An issue that all business litigators – whether involved intellectual property matters or other commercial litigation – need to keep in mind is the collateral commercial consequences of their litigation decisions, and advising clients about those risks On a macro basis, for instance, at least one author has concluded that “information-disclosure-related” litigation in the securities context – that is, securities litigation under the ’33 and ’34 Acts, premised upon incomplete or inaccurate disclosures or misrepresentations to investors – leads to the destruction of an average 3.5 percent of the equity value of a company, or an implied $24.7 billion in shareholder wealth A. Thakor, “The Unintended Consequences of Securities Litigation,” U.S. Chamber Institute for Legal Reform, October 2005 Similarly, a lender seeking to recoup its loan (rather than gain ownership of collateralized property) may consider measures short of foreclosure to gain repayment; indeed, some lenders have pursued loan modification or refinancing as a prudent response to the subprime lending “crisis.”See Knox and Kirchhoff, “Criticism Rains Down on Mortgage Industry,” USA Today, October 23, 2007
It has long been recognized that while patents are a valuable intellectual property right, infringement suits based upon patents need to be carefully considered prior to filing Leaving aside the substantial costs, because many defendants respond by challenging the validity of the patent-in-suit, a patent holder may quickly find itself on the defensive, defending its patent and, potentially, facing the real risk of finding its “crown [technological] jewel” rendered cosmetic Indeed, “roughly half of all litigated patents are found invalid, . . . ” and thus, “[w]hen a patent holder asserts its patent against an alleged infringer, the patent holder is rolling the dice If the patent is found invalid, the property right will have evaporated.”Lemley and Shapiro, “Probabalistic Patents,” Journal of Economic Perspectives, pp. 75-76 (Spring 2005)
These risks can befall trademark holders as well:when firearms manufacturer Colt Defense sought to stop competitor Bushmaster Firearms from using a registered mark (“M4”) for a competitive rifle, Colt not only failed, but found that its mark was cancelled because the term was generic Colt Def. LLC v. Bushmaster Firearms, Inc., 486 F.3d 701 (1st Cir. 2007).
The Second Circuit’s recent decision in Muchnick v. Thomson Corp. (In Re:Literary Works in Electronic Databases Copyright Litigation), 2007 U.S. App. LEXIS 27558 (Docket No. 06-0223-cv) (Nov. 29, 2007), should inform both business litigators in general, and intellectual property holders in particular, as it dealt issues relating to unregistered copyrighted material, the propriety of class settlements, and is an object lesson in the consequences of perhaps asking for a bit too much These consolidated class action cases were brought by “freelance writers who contracted with publishers to author the works for publication in print media, and retained the copyrights in those works.”2007 U.S. App. LEXIS 27558 *2 Although their contracts did not grant the right to reproduce electronically, the publishers – which included entities which published electronic content (such as The New York Times) and operators of databases using electronic content (such as Thomson Corp.) — did so As a result, freelance authors and trade groups representing authors claimed (in part relying upon the Supreme Court’s holding in New York Times Co. v. Tasini, 533 U.S. 483 (2001)), that both the electronic publication and the incorporation of electronic works into databases infringed their copyrights, as no license was granted for such electronic reproduction
Once the “basic soundness of plaintiffs’ liability theory” was confirmed by Tasini, the case was referred to mediation This proved to be time-consuming as the defense, citing the requirement of 17 U.S.C. § 411(a) that commencement of copyright claims requires registration, urged that class certification was untenable for the most of the works at issue, as jurisdiction did not exist for claims based upon unregistered works 2007 U.S. App. LEXIS 27558, *6-7 Notwithstanding, a desire for “global piece in the publishing industry,” id. * 7, lead to continued negotiations and an eventual agreement Three categories of claims were established: copyrights registered before infringement; copyrights registered after infringement but before 2003; and works either never registered or were registered after 2002 (that is, after litigation ensued) The last category was “by far the most numerous,” id. *8; and its members were entitled to substantially less remuneration than the others
Objections were raised to the settlement, especially by representatives of the third category (who claimed the disparate treatment was improper), notwithstanding the defendants’ assertions that any benefit was essentially a gift because “their claims were essentially worthless.”Id. *9 After years of objections and motions, the District Court approved the class settlement, but was never asked to address the subject matter jurisdictional issues arising from the lack of copyright registration for majority of the class plaintiffs
Objectors appealed, based upon their disagreement with the settlement allocations Rather than result in reallocation or a new settlement, the result was dismissal of the entire settlement, not from any party raised a jurisdictional challenge, but because of the Second Circuit’s sua sponte directive that the parties brief the subject matter jurisdiction issue.
The court first noted that its precedent held that registration under § 411(a) of the Copyright Act is jurisdictional See id., *12 (citing Well-Made Toy Mfg Corp. v. Goffa Int’l Corp., 354 F.3d 112, 114 (2d Cir. 2003), and Morris v. Business Concepts, Inc., 259 F.3d 65, 72 (2d Cir. 2001) Rejecting arguments that a court lacking jurisdiction to certify a litigation class could certify a settlement class, 2007 U.S. App. LEXIS 27558, *16, n.2; or that unregistered claimants could bootstrap jurisdiction from other claimants’ registered copyrights, id., *18; Judge Straub wrote that “[u]nder the plain language of the Copyright Act, registration or preregistration must occur before a plaintiff can assert a valid claim.”Id., *21, n. 5. The court next rebuffed the parties’ contention that so long as the named plaintiffs works were registered, the trial court could certify a class settlement involving thousands of unregistered copyrights Id. *26 Instead, after noting that in analogous contexts, each member of a class must satisfy the jurisdictional requirements, id. *28-30; the court held that “the phrase ‘the copyright claim’ in section 411(a) refers to each claim within a purported class, and thus requires that each class member’s claim arise from a registered copyright Only when each claim satisfies that jurisdictional prerequisite may the district court utilize Rule 23 to ‘exercise [its] jurisdiction over the various individual claims in a single proceeding.'”Id. *30-31 (citations omitted) Because of the § 411(a) defects, supplemental jurisdiction under 28 U.S.C. § 1367(a) was inapplicable, as it could not be used to confer federal jurisdiction over otherwise jurisdictionally deficient claims Id. *32-34.
While the matter was remanded, the likely consequence of the jurisdictional conclusions will be dismissal of the “large majority” of claimants, as they were holders of unregistered copyrights Id. *8 While the publishers could still resolve their disputes with the holders of registered marks, the consequence of this decision is that many authors and publishers will be left with uncertainty regarding the electronic publication issues, without a ready venue to resolve these issues on a global basis.
Muchnick bears consideration for several reasons As is true in the patent and trademark matters discussed above, it reflects the possible consequences to litigants of demanding “more:” rather than being participants in a global resolution, the objecting holders of unregistered copyrights have carved themselves out of a global resolution, leaving the publishers little incentive (or means) to engage in further dialogue with those claimants This perhaps could have been avoided with prior consideration of the potential that a reviewing court might ignore the wishes of the litigants to achieve “global peace. “Hence, prudence dictates strategic thinking prior to and during litigation, including an examination of unintended consequences.
Finally, Muchnick turned not on a nuance of IP law, but instead on more traditional business litigation precedent, including jurisdiction, class action jurisprudence, and trial tactics Hence, clients in intellectual property matters will often be best served where their litigation teams include practitioners experienced in other subject matters
Joseph G. Fortner, Jr.is the Chair of DRI’s Commercial Litigation Committee, and Co-Chair of the Commercial Litigation Practice Group of Halloran & Sage LLP, where he practices from its Hartford, Connecticut office His practice focuses on business litigation and intellectual property matters He can be reached at fortner@halloran-sage.com, and at (860) 297-4609