A great deal of this growth stems from the increased access that children have to devices that are capable of supporting mobile applications, such as smart phones and iPads.  So perhaps it is not unexpected that the mobile app industry has started to attract some negative press, mainly from Congress on behalf of parents concerned about violent content and privacy issues. 

In an effort to preempt Congress from stepping in to regulate mobile apps, two industry groups, the Entertainment Software Rating Board (“ESRB”) and the CTIA (a wireless industry trade association), recently announced a voluntary rating system to help parents to make informed decisions about whether or not a given mobile application is appropriate for their children.  The ESRB has considerable experience in this realm, as they have been in the business of rating computer and console video games since 1994. 

The rating system will consist of two components.  First, there will be rating symbols to indicate age appropriateness.  This will be reflected through a menu of six possible rating symbols: early childhood, everyone, everyone 10+, teen, mature, adults only and rating pending.  Additionally, there will be content descriptors, which will pinpoint specific elements of the app that may have contributed to a given rating.  Content descriptors will include indications of: blood and gore, intense violence, language, sexual violence, and use of drugs.  Furthermore, the content descriptors will disclose whether the app shares personal information, utilizes user-generated content and/or connects to social networks. 

Ratings will be generated automatically based on a developer’s responses to a multiple choice questionnaire that is completed when the developer submits the app to a participating storefront.  The questionnaire is intended to assess the content of an app in light of the two-prong rating.  Developers will have the opportunity to appeal the rating for their apps should they disagree with the rating assigned.  The ESRB will also maintain oversight of the rating system by “routinely testing” the most popular apps and monitoring consumer complaints. 

The system has received a warm welcome in some circles.  AT&T, Verizon Wireless, Sprint, T-Mobile, U.S. Cellular and Microsoft have all signed on as initial subscribers.  But significantly the two largest mobile app providers–Google, the maker of the Android, and Apple, the maker of the iPhone and the iPad–have declined to participate. 

The Google Android Market currently offers more than 300,000 apps which are rated using a four-tier system based on maturity level (everyone, low maturity, medium maturity, high maturity).  Google has publicly stated that they are going to retain their own system because it is well-known and understood by Android users and developers. 

The Apple App store is currently home to over 500,000 apps.  The apps are rated by Apple according to age appropriateness.  Apple has refused to comment on whether or not they will participate in the new rating system, but has not yet included itself as a participant, which is widely understood to mean that they are politely rejecting the invitation. 

The ESRB has stated that due to the Android and Apple rating systems already in place, they are not terribly concerned about this resistance, since “the goal is to get information to consumers.”

Many questions about the mobile app rating system remain and it will be interesting to see how they play out:  First, with one of the principle goals of the system being to establish a standard rating system across all mobile app platforms, will resistance by Google and Apple marginalize this rating system?  Second, can a system that relies on developers to characterize their own applications truly be considered fair and objective?  Third, can a rating system that codes each app be successful  at a time when there are so many apps already available in the market with hundreds being released every day? 

Lastly, will this type of rating system will actually change behavior?  Unlike the movie rating system, which is enforced at the purchase of point, this proposed app system is cannot prevent adult-oriented apps from being accessed by children.  In that regard, it is more like the television rating system, which can provide guidance for parents but is not intended as an “active” shield. 

Interestingly, Apple, as a storefront operator, acts as a gatekeeper at the point of purchase.  When a user attempts to download an app with adult-oriented content, Apple’s App Store forces a pop-up message for the user to confirm s/he is over 17.  Which begs the question as to whether a rating system that is not enforced by the gatekeeper will be effective.

We will keep abreast of developments as the system is deployed by stakeholders in the app landscape.

**  Alison Peyser, an associate with the firm, assisted in preparing this article.

1)       Cartoon Network, LP v. CSC Holding Inc.

Among the most recent and important decisions impacting cloud-based storage and distribution of entertainment content was the Second Circuit’s 2008 decision in Cartoon Network, LP v. CSC Holding Inc. (“Cablevision Case”), which addressed the copyright implications of a cloud-based DVR system. Specifically, cable operator Cablevision Systems Corporation (“Cablevision”) announced plans in March 2006 to market a “remote storage DVR system” (“RS-DVR”) to allow subscribers without a stand-alone DVR to record cable programs on central hard drives Cablevision maintained at a “remote” location. In response, major networks and studios sued Cablevision in federal court, claiming that the RS-DVR would directly infringe their rights to reproduce and publicly perform their copyrighted works. The district court agreed and enjoined Cablevision from operating the RS-DVR system without additional licenses from the plaintiffs. Cablevision appealed and the Second Circuit reversed the decision on all three infringement counts.

The first claim rejected by the Appeals Court was that the brief caching of buffering data while Cablevision’s system queried whether the customer had actually requested the program be recorded on to the applicable hard drive violated the exclusive right of reproduction. The Appeals Court held that the buffering period was so negligible as to fail the Copyright Act’s requirement that a copy of work be fixed in a tangible medium “for more than a transitory duration.” This point is potentially significant for future cloud business models given that cloud-based services may enable the storage, manipulation and distribution of content in multiple formats across multiple devices, which will continue to no doubt further implicate transitory caching of content at multiple stages in the process.

The second claim reversed by the Appeals Court was that Cablevision was liable for direct copyright infringement for copying programs to the RS-DVRs. Here, the Appeals Court held that Cablevision did not evince the required “volitional conduct” that actually caused the copy to be made and found that Cablevision’s conduct in designing, housing, and maintaining a system did not amount to direct infringement.

The third and perhaps most controversial claim reversed by the Appeals Court was that the transmission of programming from the RS-DVR to subscribers who requested playback breached the public performance right. Here, Cablevision argued (and the Appeals Court found relevant) that, “because each RS-DVR transmission is made using a single unique copy of a work, made by an individual subscriber” only one subscriber is capable of receiving the transmission of that particular work and thus the performance is not “public”.

Ultimately, the holding in the Cablevision Case that individualized copies of content specifically streamed to subscribers from remote DVRs constitute private, as opposed to public, performances introduces a lack of clarity regarding the rights necessary for cloud-based transmissions of audio/visual content. Put simply, the question remains as to whether streaming of legally obtained content to an end user from the cloud (e.g., MP3 tracks stored in a digital locker, etc.) implicates the public performance right. As a result, purveyors of cloud-based business models are left considering whether additional authorization is required from copyright holders, and in the absence of obtaining that consent, whether the potential exists that another tribunal could later disagree with the Second Circuit’s holding in the Cablevision Case. Furthermore, the application of the holding in the Cablevision Case to alternate fact patterns and business models, as even the court itself acknowledged, provides limited guidance.

“This holding, we must emphasize, does not generally permit content delivery networks to avoid all copyright liability by making copies of each item of content and associating one unique copy with each subscriber to the network, or by giving their subscribers the capacity to make their own individual copies. We do not address whether such a network operator would be able to escape any other form of copyright liability, such as liability for unauthorized reproductions or liability for contributory infringement.”

2) Capitol Records, LLC et al. v. MP3tunes, LLC

Another recent and ongoing case potentially impacting the digital locker and cloud computing landscape is Capitol Records, LLC et al. (“EMI”) v. MP3tunes, LLC (See Initial Complaint, EMI Summary Judgment Memorandum and Response, MP3tunes Summary Judgment Memorandum and Response, and recent Summary Judgment Ruling). Here, multiple record companies and publishers affiliated with EMI have asserted, among others, various copyright infringement claims against MP3tunes, which operates two separate online services–specifically, MP3tunes.com and Sideload.com. MP3tunes.com allows users to store their music collections in online digital lockers, which they can then access from any computer or mobile device with an Internet connection. Sideload.com is a music search engine site that allows end users to search for links on the internet to downloadable music that can be uploaded (or “sideloaded”) to an MP3tunes digital locker. Once music is placed in an end user’s digital locker, the music becomes available for transmission to any IP-enabled device at the end user’s direction.

Based on the documents filed to date, EMI has asserted a series of both direct and secondary copyright infringement claims against MP3tunes, including claims that MP3tunes has forfeited its eligibility under the Digital Millennium Copyright Act’s (DMCA) Safe Harbor provisions for its illicit conduct in knowingly providing the means for end users to violate EMI’s copyrights via Sideload.com and failing to respond to takedown notices. In fact, the majority of EMI’s claims are based on the functionality and content made available via Sideload.com, which essentially aggregates URLs linked to digital music files that can be readily downloaded or sideloaded to an online locker. EMI has asserted that the infringing nature of the links posted on Sideload.com, as well as the corresponding files that are made available via the linked URLs that are then sideloaded into an MP3tunes digital locker violate EMI’s copyrights.

While a detailed analysis of the merits of EMI’s DMCA and contributory liability theories remain outside the scope of this post (and have yet to be entirely decided by the court), the district court, in its recent ruling on the parties’ summary judgment motions, did find that the MP3tunes was entitled to the Safe Harbor protections afforded under the DMCA, but further addressed a key issue emerging in the new cloud-based lockering environment. Specifically, upon receipt of a valid takedown notice from EMI, the court found that MP3tunes had a duty to not only remove links to infringing songs publicly displayed on Sideload.com, but also a duty to remove songs stored in users’ personal lockers which were downloaded from such links. In its defense, MP3tunes claimed that it was only required to remove the URL links on Sideload.com because only those links were listed on EMI’s takedown notices and that it might be subject to lawsuits by users if it actually removed personal property from users’ digital lockers. The court, however, rejected this argument, pointing to the DMCA’s immunity provisions for service providers acting on valid takedown notices (see 17 U.S.C. 512(g)), and stating that:

“Where service providers such as MP3tunes allow users to search for copyrighted works posted on the internet and store those works in private accounts, to qualify for DMCA protection, those service providers must (1) keep track of the source and web address of stored copyrighted material, and (2) take content down when copyright owners identify the infringing sources in otherwise compliant notices… [Accordingly,] MP3tunes was obligated to remove specific works traceable to users’ lockers .. [b]ecause MP3tunes keeps track of the source and web address for each sideloaded song in each user’s locker and EMI’s notices gave sufficient information for MP3tunes to locate copies of infringing song in users lockers.

In addition to the foregoing claims, EMI also claimed that MP3tunes directly infringes that right of public performance by allowing end users to stream music from their online digital lockers to personal devices. Relying in part on the holding in the Cablevision Case, EMI asserted that MP3tunes violates the public performance right because it uses a “single master” to play songs to multiple users, as opposed to Cablevision which maintained a separate copy of each program for each subscriber who recorded it. In response, MP3tunes replied that it does not utilize a “single master” storage system, but rather a common open source distributed file software system that eliminates redundancy and enables MP3tunes to efficiently store and retrieve the millions of audio files uploaded by its users without employing a duplicative file storing method.

Ultimately, the district court held that MP3tunes does not in fact use a “single master” system, but rather a standard algorithm known as “Content-Addressable Storage” to store music files which uses hash tags associated with each uploaded song that ultimately allows for the reconstruction of the exact file the user originally uploaded to the service (i.e., there is no “master copy” of any EMI songs stored on MP3tunes’ servers). Still, this determination does not entirely address EMI’s infringement claim regarding the right of public performance as the court’s holding solely relates to the nature of the specific file storage technology employed by MP3tunes. This is in part due to the fact that EMI’s arguments on the public performance issue were largely based on distinguishing the file storing technology used by MP3tunes from the technology employed by Cablevision. In other words, EMI did not address the public performance question by looking at the intended audience of the transmissions enabled by MP3tunes, but rather whether MP3tunes used a “single master” to transmit music to end users.

Ultimately, the take away from both the Cablevision Case and the MP3tunes case is that cloud-based delivery, storage and consumption of entertainment content, whether overtly and implicitly, implicates many of the exclusive rights afforded copyright holders and stakeholders need to remain vigilant about allocating risk when the laws in the US and overseas have yet to suitably address the contours of these services and the corresponding technologies at play. We will obviously keep an eye on future developments in connection with cloudifcation of entertainment content and any case law potentially impacting the future deployment of related cloud-based products and services.

As unique as the service is though, it appears that many of its features were designed and implemented to enable Turntable.fm to operate as a “non-interactive” service under the Digital Millennium Copyright Act (“DMCA”), similar to an internet radio station, thus avoiding the need for direct licenses from the music labels.  For Turntable.fm, the distinction could mean the difference between sustaining a viable business or joining a long line of digital music services that were unable to survive because of the burden of paying license fees to the labels.  While it is too early to determine if this strategy will be challenged and/or whether it will ultimately prevail, Turntable.fm’s service clearly raises some unique legal issues.

To qualify as a “noninteractive” service under the DMCA, a service’s programming cannot be “specially created for the [user]” and cannot “substantially” consist of user-requested songs if those requests are filled within one hour of being made.  On first blush, it would appear that Turntable.fm would have a difficult time meeting these criteria.  After all, one of the core features of the service is the users’ ability to select songs to be played in whatever room the user is visiting, essentially enabling users to be DJs in a virtual music club.

However, Turntable.fm has devised various rules for the service that appear to be tailored directly to address other provisions of the DMCA which determine whether a service can be classified as “noninteractive”.  For example, if there is just one DJ in a room, then the DJ can only hear 30-second previews of the songs selected.  This means that Turntable.fm cannot be used to provide interactive, on-demand programming solely for the user.  In addition, listeners in a room cannot see what song the next DJ plans to play, which satisfies the DMCA requirement that a noninteractive service cannot reveal upcoming songs to be played and while a song is being played, artist and album information is displayed.  Turntable.fm also complies with the requirement that a “noninteractive” service cannot, in any three hour period, play more than three songs from the same album (and no more than two consecutively) and no more than four songs from the same artist (and not more than three consecutively).

Yet, notwithstanding the above restrictions, the DJs have complete control over the music played and it could be argued that this type of user control is unprecedented in a noninteractive service.

The leading case to address the issue of whether a streaming service should be deemed “interactive” or “noninteractive” under the DMCA involved a suit brought by Arista Records against Launch Media, which operates the LAUNCHcast service.  The Second Circuit approached the issue by focusing on the potential impact that a service could have on sales of recorded music.  A “noninteractive” service does not require mechanical and sound recording licenses and thus the additional revenues that the record labels would receive.  Therefore, the court reasoned, at the point that a streaming music service provides “sufficient control to users such that playlists are so predictable that users will choose to listen to the [service] in lieu of purchasing music, thereby—in the aggregate—diminishing record sales,” that service is no longer “noninteractive.”  The court went on to hold that the LAUNCHcast service is “noninteractive” stating that, “to the degree that LAUNCHcast’s playlists are uniquely created for each user, that feature does not ensure predictability.”  In making this finding, the court pointed to the fact that 60% of the songs programmed through the service are done so with virtually no input.  As the court said, “the unique nature of the playlist helps Launch ensure that it does not provide a service so specially created for the user that the user ceases to purchase music.”

Whether Turntable.fm can meet the “predictability” test established by the Launch Media decision or whether it would otherwise be deemed to comply with the DMCA’s requirements for a “noninteractive” service is open for debate.  A reasonable argument could be made that users of the service have substantial control over the songs being played, making the programming sufficiently predictable that Turntable.fm could become a substitute for purchasing music.

Beyond the Second Circuit’s analysis under the Launch Media decision, other features of the Turntable.fm service do not appear to comply with certain provisions of the DMCA’s definition of a “noninteractive” service.  The music is programmed entirely by the user DJs and streamed within one hour of “selection” in violation § 114(j)(7) of the DMCA.

More broadly, the DMCA defines an “interactive” service as one that is “specially created” for the user.  It is unclear how the “specially created” element might be interpreted for a service like Turntable.fm, which has both DJ users and “audience” users.  Depending on the vantage point (i.e. DJ user or “audience member” user), the “specially created” factor could come out on either side of the “interactive”/”noninteractive” divide.

Of course, unless and until Turntable.fm is challenged in court, these questions may never be put to the test.  But regardless of whether they are, we do not believe that the unanswered questions will slow the rapid evolution of the digital music landscape and anticipate the continued launch of new services in the coming months and years.

**  Justin Greenbaum, a summer associate with the Firm, assisted in the preparation of this piece.

While the most immediate impact of this litigation may be a delay in the development of iOS applications, there are several potential implications for Lodsys, iOS application developers and Apple. 

The technology at issue is the “In-App purchase” functionality, which allows connection to the App Store on the application’s behalf and secure processing of payments from the user. This is typically used to offer upgrades, subscription renewals and extended features to customers from inside the application and is instrumental in providing supplemental revenue for the application developer after the initial software purchase.  For example, some application developers may offer an initial or trial version of an application for a given period of time or provide free-to-paid subscriptions.

The published Lodsys patent portfolio consists of five issued patents, one of which is currently under Reexamination, and four applications.  While some bloggers contend that the claims of the Lodsys portfolio are directed towards “upgrade” products, this may be an overly narrow reading of the claims.  The claims may be broad enough to be construed to read on a variety of products offered by iOS developers, as well as other platform providers such as Google and Microsoft.  Broad interpretations, however, also leave these patents vulnerable to invalidity challenges.

Another interesting aspect to this dispute is the public nature of the communications.  Before filing the complaint, Lodsys sent letters to numerous iOS developers seeking to engage in a licensing negotiation.  Apple published its response to Lodsys stating that there is no basis for Lodsys’s infringement allegations since Apple is licensed to these patents and the application developers are protected by that license since Apple is entitled to offer these licensed products and services to its customers and business partners, who, in turn, have the right to use them. 

Apple contended that infringement could only be established based on the incorporation of Apple’s own components.  Accordingly, Apple asserts that Lodsys’s threats are based on the purchase or use of Apple products and services that are licensed under the agreement between Apple and Lodsys.  Consequently, Lodsys’s infringement contentions are barred by the doctrines of patent exhaustion and first sale.

Lodsys has been equally public with its contentions.  In addition to the blog posts on its website, Lodsys sent a letter on May 31, 2011 to Apples detailing Lodsys’s legal position on the license interpretation and has granted Apple permission to publish that letter to allow developers to review the dispute and evaluate the risks with their own counsel.  Lodsys contends that the application developers are infringing by not independently securing license rights for their applications.  Lodsys cautioned application developers that those relying on Apple’s letter do so at their peril. 

In an apparent attempt to appease the concerns of application developers, Lodsys has offered to pay $1,000 to each entity that receives an infringement notice in the event Apple’s existing license rights do extend to the application developers on Apple’s iOS.  Lodsys also provides an example of the licensing fee arrangement it is seeking from the third party application developers.  For an application performing an in-application upgrade Lodsys is seeking 0.575% of US revenue over for the period of the notice letter to the expiration of the patent, plus applicable past usage.

With the parties girding for battle, risks abound not only for Apple and the application developers, but for Lodsys as well.  In fact, an online customer satisfaction and marketing company, Foresee Results Inc., has joined the dispute on June 7, 2011  by filing a request  in the Northern District of Illinois for declaratory judgment of non-infringement and invalidity of the Lodsys patents, as well as an injunction to prevent Lodsys from interfering with Foresee Results or its customers.  The filing of this request for declaratory judgment based on the notice letters sent to its customers (Best Buy, WE Energies and Adidas AG) preempts any Lodsys litigation against these parties and allowed Foresee Results to seek resolution of this dispute in a venue of its choosing.  

Given the size of the application developer and merchant communities, and their common interest to avoid litigation, it is possible that the recipients of Lodsys’s letters will band together to pool resources in mounting a defense to the Lodsys portfolio.  The application developers may be in the best position to unearth potentially invalidating prior art given their technical proficiency, while the merchants may be able to bear a majority of the financial burden.  Additionally, or alternatively, the application developers may be able to leverage the invalidity arguments and any prior art asserted in the Foresee Results proceeding in their own defense.  Furthermore, Apple’s interests are aligned with the application developers given that a decrease in application development and sales would adversely affect Apple’s revenue stream.  While it is uncertain at this point what defense strategy Apple and the application developers will employ, their union of common interests provide a variety of options and the potential to combine resources to mount a strong validity challenge.

That challenge could take place in the courts, as evidenced by Foresee Results request for declaratory judgment,  as well as in the PTO.  Requesting the PTO to reexamine the Lodsys portfolio could be an attractive option, but only if the defendants in the litigation could prevail upon the court to grant a stay.  However, the Eastern District of Texas will infrequently stay an action in favor of a pending patent reexamination.  In the event that the Northern District of Illinois were to first find the Lodsys patents invalid, the proceedings in the Eastern District of Texas would likely be stayed pending any appeal from the Northern District of Illinois holding.

During Reexamination claims are reviewed under the lower standard of “broadest reasonable interpretation” and are not afforded a presumption of validity.  Given the breadth of experience that both Apple and the application developers have in this field, it is possible that they would be able to identify prior art which is material to the claims and not previously cited during prosecution of the Lodsys patents, thereby establishing the requisite substantial new question of patentability.  In this regard, the fact that Apple currently holds a license to the Lodsys portfolio does not necessarily indicate that the Apple has done an in depth analysis of the portfolio prior to obtaining the license, or that the patents are likely to withstand a validity challenge.  Furthermore, a licensee can challenge the validity of a patent without first breaching the license agreement.  See MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).

The application developers may also seek to obtain a license to the Lodsys portfolio.  The 0.575% royalty rate, as advertised by Lodsys, is expressly limited to an “in-application upgrade” embodiment.  Thus, additional licenses and/or higher royalty rates may be required for applications offering additional functionality.  Further, the 0.575% royalty rate may only provide a license to a single patent, though a particular application may necessitate a license to the entire Lodsys portfolio.  Application developers interested in settling or avoiding litigation should consider how a settlement might spur other patent holders to file claims.  Conversely, settling may provide Lodsys a war chest to litigate with competitors.  In any event, looking to Apple for indemnity is likely a fruitless endeavor: in at least one publicly available license agreement, Apple has a limitation of liability of $50 total.

Application developer s working on other operating systems are no doubt watching the litigation intently.  The infringement contentions in this litigation appear to apply equally to other platform providers (e.g. Google, Microsoft) as Lodsys contends that these providers have similar license agreements.  The entire application development community would be well-advised to monitoring the situation closely.

 **  Stephen Kenny, an associate at the Firm, assisted in drafting this post.

Under the new rules, developers are no longer required to offer in-app purchasing for all content used in the app but they are free to charge any price if they do choose to do so.  However, the new rules still prohibit developers from linking to external stores from within the app.  Keeping with the Kindle app example, after June 30th, Amazon will still have to remove their link from the Kindle app, but Amazon is not forced to sell their books within the app, and if they do, they can charge a premium to compensate for Apple’s cut. 

Apple’s revised policies notably came just a few days after the Financial Times, which won an award last year for the design of its iPad app, announced its new web-based app.  The new app can be accessed through a browser, allowing users to bypass Apple’s app store altogether.  The Financial Times didn’t say that they would be discontinuing their iOS app, but they encouraged their users to switch to the web-based app immediately, stating that it would be the focus of their development efforts going forward.  With Apple’s revised policies, it is unclear whether other app developers will follow FT’s lead or if Apple’s new rules will placate the discontented developers.

**  Kate O’Donnell, an associate with the Firm, assisted in preparing this post.

OpenLogic reviewed 635 leading mobile Apple iOS and Google Android apps in a license compliance assessment.  The results show that about 10 percent of the apps contained code that was subject to an open source license (either the General Public License, Lesser General Public License (GLP/LGPL) or Apache license), and over 70% percent of these were apparently using the open source code in a manner that violated key obligations required by the open source licenses. 

While certain of the violations found by OpenLogic related to requirements for attribution and/or provision of copies of the underlying open source license with the new works, in certain instances some of the apps may have required the developers to provide the source code for the app itself (that is, the open source code caused the app to go “viral”).  OpenLogic did not identify specific apps in its review but states that it targeted the “top paid and free apps for iPad, iPhone and Android across a variety of categories,” including apps from the top 20 companies in the Fortune 500.  The apps at issue included banking, sports and game applications, as well as apps from household brands and media organizations.

Perhaps this result isn’t surprising.  Many developers–and the publishers that retain them–often don’t have a complete understanding of the open source license requirements and how they may impact the actual use of the code in a specific app.  Other confusion may arise from the proliferation of outsourcing or the inadvertent bundling of original source code with protected source code.  Even when developers were aware that their app contained open source, the End User License Agreements or documentation accompanying the apps may not have been properly drafted to fully comply with the open source license requirements.

It is unclear what the ultimate impact of these findings will be.  Violation of an open source license can form the basis of a copyright infringement claim (exposing the entity using the code to statutory damages, as well as the possibility of an injunction).  Jacobsen v Katzer, an open source copyright infringement case, established that violators of open source software may be subject to claims under copyright law, including statutory damages up to $150,000 per infringing work and injunctive relief.  Injunctive relief was granted in Software Freedom Conservancy, Inc. and Erik Anderson v Best Buy Co., Inc. et al., a case where the defendant allegedly sold and distributed electronic products embedded with firmware that contained either a copy or derivative work of the plaintiff’s open source software, BusyBox, without complying with the open source license.  In addition to awarding treble statutory damages ($90,000) for willful copyright infringement and attorneys’ fees and costs, the court entered a permanent injunction against the defendant prohibiting distribution of its infringing HDTVs and ordered the forfeit of infringing HDTVs in its possession to the plaintiff, to be donated to charity.

While it is difficult to assess the litigation risk in the app space, a more critical concern for commercial application developers is the potential diminution of value that might result from the use of open source code (i.e. non-proprietary components) that might be included in their apps.  Strategic partners or potential acquirers might become concerned about hidden claims (either with respect to ownership of the app or for violation of an open source license).  Prudence would seem to compel developers and publishers to carefully scrutinize the code being incorporated into newly-developed apps and gain mastery over any open source license requirements.

What exactly is “device fingerprinting”?  Every time a computer or other mobile device connects to the Internet, it broadcasts information about its properties and settings (such as which browser is running, screen resolution, speed of connection, etc) in order to interact smoothly with websites and other computers.  Device fingerprinting technology collects this information to build a profile that can identify the individual computer or device, and in some instances, the person using it. 

Before its adoption for online marketing, fingerprinting technology was primarily used to prevent software theft, providing a means to confirm that the subject application was only used on authorized computers.  Anti-fraud companies use the technology to identify devices that had engaged in fraudulent transactions to help them prevent similar occurrences in the future.  Privacy legislation proposed this July even advocated its use to identify consumers who had opted-out of online tracking.

But device fingerprinting could also allow for much more effective tracking of online behavior than other current technologies.  Where cookies can be blocked or deleted, it’s much more difficult to prevent fingerprinting or to delete a fingerprint after it has been collected.  One study, surveying 70 million website visits, found that a fingerprint of an applicable device could be generated 89% of the time whereas cookies could only be used 78% of the time.  One developer of device fingerprinting technology claims that it is even able to link the fingerprints of different devices that appear to be used by the same person.  Eventually, the company plans on adding offline activity to the individual’s profile, using email addresses and names the user entered while browsing the web to pull information from other databases.  By collecting, generating and selling this information to marketers, the device fingerprinting could become the basis to deliver targeted ads based on a consumer’s activity from their computer, mobile phone and other devices. 

Fingerprinting and other forms of digital tracking are currently legal but both federal regulators and several members of Congress have warned that the government will intervene if the online-advertising industry does not start doing more to protect consumer privacy.  Recently, the FTC recommended that a Do Not Track System be implemented if the industry doesn’t start coming up with its own solutions soon.  The FTC proposal would require web browsers to implement a do-not-track setting directly in the browser to enable end users to block web service providers, marketers and advertisers from monitoring their online behavior.  The FTC would then police companies that implement tracking technologies and tools to ensure that they comply with user requests.  The ad industry’s current opt-out system only allows consumers to opt-out of targeted advertising, not tracking altogether. 

The industry has taken notice.  Some marketing firms say that they will create an opt-out function if they adopt fingerprint technology, though the details of how that would work are still unclear.  Other initiatives include the “Open Data Partnership”, a service that would allow consumers to see what information has been collected about them, and opt out of being tracked by participating firms.  The service is intended to be a response to the government request for more transparency and consumer control.  Eight data and tracking firms have already committed for the service’s launch in January.  Microsoft has also revealed plans for a tool to block tracking in its next version of Internet Explorer.  The tool, once enabled, will allow users to block tracking attempts from specified web addresses used by tracking companies.  But in order to use the tool, users have to direct the browser as to which tracking attempts should be blocked by selecting from lists compiled by privacy groups and other outsiders.  There won’t be any default setting to block all tracking attempts.  Additionally, the tool will only block tracking by certain technologies, such as cookies and beacons.  It doesn’t address new technologies like digital fingerprinting and “deep packet inspection,” a form of monitoring which analyzes data as it travels from the internet to the computer. 

While support for consumer protections are gaining ground, the $23 billion online advertising industry warns that an end to tracking could also mean an end to the free web content that is currently subsidized and supported by targeted advertising.  And some members of Congress have expressed hesitation about any legislation that might hurt economic recovery.  Data tracking has also enabled the customized web experience that many consumers have come to rely on.  In order for any solution to be viable in the long-term, it will have to find some way to balance these competing concerns.  

In the coming months, we will continue to monitor this and other developments in the ongoing debate over privacy on the internet.

** Kathleen O’Donnell, who joined the firm in September, assisted in drafting this article.

As the public’s demand for “any content anywhere” grows, entertainment, media and technology companies are turning to the cloud for innovative ways to distribute and monetize content. Through initiatives like digital lockers, streaming to mobile apps, progressive downloading to tablet devices, and other forms of cloud-based storage and distribution, stakeholders are exploring new business models and ways to innovate without compromising the value of content or jeopardizing the rights of content owners to control how their content is consumed by the ultimate end user.

In this CLE-accredited Webinar, we will focus on the critical legal and business issues raised by the expansion of cloud computing and its impact on the distribution and consumption of entertainment content. We will analyze how cloud computing has led to new methods of distribution that give rise to an increased threat of copyright infringement and the recent case law impacting the cloud computing landscape. We will discuss new digital rights management tools, methods of end user, subscriber and purchase authentication. We will explore how stakeholders can balance complying with evolving standards, laws and regulations with the need to exploit new technological advancements that lead to improved services and enhanced end user experiences.

Our New Media, Entertainment and Technology Group at Hughes, Hubbard & Reed will be joined by our UK-based colleagues from the international Technology and Media focused law firm Taylor Wessing LLP. Taylor Wessing will address some key international and European issues that impact cloud models. These issues will include jurisdictional risks, different rights spanning different territories, advertising laws, collecting societies, the European laws on privacy, cookies and liability for cloud platform providers, as well as challenges related to format shifting/uploading consumers’ existing content into the cloud.

The webinar will be held on Thursday, December 9, 2010 from 12:30 p.m. to 1:30 p.m. EST.  To register, please click here.

As we suspected, the response from the entertainment community has been swift, and the company has since received a barrage of cease and desist letters from television networks, movie studios, sports leagues, broadcasters, syndicators and others in the entertainment industry alleging that the operation of the service as currently conducted amounts to copyright infringement. In response, the company has now filed a complaint for declaratory judgment in Seattle district court alleging that by complying with the Act’s compulsory licensing scheme in Section 111 “it has not infringed any of the copyrights owned by the any of the Defendants.”

We will obviously keep an eye on future developments as this complaint now moves its way through the court system and the entertainment industry’s forthcoming response.

Unlike other online content distributors, the start-up has allegedly sidestepped negotiating with the copyright holders for the license of its programming, and has instead elected to wager its future on a seemingly liberal interpretation of certain provisions of the Copyright Act (the “Act”), which permit qualifying “cable systems” to rebroadcast over-the-air television signals upon the payment of certain statutorily mandated revenues. Specifically, the Act’s compulsory licensing scheme (see Section 111) allows cable systems to carry distant broadcast signals while compensating copyright owners for the public performance of their works, without the transaction costs associated with marketplace negotiations for the carriage of copyrighted programs, and instead requires that the cable system remit a fixed portion of their revenues for the retransmission of such programming to the copyright holders. Based on statements from ivi, Inc.’s management, the company has already taken steps to comply with the requirements under Act, and is apparently taking the position that its service does, in fact, qualify as a “cable system”.

The company’s current position appears to be in part attributable to the Act’s expansive definition of a “cable system”, which includes “any facility… that receives signals transmitted or programs broadcast by one or more television broadcast stations licensed by the Federal Communications Commission, and makes secondary transmissions of such signals or programs by wires, cables, microwave, or other communications channels to subscribing members of the public who pay for such service.”  The legislative intent behind the foregoing definition and the enactment of the statutory licensing scheme over 30 years ago (decades before the advent and commercialization of the Internet) was to benefit traditional cable and satellite companies operating in a heavily-regulated industry under the jurisdiction of the FCC, including a slew of rules and requirements under the Communications Act, such as programming exclusivity, sports blackouts, network non-duplication, signal quota, must-carry, and others.  The statute was not designed to provide a means for Internet-based services like “ivi tv” to avail themselves of the statutory licensing scheme by labeling themselves a “cable system” on the one hand, while at the same time finding refuge from the corresponding restrictions on MVPDs under the Communications Act because the regulation of programming retransmitted via the Internet falls outside the scope of the FCC’s jurisdiction.

This approach has been attempted before, albeit unsuccessfully.  A similar start-up, iCravetv.com played an analogous tune in 2000. Hailed as the first service to put a broad range of ordinary TV stations on the Internet–from the Simpsons to Major League Baseball games–the Toronto-based service launched to international press and huge amounts of Web traffic. They too made similar arguments regarding the contours of compulsory licensing under Canadian copyright law, but failed to quash a swift petition for a temporary restraining order initiated by United States movie studios, television studios, sports leagues and broadcasters and the iCraveTV.com service agreed to permanently shut its doors.  Notably, the petition for the temporary restraining order called the business venture “one of the largest and most brazen thefts of intellectual property ever committed in the United States.” 

Since the iCraveTV case, the U.S. Copyright Office’s Register of Copyright has repeatedly reiterated that the compulsory licensing scheme under Section 111 of the Act is inapplicable to Internet transmissions:  “..[T]he section 111 license does not and should not apply to Internet transmissions” and that “if there is to be a compulsory license covering such retransmissions, it will have to come from newly enacted legislation and not existing law.”  Most poignantly, the Copyright Office has explicitly stated that it opposes any circumstance (as in the case of “ivi tv” or iCraveTV.com) where “any online content aggregator would have the ability to use a statutory license to sidestep private agreements and [be] free from any of the limitations imposed on cable operators and satellite carriers by the Communications Act and the FCC’s rules.”   In fact, the Copyright Office openly opposes an Internet statutory license that would permit any website on the Internet to retransmit television programming without the consent of the copyright owner, stating that “such a measure, if enacted, would effectively wrest control away from program producers who make significant investments in content and who power the creative engine in the U.S. economy.”

In addition, the Copyright Office has also warned that any possible expansion of the statutory licenses to the Internet will implicate and may contradict certain international obligations, including various bilateral and multilateral trade agreements that prohibit statutory licensing of television signals over the Internet.  Specifically, the U.S. has obligations under the Berne Convention, the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), and WIPO Copyright Treaty that relate to broadcasting and Internet transmissions, including several free trade agreements with foreign nations which contain the obligation that “…neither Party may permit the retransmission of television signals (whether terrestrial, cable, or satellite) on the Internet without the authorisation of the right holder or right holders, if any, of the content of the signal and of the signal…”

Against this backdrop, even if Ivi is able to successfully defend any copyright infringement claims and challenges to its current position regarding the applicability of the compulsory licensing provisions under Section 111 of the Act, we suspect (and Ivi has even suggested) that, like  iCraveTV, the company may be on the wrong end of a barrage of claims asserted by television networks, movie studios, sports leagues, broadcasters, syndicators and others in the entertainment industry alleging that the operation of the service as currently conducted amounts to and/or results in unfair competition, tortious interference with contractual relationships, trademark infringement and dilution, false designation of origin or false representation with regard to sponsorship or authorization, etc. Additionally, until and unless Congress decides to amend the Act to clarify the legislative intent concerning the scope of the compulsory license under Section 111, any challengers to the law will need to be in a position to withstand the full weight of the United States entertainment industry which drives a substantial portion of the U.S. economy.

We will obviously keep an eye on future developments in connection with this fledgling service and the entertainment industry’s forthcoming response.