Copyright

An idea that has been bandied about for some time is now closer to becoming a reality: the Copyright Small Claims Court. This was first proposed by the Copyright Office itself back in 2013 in a special report dedicated to the topic.[ref]Copyright Small Claims[/ref] This was followed up by a bill proposed by Representative Jeffries and Marino in July of 2016, which has now been designated H.R. 5757 and is pending before the House Judiciary Committee.[ref]H.R. 5757[/ref] On December 8, House 2016 Judiciary Committee Chairman Bob Goodlatte and Ranking Member John Conyers, Jr. released a series of proposals for copyright reform, one of which was the creation of the Copyright Small Claims Court.[ref]Goodlatte & Conyers Release First Policy Proposal of Copyright Review[/ref] The very same day, Representatives Judy Chu and Lamar Smith filed a bill, very similar in text and theory to the H.R. 5757, also calling for the creation of a Copyright Small Claims Court.[ref]Fairness for Small Creators Act found at: H.R. _[/ref] The first thing that jumps out at you is that "small claims court" really isn't a court at all. If it was truly to be a court, like all other small claims courts, it would have to be housed within the Judicial Branch of the United States Government. But that is not what is being proposed. Instead, the proposed bills place the small claims court within the Copyright Office, which is run by the Library of Congress, an arm of the Legislative Branch.[ref]Library of Congress[/ref] So, immediately we have a small problem with the doctrine of separation of powers. In order to cure this problem, both bills make a concession which, while innovative, give rise to the most serious flaw in the entire program: the process is entirely voluntary. So, instead of a small claims court, what is being proposed is more akin to two parties agreeing to binding arbitration. Indeed, what is proposed reads a lot like binding arbitration. An action is commended by a filing with the appropriate office within the Copyright Office. The dispute will be determined by a panel of three "judges" who must be attorneys with not less than 7 years legal experience.[ref]Fairness for Small Creators Act at 2.[/ref] The panel can hear only three types of disputes:

• Claims of infringement arising under 17 USC 106
• Declarations of non-infringement
• Claims of bad faith DMCA notices under 17 USC 512 (f)[ref]Id. at 11-12[/ref]

Pre-trial motions are not allowed.[ref]Id. at 28[/ref] A party wishing to address an issue regarding case management or discovery may only request a "management conference."[ref]Id.[/ref] Appeals, though available, are greatly constrained:

• Appeals are called "requests for reconsideration" and are taken to the same Board who issued the original decision. This request must allege an "error of procedure, law or fact material to the outcome."[ref]Id. at 36[/ref]
• Further appeals are made to the Register of Copyrights whose review is limited to whether the Board abused its discretion in denying reconsideration.[ref]Id.[/ref]

An appeal to a Federal District Court is available only in cases alleging:

• "[F]raud, corruption or as the result of misconduct or undue means."[ref]Id. at 43[/ref]
• The Board exceeded its authority.[ref]Id.[/ref]
• The Board so messed up the decision that the resulting decision is "neither final nor definite regarding the matter of controversy."[ref]Id.[/ref]
• The Board issued a judgement on the basis of a Defendant's default or Plaintiff's failure to prosecute, and the failure was due to excusable neglect.[ref]Id. at 44[/ref]

Damages that can be awarded are limited to:

• The sum of $15,000 of statutory damages per work infringed.[ref]Id.at 15[/ref]
• Actual damages, not to exceed $30,000.[ref]Id. at 16[/ref]
• Total sum of $30,000, regardless of the amount of works claimed to be infringed which are eligible for statutory damages (not including attorneys fees).[ref]Id. at 16[/ref]
• Each side bears its own attorneys fees and costs,[ref]Id. at 17[/ref] except in the cases of a finding of bad faith in pursuing a claim, counterclaim, or defense.[ref]Id. at 37[/ref]
• Bad faith attorneys fees are limited to a total of $5,000, or $2,500 if a party is acting as their own attorney.[ref]Id.[/ref]

So, what is being proposed is a very limited system which determines specific questions with greatly streamlined procedures and a cap on the amount of damages that can be awarded. The question then becomes: is anybody really going to use this? Normal small claims courts have several features of the proposed copyright small claims courts, including streamlined procedures, limited motion practice, relaxed rules of evidence, and of course, a cap on damages. But the big difference is: if you are sued, you have to respond. This procedure is completely voluntary. Within 60 days after service, a Defendant can "opt out" of the proceeding.[ref]Id. at 27-28[/ref] What defendant, with the ability to "opt out" of being sued, isn't going to take that out? Naturally, it comes down to a question of money. If the defendant thinks that you do not have the money to file a full-fledged infringement action in Federal District Court, it's going to opt out and tell you to go pound salt. So, regardless of how little money may be at stake, if your Defendant is Google, or FaceBook, or YouTube, you can expect that they will opt out and thumb their nose at you. Or, if the infringer is located in another country, the procedure is not available because "service or waivers of personal service…may only be made within the United States."[ref]Id. at 27[/ref] Neither is the system going to encourage any increase in litigation by so-called "copyright trolls"[ref]Copyright Infringement Litigation Over BitTorrent File Sharing: Truth or Troll?[/ref] as some have contended. This is because bit-torrent lawsuits are filed against "John Doe" defendants ID'd by their IP addresses. It is then necessary to request a subpoena to the Doe defendant's ISP to obtain the person behind the IP address. Remember, in copyright small claims, there is no motion practice. Next, the proposed legislation only grants the Board the ability to "request special information" from third parties.[ref]Fairness for Small Creators Act at 29[/ref] Nowhere does it say the Board has subpoena power. And as we have seen, no ISP is going to voluntarily give up the ID of a subscriber accused of copyright infringement.[ref]14 Strikes and You're Out! (Maybe): How Cox Communications Lost its DMCA Safe Harbor[/ref] So, the procedure is only really available to that claimant that is willing to back up a small claim with the prospect of a full-fledged Federal Court lawsuit. This procedure will work, if and only if, the Defendant believes that you will proceed formally if they opt out. Further, as pointed out by Jonathan Bailey over at Plagiarism Today: "Obviously we won't know this one until some time after it begins but, if the Board is too favorable to rightsholders, defendants won't participate but if it's too favorable to defendants, plaintiffs won't bother. Without knowing how balanced the court is, we can't make a decision as to how likely it is parties will participate."[ref]Breaking Down the Fairness for American Small Creators Act[/ref] So, yes, we can build it. But will anybody come?

On November 14, 2106, literally "on the eve of trial" over the amount of damages SiriusXM might owe Flo and Eddie, Inc. due to the unauthorized use of its sound recordings, a motion was filed with the trial court announcing the parties had settled the case.[ref]Flo & Eddie Settle With SiriusXM on Eve of California Trial[/ref] What seemed curious at the time was that this trial was not the only fight going on between the two. As recounted previously on this blog, similar lawsuits were filed against SiriusXM in both New York and Florida.[ref]Flo and Eddie v. SiriusXM Radio: Have Two Hippies from the 60's Just Changed the Course of Broadcast Music?[/ref] Plus, according to the District Court Judge in the Florida proceedings: [d]ue to Sirius' licenses with the Federal Communications Commission and technological restraints on its satellite delivery systems, Sirius broadcasts identical programming to its subscribers in every state in the continental United States.[ref]Flo & Eddie, Inc. v. Sirius XM Radio, Inc. 2015 WL 3852692 District Court for the Southern District of Florida, 2015 at 1[/ref] This would make it impossible to beam different programing into specific States. So how would this settlement affect the ongoing litigation? According to the documents filed November 28, 2016, we now have the answer.[ref]Memorandum of Points and Authorities in Support of Plaintiff's Motion for Preliminary Approval of Class Action Settlement found at Flo & Eddie, Inc. v. SiriusXM Radio, Inc.[/ref] What the settlement entails is a fairly complex variation on the often used method that can be best described as the "high-low settlement." Before I became an attorney, I worked in the Florida Court system as a court clerk and saw this used on many occasions. This method essentially provides a "win-win" (if there is such a thing in litigation). Frequently occurring when the jury was deliberating, but had not yet returned a verdict, the parties would agree that regardless of the verdict there would be a threshold award and a maximum award. If the jury awarded something in the middle, then that would be the award. For example, the threshold amount might be $1 million with a cap of $10 million. So even if the jury returned a verdict totally in favor of the Defendant, in essence awarding nothing, the Plaintiff gets paid $1 million. On the other side, the jury could award $100 million. Regardless of the jury's award, the maximum the Defendant would pay would be $10 million. Any amount awarded in between those two figures would then be the award to be paid. In the Flo and Eddie case, the jury would, in no uncertain terms, be faced with a daunting task in assessing damages. According to the Court filings, the Plaintiff class members account for 15% of the 11,808,927 plays of pre-1972 sound recordings at issue.[ref]Memorandum of Points and Authorities at 9.[/ref] SiriusXM was prepared to contend that: Plaintiff cannot show that it lost any sales due to SiriusXM's use of its property, that SiriusXM did not prevent Plaintiff from granting other non-exclusive licenses, and that SiriusXM's use of Plaintiff's recordings enhanced Plaintiff's ability to profit from their recordings. (citation omitted) SiriusXM planned to offer expert testimony that the appropriate measure of damages was a reasonable royalty rate, less any deduction for Plaintiff's failure to mitigate damages.[ref]Id. at 18[/ref] This amount was, according to Court filings, "tens of millions" lower than Flo and Eddie's expert's calculations.[ref]Id.[/ref] So, in order to avoid this fight (and the inevitable appeal) here's how the settlement breaks down, and please bear with me, there are a lot of moving parts to contend with. The Minimum Payment This amount is $25 million. This payment is made regardless of the outcome in any appeal of the California action, and regardless of any adverse ruling against Flo and Eddie in either the New York or Florida proceedings, including all appeals.[ref]Id. at 8[/ref] SiriusXM also agrees not to appeal the ruling the Plaintiffs are entitled to class action status.[ref]Id. at 7[/ref] If approved by the Court this will mean that if you are the owner of a pre-1972 sound recording that has been played by SiriusXM, (and not  subject to any previous license or settlement) anywhere in the world you will be entitled to receive some compensation. Additional Contingent Payments For every final win that Flo and Eddie rack up, SiriusXM will kick in an additional $5 million per jurisdiction. If Flo and Eddie run the table, this would mean an additional $15 million would be paid by SiriusXM.[ref]Id. at 9[/ref] In addition to that amount, SiriusXM will make prospective royalty payments of 5.5% of its annual gross revenue for the next ten years commencing January 1, 2018 until modified or terminated by adverse appellate rulings. However, all payments made prior to any adverse appellate ruling against Flo and Eddie cannot be reclaimed or recouped by SiriusXM. Hang on, this gets a little complex. SiriusXM will be entitled to reduce this royalty for each appellate win that becomes final on the issue of common law performance rights. If SiriusXM wins ultimate victory in California or New York, this would reduce the royalty payment by 2% for each jurisdiction. If SiriusXM wins ultimate victory in Florida, this amount is 1.5%. So, victory in California only, or New York only, reduces the royalty to 3.5%. Victory for SiriusXM in California and New York, but not Florida, would reduce the royalty to 1.5% and so on. If SiriusXM wins all three, the royalty is eliminated, but only prospectively. The Plaintiff class would keep all royalty payments made up to that point.[ref]Id.[/ref] If the royalty continues at the full 5.5%, the payments made by SiriusXM "could generate between approximately $45.47 million (assuming that SiriusXM has no annual revenue growth) to over $59.21 million (assuming continued annual revenue growth) in additional cash payments to the Class over the next 10 years."[ref]Id. at 2[/ref] This plus the other contingent payments add up to the "$99 million" figure that has been bandied about in the press. There are, however, a lot of "ifs, ands or buts" that have to occur before that happens, not the least of which is: The Commerce Clause Exception SiriusXM has long contended that State laws affording common law copyright performance rights would violate the "dormant commerce clause" restrictions of Federal law. In the simplest terms, State regulation of what is in effect a national broadcast operation would interfere with interstate commerce, and only Congress has the power to control interstate commerce. The settlement allows SiriusXM to continue to pursue this theory on appeal in all three jurisdictions. The odds against SiriusXM succeeding are steep. This is an argument that SiriusXM has lost in all three cases.[ref]Flo and Eddie Lose Florida Lawsuit against SiriusXM[/ref] The California Court dismissed it in footnote. The Florida Court held: Congress specifically authorized the states to regulate pre–1972 sound recordings. "Any rights or remedies under the common law or statutes of any State shall not be annulled or limited by this title until February 15, 2067." 17 U.S.C. § 301(c). Where Congress specifically authorizes state action, the dormant commerce clause does not apply.[ref]Flo & Eddie, Inc. v. Sirius XM Radio, Inc. 2015 WL 3852692 District Court for the Southern District of Florida, 2015 at 6[/ref] The Judge in New York was also unpersuaded as to Sirius' dormant commerce clause argument, but for a different reason than utilized in California or Florida. Sirius's Dormant Commerce Clause challenge fails for a different reason: New York does not "regulate" anything by recognizing common law copyright. The issue is nothing more than a red herring. The Clause itself "withholds from the states[,] the power to regulate Commerce among the several States." SSC Corp. v. Town of Smithtown, 66 F.3d 502, 510 (2d Cir.1995) (original alterations omitted). Thus, "the strictures of the dormant Commerce Clause are not activated unless a state action may be characterized as a ‘regulation.'"[ref]62 F.Supp.3d at 351[/ref] Holding Sirius liable might affect interstate commerce—just as a finding of liability did in Sherlock. (citation omitted) But concluding that Sirius is liable under New York property law principles would not amount to a "regulation" of interstate commerce by New York. It would, therefore, not give rise to a Dormant Commerce Clause claim.[ref]Id. at 352[/ref] Yet, in the face of being a three time loser on this argument, SiriusXM seems hell-bent on pursuing it further. If only for the very reason that it could yield a significant savings to SiriusXM if it should prevail. If SiriusXM prevails on this argument on a final decision in any of the 9^th 2^nd or 11^th Circuit Courts of Appeals, the 5.5% royalty described above goes away, albeit prospectively. While the current court filing is silent on the contingency in the case of a Circuit split on the issue, correspondence with Plaintiff's counsel indicates there would have to be a final determination by the Supreme Court of the United States. See? It's as simple as explaining credit default swaps! Another form of hedging your bets.