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USPTO Issues “Preliminary Examination Instructions in view of the Supreme Court Decision in Alice Corporation Pty. Ltd. v. CLS Bank International, et al.”

On June 25, 2014, the USPTO issued a memorandum to the Examination Corps, entitled “Preliminary Examination Instructions in view of the Supreme Court Decision in Alice Corporation Pty. Ltd. v. CLS Bank International, et al.” This memorandum provides preliminary instructions, effective June 25, 2014, to the Patent Examining Corps relating to subject matter eligibility of claims involving abstract ideas, particularly computer-implemented abstract ideas. (A copy of the Preliminary Examination Instructions can be found here.) The memorandum states that the instructions are preliminary in nature, and that further guidance will be issued. In addition, the USPTO is requesting comments regarding their guidance to the examining corps.

In summary, the memorandum provides instructions to the Patent Examining Corps relating to subject matter eligibility of claims involving “abstract ideas,” particularly computer-implemented abstract ideas, under 35 U.S.C. § 101. The eligibility framework for claims involving abstract ideas is the same as the current framework for claims directed to laws of nature and natural phenomena.

According to the memorandum:

1)      Alice Corp. establishes that the same analysis should be used for all types of judicial exceptions, whereas prior USPTO guidance applied a different analysis to claims involving abstract ideas than to claims involving laws of nature.

2)      Alice Corp. also establishes that the same analysis should be used for all categories of claims (e.g., product and process claims), whereas prior guidance applied a different analysis to product claims involving abstract ideas than to process claims.

Assuming the claim falls within one of the statutory categories (i.e., process, machine, manufacture, or composition of matter), the examiner should determine whether the claim is directed to a judicial exception (i.e., law of nature, natural phenomenon, and abstract idea) using Part I of the two-part analysis summarized below, and, if so, determine whether the claim is a patent-eligible application of an exception using Part 2.

Two-part Analysis for Abstract Ideas

The Examining Corps are instructed to analyze all claims (product and process) using the following two-part analysis:

Part 1: Determine whether the claim is directed to an abstract idea.

Per the decision in Alice Corp., abstract ideas are excluded from eligibility based on a concern that monopolization of the basic tools of scientific and technological work might impede innovation more than it would promote it. At the same time, the courts have tread carefully in construing this exclusion because, at some level, all inventions embody, use, reflect, rest upon, or apply abstract ideas and the other exceptions. Thus, an invention is not rendered ineligible simply because it involves an abstract concept. In fact, inventions that integrate the building blocks of human ingenuity into something more by applying the abstract idea in a meaningful way are eligible.

Examples of abstract ideas referenced in Alice Corp. include:

  • Fundamental economic practices;
  • Certain methods of organizing human activities;
  • An idea of itself; and
  • Mathematical relationships/formulas.

Claims that include abstract ideas like these should be examined under Part 2 to determine whether the abstract idea has been applied in an eligible manner. If an abstract idea is present in the claim, proceed to Part 2 below. If not, proceed with examination of the claim for compliance with the other statutory requirements for patentability.

Part 2: If an abstract idea is present in the claim, determine whether any element in the claim is sufficient to ensure that the claim amounts to significantly more than the abstract idea itself. In other words, are there other limitations in the claim that show a patent-eligible application of the abstract idea, e.g., more than a mere instruction to apply the abstract idea?

Limitations referenced in Alice Corp. that may be enough to qualify as “significantly more” when recited in a claim with an abstract idea include:

  • Improvements to another technology or technical field;
  • Improvements to the functioning of the computer itself; and
  • Meaningful limitations beyond generally linking the use of an abstract idea to a particular technological environment.

Limitations referenced in Alice Corp. that are not enough to qualify as “significantly more” when recited in a claim with an abstract idea include:

  • Adding the words “apply it” (or an equivalent) with an abstract idea, or mere instructions to implement an abstract idea on a computer; and
  • Requiring no more than a generic computer to perform generic computer functions that are well-understood, routine, and conventional activities previously known to the industry.

If there are no meaningful limitations in the claim that transform the exception into a patent eligible application such that the claim amounts to significantly more than the exception itself, the claim should be rejected under 35 U.S.C. § 101 as being directed to non-statutory subject matter.

After conducting the two-part analysis, proceed with examination of the claim, regardless of whether a rejection under § 101 has been made, to determine patentability in accordance with the other requirements of 35 U.S.C. § 101 (utility and double patenting), non-statutory double patenting, and §§112, 102, and 103.

What CLS Bank Taketh, Copyright May Giveth Back

CLS Bank and Its Impact on Software Patents

Courts, commentators and clients will be struggling for some time to assess the impact on software patents of Thursday’s Supreme Court decision in Alice v. CLS Bank.  Interpreted one way, the decision kills patents directed at computer-implemented business methods.  Interpreted another way, it’s business as usual for patentees.  The Supreme Court found that using a computer to implement an abstract idea was not sufficiently inventive to justify patent protection.  It is not clear, however, whether the decision has much reach beyond the facts of the CLS Bank case itself.  Part of the problem is how miserable the patents at issue really were.  The patentee’s inspiration was to employ a third party to collect financial information on the parties to a transaction in order to verify that they had sufficient funds to close a deal.  This is otherwise known as employing an escrow agent or clearing house, and it is a method of mitigating risk in transactions that appears to be several thousand years old.  The patentee claimed their idea was eligible for a patent, however, because it used a computer program to download the financial data, perform the calculations, and send notifications regarding the financial risk (although it had never actually implemented any of the claimed systems).  The Supreme Court found that the idea to use an escrow agent in a financial transaction was an unpatentable “abstract” (and ancient) idea.  The decision to use generic computer functions to perform that role did not elevate the concept to a patentable invention.  It is easy to confine the Court’s decision to the facts of the case, mostly because the Court declined to “delimit the precise contours of the ‘abstract ideas’ category in this case.”

However, the Court made several comments in the offing that some may use to attack a broader range of software patents.  The Court found that the use of a “generic computer to perform generic computer functions” to implement an abstract idea was not a sufficiently “inventive concept” to warrant patent protection.  That much is unremarkable.  How the Court determined what counts as a “generic computer function,” however, is.  The Court determined, without the support of factual findings below, that certain computer functions were “well-understood, routine, [and] conventional,” including keeping electronic records, obtaining data, adjusting account balances, and issuing automated instructions.  What is more, the Court suggested that software patents that “purport to improve the functioning of the computer itself” or “effect an improvement in any other technology or technical field” are potentially patentable.  By contrast, those software patents that are not sufficiently technical would appear to be imperiled.  It is not clear, however, where the lines have been drawn for a computer-implemented method to be sufficiently technical, or when a non-technical method uses software in a sufficiently non-generic way.  The ambiguity is worsened by the Court’s express refusal to “delimit” what counts as an abstract idea.  What is clear is that at least some courts will give software patents greater scrutiny in the future.

Oracle v. Google and Its Impact on Software Copyright

At nearly the same time as this potential roll-back of patent protection for software, last month’s Federal Circuit opinion in Oracle v. Google may signal an expansion of copyright protection.  There the Court found that “a set of commands to instruct a computer to carry out desired operations may contain expression that is eligible for copyright protection.  … [A]n original work—even one that serves a function—is entitled to copyright protection as long as the author had multiple ways to express the underlying idea.”  This decision has challenged the perceived separation between copyright and patent law, and revealed that software developers may have more robust rights in their source code than previously thought.

Oracle v. Google involved Google’s attempt to make its Android platform compatible with programs coded in Java.  To do so, Google needed to use certain programming gateways that enable interoperability, called application program interfaces (APIs).  The APIs themselves consist of two kinds of source code— a) short phrases that identify an ensuing function called “headers” or “declarations;” and b) implementing code, often consisting of thousands of line of code, that actually performs the calculations or functions called for in the header.  Google copied the headers for 37 Java APIs, but created its own implementing code.  Oracle claimed that Google’s copying infringed Oracle’s copyright in the API’s by both—a) exactly copying the headers; and b) effectively paraphrasing (i.e. non-literally copying) Oracle’s implementing code by copying the structure, sequence, and organization (“SSO”) of the APIs.

The District Court in the case noted that “an exclusive right to a functional system, process, or method of operation  belongs in the realm of patents, not copyright.”  Keeping this separation is important because, among other things, “copyright exclusivity lasts 95 years whereas patent exclusivity lasts twenty years.”  This separation is largely maintained through the “idea/expression dichotomy,” codified at section 102(b) of the Copyright Act:

In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.

This separation is also supported by the legal doctrine of “merger,” whereby a particular expression of an idea is not given copyright protection when there are a limited number of ways to express that idea.  Because the header lines of code had to be copied exactly to ensure proper functioning with the Java programming language, the District Court found that the merger doctrine barred copyright protection for the header code.

Also at issue in the case, however, was the overall SSO of the APIs.  Although Google had written its own implementing code, it grouped the methods at issue in the same fashion (into packages, subdivided in classes, subdivided in methods) as the Oracle APIs.  Although the District Court acknowledged that the SSO of the APIs resembled a copyrightable taxonomy, and that the SSO was original, creative, and subject to multiple forms of expression, the court nonetheless found that the SSO operated as a “command structure”—a method of operation of using a “long hierarchy of over six thousand commands to carry out pre-assigned functions.”  Because of the functional nature of the SSO, the court found it was not copyrightable under section 102(b) of the Act.  Threaded throughout the court’s decision was a concern that granting Oracle control over the API’s functionality would disrupt the widespread interoperability that defines both the internet and mobile device industries, and would give Oracle a monopoly power not intended by Congress.

The Federal Circuit reversed.  As regards the Java API headers, the Court found that the merger doctrine did not apply because there were numerous ways to express the short phrases necessary to define the ensuing method of the API—albeit numerous ways that existed when the APIs were first coded.  That is, the Court found that the merger doctrine required analysis of the options available to the software coder at the time of the coding, not those options available to an infringer many years later.  Implied in the decision is that there is no fundamental right to code in Java.  If there becomes only one way to code API headers to ensure interoperation with Java, that is Google’s tough cookies (pun intended)—Google is free to program its own Java-like language from scratch and hope that it catches on.  But because there was sufficient creative selection in the header code when Java was first coded, the merger doctrine did not apply.  Because Google admitted direct copying, it was infringer.

Even more significant, however, was the Federal Circuit’s analysis on whether the overall SSO of the APIs was protected by copyright.  Here the Court purportedly applied what is known as the “abstraction-filtration-comparison test.”  This test is an exacting analysis that requires a court to break a copyrighted down into its constituent parts, sift out non-protectable information such as ideas and facts, and then compares the remaining expressive content with the allegedly infringing program.  However, when it came time to apply this analysis to the SSO, very little filtration occurred.  Rather, the Court concluded, as noted above, that “an original work—even one that serves a function—is entitled to copyright protection as long as the author had multiple ways to express the underlying idea.”

There is an inherent tension, if not outright contradiction, in the Copyright Act between section 102(b)’s prohibition against protecting a “method of operation” and the Act’s definition in section 101 of “computer program” as a “set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.”  While the Court made some attempt to harmonize these two provisions, at the end of the day it resolved the tension by coming down solidly in favor of copyright creep—“The problem with the district court’s approach is that computer programs are by definition functional—they are all designed to accomplish some task.  … If we were to accept the district court’s suggestion that a computer program is uncopyrightable simply because it ‘carr[ies] out pre-assigned functions,’ no computer program is protectable.”

To summarize, the district court found that the Java APIs were not copyrightable because the SSO functioned as a command structure, no matter how expressive and original the expression was; the Federal Circuit found that the Java APIs were copyrightable because they were expressive and original, no matter how functional the SSO’s command structure was.

Does Copyright Fill a Void?

If one assumes that CLS Bank spells the death of computer-implemented business method patents, it does not mean that companies that create software are left unprotected for their labor.  Copyright protection is available for the software’s source code and object code.  If the Federal Circuit’s opinion in Oracle v. Google influences other courts, which it historically has in a number of important jurisdictions, there may be protection available for the command structure of the software, even if not literally copied by an infringer and even if that command structure forecloses the use of certain kinds of functionality.  There are also protections available for various user-facing elements like screen displays, user interfaces, and icon designs in copyright, but also things like design patents and trade dress as well.  And, unlike patent law, these protections will not be subject to attack simply because the software is performing “generic” functions or implements an “abstract idea.”

There remain, however, some important differences between patent and copyright law:

  • Copyright law protects only “expression,” and thus only source code that was actually created.  Thus a claimant will have to actually write the code at issue.  By contrast, patent law generally extends to the idea of the invention, even if the invention has not been used in the marketplace.  The inventor in CLS Bank, for example, did not actually produce the claimed computer system.
  • Copyright law requires a showing of access and actual copying, which necessarily requires knowledge of the existence of the source code.  By contrast a patent can be infringed even if the infringer did not know of the preexisting invention.
  • Although copyright law will apparently extend to protect expression even if that expression is incidentally functional, it will not protect the underlying idea.  A rival could attempt to replicate a program’s functionality, so long as the rival coded from scratch and did not try and copy the SSO of the copyrighted program.  Note however that there is an advantage of being the first to market—even Google with its apparently limitless resources took 2 ½ years to create its version of the implementation code of the Java APIs.

All of this begs the question—would the plaintiff in CLS Bank have fared better if it had copyrighted its computer program rather than patented it?  No—CLS Bank created its own program with no apparent access, or even knowledge of, the Alice Corp. system.  However, companies that are actually producing software programs and placing them into the marketplace can enjoy robust protection for their work with the right intellectual property strategy in place.

Lanham Act Claims for Misleading Product Description Can Coexist with FDCA Labeling Regulations, Court Find

A unanimous Supreme Court (8-0, Justice Breyer recusing) ruled on June 12, 2014 in POM Wonderful v. Coca-Cola that one competitor may sue another for unfair competition under the Lanham Act for allegedly false or misleading product descriptions, notwithstanding that product labeling is regulated under the federal Food, Drug, and Cosmetic Act (FDCA).

Coca-Cola’s Minute Maid division makes and sells a juice blend that is labeled as “pomegranate blueberry,” even though the product contains just 0.3% pomegranate juice and 0.2% blueberry juice. Frustrated that the Coca-Cola product was made with predominantly less expensive apple and grape juices, yet connoted that it might have the same flavor profile as POM Wonderful’s own 85% pomegranate-15% blueberry drink, POM sued Coca-Cola under Section 43 of the Lanham Act for false or misleading product description.

The district court held that because Coca-Cola’s label conformed to FDCA regulations, POM’s Lanham Act suit was precluded, and the Ninth Circuit affirmed.  After a star-studded oral argument in the Supreme Court in which Seth Waxman represented POM and Kathleen Sullivan argued for Coca-Cola, the latter being taken to task by Justice Kennedy when Sullivan suggested that POM didn’t sufficiently credit consumers’ intelligence—“Don’t make me feel bad, because I thought this was pomegranate juice”—the Court reversed.

Following its expansive view of Lanham Act standing from the Lexmark Int’l v. Static Control Components case, decided earlier this Term, the Court noted that POM was bringing suit as a competitor of Coca-Cola; “though in the end consumers also benefit from the Act’s proper enforcement, the cause of action is for competitors, not consumers.” This observation at the outset distinguished the POM Wonderful case from the flood of consumer suits that have been brought in recent years against food and beverage companies for allegedly misleading product labeling, many of which have been found to be pre-empted by the FDCA.

Turning to the statutory interpretation of the FDCA, the Court noted that the FDA apparently does not exercise significant oversight over the content of fruit juice labels; the relevant regulation only requires that a fruit juice blend label must either declare the percentage content of the named juice, or indicate that the named juice is present as a flavor or flavoring. Neither the text of the Lanham Act or the FDCA contain any provision addressing or referring to the interplay between the two.

The Court found that harmonizing the FDCA and Lanham Act did not require preclusion of POM’s Lanham Act claim. Noting that the two statutes have co-existed since the Lanham Act was passed in 1946, the Court observed that Congress could have enacted a provision expressly preempting Lanham Act claims in favor of the FDCA, and the fact that it had not served as “powerful evidence that Congress did not intend FDA oversight to be the exclusive means” of ensuring proper food and beverage labeling. Far from interfering with the proper operation of the FDCA, the Court found, competitors’ Lanham Act claims might in fact further the same objectives: “Allowing Lanham Act suits takes advantage of synergies of multiple methods of regulation,” and competitors’ “awareness of unfair competition practices may be far more immediate and accurate than that of agency rulemakers and regulators.”

The Court’s view of the Lanham Act being a complement to, rather than precluded by, FDCA labeling regulations means that competitors bringing a false labeling claim have one less procedural hurdle to overcome. Conversely, brands should carefully consider the fact that FDCA-compliant labeling is insufficient to stave off unfair competition claims.

Second Circuit Finds That, Once Again, Book Scanning Is Fair Use

The Second Circuit Court of Appeals has delivered a resounding reaffirmation of fair use principles in the latest decision to go against the Authors Guild in its longstanding battle against book digitization.  The unanimous opinion of the three-judge panel in Authors Guild, Inc. v. HathiTrust, No. 12-4547-cv (2d Cir. June 10, 2014) affirmed nearly all of an October 2012 district court ruling that a book scanning project of a consortium of universities called HathiTrust was protected by the fair use doctrine.

HathiTrust works with Google to digitize the books held in the member institutions’ libraries.  The scanned books are hosted by the HathiTrust Digital Library (“HDL”), which allows the public to search for particular terms in the database.  Unless the copyright owner allows broader use, the search results only show the frequency and page numbers on which the search terms appear.  HDL also allows people who can demonstrate that they are unable to read a work in print to access full copies of copyrighted works.  The third feature of HDL at issue is that it preserves the books in order to permit member institutions to create a replacement copy of a copyrighted work if the institution already owned an original copy that was lost, stolen or destroyed and unavailable at a “fair” price.

The Authors Guild sued HathiTrust for copyright infringement in 2011, and was later joined by several other groups representing authors (collectively, the “Authors”).  The Second Circuit spent little time in affirming the district court’s finding that the Authors Guild, the Australian Society for Authors Limited and the Writers’ Union of Canada did not have standing to assert copyright claims of its members based on a straightforward application of section 501 of the Copyright Act.  The Court did find, however, that four other authors’ groups did have standing on the basis that foreign law conferred on them exclusive rights to assert copyright claims of their foreign members.

Turning to the issues of book digitization, the Court applied the four fair use factors to each of the disputed features of HDL.  In examining HDL’s full‐text searchable database, the Court found that it was “a quintessentially transformative use,” and, indeed, that it “adds a great deal more to the copyrighted works at issue than” other transformative uses approved by the Second Circuit.  The Court did, however, take issue with the district court’s implication that a use may become transformative by “making an invaluable contribution to the progress of science and cultivation of the arts,” noting that a transformative use is one “that serves a new and different function from the original work and is not a substitute for it.”  Nevertheless, the Court affirmed the fair use finding below because HDL’s copying of the entire work was reasonably necessary to enable the full-search functionality—swiftly disposing of the Authors’ argument that copying the works on secondary servers and back-up tapes was excessive—and the database did not serve as a substitute for the original copyrighted works such that it affected their market or value.  The Second Circuit rejected the Authors’ market-harm arguments in no uncertain terms, finding the risk of a data breach enabling worldwide distribution of the works to be too speculative to be a cognizable injury (particularly in the face of “essentially unrebutted” evidence of HDL’s extensive security procedures) and the lost licensing revenue argument to be irrelevant where, as here, the transformative use does not serve as a substitute for the original work.

Although the Court did not find that the accessibility feature offered by the HDL was a transformative use because the purpose of making text available for reading or listening is unchanged from the original copyrighted work, it nevertheless found it was a fair use by citing to the legislative history of the Copyright Act.  The Second Circuit quoted extensively from the House Committee Report that accompanied the Copyright Act, which noted that there was little to no market for books accessible to the print disabled, and in light of this, making a single copy of a copyrighted work accessible to blind persons “would properly be considered a fair use under section 107.”

Finally, the Court vacated the district court’s judgment as to the preservation feature of the HDL and remanded.  Given the application of section 501, the Court did not believe that the record showed that plaintiffs owned any copyrighted works that would potentially be subject to copying and replacement by any of the member institutions. The district court is left to determine whether the Authors have standing to pursue claims with respect to the preservation feature of the HDL.

While this decision is an unqualified victory for proponents of the fair use doctrine, there are intriguing portions that may telegraph the Court’s thinking with respect to the Authors Guild’s separate appeal of a district court ruling that Google’s Google Books project was protected by fair use.  The district court there based much of its fair use conclusions on its finding that Google Books made invaluable contributions to education and culture.  The Second Circuit’s strong language here regarding transformative use and that it must serve a new and different function from the original work may signal that the Court will find that the fair use factors do not align in favor of a project that allows users to access actual portions of copyrighted works rather than just the frequency of search terms within the work.

Rising up from the Trenches: Ninth Circuit Broadly Interprets Breach of Contract Exclusion in Trademark Infringement Case

On May 23, 2014, the Ninth Circuit upheld a California district court decision that broadly interpreted the breach of contract exclusion in a commercial general liability policy to preclude coverage for all personal and advertising injury having even a minimal factual connection or incidental relationship to a breach of contract.  Trenches Inc. v. Hanover Ins. Co., No. 12-56642 (9th Cir. May 23, 2014).

The story began when Hoodz International and Hoodz North America entered into franchise agreements with Trenches, Inc., Trenches Holdings, Inc., and their executives.  Those agreements gave Trenches the right to operate a Hoodz franchise in the commercial kitchen exhaust cleaning business.  Hoodz had the right to terminate the agreement if Trenches or its executives had any felony convictions and obligated Trenches to stop using Hoodz’s trademarks in the event of a termination.

After learning about felony convictions against certain Trenches executives, Hoodz simultaneously terminated the franchise agreements and filed a lawsuit against Trenches. The parties reached a settlement a few days later, in which Hoodz agreed to conditionally reinstate the franchise agreements to allow Trenches to sell the franchises, and Trenches agreed to give Hoodz the right to enforce the post-termination obligations under the franchise agreements.  Shortly thereafter, Hoodz terminated the conditional agreement and sued Trenches again, this time alleging that Trenches continued using Hoodz’s trademarks in violation of its post-termination obligations.

Hoodz brought seven claims, including claims for breach of both the franchise and settlement agreements as well as a claim for trademark infringement and unfair competition, which was based on Trenches’ use of Hoodz’s trademark outside the scope of the settlement agreement.  Trenches tendered Hoodz’s complaint to Hanover Insurance Co., which denied the claim.  When Hanover refused to reconsider its denial, Trenches filed a coverage action.  Hanover then filed a motion to dismiss, claiming that the underlying suit did not come within coverage and that even it did, it fell within the policy’s exclusions.

On Hanover’s motion to dismiss, the district court first ruled that contrary to Hanover’s assertions, the claim fell within the policy’s personal and advertising injury coverage.  The policy covered claims arising out of “[t]he use of another’s advertising idea in your ‘advertisement…’” and the underlying complaint alleged both that Hoodz widely advertised and promoted its trademark and that Trenches used Hoodz’s trademark without permission in its own advertising.  Since Hoodz’s trademark was its advertising idea and Trenches allegedly used it in its advertising, the claim fell within personal and advertising injury coverage.

Nonetheless, the district court granted Hanover’s motion to dismiss because the underlying suit fell within the policy’s breach of contract exclusion, which applied to “[p]ersonal and advertising injury arising out of a breach of contract, except an implied contract to use another’s advertising idea in your ‘advertisement.’”  The court rejected Trenches’ position that the exclusion only applied to claims that would not have occurred but for the breach, and instead ruled that under California law, it applied to “any personal and advertising injury that bears a minimal connection or incidental relationship to the breach of contract.”  The court further noted that the exclusion applied if all claims arise out of the same factual situation, regardless of whether the claims had a separate and independent legal basis.  Since Hoodz’s trademark infringement and unfair competition claim arose out of the same factual situation as its breach of contract claim, the district court ruled that it fell within the breach of contract exclusion and was not covered by the policy.  Trenches appealed, but the Ninth Circuit affirmed the district court’s decision in a two page decision.

Breach of contract exclusions are designed to preclude coverage for those who do not fulfill obligations they assumed under a contract. This case is an example of just how broadly courts interpret those exclusions.

Native Advertising, the First Amendment and the FTC

Editor’s Note: This blog post is a joint submission with BakerHostetler’s Data Privacy Monitor blog.

New York Partner Fernando A. Bohorquez, Jr. and Associate Alan Pate today published “All Native Advertising is Not Equal — Why that Matters Under the First Amendment and Why it Should Matter to the FTC” in the Media Law Resource Center’s MLRC Bulletin: Legal Frontiers in Digital Media. The article provides a comprehensive review of the emerging and already ubiquitous digital marketing practice known as “native advertising,” the sliding scale of possible First Amendment protections for “native advertising”, and what that may mean for the FTC’s possible regulation of the practice.

The Media Law Resource Center (MLRC) is a non-profit membership association for content providers in all media, and for their defense lawyers, providing a wide range of resources on media and content law and policy issues to its members.  For information on MLRC membership, please click here http://medialaw.org/join  For information on subscribing to MLRC’s Bulletin, an in-depth journal on media law developments and trends, click here: http://medialaw.org/publications/mlrc-bulletin

The article is available to MLRC members and subscribers to the MLRC Bulletin. The article will also be provided upon request to the authors.

FTC Says That Sponsors of Pinterest Contests Should Require Users to Post Pins with Hashtags Warning When Pins are Posted for a Prize

Editor’s Note: This blog post is a joint submission with BakerHostetler’s Data Privacy Monitor blog.

Authored by: Gerald Ferguson and Alan Pate

In a March 20, 2014 closing letter sent to fashion company Cole Haan, the FTC warned that use of the hashtag #WanderingSole in conjunction with a recent Pinterest contest did not adequately communicate the “material connection” between Pinterest contestants and Cole Haan and violates Section 5 of the FTC Act. Although the FTC declined to bring an enforcement action against Cole Haan, the findings of the letter have important implications for brands running contests and promotions on social media.

Cole Haan’s contest rules instructed contestants to create Pinterest boards titled “Wandering Sole” and pin five Cole Haan shoe images to the board. Contestants were also required to post their “favorite places to wander” and include the hashtag #WanderingSole in each pin description. The most creative qualifying entry would receive a $1,000 shopping spree from Cole Haan.

In the FTC’s closing letter, the FTC found that each Pinterest board was in fact an endorsement of Cole Haan products. Prior to sending the closing letter, the FTC had conducted an investigation into whether Cole Haan’s contest violated Section 5 of the FTC Act by soliciting these entries. Pursuant to its authority under Section 5 of the FTC Act, the FTC requires the disclosure of any material connection between a marketer and an endorser when their relationship is not otherwise apparent. According to the FTC, the financial incentive to pin Cole Haan products (i.e. the $1,000 prize) was a material connection between Cole Haan and contestants. The FTC stated that it did not believe that the use of “#WanderingSole” adequately disclosed this material connection to others who may view the entry boards.

Ultimately, the FTC declined to bring an enforcement action against Cole Haan. The FTC cited, among other considerations, the fact that the FTC had yet to publically address whether an entry into a contest is a form of material connection or whether a pin on Pinterest may constitute an endorsement.

Although the FTC did not bring an enforcement action in this case, it has now given clear notice to the business community on this issue. It is likely that the FTC will pursue enforcement actions against brands that fail to adequately disclose such material connections in the future. Accordingly, brands running contests on social media should be cautioned to clearly and conspicuously display contest rules and notices on any social media pages where they host and promote their contests. Further, brands may be advised to include the word “contest” or “sweep” in any hashtags associated with their sweepstakes or contest entries.

For more information on complying with the FTC’s rules on endorsements, see the FTC’s revised Guides Concerning the Use of Endorsements and Testimonials in Advertising.

Yelp Denied Attempt to Keep Its Online Reviewers’ Identities Anonymous

In 2012, a local rug cleaning company in Virginia, Hadeed Oriental Rug Cleaning (“Hadeed”), filed a defamation action against the authors of seven critical reviews it received on Yelp, indicating that the reviews falsely stated that Hadeed provided poor service.  Hadeed allegedly could not locate the reviewers in its customer database and believed them to be competitors, not customers. The dispute therefore implicates a set of facts atypical of your average, run-of-the-mill Yelp review.  But it nonetheless remains informative to service providers reviewed on Yelp as well as their reviewers.

Along with the complaint, Hadeed issued Yelp a subpoena to ascertain the reviewers’ identities. Yelp objected to the subpoena on a number of grounds including that Hadeed had not complied with Virginia’s law setting out the procedure for subpoenas to identify anonymous Internet users.  Towards the end of 2012, the circuit court enforced the subpoena, even imposing a $500 sanction and an award of $1,000 in attorneys’ fees to Hadeed. Yelp appealed.

Yelp’s appeal argued that the First Amendment required that Hadeed show merit on both the facts and the law before such a subpoena could be enforced.  But the Virginia appellate court’s decision declined to find that its unmasking statute was unconstitutional.

Yelp urged the court to adopt the standards in other states that require more than Virginia’s statute.  For example, Yelp pointed to a New Jersey case, (Dendrite Int’l v. Doe No. 3) where the standard articulated includes the requirement for a court to “balance the defendant’s First Amendment right to anonymous free speech against the strength of the prima facie case presented and the necessity for the disclosure . . . to allow the plaintiff to properly proceed.”  Yelp also pointed to a Delaware case (Doe v. Cahill), outlining a standard requiring the plaintiff to, among other things, support the defamation claim with facts sufficient to defeat a summary judgment motion.  Most jurisdictions follow Dendrite or Cahill.

By comparison, the Virginia statute can be satisfied, among other requirements, with a “legitimate, good faith basis” that the communications may be defamatory.  The court distilled its instructions to the following, in sum and substance.  A plaintiff must show that:

1. the plaintiff has given notice of the subpoena to the ISP, who in turn provided notice to the anonymous communicator;

2. either the communications are or may be “tortious” (here, defamatory), or the plaintiff has a “legitimate, good faith basis” for believing the same;

3. other “reasonable efforts to identify the anonymous communicator has proven fruitless;

4. the identity sought is central to advance the claim, related to the claim or defense, or directly relevant to the claim or defense. Here, the court must balance the interests of the anonymous communicator against the interests of the plaintiff.

5. there is no pending motion challenging the viability of the suit; and

6. the entity to whom the subpoena is addressed likely has responsive information.

In declining to adopt the Dendrite or Cahill standard, the Virginia appellate court found that there are many unmasking statutes around the country applying a spectrum of standards, and that Virginia’s statute was adopted considering authority from other states.  It noted, “[a]lthough the case law has coalesced around the basic framework of the Dendrite and Cahill standards, they are not the only courts to articulate a standard for identifying anonymous Internet speakers.”

Finally, with the exception of one concurring and dissenting judge who felt that Hadeed had not presented enough evidence that the reviewers were competitors not customers, the majority of the Virginia appeals court found that Hadeed had met the statute’s requirements and upheld the subpoena.

Since the decision, there has been some debate over its effect given the fact that the statute has limited jurisdiction. However, it does show that Yelp and other ISPs allowing online reviews and doing business in Virginia are not immune to having to give up information about their users.  As pointed out in case commentary such as law360, the approach of a small business suing their putative customers can be fraught with complication, and may be the reason there is little case law in this area.  There are many other approaches a business can take, including working with the site to get the post removed.

GoldieBlox and the Three Beastie Boys

It was the ad video gone viral of three young girls proudly showing off their elaborate Rube Goldberg machine made of repurposed pink toys.  They sang “it’s time to change, we deserve to see a range” and called for girls “to code the new apps” and “to grow up knowing that they can engineer that.” GoldieBlox is a toy company started by Debbie Sterling, an engineering graduate of Stanford who noticed how deeply girls are underrepresented in that field.  Her startup company talks about “disrupting the pink aisle” and sells construction toys for girls.

How fitting, then, that they decided to borrow from the Beastie Boys’ 1987 song “Girls” to express this sentiment in their advertising.  All the lyrics in the ad are set to the catchy tune of “Girls” but replace the original lyrics that called for girls “to do the dishes” and “to clean up my room” and other such tasks.

Reportedly, the Beastie Boys wrote a letter to Goldieblox about the ad saying the video constitutes copyright infringement.  In a preemptive response, Goldieblox sued the Beastie Boys along with Island Def Jam Music Group, Rick Rubin and others in the Northern District of California seeking a declaratory judgment that their work does not infringe.  They argued that the work is a clear criticism and parody of the original, and should thus be covered by the fair use doctrine. Their complaint calls the Beastie Boys’ version “highly sexist” and states that the “specific goal of the parody is to make fun of the Beastie Boys song, and to further the company’s goal to break down gender stereotypes and to encourage young girls to engage in activities that challenge their intellect.”

A discussion of the fair use defense in this context would likely center on the first of the four factors of the fair use defense found in 17 U.S.C § 107:  “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.” Indeed, Goldieblox would likely have strong arguments that the purpose of the work is criticism and parody, looking to the Supreme Court decision in another parody song suit, Campbell v Acuff Rose Music, for guidance. There, 2 Live Crew’s rap version of Roy Orbison’s “Oh, Pretty Woman” was considered a fair use because it was a parody of the original. Despite the fact that there was a commercial element there, the Supreme Court found that “[t]he language of the statute makes clear that the commercial or nonprofit educational purpose of a work is only one element of the first factor enquiry into its purpose and character.”

However, there are arguments circling on the other side as well, that the purpose here is really not criticism, but selling a product.  After all—this is not a commercial song, but a commercial advertisement.  And perhaps there are even arguments about the nature of parody itself, given that there are questions whether the Beastie Boys’ song was ever to be taken seriously anyway.  As put forth in an article in Salon, “[i]nstead of hiding behind the thoroughly lame excuse that ‘The song was sexist, ergo we can take it to sell our toys,’ GoldieBlox could instead put on its big girls pants and make something awesome now with its creative talent.”

GoldieBlox now appears to be backing down and endeavoring to do just that: focus instead on its products.

As reported here by Pitchfork, the two remaining members of the Beastie Boys, Adam Horovitz  (“Ad-Rock”) and Michael Diamond (“Mike D”), responded to the suit with a letter. It noted that they were “very impressed with the creativity and the message behind your ad,” but indicated “as creative as it is, make no mistake, your video is an advertisement that is designed to sell a product, and long ago, we made a conscious decision not to permit our music and/or name to be used in product ads.”

On November 27, GoldieBlox issued an open letter to the Beastie Boys, saying that while they believe the work is a fair use, they want to respect the wishes of the late Beastie Boys’ member, Adam Yauch, whose will reflects his request that his music never be used in advertisements. They said they would remove the video, that they are “huge fans,” and that they didn’t know about Yauch’s wishes.  It is nice to hear that this tale seems to heading toward a happy ending for the parties involved.  Though it appears, then, that there may be no legal battle on the issue of fair use.

Until next time . . .