A Court’s Ruling Demonstrates the Need for a Heightened Originality Requirement for Derivative Sound Recordings

By Timothy McMahon (Rutgers Law Student)

In 2016, a Federal District Court in California sent shock waves throughout the realm of sound recordings. ABS Entertainment vs. CBS Corporation, ABS v. CBS, began when a collective group of copyright owners of pre-1972 sound recordings brought suit against CBS for infringing on their public performance rights under state law. CBS brought forth a daring argument that the sound records they used were not the pre-1972 sound recordings instead when the pre-1972 sound recordings were transferred from analog format to digital format it created derivative works, and thus subject to the compulsory licensing scheme set up under the Copyright Act. The court agreed and found that these digital copies were in fact derivative works. What is most surprising about this holding is how low the court set the bar for originality for derivative sound recordings—a medium that should require a higher originality requirement. 

 At the heart of the case was the question of originality. The threshold for originality is low and the degree of creativity needed to satisfy originality is only “minimal” or “extremely low”—even a slight amount will suffice. The standard does not change when the work in question is a derivative work, however, there must be sufficient variation from the original work to distinguish it from the prior work in a meaningful manner.

The court relied on Circular 56  to determine whether the new sound recordings meet the minimal threshold of originality. Circular 56 states that a derivative sound recording must “be rearranged, remixed, or otherwise altered in sequence or character, or the recording must contain additional new sounds” to meet the originality requirement. The originality requirement will not be met if “mechanical changes or process, such as a change in format, delinking, or noise reduction” are made to the preexisting work.

CBS argued that changes to the timbre, spatial imagery, sound balance, and loudness were sufficient to meet the originality that Circular 56 laid out. They introduced two sound engineer’s expert testimony—one of the sound engineers personally remastered a number of the sound recordings at issue—to support their argument. The first sound engineer claimed that remastering process requires substantial “personal aesthetic” choices, and a good sound engineer would never do a simply “drag and drop” when converting the sound recording from analog to digital. The second sound engineer performed forensic test that focused on the timbre, spatial imagery, sound balance, and loudness of the two sound recordings and concluded that they were different. He did not elaborate how they differed with regards to these four areas, only that the sound recordings differed. The court found this to be enough originality to be considered derivative works and granted summary judgment.

The court is creating serious problems by holding the bar for originality in derivative sound recordings so low. Holding the originality requirement low for other derivative works is problematic, but these problems are magnified in derivative sound recordings because of the unique nature of a sound recording. Each musical track has two distinct and independent copyrighted works (1) the musical composition and (2) the sound recording. The listener’s focus will be on the musical composition and not pay attention to the sound recording. An artist could modify a painting slightly and viewers will take notice, the same cannot be said about sound recordings. Only when changes are drastic will listeners take notice. The difficulty of ascertaining what has changed in a derivative sound recording calls for a greater originality requirement in sound recordings as compared to other derivative works, and the following problems will emerge if this low standard is kept.

The first of such problems is trying to determine what is actually protectable. In derivative works, only the original elements added to the pre-existing work are actually protected in their copyright. With the bar as low as it was set in ABS v. CBS, it will be difficult—if not downright impossible—to determine what preciously is copyrightable in the derivative sound recording. The sound engineer who performed the forensic test could only determine the sound recordings were different with regard to four areas. He was unable to pinpoint how they were different, only that they differed. If we cannot identify preciously what new element has been added or changed, then we cannot grant copyright protection.

 Another problem that could arise from a low bar of originality for derivative sound recordings is the possibility of judicial error in adjudicating cases. In Gracen v. Bradford Exchange,  Judge Posner stated that artistic originality is not the same as originality under the Copyright Act and should not be the end all be all for in determining originality. Most artistic choices can be identified and raise no problem with originality, but certain choices may be so nuanced that they escape the notice of the judge. Judges after all are human and are capable of making mistakes, if the originality is ever so slight it is foreseeable that judges will make errors in adjudicating cases. The possibility of this occurring in derivative works is higher, thus Judge Posner required a higher level of originality was needed for derivative works. The possibility for judicial error will be even greater in sound recordings if the originality of a work can only be discovered through a forensic test.

The final problem with holding the bar so low is how will a copyright owner—either the original sound recording or the derivative sound recording—know when their rights have been infringed. Posner allude to this in Gracen, that if an original work of authorship and a derivative work were insurmountably similar it would lead to overlapping claims.  When the creator of a remastered work could not identify what he added by the naked ear, how will anyone know which version is being used? How will a copyright owner be able to determine if their rights have been infringed? A higher originality standard would allow copyright owners to know if and when their rights have been infringed upon.

By holding the requirement for originality for derivative sound recordings so low, the court in ABS v. CBS is opening the flood gates for future problems. In order to correct these problems, the Ninth Circuit should overturn the District Court and should implement a higher threshold of originality for derivative sound recordings.

Could Pre-1972 Sound Recordings Finally Attain Federal Copyright Protection?

By Timothy McMahon (Rutgers Law Student)

Currently a trio of acts are making their way through Congress that could forever change copyright law for sound recordings. The Music Modernization Act and the Allocation for Music Producers Act (AMP Act) are aimed at altering mechanical licensing, ASCAP and BMI rate setting, and the procedure on how producers collect royalties operate. The last of the trio, the Compensating Legacy Artists for their Songs, Service, & Important Contributions to Society Act (CLASSICS Act), seeks to do something that music producers and copyright lawyers have wanted for decades, to grant federal copyright protect to pre-1972 sound recordings. Two questions that need to be asked are how will the CLASSICS Act impact these sound recordings and will the it actually pass Congress?

Sound recordings are “works that result from the fixation of a series of musical, spoken, or other sounds but not including sounds accompanying a motion picture or other audiovisual work.” The copyright in a sound recording exists separate and independent of the copyright of the underlying work. Originally sound recordings were protected by a mixture of state statutes and common law. This changed when Congress enacted the Sound Recording Protection Act of 1971 to grant federal copyright protection for sound recordings made after February 15th, 1972. Sound recordings created before this date, pre-1972 sound recordings, were not granted federal copyright protection, however, they were not stripped of their copyrights either. Instead the Act allowed for these pre-1972 sound recordings to remain protected under the current patch work of state laws.  

Sound recordings made after February 15, 1972 are governed under the Copyright Act are subject to a compulsory licensing scheme. This compulsory licensing system is put in place to minimize transaction cost associated with finding and negotiating with individual copyright holders. Section 114(d)(1) of the Copyright Act grants terrestrial broadcast radio a license without having to pay to perform the sound recordings. Later, in the Digital Performance Right in Sound Recordings Act of 1995 (DPRA), Congress established a performance right in sound recordings in digital transmission and created a licensing system for digital broadcast radio. Unlike terrestrial radio, digital radio must pay for this license through the SoundExchange. No matter what type of radio station is playing the sound recording, the copyright owner of the underlying work still collects a royalty.

Pre-1972 sound recordings are not governed by the federal regime of copyright law, thus are not subjected to this compulsory licensing scheme. This has created conflicts between radio stations and copyright owners. Theoretically, both terrestrial and internet radio broadcasters would need to find and negotiate the use of each sound recording in order to play it on the radio—this rarely occurs. The amount of settlements and litigation over the violation of pre-1972 sound recordings have increased dramatically and copyright owners are learning the hard way that state copyright laws are inadequate in protecting public performance rights. Some states like Florida and New York have concluded that public performance rights do not exist in sound thereby allowing radio stations to freely broad cast the sound recordings without paying the copyright owner. Even in states where a public performance right exists, radio broadcasters still freely violate them. Pre-1972 sound recording copyright owners are crying out that it is unfair to be treated differently from their federally protected counter parts and has caused them to miss out on revenue they should be entitled to.

How will the CLASSICS Act seek to remedy this problem? The act falls short of fully federalizing these sound recordings, however, it does solve the problem of a lacking uniform licensing scheme for pre-1972 sound recordings. The Act gives pre-1972 sound recordings a public performance right and incorporates them into the current federal licensing scheme—where terrestrial radio broadcasters do not pay royalties and digital radio broadcasters pay royalties. The Act also clarifies that pre-1972 works are protected under the same safe harbors as sound recordings governed under the Copyright Act. Outside of these two changes, the Act leaves intact the state regimes for governing pre-1972 laws. While this act leaves open future problems that can arise by not fully federalizing pre-1972 sound recordings, it would be a major step forward for ensuring economic fairness among copyright owners in pre-1972 sound recordings and clearing up this current legal grey area.

The second question that must be asked is how likely will the CLASSICS Act be passed? Previous attempts and advocacy for pre-1972 sound recordings to be brought into the federal copyright regime have failed to gain traction, however, the current outlook is far better than previous attempts. The cause has gained momentum and the Act has currently been introduced in both the House and the Senate, with support from both parties.  In addition, prominent music organizations and 240 prominent artists have been actively campaigning for Congress to pass the Act.  With the growing number of lawsuits and cloud of doubt surrounding this area of law, the support for this Act will only continue to grow.

Despite growing awareness and support, there are some reasons that could either delay or defeat the passage of the CLASSICS Act. If Congress does not pass the Act prior to summer recess it will certainly lose momentum in the immediate future. This is because in the fall many members of Congress will be more focused on campaigning then legislating. In addition, two key sponsors of the Act, Representative Issa and Representative Goodlatte, are not seeking re-election and will be leaving Congress. This means that the Act is about to lose two of its major advocates. Also, the Act is expected to face stiff resistance from digital radio broadcasters. Sirius XM has already begun advocating against it. In an opinion piece, Sirius XM CEO Jim Meyer attacked the bill as being unfair to digital radio. Jim Meyer claims that by treating radio broadcasters differently this Act would again benefit terrestrial radio and imposes greater costs on digital radio. He suggested the Act should force terrestrial radio to pay for their license at the same rate as digital radio. Bringing terrestrial radio into the realm of paying for their license has struggled under the Fair Play Fair Pay Act.  If Congress were to amend the CLASSICS Act to reflect Meyer’s wishes it would almost certainly quash any hope of the Act passing.  Due to these factors—and the stiff resistance expected from digital broadcasters—it is unlikely that the current Congress passes the CLASSICS Act.

In summation, the CLASSICS Act would do a lot to solve the fairness problems and the legal grey area that surrounds pre-1972 sound recordings. Eventually this growing momentum will push this Act to become law, but do not expect it to be passed by the current Congress.

Tariff On Chinese Goods: A New Protection For Future Intellectual Property

By Spencer Chorney (Rutgers Law Student)

President Trump recently signed a memorandum instructing the United States Trade Representative (USTR) to introduce a new tariff worth $50 billion on Chinese goods imported into the United States under the Section 301 of the 1974 Trade Act.  The premise of this tariff comes from the theft of U.S. intellectual property that China has continuously  performed. Amongst the types of goods that are being targeted include, but are not limited to, aerospace components, information communication technology and machinery.

The Commission on the Theft of American Intellectual Property has estimated that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion. The goal of the tariffs is to limit future theft of U.S. intellectual property and to decrease the current losses that are being experienced.

In addition to the tariffs, President Trump instructed the USTR to filed a request for consultations with China at the World Trade Organization (WTO) to address China’s discriminatory technology licensing requirements. The USTR claims under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), China is breaking WTO rules by denying foreign patent holders, including U.S. companies, basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends.  Another WTO rule that China appears to be breaking is imposing mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology.

The request for consultation is the initial step the settle WTO disputes. However, if the United States and China are not able to reach a mutually agreed upon settlement, the United States may request the establishment of a WTO dispute settlement panel to review the matter.

In response to the actions taken by the U.S., China called it strongly disappointing and firmly opposes the request for consultation. China also called the actions self-defeating for the U.S. because they will directly harm the interests of U.S. consumers, companies, and financial markets. Additionally, China believes international trade order and world economic stability are also in jeopardy.  

However, China was not willing to back down. Although they stated that they are not in favor of a trade war, they are neither afraid of nor willing to recoil from a trade war. China is confident and believe they can face any challenge.

In an interview with NPR, Scott Kennedy, a specialist on China’s economy, discussed China’s use of American intellectual property. Kennedy states China has joined every international intellectual property rights agreement in the past 30 years and they have developed their own copyright, patent, and trademark laws. However, China’s policy when it comes to the high-tech industrial is about acquiring technology.

With both implementing the intellectual property laws and following the national high-tech industrial policy, conflict arises.   Chinese companies are more incline to try and achieve the policy than to follow the legal framework in place because they believe that the importance of satisfying the national interest might—and has—cause the government to ignore any of the legal violations.

Introducing the tariff has the potential to pressure China into changing their methods, however, it is a double-bladed sword. As Kennedy points out, the tariff could lead to a trade war that would only increase the theft of intellectual property.

Early reactions on the tariffs have not been good. The Dow dropped 724 points, or 2.9%, as a result of the looming tariffs on China. That decline in the Dow Jones was the fifth-largest point decline in history and the market’s worst day since the extreme turmoil of early February. However, this might have been an unavoidable circumstance to a necessary action.

The ability to control intellectual property is crucial to future of the U.S. economy. With innovation in all fields being the most important thing in the foreseeable—and unforeseeable—future, if other countries can ignore the laws and policies put in place, they will control the market. With the possible theft of their intellectual property, inventors might be disincentivize from innovating if there is no reward for their work. A resulting stagnation in U.S. innovation, as a result of fearing for intellectual property theft, will cause a larger hit on the economy in the long run, than the 2.9% drop. 

The actions taken by the U.S. to halt China’s intellectual property theft is an initial step to be better off in the long distance future, even if there is a some immediate decline.


Microtransactions: Small Payments With Huge Consequences

By Christopher Campise (Rutgers Law Student)

A microtransaction occurs when a customer, usually the owner of an internet capable app or game, makes a small purchase within the medium to unlock more content. Often, this business model is employed by developers in freemium contexts, where the initial download is free, but more extensive features and content can only be unlocked after the payment of real-world currency. However, advancing technology has resulted in microtransactions being employed in an ever expanding array of settings, including education. This is troubling as gamers, users, and students frequently lack basic ownership rights in the virtual property they purchase.  

The use of microtransactions is not exactly a new practice. Decades ago, microtransactions arguably appeared in phone booths, where quarters were inserted to purchase minutes, and in arcades, where coins and tokens were used to purchase extra races or lives. In these situations, microtransactions were benign, real currency was exchanged for an immediately used temporary and tangible benefit.  

Unfortunately, the situation is much different today. Rather than simply place a coin in a machine, customers must now assent to complex boilerplate clickwrap and browsewrap agreements. In short, these are contracts whose terms a user must accept before accessing the product. A common example would be the terms and conditions Apple forces all iPhone users to accept in order to update their devices.

Nevertheless, despite their widespread use, the average consumer of digital content often fails to even read these agreements. For example, retailer GameStation added language to its terms and conditions stipulating that whoever bought games from their site after a certain date, agreed to relinquish ownership of their “immortal soul” to GameStation should the retailer exercise the option. Of course, this was an April Fool’s prank by the retailer, but it was intended to send a serious message, as over 7,500 people had essentially willingly signed away their souls.

Additionally, these agreements are usually strikingly biased in favor of the developers and control customers’ rights within the applications in almost every way. Furthermore, assent to such contracts does not necessarily result in direct ownership of the product. Although many customers likely believe that they are granted a vested property right when they purchase an app or game, they instead often receive only a revocable license.

This does not mean that agents of the developer will be dispatched to repossess the licensed property, but in the context of applications with online capability, it could mean that support is legally revoked, sometimes resulting in lost purchases, gameplay functions, or progress. An example of such a contract is the end user license agreement (basically a type of clickwrap) applicable to enablegames’s games for players with disabilities. This agreement states in part that users are entitled to a “revocable right and license…to use one copy of the [g]ame software.”

With regard to microtransactions, many concerning issues arise from the use of these agreements. Many of the contracts even state that users have no legal rights in the virtual content they purchase. Thus, in theory, substantial amounts of real world currency could be stolen or lost if the developer decided to seize or otherwise dispose of the virtual assets. Additionally, the lack of a vested property interest in the virtual content means that a user would have no legal recourse if the property were stolen by a third party via hacking or otherwise. Ironically, even if there were legal rights in the virtual content, there would still be highly limited legal recourse against the developer, as the initial agreements usually mandate that arbitration be employed in the event of a dispute.

Basically, developers are subjecting their customers to their own self-serving legal regimes. Regardless of how much money is spent via microtransactions, in-app content and sometimes even the applications themselves, can be seized or revoked at will. No court order, warrant, due process, or other legal protections are applicable. The developers can also amend these self-contained legal systems at will, with no repercussions or user input. For example, Steam, a popular entertainment platform where games can be bought and played, recently informed one customer that should he not accept the updated clickwrap agreement, his account and all of its content could be permanently deleted.

In almost no other area of law can one’s property rights, achieved through a legal exchange of currency, be instantly and arbitrarily extinguished by a private party. Fortunately, there are signs that courts will begin to protect the rights of the digital consumer, as users begin to invest ever greater amounts of time and real-world currency into an increasingly diverse range of applications. For example, in Bragg v. Linden Research, the District Court for the Eastern District of Pennsylvania ruled that a user was not compelled to participate in mandatory arbitration with a developer, despite his accepting of the terms and conditions which provided for it. This was significant since Bragg was one of the first decisions of its kind, and the player stood to lose the equivalent of thousands of dollars of in-game assets. The court ruled in favor of the user, stating that the developer’s terms and conditions were unconscionable.

Regrettably, courts have also ruled against the consumer in such contexts. For example, in ProCD, Inc. v. Zeidenberg, the Seventh Circuit upheld a physical form of clickwrap, called a shrinkwrap, on the theory that usage of software is sufficient to constitute acceptance of the agreement’s terms. However, the ProCD court did note that such agreements could still be voided under established doctrines such as unconscionability. Hopefully, with the increasing prevalence of microtransactions, courts will err on the side of user protection, as in Bragg.

Generally, unconscionability is a defense against enforceability of contracts broken into two parts, procedural unconscionability, and substantive unconscionability. Procedural unconscionability primarily addresses problems in the bargaining process. On the other hand, substantive unconscionability is focused more on issues with the terms of the contract itself, such as gross bias.

Unconscionability seems well-suited to challenge the traditional agreements governing applications and their content due to the increasing use of microtransactions. From a procedural unconscionability standpoint, users with little to no negotiating power must accept the often buried, almost concealed terms of these agreements, if they want access to their device or app. Thus, given the ubiquity of these apps and other mediums, users are essentially forced to accept their surprising terms, potentially forfeiting their content, if they want to remain current with modern society. Speaking to a similar line of reasoning, Justice Sotomayor once stated that courts must, “reconsider…premise[s]…ill suited to the digital age.” Certainly, the law up to this point had not conceived of digital property, paid for with microtransactions, being unfairly seized in a virtual world.

Similarly, from a substantive unconscionability standpoint, the rights granted to the users are wholly biased and insufficient. As it stands now, users have virtually no protection under the terms of the agreements they are forced to accept, which can usually be amended at any time. Some courts find substantive unconscionability is present when the contract terms “shock the conscience.” Surely, it would be difficult to find a situation more shocking to the conscience than people’s assets being seized, lost or stolen on a whim, with no legal recourse. The fact that this property only exists in the digital realm is relatively meaningless considering that the virtual property carries just as much, and sometimes more, real monetary worth than more tangible assets.

In short, as technology develops, so too does the scope of microtransactions, which raises many concerns. For example, one newer virtual reality application designed to increase students’ familiarity with human anatomy, appears to be a useful pedagogical tool. However, the app initially only includes the skeletal system, with each new module of human anatomy requiring an extra purchase via microtransaction. It is difficult to imagine struggling students investing in an app, when their rights of use and microtransaction purchases could be extinguished at any moment via the terms of service. Rather, students would likely opt to pay the one-time fee to purchase a textbook, where ownership rights are not ambiguous and terminable.

Such possibilities are unfortunate as the application of virtual reality could provide a more intuitive experience than reading from a textbook. Another grim possibility is that wealthier students, not as concerned with potential loss and attending private schools with greater resources, will avail themselves of these new mediums, putting their peers at a disadvantage in an increasingly competitive job market. In addition, if educators become aware of this potential disparity, they might prohibit such tools, stifling the implementation of new educational methods. Similarly, in the gaming realm, users often enter virtual worlds as an escape from real life; little do they know that they are often escaping into a totalitarian regime, in which they lack even the most basic property rights. In sum, the increased attaching of real monetary value to virtual assets through the use of microtransactions, means that greater safeguards must be imposed to protect users’ investments.