Internet Law Archives

Atlantic Records et al. v. Brennan: Federal Judge Denies Default Judgment for RIAA

U.S. District Judge for the District of Connecticut Justice Janet Bond Arterton, handed down a very pointed and decisive opinion hammering the R.I.A.A. for its boilerplate style of pleading in the nationwide wide campaign against illegal file sharing. Justice Arterton was appointed by President Clinton in 1995. The full decision is here: Decision. At several key junctures in the opinion, Justice Arterton based her opinion on the fact that the Plaintiff’s complaint was based on “information and belief” rather than direct evidence.

The two areas of concern in the opinion, one is whether to grant a default judgment under Federal Rule of Civil Procedure 55(b)(2) and the second is whether the complaint fails to state a claim for which relief can be granted under Rule 12(b).

Default Judgment Analysis under Rule 55(b)(2)

The granting of default judgment is generally almost a “rubber stamp” kind of process. If the defendant is properly served and fails to respond to the complaint, a default judgment is almost always automatic. If the complaint demands an exact amount as judgment, the default judgment can even be entered by the court’s clerk under Rule 55(b)(1). If not, then the court holds a hearing to determine the amount of damages under Rule 55(b)(2). In this instance, however, the court stepped in and took it upon herself to examine the validity of the claims.

Reasoning from a 2nd Circuit case, Au Bon Pain Corp.v. Artect, Inc., 653 F.2d 61 (2d Cir. 1981), the court found that the default judgment process is not, in fact, automatic, but that “a district court has discretion . . . to require proof of necessary facts and need not agree that the alleged facts constitute a valid cause of action.” Artect, at 65, citing Wright & Miller, a well known legal treatise on procedure.

Looking a another legal treatise, Moore’s Federal Practice, Justice Arterton reasoned that the analysis should combine elements from Rule 55(c), the rule allowing the setting aside of a default judgment, and Rule 60(b), a more generic rule allowing a court to set aside judgments. Finding support for this analysis in 2nd Circuit case law, the court held that three factors arose in determining whether to set aside a judgment under either of the two rules: (1) “the willfulness of default”; (2) “the existence of a meritorious defense”; and (3) “the possibility of prejudice to the plaintiffs should the default judgment be vacated.”

In weighing these factors, the judge determined that the latter two factors shifted in favor of the defendant, i.e., there were abundant meritorious defenses raised in similar cases filed by the RIAA across the country, and the Plaintiff would not be prejudiced by being required to produce more specific evidence. In both instances, the court again mentioned the language that the Plaintiff’s complaint was based on “information and belief.”

Failure to State a Claim Upon Which Relief Can be Granted under Rule 12(b)(6)

The more telling section of the opinion is the court’s ostensibly sua sponte (i.e., of its own accord) analysis of whether the Plaintiff’s complaint failed to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. This rule generally gives the defendant a right to raise this defense in a response to a complaint. Ostensibly, the court raised this issue in the context of possible meritorious defenses.

Justice Arterton cites the recent Supreme Court opinion that a complaint “does not need detailed factual allegations, [but] a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions.” Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1964–65 (2007). She then observed that Plaintiff’s complaint in this case was almost identical to the one filed in Interscope Records v. Rodriguez, where the court held:

Plaintiff here must present at least some facts to show the plausibility of their allegations of copyright infringement against the Defendant. However, other than the bare conclusory statement that on “information and belief” Defendant has downloaded, distributed and/or made available for distribution to the public copyrighted works, Plaintiffs have presented no facts that would indicate that this allegation is anything more than speculation. The complaint is simply a boilerplate listing of the elements of copyright infringement without any facts pertaining specifically to the instant Defendant. The Court therefore finds that the complaint fails to sufficiently state a claim upon which relief can be granted and entry of default judgment is not warranted.

Rodriguez, No. 06-2485, 2007 WL 2408484, at *1 (S.D. Cal. Aug. 17, 2007). Citing the Second Circuit case Greyhound Exhibit Group, Inc. v. E.L.U.L. Realty
Corp., 973 F.2d 155, 158 (2d Cir. 1992), which held that the entry of default “constitute[s] a concession of all well pleaded allegations of liability,” Justice Arterton ruled that Plaintiff’s complaint was “speculative” and “inadequate.”

Eric Bangeman, of Ars Technica reports that the RIAA plans to file a brief, probably accompanying a motion for reconsideration, and possible an amended complaint, as they did in Interscope v. Rodriguez. The amended complaint provided additional details about dates, times, and IP addresses. Whether the additional details of that amendment will alter the application of Rule 12(b)(6) is still unknown, as the judge in that case has since retired.

Technorati Tags: RIAA Litigation,Digital Downloads,Copyright Infringement,File Sharing

Digital Downloads, Entertainment Industry News, Entertainment Law, Internet Law, Music Publishing

Copyright Royalty Board begins critical hearings

On Monday, January 28th, the Copyright Royalty Board (CRB) began what will be four weeks of hearings. The CRB will hear testimony from interested parties on both sides of issues which will ultimately determine the statutory mechanical rates for songwriters and music publishers. The CRB sets these rates periodically, but these particular hearings are more critical than usual because, in addition to setting rates for physical products, rates will be set for the first time ever for digital products such as digital downloads, subscription services and ringtones.

On one side of the issue is the Recording Industry Association of America (the “RIAA”), which represents the major record labels’ interest, is proposing that the current rate of 9.1 cents per mechanical copy produced be reduced to 6 cents! That reduction would roll back the rates to, well, let’s just say to well before the birth date of most of the college students the RIAA is prosecuting across the country for downloading. For digital reproductions, the RIAA is proposing an even lower rate of 5 to 5.5 cents per track.

On the other side of the issue, representing the publishers and songwriters, is the National Music Publishers Association, the NMPA. In contrast, the NMPA proposes increasing the statutory rate to 15 cents, and for digital reproductions, a rate of the greater of 12.5% of revenue, 27.5% of content costs, or a micro-penny calculation based on usage.

This are important issues, and I’ll try to keep you posted here on Law on the Row as developments happen.

Entertainment Industry News, Internet Law, Music Law

Return fire by the music industry – artists to testify before Senate

The Senate Judiciary Committee is holding a high-profile hearing today on the subject of imposing additional performance royalties on so-called “over-the-air” or “terrestrial” radio stations (I’ll just call them OTA’s in this article). Investigative hearings such as these are usually precursors to legislation being introduced on the subject. Grammy winner, Lyle Lovett and Chicago-based singer-songwriter Alice Peacock testified before the Committee this morning at 9:30 ET. Their testimony was broadcast live at C-SPAN.

So, what is the issue. OTA’s and the music industry are currently engaged in one of the biggest industry and lobbying battles to hit Washington in quite some time. The OTA’s fired a recent shot when a concurrent resolution was passed by Congress. Now, the music industry is firing back.

One of my recent blog entitled New concurrent resolution, H.Con.Res 244, introduced to combat performance royalties for record labels gives some background on the issue, which is basically this: Currently, OTA’s pay performance royalties to ASCAP, BMI and SESAC in the U.S. for airplay performances of the musical composition copyright. They do not, however, pay a performance royalty to the owners of the sound recording copyright for over the air performances of the copyright. The sound recording copyright is distinct from the musical composition copyright.

This is because when Congress introduced new legislation in the mid-90’s to grant sound recording copyright owners a right to performance royalties, it specifically excluded OTA’s from the legislation on the basis that the artists and record labels who owned the sound recording copyrights benefited from the publicity of over the air performances, which offset the need for payment of a performance royalty. Keep in mind, again, that this does not apply to the performance royalties paid to songwriters and music publishers.

The effect of the Digital Performance Royalty in Sound Recordings Act of 1995 is that only digital performances of the sound recording copyrights are entitled to compensation. This applies only to Internet webcasters, Cable Radio and Satellite radio stations. These types of services — Pandora, Sirius, XM Radio, Last.fm, for example — pay performance royalties to both the owners of the musical composition copyright and the sound recording copyright. Many industry groups are rallying to rectify what is viewed as an unfair advantage for OTA’s.

One such group is musicFIRST, which stands for “fairness in radio starting today.” This organization is made up of a large and impressive group of recording industry groups and well-known artists. Unfortunately, the RIAA’s involvement in this organization has diminished its reputation on many blogs, such as this article entitled Lovett goes to bat for radio royalties, the credibility of which is call into doubt by the fact that the writer is ostensibly unaware of Lyle Lovett’s reputation and notoriety. But don’t make the mistake of slanting your opinion against musicFIRST based on that organization’s involvement. Check out the website and seriously consider the issues and you’ll probably understand their perspective.

There is tremendous validity to the argument that radio broadcasts no longer hold the same sway over consumers that they did in 1995. One research study conducted by Dr. Stan Leibowitz, an economics professor at the University of Texas, compared record sales and music radio listening habits in nearly 100 cities across the United States and found that exposure for a song on the radio was a substitute for purchasing the music and, therefore, actually had a negative impact on sales of music. Critics point out that the study was funded, at least in part, by the musicFIRST coalition and say that there are studies which indicate the opposite, that is that radio airplay stimulates interests in new music and therefore encourages sales. Think about your own habits – when was the last time you heard a song on the car radio and rushed to buy it?

Another argument propounded by the OTA’s in opposition to payment of royalties to the owners of sound recording copyrights is that it would put them out of business. They simply can’t afford to pay more royalties for the music they use. Of course, Internet webcasters and Satellite and Cable radio providers are saying “talk to the hand . . . call waiting!” But the truth is that OTA’s get the bulk of their revenue from advertisers and their revenue increases if they attract larger audience by playing the latest music. Furthermore, stock analysts are predicting that advertising revenues, in general, are on the increase for the foreseeable future. One researcher, George Williams, reportedly found that the annual growth of radio advertising rates from 1996 to March 2007 was 10% a year, outpacing the Consumer Price Index by more than three times its 3% a year rate. It is very doubtful that OTA’s revenues would be seriously altered by this legislation, in fact, the OTA’s would more than likely simply pass the additional costs on to advertisers.

The bottom line, in my view, is that the legislation, when it is finally proposed, will create a level playing field for the broadcasting industry, providing that both digital and OTA’s pay the same royalties. This seems fair, doesn’t it? Now, whether the powerful OTA lobby will prevent the passage of such legislation is a blog for another day.

Technorati Tags: Radio , Performance Royalties , ASCAP , BMI , SESAC , musicFIRST , Radio Broadcasters , Record Labels , Music Law , Entertainment Law , Copyright

Digital Downloads, Entertainment Industry News, Internet Law, Music Law, Music Row News

New concurrent resolution, H.Con.Res. 244 introduced to combat performance fees for record labels

For years now, a huge battle has been brewing between proponents of performance royalties for the owners of sound recording copyrights to be paid by terrestrial radio stations (those broadcasting through the air) and it has been gathering steam in the last several months.

The battle is being waged between the giants of industry, the RIAA, representing the four major record labels, and organizations like the National Association of Broadcasters and the Free Radio Alliance, representing the broadcast radio industry. The latest round of fire was shot on Oct ober 31, 2007 on behalf of the broadcasters when two Texas lawmakers, Michael Conaway, a Republican, and Gene Green, a Democrat, co-sponsored concurrent resolution H. Con. Res 244, the “Local Radio F ree Act.”

A concurrent resolution is a legislative measure passed by both the House and the Senate generally used to address the sentiments of both chambers with regard to certain matters. Since they do not have the force of law, concurrent resolutions are generally used to provide for adjournments, recess, use of the Rotunda, and other such matters. The “Local Radio Free Act” is essentially a policy statement supporting free local broadcast radio and opposing any new performance fees, taxes or royalties for the public performance of sound recordings over the airways. Ever wonder what is behind all of this noise?

When a company wants to use a sound recording of a musical composition, there are two copyright owners with whom it must deal: the owner of the musical composition copyright and the owner of the sound recording copyright. For example, Dolly Parton (or her publishing company) owns the copyright to I will always love you, but two different record companies own the copyright in the sound recordings performed independently by Dolly Parton and, later, by Whitney Houston. And, of course, one of the rights granted by the Copyright Act to the owner of a copyright is the right to publicly perform the work.

For years, ASCAP, BMI and SESAC have collected the performance royalties on behalf of the composers and writers of the music compositions. All radio stations, whether terrestrial or digital (over the Internet or Satellite), pay performance royalties for the musical compositions they play over their broadcasts — to the tune of around 500 million dollars per year. It wasn’t until 1995 and the passage of The Digital Performance Right in Sound Recordings Acts that the public performance right was created in the sound recording of a musical composition. At that point in time, the digital broadcasters of music, including Satellite and Internet stations, were required to start paying a performance fee to the owners of the sound recording copyright, i.e., the record labels and artists who perform the song. The Act specifically exempts, however, the local radio stations that broadcast the music over the airways, ostensibly on the grounds that the recording artists and labels were receiving free publicity from the broadcast radio stations in exchange for the use of their sound recording.

Now, with the demise of the CD and the rise of illicit downloading, the record industry is pressing Congress hard to extend the Digital Performance royalty to the local broadcasters and, of course, those broadcasters, with their extremely old and strong political ties, are fighting hard against it.

The RIAA, for its part, is sending CEO Mitch Bainwol on the interview circuit. Bainwol is consistently hailed by many Washington publications as one of the most powerful and influential lobbyist in Washington. In an L.A. Times article in which he discussed the performance fee, Bainwol is quoted as saying that “the creation of music is suffering because of declining sales.” This group has the formidable support of the U.S. Copyright Office, which has support the removal of the exemption for terrestrial stations for many years, and the chair of the House subcommittee on intellectual property, California representative Howard Berman, who is actively pursuing legislation to remove the exemption.

The National Association of Broadcasters is fighting the RIAA with a barrage of print ads and radio ads in support of their position. They use the word “tax” as an emotive term to sway people to their side. The NBA stress that it is the major label conglomerates that would get the bulk of any new performance fees. The radio broadcasters are a formidable force themselves with corporate entities such as Cox Radio, Citadel, Cumulus, Clear Channel, just to name a few, in opposition to the expansion of the digital performance fee. This new legislation is a result of this group’s hard fought efforts against any new measures, claiming that with profit margins already in the single digits in some instances, a performance tax would obliterate their business.

In the grand scheme of events, the concurrent resolution is probably a non-event. It is the efforts of one group’s successful lobbying finding a materialization. Don’t expect this to be the last word on the subject, however.

Technorati Tags: Public Performance Royalties , Performance Rights Organizations , Music Lawyer , Music Law , RIAA , RIAA Litigation , Digital Downloads , Major Labels , Music Industry , Legislation , Lobbyists , Mitch Bainwol , Clear Channel , Cox Radio , Citadel , Cumulus , National Broadcasters Association

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Courts taking a stricter look at evidence in RIAA downloading cases

There appears to be a slight ripple of a trend among courts to take a stricter look at the evidence being presented by the RIAA in its crusade against digital downloads, based primarily on the evidence of user names and IP addresses assembled by their expert consultants, MediaSentry.

In the RIAA’s case against Jeff Dangler, filed in the U. S. District Court for the Western District of New York in Rochester, Dangler failed to file a response to the Complaint, and the Clerk entered the default against him. Pursuant to Federal Rule of Civil Procedure 55(b)(2), the Plaintiff can then apply to the judge for a judgment based on the default. In addition, Fed.R.Civ.P 55(b)(2) gives the judge the option to conduct hearings and hear evidence in order to determine if the damages requested are justified. This gives the judge the opportunity to evaluate the merits of the underlying claim and, if he finds it to be deficient, deny a judgment on the default.

On October 23, 2007, U.S. District Judge David G. Larimer denied a 55(b)(2) request by the RIAA for a default judgment of $6,420 in Atlantic v. Dangler. Judge Larimer specifically ruled that there were “significant issues of fact” in the record “as to the identification of the defendant from his alleged ‘online media distribution system’ username” heavyjeffinc@KaZaA. The court points out that there is no evidence presented that established a time period of the alleged distribution and/or infringement nor are there details sufficient to determine whether, in fact, the defendant is the user so identified.

Because of these deficiencies, Judge Larimer determined that he would hold a hearing to allow the Plaintiffs to establish additional evidence that a copyright violation was committed by the defendant. You can read the full text of the judge’s order here.

Previously, in August 2007, a similar 55(b)(2) request was denied by Judge Rudi Brewster in Interscope v. Rodriguez in the U.S. District Court for the Southern District of California. In that case, Judge Brewster held that “Plaintiffs . . . must present at least some facts to show the plausibility of the allegations of copyright infringement against on th[is specific] defendant,” citing the recent U.S. Supreme Court decision in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007) that more than a mere recitation of the elements of a claim are necessary to find relief. Basing his decision on facts similar in nature to Dangler, Brewster concluded that the RIAA’s complaint failed to state a claim upon which relief could be granted.

These decisions arise in districts where the judges are, generally speaking, more technically saavy than some other districts where these types of issues do not arise as often. In a somewhat related case, the Ninth Circuit, the appeals court that has jurisdiction over the California district courts, one bankruptcy court has already established stricter standards of proof for establishing the veracity of computer records. For more information, see the informative article entitled Admitting Computer Record Evidence after In Re Vinhnee: A Stricter Standard for the Future?, by Cooper Offenbecher. In short, this article discusses the interplay between Rules 901 and 803(6) of the Federal Rules of Evidence and their application to digital business records. Essentially, without getting into the details, there is a hearsay exception for business records allowing their admission as evidence in a trial if they are maintained in the regular course of business and are relied upon by the business. It is these sorts of dialogues that must inform the judges as they scrutinize the evidence presented by the RIAA in support of infringement claims, whether they be in the course of a default judgment or in the course of a trial.

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Technorati Tags: Digital Downloads , RIAA , Entertainment Law , Copyright Infringement , Copyright Law , Music Law , Music Lawyer , Twombly

Digital Downloads, Entertainment Industry News, Internet Law

Amazon profits in the stratosphere

Propelled primarily by the sales of 2.5 million copies of the new Harry Potter book, Amazon’s profits reach ed the stratosphere in the 3rd fiscal quarter of 2007. The company announced its third-quarter earnings in an online conference call on Tuesday, announcing a profit of $80 million, three times the $19 million it earned in the third quarter of 2006. Amazon reported sales of $3.26 billion, up 41% from $2.31 billion in the quarter last year. The company expects its overall 2007 net profits to be up by 33-36%, or somewhere north of 14 billion dollars. A replay of the webcast announcement can be heard on Amazon.

As you recall, my earlier interest in the announcement stemmed from the company’s September release of the public beta of its DRM-Free music download store. While generally overshadowed by the Harry Potter sales, Amazon’s Chief Executive Office, Jeff Bezos, did comment on the digital downloads, saying in the conference call that the company was happy with early results from the store.

"We are getting terrific feedback from customers," he said, Everybody loves the DRM-free format. Now the onus is on us to continue to convince music labels that this is a good way to sell their music."

Little more can be gained from the announcement with regard to the actual sales of MP3s. Hopefully more data will be released in the 4th Quarter announcement. The company intends to expand its digital offerings later this fall by introducing an electronic book reading device and offering downloadable e-books.

According to one research firm, Hitwise, Amazon is the leading benefactor of the web’s double-digit increase in web commerce retail sales, garnering 11.5% of the increase in traffic, followed by Wal-Mart, which received 5.4%.

Amazon, a Fortune 500 company based in Seattle, Washington began operations in July 1995.

Technorati Tags: Digital Downloads , MP3 , Internet , Entertainment Industry , Amazon

No more lines in the virtual sand – the Hew Griffiths case considered.

Back in 1999, my law clerk, J. Eric Crupi and I considered the topic of personal jurisdiction as applied to the Internet. In the resulting Law on the Row article, entitled “Lines in the Virtual Sand.” In the original article, Eric concluded that “the boundaries of personal jurisdiction in cyberspace have not been concretely defined, but rather represent unsettled lines drawn in the ‘virtual’ sand. . . .” In the intervening years, I would have to say that the lines in the virtual sand have been blown away by the winds of U.S. Court decisions, particularl after considering the three-year long case against Hew Griffiths from Australia.

The original article describe the process of personal jurisdiction as follows:

The traditional determination of whether a court has personal jurisdiction over a particular defendant involves a two-pronged analysis. The first prong of the analysis inquires into whether the state in which the lawsuit was filed (i.e. the “forum state”) has a “long-arm statute” permitting the assertion of personal jurisdiction. A long-arm statute is simply a legislative act that allows the courts of a state to assert jurisdiction over persons and corporations that, although not residents of that state, have voluntarily conducted some type of activity in that state. The second prong of the analysis, however, is more involved and inquires into whether the forum state’s assertion of personal jurisdiction complies with Constitutional due process standards. Due process requires that a non-resident defendant must have certain “minimum contacts” with the forum state such that maintaining the suit does not offend traditional notions of fair play and substantial justice. Essentially, this prong is satisfied if the defendant performs some act in the forum state through which it purposefully takes advantage of the benefits of doing business in that state and can thus reasonably anticipate being haled into that state’s courts.

It is the “minimum contacts” section of the long arm analysis that has received the most attention in the U.S. Department of Justice’s extradition of Australian Hew Raymond Griffiths. In one of the first ever extraditions for an intellectual property offense, Griffiths, 44, a British national living in Bateau Bay, Australia – a man who arguably had absolutely no physical contact with the United States – was extradited to the United States in February 2007 to face criminal charges in U.S. District Court in Alexandria, Va. On April 20, 2007, he pleaded guilty to one count of conspiracy to commit criminal copyright infringement and one count of criminal copyright infringement before U.S. District Court Judge Claude M. Hilton. He was sentenced to 51 months in prison and given credit for the three years he spent in Australian facilities awaiting extradition. He will serve out the remaining 15 months imprisonment in U.S. facilities.

Griffiths’ conviction was the latest action arising from the joint U.S. Customs/Department of Justice investigation known as Operation Buccaneer, the largest international online copyright piracy investigation ever conducted by federal law enforcement. To date, Operation Buccaneer has resulted in more than 30 felony convictions in the United States and 11 convictions of foreign nationals overseas.

In an article for the Australian Law Journal, NSW, Chief Judge in Equity, Peter Young summarized that “[Our] people are being extradited to the U.S. to face criminal charges when they have never been to the U.S. and the alleged act occurred wholly outside the US.” He concluded that while International copyright violations are a great and valid problem that must be remedied, “there is also the consideration that a country must protect its nationals from being removed from their homeland to a foreign country merely because the commercial interests of that foreign country are claimed to have been affected by the person’s behaviour in Australia and the foreign country can exercise influence over Australia.”

The DOJ Assistant Attorney General Alice S. Fisher of the Criminal Division stated the Department’s counter position, that “the Justice Department is committed to protecting intellectual property rights, and will pursue those who commit such crimes beyond the borders of the United States where necessary.” U.S. Attorney Chuck Rosenberg for the Eastern District of Virginia echoed her sentiment when he stated that “Whether committed with a gun or a keyboard — theft is theft. And, for those inclined to steal intellectual property [in the United States], or from halfway around the world, they are on notice that we can and will reach them.”

So what did Griffiths do to raise the ire of the DOJ? Griffiths, known by the screen nickname “Bandido,” was a longtime leader of an organized criminal group known as DrinkOrDie, which had a reputation as one of the oldest and most security-conscious piracy groups on the Internet. DrinkOrDie, an international organization founded in Russia in 1993 and known as the warez scene, was an underground Internet piracy community that specialized in cracking software codes and distributing the cracked versions over the Internet. Griffiths had boasted in interviews that even though he ran all of DrinkOrDie’s day-to-day operations and controlled access to more than 20 of the top warez servers worldwide, he would never be caught. Some of DOD’s most prominent victims were Microsoft, Adobe, Autodesk, Symantec and Novell, but they also affect smaller companies whose livelihood depended on the sales revenue generated by one or two products. Once cracked, these software versions could be copied, used and distributed without limitation. Members stockpiled the illegal software on huge Internet computer storage sites that were filled with tens of thousands of individual software, game, movie and music titles alleged to be worth over 50 millions dollars. The group used encryption and an array of other sophisticated technological security measures to hide their activities from law enforcement. Griffiths was certainly no farm boy and was well aware that his activities were criminal, even though many articles on the Internet about his activities point out that he allegedly made no profit from the pirated software.

Griffiths’ extradition was very controversial in Australia. The matter of U.S.A. v Griffiths has been cited as an example of how bilateral arrangements can lead to undesirable effects such as a loss of sovereignty and the introduction of draconian measures. On the other hand, increased enforcement internationally through heavy criminal sanctions is seen as an effective way of protecting legitimate distribution networks.

A common mistake made in many of the Internet discussions about the Griffiths case is that the extradition occurred pursuant to the Australia-United States Free Trade Agreement (“AUSFTA”). Griffiths’ indictment, however, occurred before amendments were enacted to harmonise the Australian Copyright Act with U.S. copyright laws, so AUSFTA had nothing to do with the extradition. There were multiple factors that motivated extradition, not the least of which was that the DOJ alleged conspiracy, claiming that most of the overt acts were based in the United States and that many DrinkorDie members were located in the U.S. This gives credence to the argument that, as the leader of DOD, Griffiths was subject to its jurisdiction. This analysis is no different than exercising jurisdiction over a criminal enterprise whose activities result in murder rather than theft – the analysis has nothing to do with the severity of the crime. That said, it is not wise to underestimate the impact that the lobbyist for the powerful technology industry may have had on the government’s interest in this case, nor the effect of the close relationship between Australia and the United States, both of which made extradition more likely.

The bottom line in all of this is that the traditional geographical boundaries which once severely restricted the reach of the long arm of the law are no longer an impediment. If a person’s criminal activities rise to a significant enough level as to garner the attention of a organization such as the DOJ, that person is going to find him or herself in unfamiliar territory being charged with violation of crimes in that territory. The lines in the virtual sand have disappeared.

DIGG IT!

Internet Law, Life on the Row, Music Industry, Music Row News

The Digital Lowdown: What’s a good deal?

The author, Steven Corn is the co-founder of Big Fish Media, a digital music distribution company working with all the major download music services like iTunes, eMusic and Napster. He is the author of the blog, The Digital Lowdown. This article appeared in Issue 32 of Royalty Week, dated October 9, 2007 and is reprinted here with the permission of the author.

Recently the CEO of Vivendi, Jean-Bernard Levy, called the deal between Apple and its music providers “indecent” and complained about the lack of a differentiated compensation structure. His simple, yet bold, comment reflects the primary complaint that the major record labels have with the iTunes business model. They feel that they are not getting paid enough and they want a better deal from iTunes. As a provider of over 50,000 tracks to iTunes (and other services), one might think that I would agree with his viewpoint. However, his statements are flawed and represent a desperation that pervades the music industry today.

Referring to the iTunes deal as “indecent” is nothing short of a hyperbole. When a UMG CD is sold for $13.99, the distributor generally receives about $9.99. The record label would probably receive $5 – $6 per CD. (Note: these figures vary greatly from album to album and distributor to distributor. This estimate is admittedly rough but serves merely to give a general idea of the revenue splits for selling CDs.)

If the CD being sold is a Universal Music Group artist and the distributor is Universal’s own company, then Vivendi can claim to earn about 70% of retail sales. This is remarkably similar to the wholesale price of an iTunes sale. If a particular CD is an older catalog item, the distributor might offer it at a discounted price. This is reflected in CD sale prices ranging from $9.99 – $11.99. The wholesale on such sales will still remain about 70%.

So, it is unclear how Mr. Levy is calculating his math when he calls the splits on iTunes “indecent.” In many industries, a 70% wholesale price would be considered quite good.

I suppose that a counterargument would be that iTunes makes a lot of money selling iPods and the labels do not share in those revenues (not for any lack of trying on their part). And yet, a supplier of socks to Wal-Mart does not make money when Wal-Mart sells shoes. I suspect that the wholesale price for goods in Wal-Mart, a company notorious for having very slim margins, is no better than 70% and quite possibly much worse.

The battle between iTunes and Vivendi is certainly heating up. The labels are, no doubt, greatly concerned with the large market share that iTunes has and relinquishing control has never been a trait of the majors. For many labels, iTunes is becoming their number one retailer topping even Wal-Mart and other big box stores. If the digital marketplace was more diverse with less concentration in one retailer, then it is likely that the labels would be less critical of the wholesale pricepoint on iTunes.

It is interesting to note that Mr. Levy’s comment occurred on the same day as the beta launch of Amazon’s eagerly awaited download store. While Amazon does offer a multi-tiered pricing structure, their wholesale percentages still closely resemble iTunes. Furthermore, the revenue split on competing services like Napster, Rhapsody and Zune are even less favorable than iTunes. These services appear to escape Mr. Levy’s wrath due, I would presume, to their small market share when compared to iTunes.

So, is it the deal that is indecent? Or is it the fact that Vivendi can’t seem to find effective ways to counteract the decline in physical goods? Perhaps it is the basic fear of the power that iTunes wields.

When a market is declining, as CD sales are, it is natural for large companies to maximize their other revenue streams. Consistent with the Wal-Mart analogy, many companies feel the pressure of meeting their targeted price points and margins. And yet, it is very hard to ignore such a major retail outlet, regardless of what products you manufacture. If Vivendi decides to pull out of iTunes, I am sure that most any indie label would be happy to step in and offer their albums for the same banner slots that UMG has secured in the past. Perhaps some consumers will be upset that they cannot buy both a Nine Inch Nails (UMG) and an Artic Monkeys (WMG) track on the same store. But I doubt that it would greatly affect the general appeal of iTunes. Mr. Levy’s comments sound like a game of “chicken” where no one really cares who wins.

Tags: Digital+Downloads, MP3, music+law, copyright, music+industry, universal+music+group, vivendi, record+distributors

Internet Law

Lines in the Virtual Sand

by J. Eric Crupi

Consider this scenario: A music publishing company in Nashville advertises its services worldwide via an Internet web site. The site displays general information about the company, such as a description of its business, a listing of prominent clients, the company logo, and a phone number. In addition, the site also provides a hypertext email link and invites artists seeking a publishing deal to email demos of their music to the publisher for consideration. An aspiring artist living in Oregon finds the web site and decides to accept the publisher’s invitation. She emails her best song to the publishing company with the hope of having it drift its way into interested (and, hopefully, decision-making) ears. The publishing company does eventually listen to the song, but informs the artist via email that it just isn’t what radio wants.

One year later the artist turns on the radio only to hear a song that sounds all too familiar — it’s the song she submitted performed by another artist! Although the lyrics and tonal progression were somewhat modified, the publisher stole the core idea and used it in the creation of another song. As a result, the Oregon artist wants to sue the Nashville music publisher in Oregon Federal District Court for the publisher’s infringement of her copyright. Question: Does the Oregon court have personal jurisdiction over the Tennessee publisher? In other words, does the Oregon court have the power to require the publisher to appear and defend in an Oregon courtroom? The answer is not as clear as one might expect.

When a person brings a lawsuit claiming that the defendant infringed his or her copyright, the legal system has several procedural regulations that are automatically implemented to protect the defendant from being unfairly prejudiced in an attempt to defend the lawsuit. One such system of procedural rules is known as the law of personal jurisdiction. Essentially, personal jurisdiction is the legal power that a court has over a defendant, and more specifically, the ability to force the defendant to appear and defend in a particular state for the adjudication of that defendant’s legal obligations.

The traditional determination of whether a court has personal jurisdiction over a particular defendant involves a two-pronged analysis. The first prong of the analysis inquires into whether the state in which the lawsuit was filed (i.e. the “forum state”) has a “long-arm statute” permitting the assertion of personal jurisdiction. A long-arm statute is simply a legislative act that allows the courts of a state to assert jurisdiction over persons and corporations that, although not residents of that state, have voluntarily conducted some type of activity in that state. The second prong of the analysis, however, is more involved and inquires into whether the forum state’s assertion of personal jurisdiction complies with Constitutional due process standards. Due process requires that a non-resident defendant must have certain “minimum contacts” with the forum state such that maintaining the suit does not offend traditional notions of fair play and substantial justice. Essentially, this prong is satisfied if the defendant performs some act in the forum state through which it purposefully takes advantage of the benefits of doing business in that state and can thus reasonably anticipate being haled into that state’s courts.

The traditional personal jurisdiction analysis is focused, therefore, upon the defendant’s physical and tangible contacts with a defined geographic area. Interactions in the “virtual world,” however, are geographically transparent, and, as a result, have caused much confusion for courts that have attempted to apply traditional jurisdictional criteria rooted in a real-space dimension. For example, it is often impossible to discern the location of a particular Internet user, host machine, or administrator because such information is unimportant to the network’s design and function. Parties involved in any type of online transaction could literally be in adjoining rooms or on opposite sides of the globe, and the network offers no practical way of telling the difference. Additionally, even if an Internet site or its administrator can be geographically pinpointed, such information is mutable given the relative ease with which a site administrator can relocate his entire on-line business, including his Internet address, to another host machine in a different jurisdiction. The entire change of address would be completely invisible to Internet users and theoretically could be accomplished in less than an hour.

In the past three years, a wave of cases involving such activities conducted in cyberspace (i.e., business transactions and/or communications conducted via web sites, emails, news group postings, etc…) has surged its way through the court system, leaving in its wake some germane precedent regarding personal jurisdiction. Unfortunately, these decisions are not entirely consistent with each other and, thus, a coherent and uniform set of rules regarding personal jurisdiction in cyberspace transactions has not yet developed.

One such case is Bochan v. La Fontaine, a recent decision by a federal court in Virginia that subjected defendants residing in New Mexico and Texas to the jurisdiction of the Virginia court by virtue of their cyber-interactions with the state. In Bochan, a Virginia plaintiff brought a civil suit alleging that the out-of-state defendants had posted defamatory messages directed towards him on a “Usenet” newsgroup, a kind of electronic bulletin board that can be accessed and read by Internet users all over the world. Under the first prong of its personal jurisdiction analysis, the court asserted long-arm jurisdiction over the New Mexico defendant because he promoted his computer hardware company and solicited business via an interactive web site that was accessible to Virginia Internet users 24 hours a day. More interesting (and ostensibly tenuous), however, is the court’s finding that the Texas defendants were within its reach under Virginia’s long-arm statute because the defamatory messages they posted using their America Online (“AOL”) account must have been transmitted, in the first instance, to AOL’s server (i.e. hardware) surreptitiously located within Virginia. As a matter of course, the messages were stored there temporarily and then transmitted to other Usenet servers (i.e. physical locations) around the world. Thus, the court reasoned that even though the Texas defendants had no business or personal ties to Virginia, the server was integral to the publication of the defamatory message and the posting constituted a sufficient act in Virginia to satisfy the long-arm statute.

In prong two of its jurisdictional analysis, the Virginia court found that jurisdiction over the defendants was proper because the defamation claim arose directly from a sufficient number of minimum contacts between the defendants and Virginia. The court substantiated its finding by noting that the harm to the plaintiff’s reputation, if any, was suffered primarily in Virginia. Furthermore, since the defendants knew that the message recipient was a Virginia citizen (although the defendants denied having this knowledge), they reasonably could foresee being haled into that forum’s court system.

Unfortunately, the Bochan decision presents both theoretical and practical problems. From a theoretical standpoint, the decision creates precedent for a finding of “long-arm” jurisdiction and sufficient minimum contacts based solely upon a transaction as superficial and arbitrary as the posting of a newsgroup message on a server that happened to be located (unbeknownst to the defendants) in Virginia. As a practical consideration, the decision also jars sharply against other jurisdictions’ quantifications of what constitutes sufficient minimum contacts in cyberspace.

Although all cases are highly fact-intensive determinations, several jurisdictions have fortunately set a higher burden that the plaintiff must meet in order to establish that personal jurisdiction grounded in “virtual” interactions is proper. For example, in Cybersell, Inc. v. Cybersell, Inc., an Arizona court held that personal jurisdiction could not be maintained over a Florida corporation even though the company advertised its services via a web site that included a local phone number, an invitation to send email, and a hypertext link that allowed users to introduce themselves. Similarly, in Bensusan Restaurant Corp. v. King, a New York court concluded that the assertion of jurisdiction over a defendant merely because he advertised his business through a web site would violate the due process clause.

Although Bochan and these contrasting decisions do not provide a clear definition of what constitutes minimum contacts in cyberspace, the overall emerging trend among courts is a sliding scale approach; that is to say, minimum contacts can be established if the defendant has taken “deliberate action” within the forum state, such as creating contractual obligations with a resident of the state via the Internet. Thus, under this approach, web sites that only passively advertise may not subject the out-of-state site operator to a foreign court’s jurisdiction.

So, what does all this mean for our hypothetical Nashville publisher? It means that if the Bochan ruling were applied in an Oregon court, the publisher, by virtue of accepting the artist’s emailed song, is potentially subject to jurisdiction in Oregon, even though the publisher has never been to Oregon or otherwise had any business or personal contacts with that state. As a practical matter, the Bochan ruling would require the Nashville publisher either to hire an Oregon lawyer to defend the action in that jurisdiction or suffer a default judgment. If, on the other hand, the sliding-scale approach were applied to our Nashville publisher’s scenario, the songwriter would have to show that our publisher had more significant minimum contacts in the state of Oregon in order to establish jurisdiction. In all likelihood, under this analysis, the passive receipt of the songwriter’s song by email would not be an adequate nexus with Oregon to permit its courts to entertain a lawsuit against our Nashville publisher.

Since the boundaries of personal jurisdiction in cyberspace have not been concretely defined, but rather represent unsettled lines drawn in the “virtual” sand, the wise business person who utilizes the Internet’s marketing and communicative powers will remain cognizant of his or her cyber-contacts and the potential jurisdictional consequences that may flow as a result. If you have questions involving such legal issues, contact an attorney familiar with the Internet and its interaction with entertainment, trademark, and copyright issues.

Acknowledgement is given to the following resources from which several references were cited:

C Carl S. Kaplan, AOL Subscribers Can Be Sued in Virginia, Judge Rules, CYBER LAW JOURNAL (June 11, 1999)

(http://www.nytimes.com/library/tech/99/06/cyber/cyberlaw/11law.html)

C Dan L. Burk, Jurisdiction in a World Without Borders, 1 VA. J.L. & TECH. 3 (Spring 1997)

http://vjolt.student.virginia.edu/text_only/vol1/home_art3.html

C Thomas P. Vartanian, It’s a Question of Jurisdiction – Irreconcilable Differences in Cyberspace, BUSINESS LAW TODAY, July/Aug.1999, 22-26.