U.S. Court of Appeals for the Fifth Circuit, Camellia Grill Holdings, Inc. v. Upton Grill, L.L.C., Docket No. 18-30515

Sale of a Business, then

License Agreement

Trademark

Goodwill

Geographically Bounded Rights to Trademarks

Trade Dress

Breach of Contract

Louisiana Law

An attempt to simultaneously sell a restaurant and license associated intellectual property has led to ten years of litigation in state and federal court.

The Bill of Sale has a choice of law provision stating it is “governed by and construed in accordance with the laws of the State of Louisiana.”

Michael Shwartz and his family owned and operated the Camellia Grill restaurant on Carrollton Avenue (the “Carrollton restaurant”) for decades. He operated the business—the single restaurant—through a wholly owned corporation, Camellia Grill, Inc. In 1999, Shwartz formed CGH for the sole purpose of owning federally registered Camellia Grill trademarks.

In 2006, Shwartz agreed to sell the Carrollton restaurant to Hicham Khodr. On August 11, in the “Bill of Sale,” Shwartz sold to Uptown Grill, L.L.C. all his “right, title and interest in and to the . . . tangible property located within or upon” the Carrollton restaurant, including “all furniture, fixtures and equipment, cooking equipment, kitchen equipment, counters, stools, tables, benches, appliances, recipes, trademarks, names, logos, likenesses, etc., and all other personal and/or movable property . . . located within or upon the property.” On August 27, in the “License Agreement,” CGH licensed to The Grill Holdings, L.L.C. (“TGH”) the right to use certain defined “Marks.” These “Marks” included “all ‘Camellia Grill’ marks on file with the United States Patent and Trademark Office” and “all ‘trade dress’ associated with the ‘Camellia Grill’ Restaurant,” as well as blueprints, menus, and recipes. Section 5 of the License Agreement provides that the “Licensee acknowledges and agrees that all of the Licensor’s right, title and interest in and to the Marks shall remain the property of the Licensor.” The License Agreement also bound TGH’s affiliates and related companies.

(The marks are registered pursuant to the Lanham Act, 15 U.S.C. § 1051 et seq., which provides for federal trademark protection.)

Following state court litigation that ended in the termination of the License Agreement, Khodr filed a declaratory action to determine the parties’ respective rights in the Camellia Grill trademarks within or upon the Carrollton restaurant. Shwartz filed a separate action asserting trademark and trade dress infringement claims and breach of contract claims based on the continued use of Camellia Grill-related intellectual property following the termination of the License Agreement. The cases were consolidated.

(Shwartz and Khodr had previously signed a contract selling the Carrollton restaurant’s immovable property, which is not at issue.)
(The state court found that Khodr had breached the License Agreement and terminated that contract effective June 1, 2011. The Grill Holdings, L.L.C. v. Camellia Grill Holdings, Inc., 120 So. 3d 294 (La. Ct. App. 2013).)

The Bill of Sale conveyed all Shwartz’s “right, title and interest” to the “trademarks, names, logos, likenesses, etc. . . . located within or upon” the Carrollton restaurant. This court previously held that the Bill of Sale clearly “transfers to Uptown Grill the trademarks within or upon the Carrollton Avenue location.” Shwartz, 817 F.3d at 258. The question now is whether Shwartz retained any interest in the trademarks. He did not.

When interpreting a contract, “words of art and technical terms must be given their technical meaning.” LA. CIV. CODE ANN. art. 2047. “Trademark” is a technical term that must be given its technical meaning absent any other definition in the Bill of Sale. A trademark is a designation that identifies the source of goods and services and that has no independent significance separate from the goodwill of the business it symbolizes. As a technical matter, a trademark cannot be separated from the goodwill of a business. So, when an entire business is sold, as here, the goodwill and associated trademarks are necessarily transferred absent certain conditions not present here. Thus, the Bill of Sale unambiguously sold all rights to the Camellia Grill trademarks, and we cannot look to parol evidence to find otherwise.

“A trademark is merely a symbol of goodwill and has no independent significance apart from the goodwill that it symbolizes.” Sugar Busters LLC v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999). A trademark “only gives the right to prohibit the use of it so far as to protect the owner’s good will” and so “cannot be sold or assigned apart from the goodwill it symbolizes.” Id.  So, trademarks are “incidents and appurtenances to businesses and trades. They have no independent existence . . . .” Holly Hill Citrus Growers’ Ass’n v. Holly Hill Fruit Prods., 75 F.2d 13, 15 (5th Cir. 1935); see United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 97 (1918) (holding that it is a “fundamental error to suppose that a trademark right is a right in gross or at large” and that there is “no such thing as property in a trademark except as a right appurtenant to an established business or trade in connection with which the mark is employed”). Put another way, “trademark rights do not exist in the abstract, to be bought and sold as a distinct asset.” Berni v. Int’l Gourmet Rest. of Am., Inc., 838 F.2d 642, 646 (2d Cir. 1988); see also Mister Donut of Am., Inc. v. Mr. Donut, Inc., 418 F.2d 838, 842 (9th Cir. 1969) (“The law is well settled that there are no rights in a trademark alone and that no rights can be transferred apart from the business with which the mark has been associated.”). “If an assignee of a trademark also buys the total associated business, including physical assets and such intangibles as trade secrets, formulas and customer lists, then there is no doubt that the assignee has acquired the ‘good will’ associated with the trademark it has purchased.” MCCARTHY ON TRADEMARKS & UNFAIR COMPETITION § 18:23 (5th ed. 2019). When a business is sold as a “going concern, trademarks and the good will of the business . . . are presumed to pass with the sale of the business.” Id. § 18:37 (calling this an “old and clear rule”).

Thus, trademark ownership and the related goodwill “impliedly pass with ownership of a business, without express language to the contrary.” Yellowbook Inc. v. Brandeberry, 708 F.3d 837, 844 (6th Cir. 2013). Moreover, to retain ownership after the sale of the business associated with the trademark, “the owner’s intent to resume producing substantially the same product or service must be manifest, some portion of the goodwill of the previous business must remain with the owner, and resumption of operations must occur within a reasonable time.” Berni, 838 F.2d at 647. When selling an entire business, the rights to associated trademarks are necessarily sold unless at least two conditions are met: (1) the contract expressly reserves some right and interest in the trademark, and (2) the seller retains some of the business’s goodwill. The latter condition is the most important, as no rights to trademarks can exist without the related goodwill.

No goodwill was expressly retained or remained to which otherwise free-floating trademark rights could attach, and Shwartz has never argued that he retained some part of the business’s goodwill. Without looking outside the four corners of the Bill of Sale, and given the technical understanding of the term “trademark,” the contract unambiguously transfers “all of Shwartz’s right, title, and interest” in the Camellia Grill trademarks.

It is of course possible to assign geographically bounded rights to trademarks. See MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION § 18:21 (5th ed. 2018) (“The sale of a geographically separate portion of a marketing business may be valid as a transfer of a separate and distinct goodwill.”). However, the validity of such an assignment relies on the premise that there exists another portion of the business with separate and distinct goodwill retained by the seller. See id. (citing Ky. Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 268 (5th Cir. 1977); Greenlon, Inc. of Cincinnati v. Greenlawn, Inc., 542 F. Supp. 890 (S.D. Ohio 1982); Cal. Wine & Liquor Corp. v. William Zakon & Sons, 8 N.E.2d 812 (Mass. 1937)). We have not been able to locate a case, and Shwartz points to none, where a trademark owner sells his sole business, assigns a related trademark only as to that single business location, and retains a right to use the trademark when no other business or portion of the business with goodwill symbolized by that trademark exists. The point is not that a geographically bounded right to a trademark can never be assigned. The point is that in the context of this transaction it could not.

Finding Khodr to be the owner of all trademark rights associated with Camellia Grill also comports with the policy of avoiding the fragmentation of trademark ownership. See  MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION § 16:40 (5th ed. 2018) (“When there is a dispute over who owns a trademark, the worst possible solution is to allow mark ownership to be shared among the warring parties.”). Finding that Shwartz retained some rights in the Camellia Grill trademarks would be contrary to a fundamental purpose of trademarks: identifying a single source of a product or service. This policy seems particularly applicable given the parties’ acrimonious and litigious history.

Shwartz argues that finding the Bill of Sale to have assigned all trademark rights to Khodr is in direct tension with the License Agreement. If Shwartz sold all trademark rights to Khodr in the Bill of Sale, then Shwartz could not turn around and license these rights in the License Agreement.

(…) Given that all parties have always treated it as valid. The parties appear to have made a mutual mistake as to a material, basic assumption upon which the License Agreement was made: that Shwartz had rights to license. Under Louisiana law, this would render the License Agreement “relatively null.” LA. CIV. CODE ANN. art. 2031. Such a contract may be enforced. And relative nullity “may be invoked only by those persons for whose interest the ground for nullity [such as mutual mistake] was established, and may not be declared by the court on its own initiative.” Because Khodr is not attempting to nullify the License Agreement, we will enforce it as far as possible. However, as this court previously held, the License Agreement does not supersede or modify the Bill of Sale. Shwartz, 817 F.3d at 258 n.2. Therefore, Shwartz cannot sustain his claims of trademark ownership on the basis of the License Agreement.

We affirm the district court’s ruling that the Bill of Sale assigned all Camellia Grill trademark rights to Khodr.


Trade Dress

Trade dress “refers to the total image and overall appearance of a product and may include features such as the size, shape, color, color combinations, textures, graphics, and even sales techniques that characterize a particular product.” Test Masters Educ. Svcs., Inc. v. State Farm Lloyds, 791 F.3d 561, 565 (5th Cir. 2015). It is “distinct from a ‘trademark’ or a ‘service mark,’” and has been extended to the “overall ‘motif’ of a restaurant.” Id. at 564–65. The Bill of Sale unambiguously transferred “all furniture and equipment Shwartz contends constitutes trade dress, . . . trademarks, names, logos, and likenesses, etc.” at the Carrollton restaurant. Shwartz necessarily transferred the right to use any trade dress that existed there.

We affirm the district court’s ruling that the Bill of Sale assigned the trade dress associated with the Carrollton restaurant. Moreover, no abstract rights to trade dress could remain following the sale of the entire business. It follows that the Bill of Sale assigned all Camellia Grill trade dress rights to Khodr, much as all the trademark rights were assigned.

(The district court found that the alleged elements of the trade dress include: (1) the “straw popping” routine, (2) U-shaped counters, (3) audible order calling routine, (4) pink and green wall scheme, (5) separate pie cases on the rear wall at both ends of the cooking line, (6) stainless steel stemmed stools with green cushions, (7) individual counter checks handed to each customer, and (8) fluted metal design under the counters and above the cooking line.)

Even though we find all putative trade dress rights were assigned to Khodr in the Bill of Sale, we must still determine whether the License Agreement afforded Shwartz any enforceable contract rights (question remanded).

Breach of Contract (Louisiana law)

Under Louisiana law, damages for a breach of contract “are measured by the loss sustained by the obligee and the profit of which he has been deprived.” LA. CIV. CODE ANN. art. 1995.

Secondary Sources: 
MCCARTHY ON TRADEMARKS & UNFAIR COMPETITION § 18:23 (5th ed. 2019)


(U.S. Court of Appeals for the Fifth Circuit, March 29, 2019, Camellia Grill Holdings, Inc. v. Upton Grill, L.L.C., Docket No. 18-30515)

California Court of Appeal, Second Appellate District, Refugio Valdez v. Seidner-Miller, Inc., Docket No. B281003, Certified for Publication

California Law

Consumer Legal Remedies Act (CLRA; Civ. Code, § 1750 et seq.)

Unfair Competition Law (UCL; Bus. & Prof. Code, § 17200 et seq.)

Civil Code Section 16321 (Requiring Translation of Certain Contracts; Vehicle Leasing Act)

30 Days’ Advance Notice

Appropriate Correction

Deadline, Method of Computation

Common Law

Tagalog

Section 1782, subdivision (b), provides that a consumer may not bring an “action for damages” for violation of the CLRA if, after giving the business 30 days’ advance notice of the alleged violations, the business provides a timely and “appropriate correction, repair, replacement, or other remedy.”

The CLRA proscribes “unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or that results in the sale or lease of goods or services to any consumer,” including, as alleged by Valdez: “(5) Representing that goods or services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities that they do not have . . . . [¶] . . . (14) Representing that a transaction confers or involves rights, remedies, or obligations that it does not have or involve, or that are prohibited by law. . . . (17) Representing that the consumer will receive a rebate, discount, or other economic benefit, if the earning of the benefit is contingent on an event to occur subsequent to the consummation of the transaction. (18) Misrepresenting the authority of a salesperson, representative, or agent to negotiate the final terms of a transaction with a consumer.” (§ 1770, subd. (a).)

At least 30 days “prior to the commencement of an action for damages” under the CLRA, the consumer must provide written notice “of the particular alleged violations of Section 1770” and “demand that the person correct, repair, replace, or otherwise rectify the goods or services alleged to be in violation of Section 1770.” (§ 1782, subd. (a).) Further, “no action for damages may be maintained under Section 1780 if an appropriate correction, repair, replacement, or other remedy is given, or agreed to be given within a reasonable time, to the consumer within 30 days after receipt of the notice.” (§ 1782, subd. (b).)

Where a business conditions its offer to remedy a violation of the CLRA on the consumer waiving his or her right to injunctive relief and remedies under other statutes and common law, the offer is not an appropriate correction offer as contemplated by section 1782, subdivision (b), and does not bar a lawsuit by the consumer. Neither can the business demand as part of its correction offer that the consumer consent to additional settlement terms unrelated to the compensation necessary to make the consumer whole.

Valdez contends that by conditioning relief on release of claims not subject to the CLRA’s prelitigation notice requirements and on compliance with other settlement terms, including Seidner’s subjective approval of the vehicle’s condition, Seidner’s settlement offer was not an appropriate correction offer as contemplated by section 1782, subdivision (b). We agree. Seidner’s draft settlement agreement contained a broad release of known and unknown claims, including an agreement that the parties release each other “from any and all past, present, and future claims, demands, causes of action, obligations, damages, injuries, liens, and liabilities, of any nature whatsoever, relating to or arising out of the Action.” In addition to a release of claims, the draft settlement agreement contained a covenant not to sue under which the parties and their attorneys “agree never to commence or prosecute, nor voluntarily aid in the commencement of prosecution of any claims, demands, causes of action, obligations, damages, injuries, liens, and liabilities, of any nature whatsoever, against the other parties hereto . . . , which arise out of or which related in any way to any of the claims, demands, causes of action, obligations, damages, injuries, liens, and liabilities which comprise the subject matter of this Agreement.” The draft settlement agreement defined “Action” as Valdez’s “demand” in its CLRA notice to Seidner.

This broad release language and covenant not to sue would have prohibited Valdez from asserting his section 1632, UCL, and fraud claims and his claim for injunctive relief under the CLRA. Yet Valdez had a right to bring those claims without first providing notice under the CLRA. As to a CLRA claim, a timely and appropriate correction under section 1782, subdivision (b), only bars a claim for damages, not injunctive relief. (§ 1782, subd. (b) [“no action for damages may be maintained under Section 1780” if an appropriate correction offer is made (italics added)] & subd. (d) [“An action for injunctive relief brought under the specific provisions of Section 1770 may be commenced without compliance with subdivision (a).”]; Meyer, supra, 45 Cal.4th at p. 645 [“Section 1782, subdivision (d) contemplates the filing of a CLRA action for injunctive relief alone, and such actions are not subject to the requirements of subdivisions (a) and (b) of notice and allowance for voluntary correction.”]; Flores v. Southcoast Automotive Liquidators, Inc. (2017) 17 Cal.App.5th 841, 850 (Flores) [“An action for injunctive relief under section 1770 may be filed without sending a notice under section 1782, subdivision (a).”]; see Gonzales v. CarMax Auto Superstores, LLC (9th Cir. 2017) 845 F.3d 916, 918 [defendant’s correction offer did not bar plaintiff’s recovery of attorney’s fees where plaintiff sought only injunctive relief for violation of the CLRA].)

If a consumer files an action under section 1780 seeking only injunctive relief, he or she may amend the complaint without leave of court to seek damages after complying with the requirements for notice and a correction offer under section 1782, subdivisions (a) and (b). (§ 1782, subd. (d).)

Here, Valdez sought injunctive relief under the CLRA and UCL, prohibiting Seidner “from entering into lease agreements without providing appropriate translations, prior to execution, when negotiations are conducted primarily in a language other than English . . . .” Injunctive relief is available under both the CLRA and the UCL.

In addition, as our colleagues in Division Five concluded in Flores, a “reasonable correction offer prevents the plaintiff from maintaining a cause of action for damages under the CLRA, but does not prevent the plaintiff from pursuing remedies based on other statutory violations or common law causes of action based on conduct under those laws.” (Flores, supra, 17 Cal.App.5th at p. 850.) As the Flores court observed, “plaintiffs routinely plead fraud, UCL, and CLRA claims based on similar allegations.” (Ibid.) Further, “the remedies of the CLRA are cumulative of other rights.” (Id. at p. 849.) Section 1752 provides, “The provisions of this title are not exclusive. The remedies provided herein for violation of any section of this title or for conduct proscribed by any section of this title shall be in addition to any procedures or remedies for any violation or conduct provided for in any other law. . . . If any act or practice proscribed under this title also constitutes a cause of action in common law or a violation of another statute, the consumer may assert such common law or statutory cause of action under the procedures and with the remedies provided for in such law.”

Here, Valdez asserted a claim for violation of section 1632, subdivision (b)(1), which provides in relevant part, “Any person engaged in a trade or business who negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, orally or in writing, in the course of entering into [an agreement subject to the provisions of section 2985.7 (Vehicle Leasing Act)], shall deliver to the other party to the contract or agreement and prior to the execution thereof . . . a translation of every term and condition in that contract or agreement . . . .” (See Lopez v. Asbury Fresno Imports, LLC (2015) 234 Cal.App.4th 71, 77 [when both parties use a foreign language to negotiate the transaction, § 1632 “prevents the seller from suddenly springing on the buyer a contract written in English and expecting the buyer to sign it without reviewing its terms”]; Reyes v. Superior Court (1981).)

We recognize many of the remedies available to Valdez under section 1632, the UCL, and for fraud were duplicative of the remedies available for violation of the CLRA. We do not suggest Valdez will be entitled to double recovery at trial; rather, he can pursue his claims under multiple statutes and common law, leaving the determination of appropriate remedies to the trial court at trial.

Seidner could have made an appropriate correction offer had it offered simply to refund Valdez’s down payment and monthly payments, pay off the outstanding loan balance, and pay attorney’s fees and costs. Although Valdez would still have been able to pursue his other claims, nothing would have prevented Seidner from attempting to negotiate a separate settlement of those claims. But Seidner’s effort to exact additional concessions from Valdez as part of a global settlement ran afoul of sections 1752 and 1782, subdivisions (b) and (d), of the CLRA. Because Seidner did not make an appropriate correction offer, it failed to meet its burden of showing a complete defense to Valdez’s claims to support the grant of summary judgment.

(Code of Civil Procedure section 12a, subdivision (a), provides that “if the last day for the performance of any act provided or required by law to be performed within a specified period of time is a holiday, then that period is hereby extended to and including the next day that is not a holiday.” A “holiday” is defined to include Saturdays (Code Civ. Proc. § 12a, subd. (a)) and Sundays (id., § 10). Contrary to Valdez’s contention, nothing in Code of Civil Procedure section 12a limits its application to business institutions and government offices that would be inaccessible on weekends. (See DeLeon v. Bay Area Rapid Transit Dist. (1983) 33 Cal.3d 456, 460 [“Consistent with the need for certainty in the method of computing time, a case will not be found to come under an exception to the general rule [under section 12a] unless there is a clear expression of provision for a different method of computation.”]; Ystrom v. Handel (1988) 205 Cal.App.3d 144, 147-148 [rejecting contention that Code Civ. Proc., § 12a only applies to acts requiring access to a courthouse or other public office].))

(California Court of Appeal, Second Appellate District, March 27, 2019, Refugio Valdez v. Seidner-Miller, Inc., Docket No. B281003, Certified for Publication)

Air & Liquid Systems Corp. v. DeVries, Docket 17-1104

Tort Law

Maritime Tort Case

Maritime Law

Navy Veterans

Common-Law Court

Asbestos

Product Manufacturer

Duty to Warn

Liability for Harms Caused by Later-Added Third-Party Parts

Summary: In the maritime tort context, a product manufacturer has a duty to warn when its product requires incorporation of a part, the manu­facturer knows or has reason to know that the integrated product is likely to be dangerous for its intended uses, and the manufacturer has no reason to believe that the product’s users will realize that danger.

In maritime tort cases, we act as a common-law court, subject to any controlling statutes enacted by Congress. See Exxon Shipping Co. v. Baker, 554 U. S. 471, 507–508 (2008).

Three approaches have emerged on how to apply that “duty to warn” principle when a manufacturer’s product requires later incorporation of a dangerous part in order for the integrated product to function as intended. The first—the foreseeability rule—provides that a manu­facturer may be liable when it was foreseeable that its product would be used with another product or part, even if the manufacturer’s product did not require use or incorporation of that other product or part. The second—the bare-metal defense—provides that if a manu­facturer did not itself make, sell, or distribute the part or incorporate the part into the product, the manufacturer is not liable for harm caused by the integrated product—even if the product required incor­poration of the part and the manufacturer knew that the integrated product was likely to be dangerous for its intended uses. A third ap­proach, falling between those two, imposes on the manufacturer a duty to warn when its product requires incorporation of a part and the manufacturer knows or has reason to know that the integrated prod­uct is likely to be dangerous for its intended uses.

The third approach is most appropriate for this maritime context.

Requiring the product manufacturer to warn when its product requires incorpora­tion of a part that makes the integrated product dangerous for its in­tended uses is especially appropriate in the context of maritime law, which has always recognized a “special solicitude for the welfare” of sailors. American Export Lines, Inc. v. Alvez, 446 U. S. 274, 285.

The maritime tort rule adopted here encompasses all of the fol­lowing circumstances, so long as the manufacturer knows or has rea­son to know that the integrated product is likely to be dangerous for its intended uses, and the manufacturer has no reason to believe that the product’s users will realize that danger: (i) a manufacturer di­rects that the part be incorporated; (ii) a manufacturer itself makes the product with a part that the manufacturer knows will require re­placement with a similar part; or (iii) a product would be useless without the part.

(U.S. Supreme Court, March 19, 2019, Air & Liquid Systems Corp. v. DeVries, Docket 17-1104, J. Kavanaugh)

U.S. Court of Appeals for the Ninth Circuit, VHT, Inc., a Delaware Corporation, v. ZILLOW GROUP, Inc., a Washington Corporation, Docket No. 17-35587 17-35588, For Publication

Copyright Law

Internet Law

Copyright Infringement

Napster Case

Causation in Cases Involving Automated Systems

Automated- Service Provider’s Direct Liability for Copyright Infringement

Copyright Liability for Website Owners

Feed Providers

Evergreen Rights

Deciduous Rights

License Agreement

Fair Use

Search Engine Cases

Google Books Search Engine

Copyright infringement action brought by VHT, Inc., a real estate photography studio, against Zillow Group, Inc., and Zillow, Inc., an online real estate marketplace.

VHT alleged that Zillow’s use of photos on the “Listing Platform” and “Digs” parts of its website exceeded the scope of VHT’s licenses to brokers, agents, and listing services that provided those photos to Zillow.

Real estate brokers, listing services, and agents hire VHT to take professional photos of new listings for marketing purposes. A VHT photographer takes the photos and sends them to the company’s studio for touch-up, where they are saved to VHT’s electronic photo database, and then delivered to the client for use under license. Each license agreement between VHT and its clients differs slightly, but each contract generally grants the requesting client the right to use the photos in the sale or marketing of the featured property.

The heart of this dispute is Zillow’s copyright liability for use of VHT photos. VHT argues that Zillow directly infringed its copyrighted photos, both those on the Listing Platform and Digs. VHT also argues that Zillow indirectly infringed through use of the photos on Digs. These claims pertain to different images, focus on different features of Zillow’s website, and have different procedural postures, so we consider the various categories of photos separately.

Direct infringement

VHT’s key claim is that Zillow is directly liable for infringing VHT’s copyright on photos that were posted on the Listing Platform and Digs. To prevail on a claim of direct copyright infringement, VHT must establish “ownership of the allegedly infringed material” and that Zillow “violated at least one exclusive right granted to” VHT under 17 U.S.C. § 106. A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1013 (9th Cir. 2001). It is undisputed that VHT is the copyright holder of the allegedly infringed photos and therefore has the exclusive right to reproduce, adapt, and display them. 17 U.S.C. § 106.

VHT must also establish causation, which is commonly referred to as the “volitional-conduct requirement.” See Perfect 10, Inc. v. Giganews, Inc., 847 F.3d 657, 666 (9th Cir. 2017). As we set out in Giganews—decided on the first day of the VHT/Zillow trial and the closest circuit precedent on point—“volition in this context does not really mean an act of willing or choosing or an act of deciding”; rather, “it simply stands for the unremarkable proposition that proximate causation historically underlines copyright infringement liability no less than other torts.” Id. Stated differently, “direct liability must be premised on conduct that can reasonably be described as the direct cause of the infringement.” Id. This prerequisite takes on greater importance in cases involving automated systems, like the Zillow website.

In addressing this concept, Justice Scalia noted that “every Court of Appeals to have considered an automated- service provider’s direct liability for copyright infringement has adopted the volitional-conduct rule.” Am. Broad. Cos., Inc. v. Aereo, Inc., 573 U.S. 431, 453 (2014) (Scalia, J., dissenting). He went on to explain that while “most direct- infringement cases” do not present this issue, “it comes right to the fore when a direct-infringement claim is lodged against a defendant who does nothing more than operate an automated, user-controlled system. . . . Most of the time that issue will come down to who selects the copyrighted content: the defendant or its customers.” Id. at 454–55.

Giganews, Aereo, and out-of-circuit precedent counsel that direct copyright liability for website owners arises when they are actively involved in the infringement. “‘The distinction between active and passive participation’” in the alleged infringement is “‘central’” to the legal analysis. Giganews, 847 F.3d at 667 (quoting Fox Broad. Co. v. Dish Network LLC, 160 F. Supp. 3d 1139, 1160 (C.D. Cal. 2015)).

In other words, to demonstrate volitional conduct, a party like VHT must provide some “evidence showing the alleged infringer exercised control (other than by general operation of its website); selected any material for upload, download, transmission, or storage; or instigated any copying, storage, or distribution” of its photos. VHT failed to satisfy that burden with respect to either the photos on the Listing Platform or on Digs.

Zillow has agreements with its feed providers granting it an express license to use, copy, distribute, publicly display, and create derivative works from the feed data on its websites. Feed providers represent that they “have all necessary rights and authority to enter into” the agreements, and that “Zillow’s exercise of the rights granted thereunder will not violate the intellectual property rights, or any other rights of any third party.”

These agreements provide Zillow with either “evergreen” or “deciduous” rights in the photos provided through the feeds. An evergreen right permits use of a photo without any time restriction, “on and in connection with the operation, marketing and promotion of the web sites and other properties, owned, operated or powered by Zillow or its authorized licensees.” By contrast, a deciduous right is temporally limited: Zillow may use the photo when the real estate listing for its corresponding property is active, but once the listing is removed (for example, when the property sells), the photo must be taken down from Zillow’s websites. To treat each photo consistently with its deciduous or evergreen designation, Zillow developed automated “trumping” rules to determine which photos to display on the Listing Platform.

VHT argues that Zillow “designed its system to . . . cause the reproduction, display, and adaptation of VHT photographs post-sale on the Listing Platform,” and “chose to simply ignore VHT’s notices that post-sale use was beyond the scope of VHT’s licenses.” The district court granted summary judgment to Zillow, concluding that it did not engage in volitional conduct and therefore did not directly infringe VHT’s copyrights in 54,257 photos by displaying them on the Listing Platform after a real estate property was sold.

Zillow did not engage in volitional conduct necessary to support a finding of direct liability. The content of the Listing Platform is populated with data submitted by third- party sources that attested to the permissible use of that data, and Zillow’s system for managing photos on the Listing Platform was constructed in a copyright-protective way. The feed providers themselves select and upload every photo, along with the evergreen or deciduous designations, that wind up on the Listing Platform. As a result, the photos on the Listing Platform were not “selected” by Zillow. See Giganews, 847 F.3d at 670. Nor did Zillow “exercise control” over these photos beyond the “general operation of its website.” Id. Zillow required feed providers to certify the extent of their rights to use each photo. Consistent with these designations, Zillow’s system classified each photo as deciduous or evergreen and programmed its automated systems to treat each photo consistently with that scope of use certified to by the third party.

Further, when multiple versions of the same photo were submitted through the various feeds, Zillow invoked its copyright-protective “trumping” rules. For example, one rule might prefer a photo provided by an agent over one provided by a multiple listing service, and another might prefer a local broker to an international one. Zillow used a rule that gave preference to photos with evergreen rights over photos with deciduous rights in the same image. As the district court recognized, “trumping” is a reasonable way to design a system to manage multiple versions of the same photo when the authorized use varies across versions. These rules, along with other features of the system, facilitate keeping the photos with evergreen rights on the website and removing the photos with deciduous rights once a property has sold. Thus, Zillow actively designed its system to avoid and eliminate copyright infringement.

(…) Courts have analogized online facilities, like Internet service providers, to a copy machine owner, who is not liable “when a customer duplicates an infringing work.” CoStar, 373 F.3d at 550.

Fair Use Defense

Protection of copyrighted works is not absolute. “The fair use defense permits the use of copyrighted works without the copyright owner’s consent under certain situations.” Amazon, 508 F.3d at 1163. Fair use both fosters innovation and encourages iteration on others’ ideas, “thus providing a necessary counterbalance to the copyright law’s goal of protecting creators’ work product.” Id.; see Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 575–76 (1994). Fair use also aligns with copyright’s larger purpose “‘to promote the Progress of Science and useful Arts,’ . . . and to serve ‘the welfare of the public.’” Amazon, 508 F.3d at 1163 (quoting U.S. Const. art. I, § 8, cl. 8, and Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 n.10 (1984)).

(…) The focus of the parties’ debate here is whether Zillow’s tagging of 3,921 VHT photos for searchable functionality on Digs was transformative and thus supported a finding of fair use. The purpose of Digs is to permit users to search for certain attributes or features, such as a marble countertop or hardwood floor, and view photos of rooms with those attributes or features. These photos are either uploaded by users to Digs, or selected manually or electronically by Zillow. Zillow then tags the photos to make them searchable. Of course, tagging makes it possible for a user’s keyword search to produce relevant results. Zillow refers to these tagged photos as “searchable images” or components of the “searchable set.” VHT’s 3,921 photos are in the searchable set.

Zillow contends that Digs is effectively a search engine, which makes its use of VHT’s photos transformative, and therefore fair use. VHT responds that this is not fair use because Digs is not a search engine and the tagging for searchable functionality is not transformative. Dueling “search engine” characterizations do not resolve fair use here. Instead, we step back and assess the question holistically, as we have been instructed to do by the statute and the Supreme Court. We consider the reality of what is happening rather than resorting to labels. To do that, it is helpful to recount the history of the search engine cases.

Evolution of Search Engine Cases

Over the past two decades, search engines have emerged as a significant technology that may qualify as a transformative fair use, making images and information that would otherwise be protected by copyright searchable on the web. See Amazon, 508 F.3d at 1166–67; Kelly, 336 F.3d at 818–22. In assessing fair use in the context of search engines, courts have relied heavily on the first fair use factor, and in particular “whether and to what extent the new work is transformative.” Campbell, 510 U.S. at 579; see also Amazon, 508 F.3d at 1164 (explaining the Kelly court relied “primarily” on the first fair use factor when conducting its analysis); Authors Guild v. Google, Inc., 804 F.3d 202, 220–221, 223 (2d Cir. 2015) (offering a relatively abbreviated consideration of the remaining three fair use factors, all of which were informed by its analysis of the first factor).

In an early opinion applying fair use principles in the digital age, we held that the now-defunct search engine Arriba’s creation and use of thumbnail versions of a professional photographer’s copyrighted images was fair use because the “smaller, lower-resolution images . . . served an entirely different function than the original images.” Kelly, 336 F.3d at 815, 818. The original images served an artistic or aesthetic purpose. Id. at 819. By contrast, the thumbnail images, which were provided in response to a user’s search query, were incorporated into the search engine’s overall function “to help index and improve access to images on the internet and their related web sites.” Id. at 818. Investing the images with a new purpose made Arriba’s use transformative, not superseding. Indeed, the thumbnail versions could not supersede the original use because the thumbnails were grainy and low-resolution when enlarged. Id. Additionally, Arriba’s use of the thumbnail images “promoted the goals of the Copyright Act and the fair use exception” because they “benefited the public by enhancing information-gathering techniques on the internet.” Id. at 820. Just as Campbell had drawn out the principle of transformation from the first statutory factor, we drew out the principle of public benefit.

Building on our reasoning in Kelly, in Amazon we held that Google’s use of thumbnail images in its search engine is “highly transformative” and thus fair use. 508 F.3d at 1163–65. As in Kelly, we concluded that “a search engine provides social benefit by incorporating an original work into a new work, namely, an electronic reference tool.” Id. at 1165. On a scale much greater than the search engine at issue in Kelly, Google “improves access to images on the internet and their related web sites” by “indexing” the internet and linking to the original source image generated in the search results. Kelly, 336 F.3d at 815–16, 818. By using the thumbnail images in service of the search engine, Google “transforms the image,” which might have been created for an “entertainment, aesthetic, or informative function,” “into a pointer directing a user to a source of information.” Amazon, 508 F.3d at 1165. As a result of the new function that the image serves, Google’s use of the entire image in its search engine results “does not diminish the transformative nature of its use.” Id. And, further developing the public benefit principle from Kelly, we emphasized that Google’s search engine both “promotes the purposes of copyright and serves the interests of the public,” which significantly outweighed the superseding or commercial uses of the search engine, and strongly supported finding fair use. Id. at 1166.

More recently, the Second Circuit considered whether fair use protected the Google Books search engine, which employs digital, machine-readable copies of millions of copyright-protected books scanned by Google. Authors Guild, 804 F.3d at 207–08. The Google Books search engine enables a full text search, which makes possible searching for a specific term, and then provides “snippets,” or a part of a page, for users to read. Id. at 208–09, 216–17. The court held that both functions involve a “highly transformative purpose of identifying books of interest to the searcher.” Id. at 218. The search function “augments public knowledge by making available information about Plaintiffs’ books without providing the public with a substantial substitute.” Id. at 207. And the search engine makes possible a new type of research known as “text mining” or “data mining,” whereby users can search across the corpus of books to determine the frequency of specified terms across time. Id. at 209, 217. Additionally, the “snippet” view provides context for users to assess if a book is relevant to them, without providing so much context as to supersede the original. Id. at 218. To boot, Google often provides a link to a page where the entire book can be found at a library or purchased. Id. at 209. Concluding that Google’s commercial motivation did not significantly outweigh these transformative uses, the court held that the first factor strongly supported a finding of fair use. Id. at 219.

What we divine from these cases is that the label “search engine” is not a talismanic term that serves as an on-off switch as to fair use. Rather, these cases teach the importance of considering the details and function of a website’s operation in making a fair use determination.

Unlike the internet-wide search engines considered in Amazon and Kelly, Digs is a closed-universe search engine that does not “crawl” the web. Users can run searches on the “searchable set” of images within Digs’ walled garden, which includes VHT photos. The search results do not direct users to the original sources of the photos, such as VHT’s website. Rather, they link to other pages within Zillow’s website and, in some cases, to third-party merchants that sell items similar to those featured in the photo.

That Digs makes these images searchable does not fundamentally change their original purpose when produced by VHT: to artfully depict rooms and properties. Additionally, Digs displays the entire VHT image, not merely a thumbnail. Unlike in Amazon, the new image does not serve a “different function” than the old one. Amazon, 508 F.3d at 1165. Zillow’s use preserves the photos’ “inherent character.” Monge, 688 F.3d at 1176. And Zillow “simply supersedes VHT’s purpose” in creating the images in the first place. Kelly, 336 F.3d at 819–20; see Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 550–51 (1985) (holding that if a new work “supersedes the use of the original,” it is probably not a fair use).

These features, in conjunction with other creative aspects of Google Books, result in a categorically more transformative use than Zillow’s simple tagging and query system that displays full-size copyrighted images serving the same purpose as the originals, with no option to opt out of the display, and with few, if any, transformative qualities. Any transformation by Zillow pales in comparison to the uses upheld in prior search engine cases. Such use also does nothing to further the use of copyrighted works for the socially valuable purposes identified in the Copyright Act itself, like “criticism, comment, news reporting, teaching . . . , scholarship, or research.” 17 U.S.C. § 107; see also NIMMER ON COPYRIGHT § 13.05[A]. The lack of transformation is especially significant because, as Kelly teaches, “the more transformative the new work, the less important the other factors, including commercialism, become.” 336 F.3d at 818 (citing Campbell, 510 U.S. at 579).

Our decisions in Amazon and Kelly provide a roadmap for analyzing the second factor, which focuses on the nature of the copyrighted work. In those cases, we held that photographers’ images are creative, especially when they are created for public viewing. Amazon, 508 F.3d at 1167; Kelly, 336 F.3d at 820. “Works that are creative in nature are ‘closer to the core of intended copyright protection’ than are more fact-based works.” Napster, 239 F.3d at 1016 (quoting Campbell, 510 U.S. at 586).

The third factor evaluates the amount and substantiality of the copyrighted work that was used.

Finally, the fourth factor considers “the effect of the use upon the potential market for or value of the copyrighted work.” 17 U.S.C. § 107(4). To defeat a fair use defense, “one need only show that if the challenged use should become widespread, it would adversely affect the potential market for the copyrighted work.” Harper & Row Publishers, 471 U.S. at 568.

Taken together, the nature of Zillow’s use, when integrated with the four factors, cuts against finding fair use by Zillow. We affirm the district court’s grant of summary judgment to VHT with respect to fair use.

Vicarious Liability

Our conclusion is consistent with earlier dicta that “the vicarious liability standard applied in Napster can be met by merely having the general ability to locate infringing material and terminate users’ access.” UMG Recordings, Inc. v. Shelter Capital Partners LLC, 718 F.3d 1006, 1030 (9th Cir. 2013). Once VHT photos were uploaded to the Listing Platform with appropriate certification of rights, ferreting out claimed infringement through use on Digs was beyond hunting for a needle in a haystack. As the district court concluded, “the trial record lacks substantial evidence of a practical ability to limit direct infringement for the same reasons it lacks substantial evidence of simple measures to remove infringing material.” And linking a claimed infringement to a feed provider was even more of an impossibility.

We affirm the district court’s judgment notwithstanding the verdict concluding that substantial evidence did not support the claim that Zillow secondarily infringed VHT’s exclusive rights in its photos.

Secondary sources: NIMMER ON COPYRIGHT.

(U.S. Court of Appeals for the Ninth Circuit, March 15, 2019, VHT, Inc., a Delaware Corporation, v. ZILLOW GROUP, Inc., a Washington Corporation, Docket No. 17-35587 17-35588, Judge McKeown, For Publication)

FTC, Subpoenas & Civil Investigative Demands

FTC

Subpoenas

Civil Investigative Demands (CIDs)

Scope and Timeframe

Meet-and-Confer Session

FTC’s Rules of Practice

Petitions to Limit Subpoenas and CIDs

Petitions to Quash subpoenas and CIDs

By Burke Kappler, Attorney, FTC Office of General Counsel
March 6, 2019

Republication

https://www.ftc.gov/news-events/blogs/competition-matters/2019/03/ftc-takes-its-subpoenas-cids-seriously-you-should-too?utm_source=govdelivery

The FTC’s ability to obtain information through subpoenas and civil investigative demands (CIDs) is critical to the task of investigating potential law violations.

These requests are legally enforceable demands, and recipients of subpoenas or CIDs need to take their obligation to comply seriously. We expect all companies and individuals who receive compulsory process to respond completely and in a timely manner, or to disclose quickly and candidly any obstacles to full compliance. We routinely work with recipients to narrow or defer requests, and generally, we have found that parties cooperate.

FTC staff are always willing to work with parties and their counsel to determine the scope of the agency’s subpoena or CID and a timeframe for compliance. In fact, the FTC’s Rules of Practice require parties to meet and confer with FTC staff to identify any issues, problems, or concerns that might affect a party’s ability to comply. As provided in the FTC’s Rules of Practice, based on what we learn from the meet-and-confer session, FTC staff may agree in writing to limit some of the requests or to extend the deadline for compliance. The Rules contemplate some flexibility for staff to modify certain obligations in the demand and the opportunity to meet and confer is an important part of the process. FTC staff expects all subpoena and CID recipients to use this process if they have concerns about their ability to comply in full and on time.

Not everyone wants to cooperate upon receiving a subpoena or CID. When that happens, the FTC’s Office of General Counsel may get involved in order to obtain judicial enforcement of the Commission’s process.

In just the last three years, the Commission has filed 12 federal court actions against process recipients that failed to comply fully with the agency’s subpoenas and CIDs. In the 11 actions that have been resolved to date (see list below), either the court enforced the subpoena or CID or we settled with the party after they complied with the requests.

In the same vein, the Commission expects recipients to comply with Commission orders adjudicating petitions to limit or quash subpoenas and CIDs. If a recipient fails to comply with such an order, the Commission will now direct the Office of General Counsel to commence enforcement proceedings within 30 days of the established deadline. Subpoena and CID recipients should thus comply promptly with such orders or risk an enforcement proceeding.

U.S. Supreme Court, Fourth Estate Pub. Benefit Corp. v. Wall-Street.com, Docket No. 17-571, J. Ginsburg, unanimous

Copyright Infringement

License Agreement

Application to Register

No Civil Action for Infringement of the Copyright shall be Instituted until . . . Registration of the Copyright Claim has been Made

Expedited Processing of a Claim for an Additional $800 Fee

Statute of Limitations

Foreign Works

Berne Convention for the Protec­tion of Literary and Artistic Works’ bar on Copyright For­malities for such Works

Title 17 U. S. C. §411(a) states that “no civil action for infringement of the copyright in any United States work shall be instituted until . . . registration of the copyright claim has been made in accordance with this title.”

(…) Section 411(a) provides, in principal part: “No civil action for in­fringement of the copyright in any United States work shall be insti­tuted until preregistration or registration of the copyright claim has been made in accordance with this title. In any case, however, where the deposit, application, and fee required for registration have been deliv­ered to the Copyright Office in proper form and registration has been refused, the applicant is entitled to institute a civil action for infringe­ment (…)”.

Registration occurs, and a copyright claimant may commence an infringement suit, when the Copyright Office registers a copyright. Upon registration of the copyright, however, a copyright owner can recover for infringement that occurred both before and after registra­tion.

Under the Copyright Act of 1976, as amended, a copyright au­thor gains “exclusive rights” in her work immediately upon the work’s creation. 17 U. S. C. §106. A copyright owner may institute a civil action for infringement of those exclusive rights, §501(b), but generally only after complying with §411(a)’s requirement that “reg­istration . . . has been made.” Registration is thus akin to an admin­istrative exhaustion requirement that the owner must satisfy before suing to enforce ownership rights.

True, registration processing times have in­creased from one to two weeks in 1956 to many months today. De­lays, in large part, are the result of Copyright Office staffing and budgetary shortages that Congress can alleviate, but courts cannot cure.

Unfortunate as the current administrative lag may be, that factor does not allow this Court to revise §411(a)’s congressionally composed text.

(The Register of Copyrights is the “director of the Copyright Office of the Library of Congress” and is appointed by the Librarian of Congress. 17 U. S. C. §701(a). The Copyright Act delegates to the Register “all administrative functions and duties under [Title 17].”)

In limited circumstances, copyright owners may file an infringement suit before undertaking registration. If a copyright owner is preparing to distribute a work of a type vulnerable to predistribution infringement—notably, a movie or musical composition—the owner may apply for preregistration. §408(f)(2); 37 CFR §202.16(b)(1) (2018). The Copyright Office will “conduct a limited review” of the application and notify the claimant “upon completion of the preregistration.” §202.16(c)(7), (c)(10). Once “prereg­istration . . . has been made,” the copyright claimant may institute a suit for infringement. 17 U. S. C. §411(a). Preregistration, however, serves only as “a preliminary step prior to a full registration.” Preregistration of Cer­tain Unpublished Copyright Claims, 70 Fed. Reg. 42286(2005). An infringement suit brought in reliance on pre­registration risks dismissal unless the copyright owner applies for registration promptly after the preregistered work’s publication or infringement. §408(f)(3)–(4). A copyright owner may also sue for infringement of a live broadcast before “registration . . . has been made,” but faces dismissal of her suit if she fails to “make registration for the work” within three months of its first transmission. §411(c). Even in these exceptional scenarios, then, the copyright owner must eventually pursue registration in order to maintain a suit for infringement.

(…) Noteworthy, too, in years following the 1976 revisions, Congress resisted efforts to eliminate §411(a) and the registration requirement embedded in it. In 1988, Con­gress removed foreign works from §411(a)’s dominion in order to comply with the Berne Convention for the Protec­tion of Literary and Artistic Works’ bar on copyright for­malities for such works. See §9(b)(1), 102 Stat. 2859. Despite proposals to repeal §411(a)’s registration require­ment entirely, however, see S. Rep. No. 100‒352, p. 36 (1988), Congress maintained the requirement for domestic works, see §411(a). Subsequently, in 1993, Congress considered, but declined to adopt, a proposal to allow suit immediately upon submission of a registration application. See H. R. Rep. No. 103–338, p. 4 (1993). And in 2005, Congress made a preregistration option available for works vulnerable to predistribution infringement. See Artists’ Rights and Theft Prevention Act of 2005, §104, 119 Stat. 221.

(…) Fourth Estate raises the specter that a copyright owner may lose the ability to enforce her rights if the Copyright Act’s three-year statute of limitations runs out before the Copyright Office acts on her application for registration (…). Fourth Estate’s fear is overstated, as the average processing time for registration applications is currently seven months, leaving ample time to sue after the Register’s decision, even for infringement that began before submission of an application. See U. S. Copyright Office, Registration Processing Times (Oct. 2, 2018) (Regis­tration Processing Times), https://www.copyright.gov/registration/docs/processing-times-faqs.pdf

Further, in addition to the Act’s provisions for preregistration suit, the Copyright Office allows copyright claimants to seek expedited processing of a claim for an additional $800 fee. See U. S. Copyright Office, Special Handling: Circular No. 10, pp. 1–2 (2017). The Copy­right Office grants requests for special handling in situations involving, inter alia, “pending or prospective litigation,” and “makes every attempt to examine the application . . . within five working days.” Compendium of U. S. Copyright Practices §623.2, 623.4 (3d ed. 2017).

(U.S. Supreme Court, March 4, 2019, Fourth Estate Pub. Benefit Corp. v. Wall-Street.com, Docket No. 17-571, J. Ginsburg, unanimous)