Tuesday, August 16, 2016

Flattery Will Get You Nowhere: Federal Court Dismisses Winemaker's Insurance Coverage Action Based on Intellectual Property Exclusion

A federal Court in Northern California has dismissed an insurance coverage action based on the insurance policy's intellectual property exclusion. The Court found the insurer did not owe a duty to defend an underlying case against a winemaker for allegedly selling its wine under the name of its former president without his consent. Among the court's findings was that there was no coverage for disparagement because the company's alleged conduct did not disparage the former president. Rather, the use of his name to sell its products was more a form of flattery.

Paul Dolan is a fourth generation winemaker. In 2004, he and a family named Thornhill formed the Mendocino Wine Group (Mendocino). Dolan initially served as president and agreed to permit the company to develop wine using his name as a trademark, so long as he "was able to control the nature and quality of wine that would be sold under his name." The company then began selling wine under the Paul Dolan trademark.

According to Dolan, in 2012, he was "ousted" from the company. He then filed a lawsuit against the company, alleging claims for (1) a declaration that the company could no longer use the Paul Dolan trademark; (2) unfair competition in violation of the Lanham Act; violation of the common law right of publicity and statutory right of publicity under California Civil Code § 3344; and cancellation of the Dolan trademark registration.

Dolan asserted that he never intended the company could use his name forever, and he revoked his consent for the company to use his name in connection with any Dolan trademark. Nevertheless, he alleged, the company continued to distribute and sell wine under the Paul Dolan trademark, and continued to use his name to market, advertise and promote its products. His lawsuit against the company claimed the continued use of the trademark violated his right of publicity and caused damage to Dolan because it directly conflicted with his own ability to use his name in connection with wine and related products and services, and because it falsely suggested the goods the company was selling and distributing were connected with him.

Mendocino tendered Dolan's claims to its insurer, Unigard Insurance Company, for coverage under a commercial general liability insurance policy. The policy stated the insurer would pay "those sums that the insured becomes legally obligated to pay as damages because of 'personal and advertising injury' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages for 'personal and advertising injury' to which this insurance does not apply..."

The policy also defined "personal and advertising injury" to mean "[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services" and "[o]ral or written publication, in any manner, of material that violates a person's right of privacy."

The policy contained an intellectual property exclusion, which expressly excluded coverage for infringement of copyright, patent, trademark or trade secret, which was defined to mean "'personal and advertising injury' arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your 'advertisement.' 

"However, the exclusion does not apply to infringement, in your 'advertisement,' of copyright, trade dress, or slogan."

Unigard denied coverage of the claims, asserting the claims alleged in the underlying action did not give rise to coverage under the policy's insuring provisions and there was no duty for it to defend Mendocino, and also because coverage was excluded based on the intellectual property exclusion. In turn, Mendocino sued Unigard for breach of contract and bad faith. Unigard filed a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, asserting that Mendocino's complaint failed to state a legal claim for which relief could be granted. The Court agreed and dismissed Mendocino's lawsuit.

The Court explained that, under California law, an insurer must defend its insured against claims that create a potential for indemnity under the policy. Dolan's claims were based on his allegations that Mendocino had misappropriated his likeness without authorization. The Court found these claims did not create even a potential for coverage.

The Court explained there are two types of appropriation claims, which are distinguished by the nature of the plaintiff's right and the resulting injury. The first type - - the right of publicity - - is essentially that the public's reaction the to the individual's name and likeness, which endows them with "commercially exploitable opportunities."

The second type of appropriation brings injury to the feelings. It concerns the plaintiff's peace of mind. It is mental and subjective.

The right of publicity is considered an intellectual property right that protects a form of intellectual property which society deems to have some social utility. The "mental and subjective" type of appropriation, on the other hand, does not.

The Court found that the exclusion applied to bar coverage. While the policy covered damages for violations of privacy rights, it excluded coverage for injuries arising out of violations of intellectual property rights, such as Dolan's right of publicity claim. Dolan did not assert a claim based on injured feelings, but only that Mendocino's use of his name and likeness diminished his marketability and publicity value and deprived him of his right of publicity - - a violation of his intellectual property right, which was excluded by the plain language of the intellectual property exclusion.

Mendocino also argued that there was coverage because the allegations in Dolan's complaint alleged the elements of a defamation claim. Unigard countered that there were no allegations of the publication of defamatory material. Defamation involves a publication that is false, defamatory, and unprivileged, and has a natural tendency to injure or that causes special damage, and that the publication is to a third person who understands both the defamatory meaning of the statement and its application to the referenced person. Similarly, disparagement concerns a false or misleading statement that specifically refers to the plaintiff's product or business and clearly derogates that product or business. Ordinarily, damage caused by defamation involves injury to a person's reputation. However, a party's attempt to copy or infringe another's intellectual property, without more, does not constitute disparagement.

Here the Court found Dolan's allegations did not allege Mendocino's misappropriation constituted a defamatory statement. Rather, Dolan contended his reputation was harmed because Mendocino's unauthorized continued sale, distribution and marketing of wine under the Paul Dolan trademark, which damaged him because it directly conflicted with his ability to use his own name in connection with wine and related products and services, and because it falsely suggested the goods Mendocino was distributing were connected with Dolan. As the court found, while these allegations supported a violation of the right of publicity, they did not support a claim for disparagement or defamation. Indeed, the Court found, Mendocino's alleged attempt to falsely sell its wine under Dolan's name is "more akin to flattery" than disparagement, and therefore did not trigger a duty to defend. (The Court's observation may find support in reports that the company subsequently settled with Dolan in a deal that permitted Mendocino to continue to sell wine under the Dolan name.)

Without a breach of the insurance contract, moreover, there can be no breach of the implied covenant of good faith and fair dealing as a matter of law. The court therefore dismissed Mendocino's claims under Rule 12(b)(6), both for breach of contract and for bad faith.  

The case is Mendocino Wine Grp., LLC v. QBE Ams., Inc., U.S. District Court for the Northern District of California Case No. 15-cv-06342-HSG (August 5, 2016).

Friday, May 13, 2016

Star Trek Fan Film Producers Lose Effort to Dismiss Copyright Infringement Action

During its half-century voyage, the Star Trek franchise developed a planetary defense system. The defense system was designed to employ various strategies and procedures in an effort to protect fictional planets from attack.  The makers of a crowdfunded Star Trek-themed short film recently failed to effectively employ similar defenses to fend off an attack by the owners of the Star Trek franchise. Earlier this week, on May 9, U.S. District Court Judge R. Gary Klausner denied the filmmakers' motion to dismiss, under Rule 12(b)(6) of the Federal Rules of Civil Procedure, in which they argued the plaintiffs had failed to state a claim for which relief can be granted by the Federal Court.

The lawsuit was brought by Paramount Pictures and CBS Studios as the owners of the copyrights in the Star Trek franchise. They alleged in their Complaint that they owned the copyrights in the science fiction franchise, which chronicles the adventures of the U.S.S. Enterprise and its crew as they travel through space during the twenty-third century. The original television series was first broadcast nationwide in the United States in 1966 and since that time has been in syndication throughout the U.S. almost continuously.  Subsequently five additional Star Trek television series have been broadcast, totaling more than 700 episodes. There also have been a dozen Star Trek motion pictures, and the studios are continuing to develop additional works, including the planned release of an new feature film in 2016 and new television series in 2017. CBS is the owner of the copyrights in the television series and Paramount owns the copyrights in the films. They also jointly own certain copyright rights in multiple novels and other works.

In the original series, captain of the Enterprise James T. Kirk met former Starship captain Garth of Izar and the two of them discussed captain Garth’s victory in "the Battle of Axanar."  When Paramount and CBS recently learned of the development of an unauthorized production of a short film entitled Prelude to Azanar, they filed suit against its producers for copyright infringement, alleging the film incorporates numerous elements of their copyrighted works.

In an effort to fend off the lawsuit, the producers of Prelude to Azanar filed a Rule 12(b)(6) motion to dismiss. Rule 12(b)(6) is a procedural mechanism that allows a defendant being sued in Federal Court to seek an an order dismissing the case on the grounds that the complaint is legally insufficient and that, as a matter of law, it fails to state legal grounds justifying relief the court can grant.  Under the U.S. Constitution, Federal Courts have limited jurisdiction, and their authority does not extend to every dispute. Where a case fails to state a legal claim it will be dismissed. It is a potentially cost- and time-saving tool that allows for the early resolution of a case. If successful, the defendant can avoid incurring significant legal fees that otherwise would be necessitated by taking and responding to discovery and preparing for trial. 

In ruling on the motion, courts generally will not consider anything but the applicable law and the allegations in the complaint. Indeed, that is the point. Before the parties have to go through the expensive exercise of attempting to discover potentially relevant evidence, argue about and ask a fact finder to evaluate and determine disputed facts, the Court may first evaluate whether a complaint states a legal claim, assuming the alleged facts to be true.  If it does not, the case will be concluded at an early stage.

In the Prelude to Azanar action, the producers of the short film filed a motion to dismiss, arguing that the complaint failed to sufficiently plead a cause of action for copyright infringement. They asserted that the complaint failed to give them sufficient notice of the copyrighted works they were accused of infringing and that certain elements were not protectable under the copyright laws in any event, such as characters, species, costumes, makeup, weapons, and starships. They also raised issues concerning whether Paramount had standing to sue, and various other arguments, including that the lawsuit constituted an unlawful prior restraint under the First Amendment. However, the Court rejected every argument and found the complaint sufficiently alleged viable claims for copyright infringement. 

The defense system did not succeed and the producers of Prelude to Azanar were unable to ward off the studios' attack, at least not yet.  But this was not a ruling on the merits and the case is far from over.  Instead, the battle will continue.  Discovery will proceed and the facts and evidence will be developed as the case progresses.  Who will prevail on the ultimate issues remains to be seen.  As Judge Klausner put it, "whether Plaintiff's Claims will proper" is an issue for another day. But at least for the moment, "Plaintiff's claims will live long enough to survive Defendants' Motion to Dismiss."

Watch this space for further developments.  The case is Paramount Pictures Corp. & CBS Studios Inc. v. Axanar Productions, Inc. & Alec Peters, U.S. District Court, Central District of California, Case No. CV 15-09938 RGK.

Wednesday, November 4, 2015

Google Cries Fair, Authors Cry Foul, And The Times Simply Cries

Last month, six days apart, two significant, seemingly independent events shook the digital world. On Saturday, October 10, 2015, The New York Times lost a significant portion of its historical archives to underground flooding. Less than a week later, on Friday, October 16, the Second Circuit Court of Appeals issued its landmark Google Books decision, finding Google's unauthorized scanning and digitization of more than 10 million books constituted "fair use," and thus did not infringe copyright rights of the objecting authors.

Google began scanning and digitizing of tens of millions of books more than a decade ago, with the assistance of major libraries that made their collections available to Google. Through its scanning and digitization of copies of millions of books, Google established a publicly available search function allowing Internet users to search free of charge to determine whether a book contains specified words or terms. “Snippets” of text are displayed containing the searched terms. Google also allowed participating libraries to download and retain digital copies of the books they submitted, under agreements requiring the libraries not to use the digital copies in violation of copyright law.

Certain authors who had not consented to Google's use filed the copyright infringement lawsuit asserting that their published and copyright-protected books were digitized without their permission. In its decision, the Court of Appeals found Google's uses of works were "transformative" fair uses and authorized under copyright law. The Court's decision ends nearly 10 years of court challenges to Google's attempt to digitize the world's book collection. Debate continues, however, as to the Court's reasoning and the impact of the decision.

Google is obviously pleased with the result, which was authored by Judge Pierre Leval, a heavyweight in copyright circles. In his ruling, Judge Leval also managed to take the judicial equivalent of a selfie. In 1990, prior to his appointment to the appellate court, Judge Leval had written an influential article entitled “Toward a Fair Use Standard.” In his article, Judge Leval proposed a new approach to fair use, the copyright defense that permits the use of a copyrighted work in limited circumstances.

Judge Leval had argued that fair use should be guided by whether the secondary use is employed in a manner or purpose that is different from that of the original work. That is, a secondary use cannot simply repackage or usurp the original work; but if it uses the original work in a manner that essentially treats the original work as "raw material" and transforms it to create new information, aesthetics, insights or understandings, that serves the purpose of enriching society and thereby furthers an important goal of copyright law.

The Supreme Court would later cite extensively to Judge Leval's article and transformative use theory in another fair use case, Campbell v. Acuff Rose Music. In that case, the Supreme Court found 2 Live Crew's song, "Pretty Woman," to be protected by the fair use defense because it transformed, by way of "parody," the Roy Orbison ballad, "Oh Pretty Woman." In his Google Books decision, Judge Leval has now relied on the Campbell case that, in turn, relied on his original article, effectively allowing the judge indirectly to rely on himself as his own authority.

Not everyone is snapping selfies, however. The Author's Guild is far from pleased. The Guild maintains that Google's unauthorized use of the authors' works has damaged, and will continue to damage, their potential future markets and income. According to a Guild-commissioned study, between the years 2009 - - before the e-book market was fully established - - and 2015, writing-related income of full-time book authors dropped dramatically, from $25,000 to $17,500, while writing-related income of part-time authors fell from $7,250 to $4,500.

The Guild has criticized the Second Circuit's ruling as "reductive" and is preparing to seek review of the decision by the Supreme Court. However, at this point, it seems like the authors will be swimming against the current.

But what has this all to do with flooding at The Times? It will not be lost on the newspaper that, as Google previously warned, unless physical copies of important documents are digitized, they risk eventually being lost to history. That is one of the purposes Google has suggested justifies its digitization projects and the newspaper is now living the cautionary tale.

The "Morgue," as The Times' archive department is known, is home to the paper's "dead" stories. It is located below-ground in the building next door to its Manhattan headquarters. Established in 1905, the Morgue was created to maintain the newspaper's archival library, which includes hard copies of fourteen decades of newspaper clippings and several million photographs - - the great majority of which have never been digitized.

On October 10, a news assistant was sent to retrieve a photograph from the Morgue to to accompany, of all things, an obituary. He discovered a waterfall streaming down from the pipes above, drenching portions of the collection. The damaged materials including boxes that held a yet-undetermined number of photographs. The assistant sent for backup but, despite the fast-acting team's ability to rescue most of the collection, some of it was destroyed. The Morgue's manager has not yet been able to quantify the full extent of the damage, but estimates that roughly 10 percent of the damaged photos may be beyond repair.

In his decision, Judge Leval wrote that the Google Books case had tested the boundaries of fair use. Those boundaries may be delineated more keenly when juxtaposed against the loss at The Times. Copyright law is said to serve the goals of expanding public learning and protecting the incentives of authors to create, which also is intended to further the public good.  The works of authors who objected to the digitization of their books have now become part of the global archive, while a significant portion of The Times un-digitized collection has been damaged and now may be gone forever. Which of these circumstances may better serve the law's objectives will continue to be the subject of much debate.