of those trade secrets.

*10 Finally, none of the extrinsic evidence supplied by the parties suggests that they intended the Asia exception to be a stand-alone provision, or any terms of the License Agreement to survive the expiration of Sekisui’s patent rights and NOVA’s secrecy obligations with respect to the trade secrets.

Kaleidescape and stipulations that a party is entitled upon breach to injunctive relief

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Shourin Sen - 20 August 2009 – 9:00 am
Filed under Licensing

DVD Copy Control Ass’n, Inc. v. Kaleidescape, Inc., 2009 WL 2450711 (Cal.App. 6 Dist. 2009)

I thought it would be worthwhile to mention the secondary licensing issue decided in Kaleidescape. DVD Copy Control Association’s licensing agreement contained one of those ubiquitous provisions that states that a party is entitled to an injunction upon breach:

[S]ection 9.2 of the License Agreement contained the recitation: “[D]ue to the unique nature of certain provisions hereof and the lasting effect of and harm from a breach of such provisions . . . in the event that Licensee breaches its obligations . . . , money damages alone will not adequately compensate an injured party . . . [and,] upon showing to the relevant court’s satisfaction that applicable factors other than the fact that harm will be irreparable and that monetary damages are not sufficient to remedy the injury have been fulfilled, will be entitled to specific performance or other temporary, preliminary, or permanent injunctive relief including corrective actions appropriate to the circumstances for the enforcement of any such obligations (whether or not there have been commercial sales of products subject to the requested relief).

The California state trial court appeared to reject the stipulation outright because “parties cannot control the sound exercise of jurisdiction by the trial court acting in equity.” The Court of Appeals clarified that the stipulation was binding to the extent that it would not be contrary to a rule of law or public policy.  The Court compared the injunction provision in this respect to a  liquidated damages stipulation and a consent decree:

It follows that, as a general matter, where the parties have stipulated to the nature or amount of a remedy, it is proper for the trial court to honor the parties’ agreement unless it finds that to do so would be contrary to a rule of law or public policy. The instant stipulation is no exception. In determining the lawfulness of a stipulation that contemplates an equitable remedy, the court should take into account the special nature of equitable remedies. (13 Witkin, Summary of Cal. Law, supra, Equity, § 2, p. 283.) Given their extraordinary nature, equitable remedies are usually unavailable where the remedy at law is adequate, as where damages are quantifiable. (Id. at § 3, pp. 284-285; Morrison v. Land (1915) 169 Cal. 580, 586.) That means that a court must reject a stipulation contemplating an equitable remedy that is contrary to law or public policy, such as where the evidence shows that an aggrieved party actually has an adequate remedy at law. Otherwise, the court should honor the parties’ agreement and enforce the stipulation. In the present case, the evidence was that the CSS license helped create the market for movies in the DVD format by reassuring the movie studios that movies released on DVDs could not be easily copied. Industry witnesses testified to their concern that an unaddressed breach of the license would undermine that reassurance and make the movie.

Fn 6. The majority of the appellate cases from other jurisdictions cited by the parties handle the issue in just this way. (See Dominion Video v. Echostar Satellite Corp. (10th Cir. 2004) 356 F.3d 1256, 1259, 1264 [rejecting preliminary injunction based upon contractual stipulation where district court had rejected all the plaintiff?s evidence of actual harm and found that damages could be quantified]; Smith, Bucklin & Associates, Inc. v. Sonntag (D.C. Cir. 1996) 83 F.3d 476, 478, 481 [contractual provision was “insufficient prop” to support irreparable harm finding where injury could be adequately compensated at law]; Ed Bertholet & Associates v. Stefanko (Ind.App. 1998) 690 N.E.2d 361, 363-364 [contractual provision not binding upon the court where there was no evidence of irreparable harm and affirmative evidence of adequate monetary remedy]; Ticor Title Ins. Co. v. Cohen (2nd Cir. 1999) 173 F.3d 63, 68-69 [permanent injunction upheld where irreparable harm shown by difficulty in calculating monetary damages and contractual provision stipulating that breach would cause irreparable injury].)