The MovieTube Litigation Part I: Who Needs SOPA?

On July 24th, six major studios sued MovieTube for direct and indirect copyright infringement, trademark infringement, and unfair competition in the Southern District of New York. MovieTube is alleged to have operated twenty-nine foreign-based websites that streamed, displayed, and uploaded infringing copies of the studios’ copyrighted works. Not knowing the defendants’ true identities, the studios brought suit against the “John Does, Jane Does and/or XYZ Corporations” that allegedly operated the MovieTube sites. The district court allowed the studios to serve process on the defendants via email.

The remedies being sought by the studios have raised a few feathers. MovieTube operates out of Singapore, and the studios argue that it is “essential . . . that injunctive relief include orders directed at third parties whose services enable Defendants’ activities.” Since MovieTube relies on “domain name registries and other third-party service providers and their network of affiliates to carry out their activities,” the studios are seeking an order “requiring that: (i) registries and registrars disable the domain names used to operate the MovieTube Websites and (ii) third-party service providers cease providing services to the MovieTube Websites and Defendants in relation to the Infringing Copies.”

While some have suggested that the studios “didn’t get the memo that SOPA failed,” I think the real question is, “Who needs SOPA?” Everyone knows that SOPA never became law, and the studios haven’t brought any claims under SOPA. Moreover, even if SOPA were the law, it would make no difference here. SOPA would have only provided private rightholders with statutory remedies against a “payment network provider” or an “Internet advertising service.” Only actions brought by the Attorney General would qualify for statutory remedies against service providers such as registrars, registries, and search engines.

The studios instead argue that the court’s power to issue such orders comes from:

(i) 17 U.S.C. § 502, which allows a court to “grant temporary and final injunctions on such terms as it may deem reasonable to prevent or restrain infringement of a copyright;”

(ii) 15 U.S.C § 1116(a), which provides for an injunction “according to the principles of equity and upon such terms as the court may deem reasonable, to prevent the violation of any right of the registrant of a mark registered in the Patent and Trademark Office or to prevent a violation under subsection (a), (c), or (d) of section 43 [15 U.S.C. § 1125];”

(iii) Federal Rule of Civil Procedure 65(d)(2), which imbues courts with the power to issue injunctions that bind parties, parties’ officers, agents, servants, employees, and attorneys and any “other persons who are in active concert or participation with” any such individuals or entities;

(iv) the Court’s “inherent equitable power to issue provisional remedies ancillary to its authority to provide final equitable relief,” which encompasses injunctions as broad as restraining defendants’ assets to preserve them for disgorgement of profits and equitable accounting . . . and/or

(v) the Court’s power pursuant to 28 U.S.C. § 1651 (the All Writs Act) to issue all writs necessary or appropriate in aid of its jurisdiction and agreeable to the usages and principles of law.

The question is whether the court has the power under these authorities to issue an injunction against MovieTube that binds third-party service providers. SOPA has nothing to do with it.1

After the studios filed suit, the MovieTube defendants shut down their operations. Nonetheless, a group of tech giants, comprised of Google, Facebook, Tumblr, Twitter, and Yahoo, filed an amicus brief arguing that “the proposed injunction violates Federal Rule of Civil Procedure 65 and the safe-harbor provisions of the DMCA.” Specifically, the amici claim that an injunction against MovieTube couldn’t bind third parties such as themselves because Rule 65(d)(2) and Section 512(j) of the DMCA wouldn’t allow it.2 I don’t think either of these two arguments holds much water, especially for service providers like these amici that link to or host infringing material.

In this first post, I’ll look at their claim that they cannot be bound by an injunction against the MovieTube defendants under Rule 65(d)(2). In particular, I’ll focus on their contention that they’re just like the third party in Blockowicz that the Seventh Circuit held was not in “active concert” with the enjoined defendants. In a later post, I’ll examine their arguments concerning CloudFlare, which a district court recently held to be bound by an injunction against Grooveshark, and the applicability of Section 512(j) of the DMCA to the proposed injunction here.

Blockowicz and Rule 65(d)(2)

Rule 65(d)(2) provides that only three groups may be bound by an injunction:

(2) Persons Bound. The order binds only the following who receive actual notice of it by personal service or otherwise:

(A) the parties;

(B) the parties’ officers, agents, servants, employees, and attorneys; and

(C) other persons who are in active concert or participation with anyone described in Rule 65(d)(2)(A) or (B).

The amici argue that Rule 65(d)(2) can’t bind third parties like them since it cannot be shown that they are in “active concert or participation” with the MovieTube defendants. In support, they cite the Seventh Circuit’s decision in Blockowicz v. Williams. The issue there was whether nonparty Ripoff Report was bound by an injunction against some of its users that had posted defamatory material to its site. Ripoff Report conceded “actual notice” of the injunction, but it argued that it was not in “active concert” with its defaming users.

The Seventh Circuit agreed:

Actions that aid and abet in violating the injunction must occur after the injunction is imposed for the purposes of Rule 65(d)(2)(C), and certainly after the wrongdoing that led to the injunction occurred. This requirement is apparent from Rule 65(d)(2)’s text, which requires that nonparties have “actual notice” of the injunction. A non-party who engages in conduct before an injunction is imposed cannot have “actual notice” of the injunction at the time of their relevant conduct. . . .

Further, the [plaintiffs] presented no evidence that [Ripoff Report] took any action to aid or abet the defendants in violating the injunction after it was issued, either by enforcing the Terms of Service or in any other way. . . . [Ripoff Report’s] mere inactivity is simply inadequate to render them aiders and abettors in violating the injunction.

Thus, Ripoff Report was not in “active concert” with its users by simply continuing to host the defamatory material that had been posted to its site before the injunction was issued. The amici here claim that this same logic applies to them: “[E]ven if Plaintiffs had shown that the Neutral Service Providers rendered services to the Defendants, merely continuing to provide those services cannot amount to acting in concert.’”

Blockowicz is not binding precedent here, of course, but the district court could find it persuasive. I think it’s clear that the Seventh Circuit reached the wrong conclusion. The test is whether the third party has actual notice of the injunction and then aids and abets the enjoined defendant. It’s black letter law that anyone who publishes or republishes defaming material is strictly liable for the defamation. On the other hand, a distributor is not liable as a publisher unless it knows or has reason to know that the material is defamatory.

For example, a book publisher is strictly liable for publishing a defamatory book. A bookseller that sells that defamatory book is not liable for the defamation unless it knows the material is defamatory. If it learns of the defamatory nature of the book and then continues to sell it, the bookseller is considered a publisher and is liable for the defamation along with the book publisher. In other words, the passive book distributor becomes an active aider and abettor of the book publisher once it gains knowledge of the defamation and fails to stop selling the book.

Of course, this rule from the physical world does not apply when it’s done on the internet. Section 230(c)(1) of the Communications Decency Act provides: “No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” While the statute on its face only grants immunity to a “publisher,” courts have interpreted it broadly to apply to a “distributor” as well. As the Fourth Circuit put it in the leading case, “distributor liability. . . is merely a subset, or a species, of publisher liability, and is therefore also foreclosed by § 230.”

Section 230’s immunity for a publisher extends to a distributor with knowledge because that knowledge transforms the distributor into a publisher. The plaintiffs in Blockowicz could not go after Ripoff Report directly because Section 230 granted it immunity from civil liability. The reason it had such immunity was precisely because the knowledge of the defamation transformed it from a passive distributor to an active publisher. The plaintiffs instead went after the defamers directly, asking the court to bind Ripoff Report under Rule 65(d)(2). The Seventh Circuit’s refusal to stop Ripoff Report from aiding and abetting the enjoined defendants left the plaintiffs without a remedy—an absurd result.

Turning back to MovieTube, the amici claim that an injunction against the defendants could not bind them since they wouldn’t be aiding and abetting the defendants. This is simply not true. As with defamation, it’s black letter law that a service provider that knowingly provides material support to an infringer is contributorily liable for the infringement. In other words, the passive service provider becomes an active aider and abettor of the infringer once it gains knowledge of the underlying infringement and fails to act. This is why service providers such as the amici remove infringing material once they receive notice that they are linking to or hosting it.

When it comes to copyright infringement, the amici cannot hide behind the broad immunities of Section 230. They instead can only hope to qualify for the limitations on liability found in Section 512 of the DMCA. Of course, these safe harbors don’t protect the amici if they learn of infringing material on their systems and fail to remove it. Under Section 512(d)(1), a search engine such as Google or Yahoo does not get immunity unless it, “upon obtaining . . . knowledge or awareness” of infringing material, “acts expeditiously to remove, or disable access to, the material.”3 The same holds true under Section 512(c)(1) for sites like Facebook, Tumblr, and Twitter that host content uploaded by their users.

When a service provider learns of infringing material on its system and fails to remove it, it becomes an aider and abettor that is jointly and severally liable with the direct infringer. But this is only true when that service provider’s contribution to the infringement is material. The DMCA codified exclusions to the safe harbors for contributions that were decidedly material, such as linking to or hosting infringing material. However, things get hazier at the margins. For example, a panel of the Ninth Circuit once split over whether a credit card processor materially contributes by servicing an infringing site. Over the vociferous dissent of Judge Alex Kozinski,4 the two-judge majority held that it did not.

The problem for Google, Facebook, Tumblr, Twitter, and Yahoo is that there is no doubt that their failure to act once they receive notice of infringing material unquestionably constitutes aiding and abetting. Not only is it enough to find them in “active concert” with their users under Rule 65(d)(2), it’s enough to hold them contributorily liable for the infringement. They aren’t like a credit card processor, where the materiality of the contribution is in doubt. It’s well-settled that what the amici do—linking to and hosting copyrighted works—constitutes material contribution. That’s why the safe harbors under Section 512, which codified the case law, don’t apply to service providers such as them that fail to remove infringing material upon notice.

In the next post, I’ll discuss the arguments raised by the amici concerning the CloudFlare litigation and the applicability of Section 512(j).

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© 2015 Devlin Hartline. Licensed under the Law Theories Public License 1.0.

  1. I get that many people are just playing the SOPA card for rhetorical effect. But some are also arguing that SOPA would have provided rightholders with these remedies, and since SOPA is not the law, the studios therefore don’t have these remedies available. This argument is simply fallacious. With or without SOPA, the issue remains whether the court has the authority to grant the studios the requested relief. 
  2. The amici do not address the existence of such authority under the Lanham Act or under the court’s inherent equitable power, and neither do I. They do argue that the All Writs Act provides no such authority, but I leave that argument aside. 
  3. See also Perfect 10, Inc. v., Inc., 508 F.3d 1146, 1172 (9th Cir. 2007) (“Accordingly, we hold that a computer system operator can be held contributorily liable if it has actual knowledge that specific infringing material is available using its system and can take simple measures to prevent further damage to copyrighted works yet continues to provide access to infringing works. . . . Applying our test, Google could be held contributorily liable if it had knowledge that infringing Perfect 10 images were available using its search engine, could take simple measures to prevent further damage to Perfect 10’s copyrighted works, and failed to take such steps.”) (quotations and citations omitted). 
  4. See Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788, 816 (9th Cir. 2007) (Kozinski, J., dissenting) (“Defendants here are alleged to provide an essential service to infringers, a service that enables infringement on a massive scale. Defendants know about the infringements; they profit from them; they are intimately and causally involved in a vast number of infringing transactions that could not be consummated if they refused to process the payments; they have ready means to stop the infringements.”). 

Patent Licensing and Secondary Markets in the Nineteenth Century

The following post, which first appeared on the Center for the Protection of Intellectual Property (CPIP) blog, comes from CPIP Programs and Research Associate Terrica Carrington, a rising 3L at George Mason University School of Law, and Devlin Hartline, Assistant Director of CPIP. They review a paper from CPIP’s 2014 Fall Conference, Common Ground: How Intellectual Property Unites Creators and Innovators, that was recently published in the George Mason Law Review. It is reposted with permission here.

By Terrica Carrington & Devlin Hartline

In his paper, Patent Licensing and Secondary Markets in the Nineteenth Century, CPIP Senior Scholar Adam Mossoff gives important historical context to the ongoing debate over patent licensing firms. He explains that some of the biggest misconceptions about such firms are that the patent licensing business model and the secondary market for patents are relatively new phenomena. On the contrary, Mossoff shows that “famous nineteenth-century American inventors,” such as Charles Goodyear, Elias Howe, and Thomas Edison, “wholeheartedly embraced patent licensing to commercialize their inventions.” Moreover, he demonstrates that there was “a vibrant secondary market” where patents were bought and sold with regularity.

Like many inventors, Mossoff explains, it was curiosity—rather than market success—that drove Charles Goodyear to create. Despite having invented the process for vulcanized rubber, Goodyear “never manufactured or sold rubber products.” While he enjoyed finding new uses for the material, commercialization was not his niche. Instead, Goodyear “transferred his rights in his patented innovation to other individuals and firms” so that they could capitalize on his inventions. “As the archetypal obsessive inventor,” notes Mossoff, “Goodyear was not interested in manufacturing or selling his patented innovations.” In fact, his assignees and licensees “filed hundreds of lawsuits in the nineteenth century,” demonstrating that “patent licensing companies are nothing new in America’s innovation economy.”

Mossoff next looks at Elias Howe, best known for his invention of the sewing machine lockstitch in 1843, who “licensed his patented innovation for most of his life.” Howe was also famous for “suing commercial firms and individuals for patent infringement” and then entering into royalty agreements with them. It was Howe’s troubles with “noncompliant infringers” that “precipitated the first ‘patent war’ in the American patent system—called, at the time, the Sewing Machine War.” Howe engaged in “practices that are alleged to be relatively novel today,” such as “third-party litigation financing,” and he even joined “the first patent pool formed in American history,” known as “the Sewing Machine Combination of 1856.”

Finally, Mossoff discusses Thomas Edison, whom many consider to be “an early exemplar of the patent licensing business model.” Edison sold and licensed his patents, especially early on, so that he could fund his research and development. However, Edison is a “mixed historical example” since “he manufactured and sold some of his patented innovation to consumers, such as the electric light bulb and the phonograph.” Moreover, despite his “path-breaking inventions,” the marketplace was often dominated by his competitors. Mossoff notes that Edison was a better inventor than businessman: “At the end of the day, Edison should have stuck to the patent licensing business model that brought him his justly earned fame as a young innovator at Menlo Park.”

While some might call these inventors anomalies, Mossoff reveals that they were in good company with others who utilized the patent licensing business model to serve “one of the key policy functions of the patent system by commercializing patented innovation in the United States.” These include “William Woodworth (planing machine), Thomas Blanchard (lathe), and Obed Hussey and Cyrus McCormick (mechanical reaper)” and many others who “sold or licensed their patent rights in addition to engaging in manufacturing and other commercial activities.” This licensing business model continues to be used today by innovative firms such as Bell Labs, IBM, Apple, and Nokia.

Mossoff next rebuts the “oft-repeated claim” made by many law professors that “large-scale selling and licensing of patents in a secondary market is a recent phenomenon.” This claim is as “profoundly mistaken as the related assertion that the patent licensing business model is novel.” Mossoff notes that during the Sewing Machine War of the Antebellum Era, “the various patents obtained by different inventors on different components of the sewing machine were purchased or exchanged between a variety of individuals and firms.” As early as the 1840s, individuals acquired patents in the secondary market and used them to sue infringers.

In fact, Mossoff points out that it was not uncommon to see newspaper ads offering patents for sale in the nineteenth century:

The classified ads in Scientific American provide a window into this vibrant and widespread secondary market. In an 1869 issue of Scientific American, among ads touting the value to purchasers of “Woodbury’s Patent Planing and Matching and Moulding Machines” and ads declaring “AGENTS WANTED—To sell H.V. Van Etten’s Patent Device for Catching and Holding Domestic Animals,” one finds ads offering patents and rights in patents for sale:

Such ads were ubiquitous in the nineteenth century, says Mossoff, and they “belie any assertions about the absence of such historical secondary markets by commentators today.” Similarly, Mossoff points to research showing the “fundamental and significant role” performed by intermediaries known as “patent agents,” the “predecessors of today’s patent aggregators.” These patent agents invested in a wide range of products and industries—a remarkable feat given the “constraints of primitive, nineteenth-century corporate law and the limited financial capabilities of market actors at that time.”

In his brief yet insightful account of the history of patent licensing firms, Mossoff refutes the modern misconception that “the patent licensing business model and secondary markets in patents are novel practices today.” It’s important to set the record straight, especially as many in modern patent policy debates rely on erroneous historical accounts to make negative inferences. The evidence from the nineteenth century isn’t that surprising since it reflects “the basic economic principle of the division of labor that Adam Smith famously recognized as essential to a successful free market and flourishing economy.” Casting “aspersions on this basic economic principle,” Mossoff concludes, “strikes at the very core of what it means to secure property rights in innovation through the patent system.”

Creators, Innovators, and Appropriation Mechanisms

The following post first appeared on the Center for the Protection of Intellectual Property (CPIP) blog, and it is reposted with permission here.

In Creators, Innovators, and Appropriation Mechanisms, CPIP Senior Scholar Sean O’Connor tackles the erroneous narrative in copyright debates that tech firms produce “the innovative technologies and digital platforms of the future” while content owners “thwart this progress to maintain the status quo of an analog content world that no longer exists.” The reality, O’Connor explains, is that “innovators are creators and creators are innovators,” and they both develop new technologies and content. Moreover, they each depend on their IP rights to monetize the goods and services that they produce. In other words, creators and innovators both utilize IP-based “appropriation mechanisms” to profit from their creative innovations.

IP rights take many shapes: patents, trade secrets, copyrights, trademarks, publicity rights, etc. The common denominator, O’Connor reasons, is that they “allow producers of creativity, innovation, goods, or services to monetize their productions” by providing the foundation for the investment of time and resources. Despite their common reliance on IP, some tech innovators are attempting to undermine the appropriation mechanisms of content creators as they downplay the importance of their own appropriation mechanisms. These innovators devalue the IP rights of creators in order to make their own IP rights more valuable.

O’Connor gives the examples of search and social media platforms, which “largely monetize their technology innovations through advertising models.” These tech innovators would prefer “content creators to exercise minimal appropriation rights so that maximal content is freely available” for their platforms. The stage was set for such innovators, O’Connor explains, when the Supreme Court injected transformative fair use into the case law in Campbell v. Acuff-Rose. This doctrine was further developed in the “appropriation art” cases, such as those involving artists Jeff Koons and Richard Prince.

The “hubris” of such appropriation artists, notes O’Connor, is that they think “their contributions are valuable” while the contributions of others are not. The emergence of social media platforms has exacerbated this situation by allowing creative works to be “distributed around the world with a click of a mouse.” While supporters of this user-generated content culture often condemn “the allegedly outdated artifact of copyright law,” O’Connor argues that the copyright system supports a professional class of creators that produces the best creative works. Destroying the appropriation mechanisms for content creators would lead to a world full of “amateur song selfies.”

According to O’Connor, the irony of the “content wants to be free” mentality is that “social media platforms are themselves monetizing” content “through advertising and data mining.” And “it seems inequitable at best” for these platforms to advocate for free culture when they’re in the business of monetizing the culture of others. While some tech innovators ostensibly seek balance between the rights of creators and the public interest in access to knowledge, O’Connor notes that they often treat “free access as a trump card” to favor their rights over the rights of others.

O’Connor notes that both search and social media platforms depend on the content created by others to make a profit. This includes the “treasure trove of personal preferences and habits” that are packaged and sold as valuable data as well as the creative works with which users populate their platforms:

The business models of Google/YouTube, Facebook, Pinterest, Instagram, and other search firms and social media platforms rely on content as a mere “commodity” that is sent through the systems by users as fuel for this community of users to engage with the platforms in ever-increasing amounts. Because the business models are largely ad-based and depend on data mining for revenue, the number one imperative for the platforms is to maximize the number of users and click-throughs.

These platforms greatly benefit from Section 512 of the DMCA, which creates incentives for them to be “reactive, not proactive” when it comes to the rights of creators. Tech innovators get the advantages of the safe harbors by simply responding to takedown notices, and the threat of “red flag” knowledge encourages a hands-off approach. O’Connor points out how this leads to a perverse situation where search and social media platforms see “no upside to monitoring” for violations of creators’ rights.

O’Connor contends that the “most troubling aspect” of this situation is that search and social media platforms “appear to value their own contributions—the computer code and business model—over the vast amounts of other people’s content that effectively power use of their systems.” And this gets to O’Connor’s central point: These platforms are “economically benefitting from their own IP-protected services by monetizing these services through a model that undermines creators’ IP.” That is, it’s not that these tech innovators are anti-IP, it’s that they think their own IP is more important than the IP rights of creators.

To illustrate, O’Connor points to how Google heavily relies on its own IP:

[W]hen Google, for example, uses its advanced algorithms to profit from advertising and data mining tied to links to pirate sites or copyright-infringing content on its subsidiary, YouTube, it is very much relying on its patents, trade secret, copyright, and contract protections on these algorithms so that other search and social media firms cannot simply duplicate this code.

O’Connor explains that tech innovators can “freely advocate for copyright reform that would weaken copyright enforcement for content owners without much risk that any changes would hurt their own appropriation mechanisms.” Even if their efforts successfully weaken some of their own IP rights, such as copyright protections for their source codes, they have a panoply of other appropriation mechanisms that they can rely on instead, such as patents, trade secrets, contracts, and the like. Importantly, the same does not hold true for the many content creators that have only their copyrights to protect them.

In the digital age, the differences between creators and innovators are rapidly disappearing, and companies like Pixar, Getty Images, Valve, Netflix, and YouTube produce both new technologies and content. While the “rhetoric on the tech side” seeks to “paint this as a battle of the future versus the past,” O’Connor reasons that it “all comes back to inputs, outputs, and appropriation mechanisms.” Both creators and innovators require “inputs to develop their value-added outputs.” And while this may be easier to see with content creators, since their inputs and outputs are publicly accessible, the same holds true for tech innovators, whose technological inputs and outputs largely operate behind-the-scenes.

O’Connor concludes that creators and innovators alike depend on appropriation mechanisms, for without them, “few would be able to realize or implement their visions with any degree of certainty.” However, many tech innovators are attacking the appropriation mechanisms of content creators under “the guise of a kind of open source ethic for content.” But these innovators, O’Connor explains, are “simply trying to keep their input costs as low as possible while glossing over the fact that they vigorously control, protect, and monetize their outputs.” And as the line between creators and innovators further erodes, O’Connor hopes that these tech innovators will soon realize that the IP rights of creators are just as important as their own IP rights.

Digital Goods and the ITC: The Most Important Case That Nobody is Talking About

The following post first appeared on the Center for the Protection of Intellectual Property (CPIP) blog, and it is reposted with permission here.

By Devlin Hartline & Matthew Barblan

In its ClearCorrect opinion from early 2014, the International Trade Commission (ITC) issued cease and desist orders preventing the importation of infringing digital goods into the United States. The ITC’s 5-1 opinion has since been appealed to the Federal Circuit, with oral argument scheduled for the morning of August 11th, and the case has drawn a number of amicus briefs on both sides. Despite receiving little attention in media or policy circles, the positive consequences of the ITC’s decision are significant.

This case is important because the problem of the importation of infringing digital goods continues to grow. The ITC’s authority over digital goods can be a powerful tool for creators and innovators against a threat that has only gotten worse, and it would permit the ITC to go about doing what it’s always done in the intellectual property space—protecting our borders from the threat of foreign infringing goods. Interestingly, a look at the proceedings in the ITC and the briefs now before the Federal Circuit reveals how some parties now opposing the ITC’s authority over digital goods had argued for the opposite just a few years back.

The ITC Proceedings

This case began in March of 2012, when Align Technology Inc. filed a complaint with the ITC alleging that its only competitor, ClearCorrect Operating LLC, violated Section 337 of the Tariff Act of 1930 by importing digital goods that infringed several of its orthodontic patents. Section 337, codified at 19 U.S.C. § 1337, makes unlawful the “importation . . . of articles” that infringe “valid and enforceable” patents, copyrights, or trademarks, and it declares that the ITC “shall investigate any alleged violation of this section on complaint under oath or upon its initiative.”

There are two statutory remedies available to a complainant in an ITC proceeding. The first is an exclusion order, which dictates that “the articles concerned . . . be excluded from entry into the United States.” Exclusion orders are issued by the ITC and enforced by the U.S. Customs and Border Protection. The second remedy is a cease and desist order, which directs any person violating Section 337 “to cease and desist from engaging in the unfair methods or acts involved.” The ITC enforces its own cease and desist orders through the imposition of civil penalties, recoverable in the federal district courts.

Align’s complaint with the ITC involved its patented Invisalign System, a “proprietary method for treating crooked and misaligned teeth” using modern plastic aligners instead of old-fashioned metal braces. Align alleged that ClearCorrect violated Section 337 by importing “digital models, digital data and treatment plans that . . . infringe or induce infringement of” its patents, and it asked the ITC to “issue permanent cease and desist orders” prohibiting ClearCorrect from importing the digital files. In response, ClearCorrect argued that “no articles” had been imported since the digital data associated with the teeth aligners were not themselves “articles.”

This was the primary bone of contention: The ITC only has statutory authority over the “importation . . . of articles,” and if digital goods are not “articles,” then the ITC has no jurisdiction. After an administrative law judge (ALJ) determined that the digital files at issue were indeed “articles” within the meaning of Section 337, ClearCorrect petitioned the ITC to review that determination. The ITC took the case and solicited comments from the public as to whether electronic transmissions are “articles” under Section 337.

The ITC ultimately sided 5-to-1 with Align. On the threshold issue of whether electronic transmissions constitute “articles” under Section 337, the ITC affirmed the ALJ’s conclusion that they do: “[T]he statutory construction of ‘articles’ that hews most closely to the language of the statute and implements the avowed Congressional purpose for Section 337 encompasses within its scope the electronic transmission of the digital data sets at issue in this investigation.” This was consistent, said the ITC, with the “legislative purpose . . . to prevent every type of unfair act in connection with imported articles . . . and to strengthen protection of intellectual property rights.”

Appeal to the Federal Circuit

Having lost at the ITC, ClearCorrect appealed to the Federal Circuit. There, it focused its arguments on the statutory question of whether digital goods constitute “articles” under Section 337.

Public Knowledge and the Electronic Frontier Foundation (EFF) filed an amicus brief calling the ITC’s decision “sweeping and unprecedented,” and they urged the Federal Circuit to reject the ITC’s “overzealous construction” of the term “articles.” Aside from the statutory issue, the digital rights groups suggested that there were “important reasons” why Section 337 “ought not cover telecommunications.” They stressed the “real and unanswered questions about the enforcement role” ISPs would play, and they noted how ISPs “could be required to actively block transmission of certain content.”

It’s worth noting that no ISPs were involved in the ClearCorrect litigation—only ClearCorrect itself was subject to a cease and desist order. But this ISP question seems to be the reason why the case drew their attention: The real concern wasn’t whether ClearCorrect had infringed Align’s patents; it was whether the ITC had the authority to issue cease and desist orders to ISPs. This sentiment was echoed in an amicus brief by the Internet Association, which includes Google, arguing that the internet “should not be restricted to national borders” because of “the unforeseeable but far-reaching results that would follow.”

The policy arguments made by Public Knowledge, the EFF, Google, and others were essentially circular: The internet should be “open” so we shouldn’t let the ITC “close” it. But that begs the question of what the ideal “open” internet looks like, and what illegal activities should or should not be tolerated in the digital space. We shut our borders to infringing physical goods. What makes infringing digital goods so special? A right is only as good as the remedies available to enforce it, so why should we give short shrift to the property rights of artists, creators, and innovators?

Align’s intervenor brief took the groups to task: “The amici briefs supporting ClearCorrect brim with hyperbole.” Align noted that the ITC “only asserts jurisdiction over the ‘articles” that are electronically transmitted, not over all acts of transmission.” It pointed out that it is the “owner, importer, or consignee” of the “articles” that violates Section 337, not the carrier, and it said that the claim that the ITC could issue cease and desist orders against ISPs for “data transmission activities” is “baseless.”

Supporting the ITC’s understanding of “articles,” an amicus brief filed by the Association of American Publishers explained that the ITC’s “authority over electronically transmitted copyrighted works is critical because . . . there has been rapid growth in digital publications.” It pointed to the rise in digital piracy “at the expense of U.S. creators and innovators.” It urged that affirming the ITC’s decision was “crucial” since it “will help ensure that unfair trade practices abroad do not harm the livelihoods” of those that “rely on copyright protection.”

An amicus brief filed by Nokia supporting the ITC also noted the importance of protecting intellectual property: “Stripping the Commission of its long-exercised authority over electronic transmissions could gravely damage the protection of valid patent rights through Section 337 investigations.” It pointed out that holding otherwise would lead to “absurd results” since the ITC would have jurisdiction over software “imported on a USB stick or CD-ROM” but not software disseminated by “electronic transmission.” Such a result would be “wholly contrary to the remedial purpose of Section 337.” Nokia concluded that the ITC’s “authority should not wax and wane as technology develops new methods of dissemination.”

The MPAA and the RIAA likewise submitted an amicus brief supporting the ITC. The industry groups pointed out that “illegal downloads and illegal streaming” account for most of the infringement losses they suffer, and they argued that “copyright protection is essential to the health” of their industries. They urged the Federal Circuit to affirm the ITC because “Section 337 is a powerful mechanism for stopping illegal electronic imports,” and doing so “would give effect to the intent of Congress that Section 337 protect U.S. industries from all manner of unfair acts in international trade.”

Who has the better argument here? Obviously, both sides argued that the text of Section 337 favored their positions. ClearCorrect and its supporters claimed that “articles” should be interpreted narrowly to include only tangible goods, while the ITC and its supporters wanted a read of the statute that allows the ITC to continue to fulfill its mission even as new technology and methods of trade become more common. What may come as a surprise, however, is that many of the groups now seeking to limit the ITC’s jurisdiction were arguing just the opposite a few years ago.

Remember the OPEN Act?

It may seem like ages ago, but it’s been less than four years since Congress debated the Stop Online Piracy Act (SOPA) and the PROTECT IP Act. Those two bills would have explicitly afforded artists and creators robust tools to use in the federal district courts against foreign rogue sites that aim their infringements at the United States. Many vocal opponents of the bills supported an alternative approach: the OPEN Act. Under the OPEN Act, the ITC would have been given explicit authority to investigate complaints against foreign rogue sites that import infringing digital goods into the United States.

The OPEN Act’s sponsors set up a website at where members of the public could see the text of the bill and suggest changes to it. The website included an FAQ to familiarize supporters with the thinking behind the OPEN Act. As to why online infringement was an issue of international trade, the FAQ pointed out that “there is little difference between downloading a movie from a foreign website and importing a product from a foreign company.”

When advocating for the OPEN Act as a good alternative to SOPA and the PROTECT IP Act, the bill’s sponsors touted the ITC as being a great venue for tackling the problems of foreign rogue sites. Among the claimed virtues were its vast experience, transparency, due process protection, consistency, and independence:

For well over 80 years, the independent International Trade Commission (ITC) has been the venue by which U.S. rightsholders have obtained relief from unfair imports, such as those that violate intellectual property rights. Under Section 337 of the Tariff Act of 1930 – which governs how the ITC investigates rightsholders’ request for relief – the agency already employs a transparent process that gives parties to the investigation, and third party interests, a chance to be heard. The ITC’s process and work is highly regarded as independent and free from political influence and the department already has a well recognized expertise in intellectual property and trade law that could be expanded to the import of digital goods.

The Commission already employs important safeguards to ensure that rightsholders do not abuse their right to request a Commission investigation and the Commission may self-initiate investigations. Keeping them in charge of determining whether unfair imports – like those that violate intellectual property rights – [sic] would ensure consistent enforcement of Intellectual Property rights and trade law.

Some of the groups now arguing that the ITC shouldn’t have jurisdiction over digital goods openly supported the OPEN Act. Back in late 2011, the EFF stated that it was “glad to learn that a bipartisan group of congressional representatives has come together to formulate a real alternative, called the OPEN Act.” The EFF liked the bill because the “ITC’s process . . . is transparent, quick, and effective” and “both parties would have the opportunity to participate and the record would be public.” It emphasized how the “process would include many important due process protections, such as effective notice to the site of the complaint and ensuing investigation.”

Google likewise thought that giving the ITC jurisdiction over digital goods was a great idea. In a letter posted to its blog in early 2012, Google claimed that “there are better ways to address piracy than to ask U.S. companies to censor the Internet,” and it explicitly stated that it “supports alternative approaches like the OPEN Act.” Google also signed onto a letter promoting the virtues of the ITC: “This approach targets foreign rogue sites without inflicting collateral damage on legitimate, law-abiding U.S. Internet companies by bringing well-established International trade remedies to bear on this problem.”


The ITC has been protecting our borders against the importation of infringing goods for nearly a century now. As technology and trade evolves, it makes perfect sense to let the ITC continue to do its job by protecting our borders against the importation of infringing digital goods. This is an important tool for our innovators and creators in combating the ever-growing flood of foreign infringing goods.

The fact that many of those who supported the OPEN Act are now supporting ClearCorrect suggests that for them this appeal isn’t really about whether digital goods are “articles” under Section 337. The ITC is an appropriate venue for all of the reasons the supporters of the OPEN Act publicized just over three years ago: The process is transparent, there’s ample due process protections, the commissioners are experienced and independent, and their decisions are consistent.

As the 5-1 opinion suggests, affirming the ITC’s decision should be an easy choice for the Federal Circuit. Let’s hope the Federal Circuit does the right thing for our artists and innovators.

How Rhetorical Epithets Have Led the FTC Astray in its Study of Patent Licensing Firms

The following post first appeared on the Center for the Protection of Intellectual Property (CPIP) blog, and it is reposted with permission here.

We’ve all heard the narrative about patent licensing firms, often referred to pejoratively as “patent trolls.” These patent owners, who choose to license their innovations rather than build them, are the supposed poster-children of a “broken” patent system. It’s as if commercializing one’s property, just like a landlord leases his land for another to use, is suddenly a bad thing. Nevertheless, the power of this “troll” rhetoric cannot be denied. Many provisions in 2011’s Leahy-Smith America Invents Act were aimed at starving out these “trolls,” and no less than five bills currently under consideration in the House and Senate seek to further deflate their sails.

Another example of the powerful appeal of the “patent troll” rhetoric is that the agencies charged with enforcing antitrust law have also been convinced that there is something amiss with the commercial licensing of patented innovation in the marketplace. This has been a key feature of the deployment of patented inventions in America’s innovation economy since the early nineteenth century, as scholars have shown. Last year, the Federal Trade Commission (FTC) instigated its own investigative study of what it calls “patent assertion entities” (PAEs), which is merely a more formal and neutral-sounding synonym for the popularized “patent troll” epithet.

In a new paper published in the George Mason Law Review, Sticks and Stones: How the FTC’s Name-Calling Misses the Complexity of Licensing-Based Business Models, CPIP Senior Scholar Kristen Osenga takes a closer look at the FTC’s ongoing study of PAEs and finds that it is destined to fail for two simple, yet inescapably obvious, reasons.

The first is the basic definitional problem of the FTC’s characterization of PAEs, which puts all patent licensing firms in the same boat. Failing to take a more nuanced approach, Osenga warns, “fires up the rhetoric but obscures thoughtful discussion and debate about the issue.” Building upon her previous work, she explains:

[T]he real problem is that patent licensing firms are treated as a homogenous category, with no attention paid to the wide range of business models that exist under the patent licensing firm umbrella. The categorical determination of patent licensing firms as “problems” imputes to a large, diverse group of firms the negative actions and qualities of a small number of bad actors.

Since not all “trolls” are alike, Osenga cautions, it’s “naïve and inaccurate” to lump them all together. And when the FTC makes this mistake, it leads to a situation “where words actually can hurt, much more so than sticks and stones.” The FTC’s study is explicitly “premised on a one-size-fits-all conception of patent licensing firms.” Rather than shedding much-needed light on the complex innovation ecosystem, the study promises to squander the opportunity by failing to recognize that not all “trolls” are the same.

Osenga notes that the FTC is uniquely situated to obtain nonpublic information about how these patent licensing firms operate using its investigative power under Section 6(b) of the FTC Act. Unfortunately, however, the study is premised on the faulty notion that the only upside of patenting licensing firms is to “compensate inventors.” But this focus on patents-as-incentives misses the forest for the trees, Osenga urges, as it fails to account for the larger patent-commercialization network:

[T]here are many steps between invention and the introduction of an actual product to the market and consumers. These steps include transforming an idea in to a marketable embodiment, developing facilities to produce the marketable embodiment, creating distribution channels to bring the embodiment to the consumer, and making the consumer aware of the new product. Each of these steps requires its own additional resources in the form of both capital and labor.

The FTC study, like many patent skeptics, fails to consider the benefits of the division of labor that patent licensing firms represent. Not every inventor is willing or able to bring an invention to the marketplace. Osenga’s point is that patent licensing does more than simply compensate inventors for their troubles; it creates liquid markets and solves problems of asymmetrical actors and information. These exchanges increase innovation and competition by playing the role of match-maker and market-maker, and they place valuable patents into the hands of those who are better positioned to exploit their worth.

Osenga points out that there are indeed possible negative effects with patent licensing firms. For example, they sometimes engage in ex post licensing, waiting to offer licenses until after the would-be licensee has already adopted the technology. These firms can be better positioned litigation-wise since their potential exposure is typically less than that of the infringers they sue. Finally, patent aggregators tend to have greater market power, and it can be difficult to judge the quality of any given patent that’s asserted when they offer to license their entire portfolio.

As with all things, Osenga stresses, there’s both good and bad. The problem is figuring out which is greater. The FTC could conduct a study that reveals a “detailed understanding of the complex world of patent licensing firms,” she laments, but that’s not what the FTC is doing:

[T]he configuration of the study is slanted in such a way that only part of the story will be uncovered. Worse still, the study has been shaped in a way that will simply add fuel to the anti-“patent troll” fire without providing any data that would explain the best way to fix the real problems in the patent field today.

This leads to the second problem with the FTC study, which follows as a necessary, logical consequence from the first definitional problem: There are serious methodological problems with the study that will undermine any possible empirical conclusions that the FTC may wish to draw.

Osenga says that the FTC’s study is simply not asking the right questions. Painting a complete picture of complex licensing schemes requires more than just counting the number of patents a firm has and adding up the attempts to negotiate license deals. To really get to the bottom of things, she contends, the FTC should be asking why patentees sell their patents to licensing firms and why licensing firms buy them from patentees. Better still, ask them why they decided to become patent licensing firms in the first place.

This insight is powerful stuff. It’s not enough to simply ask these firms what they’re doing; to really understand them, the FTC must ask them why they’re doing it. And the results are likely to be varied:

Some, of course, begin with this business model in mind. Others invent new technology but are unable to successfully commercialize it themselves, despite making efforts to do so. Still others exist as practicing entities for years or decades before something changes—supply change issues, rampant infringement by competitors, and regulatory initiatives—and they are no longer able to exist as a viable practicing entity.

Similarly, the FTC could ask them what kind of firms they are, and these answers are also likely to be diverse. Osenga’s point is that the FTC’s questions aren’t designed to showcase the vast differences between the various types of patent licensing firms. If the FTC wants to get to the bottom of how these firms affect innovation and competition, the first step should be to realize that they’re not all the same. The FTC’s study is as clumsy as those who refer to all such firms as “patent trolls,” and the lack of nuance going in will unfortunately produce a study that lacks nuance coming out.

In the end, Osenga agrees that deterring abusive behavior is a good thing, and she worries about innovation and competition. However, unlike many in patent policy debates, she is also concerned that the rhetoric is having an undue influence on policymakers. Throwing all patent licensing firms into the “patent troll” bus will not get us the narrowly-tailored reforms that we need. Sadly, the FTC’s approach with its ongoing study appears to have swallowed this rhetoric wholesale, and it seems unlikely that the results will be anything but more fuel for the “patent troll” pyre.