> home
> About
> Contact Us
> Editorial Info
> IEEE-USA

01.12

Protecting Brand Reputation with Software Copyrights

BY EMMETT COLLAZO

When companies create software, from industrial-strength utility programs to web services to smart phone and tablet application programs, they create copyrighted works. One interest that copyright law immediately protects is a creator company’s innovative or creative expressions written in Python, C++, ASP, or any other coding language. But copyright protections can go much further: copyrights can also protect a creator company’s reputation.

The protectable reputation interest is best understood as the relationship between a creator company and the public. This reputation is unlike physical property because a creator company will not completely control the relationship. The relationship is partly controlled by the creator company, and partly by the public. Because the creator company does not control the entire relationship, the value in the relationship can change when competitors or other entities interfere with the relationship. Interference with the relationship can ruin a business’s intellectual property portfolio. Such damage to a business can be reflected on balance sheets, for example in the form of a change in the valuation properties of an intellectual property asset.

This article discusses how and when software copyright protections are strongest for creator companies, and why many creator companies have found that copyright protection, and not patent protection, is sufficient to preserve the creator companies’ rights. Additionally, because many creator companies may not yet have (i) the financial assets, or (ii) the time, to develop a patent portfolio, this article discusses how protections available in copyright law allow a creator company to depend on a copyrighted work’s value when making the creator company more attractive for investors, or merger or acquisition opportunities. 

The strongest legal protection for a copyright is an injunction

While there are many ways to protect copyright interests, the nuclear legal option is the injunction. An injunction is a court order that either bars or restrains an entity from some action, or forces an entity to take a specific action. In the software context, an injunction usually takes the form of a restraining order, which bars an infringing company from distributing, selling, or licensing infringing software. Such an order barring distribution, sales, or licensing is a nuclear option because the court’s order will quickly take effect throughout the United States, even if massive shipments of a product (for example, electronic devices containing software programs that infringe another’s copyright) are on the verge of being released to the public. The injunction order is backed by draconian legal penalties, so a court can fashion obedience to the injunction order.

Interference with a copyright typically arises in one of two ways. Either a competitor has copied a software program without any permissions (copyright infringement), or a competitor has modified a copyrighted work, therefore is making an unauthorized derivative work with the software (infringement of derivative works). In either case, a competitor’s subsequent distribution, sale, or licensing of that program is fodder for injunction litigation. The copyright owner may ask a court for a temporary restraining order or a preliminary injunction at the earliest stages of a lawsuit. At the injunction hearing, the copyright owner will have the burden of proving why an injunction is warranted.

Injunction law at the heart of such a hearing, and specifically the legal burden on copyright owners, has radically changed in the last five years. The law continues to change, albeit in a predictable direction. Broadly, in today’s copyright infringement lawsuits, courts will ask a copyright owner, and the alleged software copyright infringer, how each side, and how the public, is being harmed by continued infringement. The victor will be the party that provides the best evidence of one of two narratives: a trademark-like narrative, where an injunction is favored, or a patent-troll narrative, which is disfavored.

From RIM to eBay

These narratives have developed in injunction litigation as the courts have compared and distinguished lessons from patent litigation (concerning uses of an inventors’ knowledge),[i] trademark litigation (concerning branding and reputation disputes), and copyright litigation. Regarding lessons from patent injunction cases, courts have learned the largest lessons from the Research In Motion (RIM) and eBay cases. In the former, a Virginia-based patent holding company, NTP, Inc., sued Canadian Blackberry maker RIM. In the early 2000’s, RIM had created the first widely commercialized wireless email system. NTP, which tried but failed to commercialize wireless email, sued RIM to prevent RIM’s inadvertent infringement of several NTP patents. After years of litigation, a court found RIM inadvertently infringed NTP’s patents.

Unfortunately for RIM and the Blackberry-using public, the general rule, in the United States at the time was where a court found infringement, the remedy for the infringement was an injunction barring the continued infringing activity. The seemingly accepted theory was that, like an intruder trespassing on a property owner’s land, RIM (the intruder) should not be allowed to continue to trespass on NTP’s patents. RIM was ordered to cease infringing activity, which included an immediate, nationwide end of RIM’s wireless email service for millions of Blackberry owners. To avoid the automatic injunction, and to allow the millions of Blackberry owners to continue using its service (including federal and state government employees) RIM paid NTP $612.5 million to buy off the injunction. Then, approximately three months after this settlement, the U.S. Supreme Court decided eBay.

On 15 May 2006, the U.S. Supreme Court’s eBay decision overturned the Federal Circuit’s “general rule” that permanent injunctions should be ordered as an automatic remedy for patent infringement.[ii] Like the NTP case, the patent holder in that case counted on the general rule to leverage a finding of infringement to win a large settlement. During oral argument, the Supreme Court Justices discussed the rights of patent “trolls,” and how intellectual property was unlike physical property. Ultimately, the court eliminated the general rule, and the unanimous court reminded the courts to use the proven, centuries-old, traditional multi-factored test when evaluating injunction requests. The test states that an injunction “may” (not “should” or “shall”) be granted if an intellectual property owner proves:

(1)    a likelihood of irreparable harm will accrue to the intellectual property holder, absent the injunction,

(2)    that monetary damages are inadequate to compensate for the harm of infringement,

(3)    that “balance of the hardships” between the parties favors the intellectual property owner (this is where the court should consider harm of an injunction to the infringer), and

(4)    that the “public interest” would not be disserved by the injunction (the “public interest” includes considering harm of an injunction to third parties).

The unanimous opinion also stated that the test must be used “in patent disputes no less than in other cases governed by such standards.” These “other cases” include copyright and trademark cases.

Several Supreme Court Justices then took the time to level a specific warning to the lower courts. In the concurring opinion, Justice Anthony Kennedy, joined by three other Justices, wrote that courts should watch for non-practicing entities – firms using intellectual property only to obtain licensing fees – who might use the injunction threat as “a bargaining tool to charge exorbitant fees.” These four members of the Court called for judges to consider the threat of an injunction being used “simply for undue leverage in negotiations.” If a judge found a patent being used as such a bargaining tool, the judge should not order the injunction reflexively. Unlike an intrusion on property, such infringement could be compensated monetarily.

The slow adoption of eBay into copyright law

In the last five years, the courts have paid close attention to eBay’s commands, as well as Justice Kennedy’s concerns. However, when the courts have taken the eBay warnings to heart and changed their precedents in trademark and copyright cases,[iii] they have been left with a problem. Before eBay, and like patent cases, trademark and copyright infringement cases were usually decided with general rules. Where trademark or copyright infringement occurred, an injunction was usually found warranted.

Since the 2006 eBay decision, courts have rightly removed the taint of these presumptions from their copyright and trademark injunction precedents. But without the easy use of general rules, courts are left the hard work of determining the remainder of the balancing test, specifically (1) when money sufficiently compensates infringement harms, and (2) how courts should value the public interest in continued infringement. For copyrights specifically, courts have no consistent standards in the copyright context for addressing the issue raised by eBay, namely: how do courts know when a copyright is so minor an interest that (i) the copyright injunction is being used for undue leveraging to charge exorbitant fees, (ii) the copyright injunction would not serve the public interest, and (iii) an involuntary copyright license should be allowed?[iv]  In part, the challenge exists because courts cannot simply adopt patent or trademark law injunction precedents wholesale. However, courts have been adopting, and continue to adopt, predictable lessons from those intellectual property fields.

Lessons for software companies: Psystar and Bethesda

In trademark cases, even with eBay’s cautions, injunctions are frequently, if not reflexively, granted, because courts have learned that an irreparable harm exists when infringers interfere with the relationship between potential consumers and trademark owners. This confusion can lead to the complete loss of business’s reputation, or loss to a business’s goodwill in a product’s source. These harms are so great to consumers and trademark owners that unlike patents and copyrights, and despite eBay, the old “general rule” of an automatic injunction has seen almost no change after eBay, as the reputational harm is “inescapable.”[v]

Like the trademark injunction considerations of preventing consumer confusion and protecting reputation and goodwill, and unlike the criticized use of a patent as a mere bargaining tool, courts have determined that copyright infringement may also involve the loss of the right to control reputation or goodwill. For example, in 2009, Apple sued Psystar, another California software company, because Psystar made a derivative product from Apple’s copyrighted operating system software. The interference with Apple’s famous “walled-garden” approach to its software products struck a chord with the court. The court barred distribution of Psystar’s product because “[w]ith respect to its brand, business reputation, and goodwill, [copyright owner] Apple has put forth significant evidence, undisputed by Psystar, that its investment in and commitment to high standards … would be irreparably harmed” unless the court ordered an injunction.[vi] The court ordered the injunction, protecting Apple’s copyrights in its OS software programs. Similarly, in a 2010 software injunction case, Splitfish AG v. Bannco Corp., the court ordered an injunction to restore a software company’s “intangible right to control the means and methods by which copyrighted [software code] is seen by the public.”[vii]

In contrast to the Psystar and Splitfish cases, courts have not favored attempts to use a copyright in the way the patent owner did in the RIM case, when there is no interference with the creator’s relationship with the public. In the case of Bethesda Softworks v. Interplay Entertainment, video game developer Bethesda Software sued to enjoin Interplay Entertainment from an internal project, which included changes to Bethesda’s “Fallout” video game software. But when the court learned that nothing had been released to the public, the court decided there was no reason to order the injunction. Rather, the infringement occurred in “an internal development project.” The court found “[t]here can be no launch of [the software] without express permission from [the copyright owner]” so no injunction was needed.[viii] Thus, the use of a copyright to ransom a settlement was not accepted. The key issue is whether the infringer harms the software author’s relationship with the public, and not just that infringement occurred.

Lessons from the entertainment industry: the public interest factor is malleable

As in the software industry, in the entertainment industry, to avoid an injunction, copyright infringers must show that the infringer’s conduct will not interfere with a reputation or relationship between the copyright owner and the public. For example, in the literature context, copyright protections have included a First Amendment right to “not speak” in order to protect reputational interests, and control over an author’s work. That First Amendment right was cited in a 2010 case involving an author who used, without permission, J.D. Salinger’s famous character Holden Caulfield.[ix] In that case, the court sided with the content owner, Mr. Salinger, who, like Apple in the Psystar case, had gone to great efforts to protect his reputation, as well as his characters’ reputations, such as in a number of lawsuits.

Courts do not agree on when copyright infringement is sufficiently in the “public’s interest” (factor four from the eBay test). In rare cases, copyright infringement can create jobs. For example, in the May 2011 injunction dispute between a tattoo owner and movie distributor Warner Brothers, the court found the public interest factor was “significant” and “disruptive,” in that thousands of jobs and numerous businesses depended on timely release of The Hangover II.[x] While copyright infringement will be allowed to continue if infringement creates thousands of jobs, cure massive business problems or human diseases, those are rare cases.

Courts often look for a much lower standard. In one 2011 case, a court found the public interest factor in the eBay test was sufficient because the public had an interest in the continued enjoyment of watching replays of NFL games.[xi] Yet, while in that case the public interest was served by allowing replays of a sporting event, the same court, in a case involving Disney’s copyrights, found the public interest defaults to the copyright owner to protect the sanctity of copyrights.[xii]

The lesson from the above is that for infringers, the public interest consideration is the most malleable eBay factor, and holds the most potential for infringers to avoid an injunction. Infringers should try to support a narrative that (1) the copyright owner is more like a non-practicing entity, therefore any irreparable harm that may exist is limited, and (2) tangible harm to third parties (the public) exists if the injunction is granted. Meanwhile, software copyright owners are best protected with a focus on reputational interests, and not on the absence of the public’s interest in infringement.

Conclusion

In its simplest form, eBay was meant to remove the “common judicial response” in intellectual property cases that where infringement existed, an injunction was automatically warranted. To curb undue leverage in settlement negotiations, courts in copyright cases are slowly adopting principles that led to the eBay decision.  Their work is far from over.  Courts are continuing to create post-eBay case law that removes opportunistic ransoming of infringers’ business interests, while also slowly separating truly irreparable infringement injuries (for example, harms to the reputation relationship), from infringement that may actually serve the public interest. 

In that vein, infringers are avoiding injunctions when their legal teams can provide a narrative that focuses on the copyright owner as a non-practicing entity that merely seeks to obtain undue leverage in its suit, and preventing infringement would harm the public interest.  Meanwhile, copyright owners are best served by cloaking themselves in copyright values that work like trademarks, where, without an injunction, infringement creates irreparable harm to reputation, goodwill, and a software author’s control over its creations, and the users’ relationship with those creations. Legal teams will not be able to offer black and white predictions as copyright injunction law evolves, except for one: the power of an injunction will likely be denied where the software copyright owner allows itself to be painted as a non-practicing copyright troll seeking to extract excessive licensing fees.

Endnotes

	Comments on this story may be emailed directly to Today's Engineer or submitted through our online form.

This article does not constitute legal advice as every situation is different. Consult your attorney before making any decisions.

Emmett Collazo is a registered U.S. patent attorney at Porzio Bromberg and Newman, P.C.  He focuses on national and international patent, trademark, and copyright disputes.

  home