Sunday, June 27, 2010

SDNY: Bernie Madoff Videos and the Copyright Act's Preemption of State Law Claims

" is virtually impossible for violations to go undetected on Wall Street today..."  Bernie Madoff, in the 2007 YouTube interview I posted below.   Watching the video is really like a punch in the stomach, and I didn't even lose any money.

Another Bernie Madoff video was at issue in Stadt v. Fox News Network, 2010 WL 2540957 (S.D.N.Y. June 22, 2010)(SAS).   Stadt had a 2003 copyrighted video of Madoff on vacation.  He licensed it to Fox for a period to be labelled as a "Fox Business Exclusive" for $10K.  After the license ran out, he caught Fox still using it and licensed it for an additional $50K.   After that license ran out, he caught Fox using it again.  After he contacted them, they stopped using it, but wouldn't tell him how many times it was downloaded after the license expired or give any information on how much money they'd made from it.   He sued for copyright infringement and the following seven claims.

1. breach of contract;
2. conversion;
3. breach of fiduciary duty and an accounting;
4. deceptive trade practices in violation of section 349 of New York General Business Law
6. unjust enrichment; and
7. unfair competition

Fox moved to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, raising the issue of preemption.  "Preemption" comes about because the Copyright Act says basically that the Copyright Act exclusively governs copyrights in 17 USC 301.   So if the Copyright Act governs copyrights, how can state law govern copyrights?

State law comes up when someone enters into a contract for the sale (assignment) or rent (license) of copyrightable subject matter.   So a person's act may be both a copyright infringement AND a breach of contract.  Sorting out which state law claims are "equivalent" to copyright infringement claims sounds easy, but in fact requires a careful, fact-based analysis.

Practice Tip:   Where a plaintiff has thrown in the kitchen sink in a copyright pleading and realizes that certain state law claims may not be worth fighting for, prior to any answer or summary judgement motion being filed, the plaintiff may simply file a notice of dismissal without prejudice under Rule 41(a) of the Federal Rules of Civil Procedure.   This is a good idea in copyright litigations because at the end of the day, if one forces a court to resolve weak claims against you, it may affect/reduce an ultimate assessment of attorneys fees.  An alternative, if you see that your Complaint failed to plead necessary elements (your adversary's motion to dismiss is likely to point this out to you, is to cross-move for leave to amend pursuant to Rule 15 of the Federal Rules of Civil Procedure with a Proposed Amended Complaint attached to your papers.

In Stadt v. Fox Network, the district court, Judge Scheindlin considered whether each claim was preempted by copyright or whether Stadt had failed to state a claim:

The Copyright Act expressly provides for preemption of state law.FN29 In Briarpatch Ltd. v. Phoenix Pictures, Inc., the Second Circuit held;

FN29. See 17 U.S.C. § 301(a).

The Copyright Act exclusively governs a claim when: (1) the particular work to which the claim is being applied falls within the type of works protected by the Copyright Act ..., and (2) the claim seeks to vindicate legal or equitable rights that are equivalent to one of the bundle of exclusive rights already protected by copyright law.... The first prong of this test is called the “subject matter requirement,” and the second prong is called the “general scope requirement.” ... The general scope requirement is satisfied only when the state-created right may be abridged by an act that would, by itself, infringe one of the exclusive rights provided by federal copyright law.... [T]he state law claim must not include any extra elements that make it qualitatively different from a copyright infringement claim.... To determine whether a claim is qualitatively different, we look at “what [the] plaintiff seeks to protect, the theories in which the matter is thought to be protected and the rights sought to be enforced.” FN30

FN30. Briarpatch Ltd. v. Pheonix Pictures, Inc., 373 F.3d 296, 305-06 (2d Cir.2004) (emphasis added) (citations omitted).

The court takes a “restrictive view” of what qualifies as an extra element sufficient to shield the claim from copyright preemption.FN31 Nevertheless, “a state law claim is qualitatively different if it requires such elements as breach of fiduciary duty, or possession and control of chattels.” FN32
FN31. Id. at 306. FN32. Id.

Although the court looked only to 17 USC 301(a), let me quote both 301(a) and (b) for you, with screaming loud bold to make reading the statute easier, full statute here:

§ 301. Preemption with respect to other laws:

(a) On and after January 1, 1978, all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

(b) Nothing in this title annuls or limits any rights or remedies under the common law or statutes of any State with respect to —
(1) subject matter that does not come within the subject matter of copyright as specified by sections 102 and 103, including works of authorship not fixed in any tangible medium of expression; or
(2) any cause of action arising from undertakings commenced before January 1, 1978;
(3) activities violating legal or equitable rights that are not equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106; or
(4) State and local landmarks, historic preservation, zoning, or building codes, relating to architectural works protected under section 102(a)(8).

The Judge's conclusion:


For the reasons set forth above, Fox's motion to dismiss the breach of contract claim is denied. Fox's motion to dismiss the breach of fiduciary duty and an accounting, section 349, unjust enrichment, and unfair competition claims is granted. These claims are dismissed with prejudice. Fox's motion to dismiss the conversion claim is granted, and this claim is dismissed with leave to replead.

Stadt v. Fox News Network LLC, 2010 WL 2540957, 7 (S.D.N.Y. 2010).

Conversion under New York State law requires a demand for the return of a chattel, and the holder's refusal to return the chattel.  The court found that plaintiff's hadn't alleged a demand or refusal, so was granted leave to replead.  In copyright cases a conversion claim usually involves something like masters or high quality originals from which copies can be made that the defendant failed or refused to give back.

Chapter 10 of my Copyright Litigation Handbook is titled "Removal from State Court and Preemption".  In it I discuss the preemption doctrine and how it applies in litigation involving copyrighted works.

Will plaintiff really demand the return of the Bernie Madoff video?  Stay tuned.

Purchase Copyright Litigation Handbook from West here

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