educational

Summer of Really Big Court Decisions

Gregory Piccionelli
From time to time there are rulings in court cases that dramatically affect the entire adult entertainment industry.

One such ruling, for example occurred in December of 2006, when a federal judge in Colorado ruled the 2257 regulation’s old secondary-producer requirements to be unconstitutional.

That case provided a large number of Free Speech Coalition members who would have been subject to the regulations as secondary producers a nearly three-year reprieve from the onerous provisions until new regulations could be properly enacted by Congress and promulgated by the Justice Department.

Another milestone case was, of course, last year’s ruling in the 9th U.S. Circuit Court of Appeals that established for the first time that content distributed via the Internet must be judged by a national standard in obscenity cases and not by the local community standards of the place the material is transmitted from or received.

In doing so, the court deprived the government of one of its most powerful tools in prosecuting obscenity cases, the ability to bring the action in the most conservative jurisdiction they can find, at least with respect to prosecutions in the 9th Circuit (California, Arizona, Nevada, Oregon, Washington, Idaho, Montana, Alaska, Hawaii, Guam and the Northern Mariana Islands).

Landmark cases affecting the entire adult entertainment industry are generally rare. Cases of great importance to both the adult and mainstream businesses rarer still. Therefore one does not expect, for example, that three court decisions of great importance to the entire entertainment industry would be handed down in a single month. But that is exactly what happened.

In the first month of the summer of 2010 the federal courts provided us with rulings on three very important and very closely followed cases: the stunning dismissal of the government’s obscenity prosecution of John Stagliano and Evil Angel, the dismissal of Viacom’s suit against Google alleging massive tube site copyright infringement via You Tube, and the U.S. Supreme Court’s ruling in the case of Bilski vs. Kappos to determine if inventors can continue to obtain and enforce patents for business methods.

While all three cases are of great important to the adult entertainment industry, much has already been reported in adult entertainment press about the Stagliano case, so much in fact, I am concerned that the critical importance of the other two cases may have been somewhat underreported in the shadow of the government’s defeat in the Stagliano case.

Therefore, this article will focus primarily on the Viacom and Bilski rulings, as it cannot be understated how both are likely to play a large role in shaping how the adult industry evolves and operates for the foreseeable future.

As such, adult industry entrepreneurs are well advised to obtain at least a fundamental understanding of what these rulings mean and how they will likely affect the industry for many years to come.

A brief word about the Stagliano case. Before commencing our discussion regarding the very important rulings in the Viacom and Bilski cases, I would be remiss not to render at least a couple of opinions regarding the turn of events in the Stagliano/Evil Angel obscenity prosecution case.

In 2008, the Justice Department brought its mean spirited and otherwise wrongfully commenced obscenity prosecution of John Stagliano and Evil Angel supposedly, in part, to “show” the adult entertainment industry that mainstream adult content could be effectively prosecuted and found to be obscene. John Stagliano’s stunning defeat of the government has instead resulting in what one might call a gigantic legal boomerang for our so-called “public servants” at the Obscenity Task Force.

To say the case was mishandled by the government would be a huge understatement. The magnitude of legal incompetence demonstrated in their prosecution of the case can only be compared in size to the magnitude of legal competence and professionalism demonstrated by my friends and collegues Paul Cambria, Bob Corn-Revere, Alan Gelbard and Louis Sirkin.

The government’s attorneys were clearly outmatched by the defense team from the start. The prosecution’s errors, both fundamental and abstract, were quickly and, even brilliantly I would say, seized upon and exploited maximally by the defense.

The case demonstrates once again why it is so important for adult entertainment industry participants to seek out the counsel of experienced adult industry attorneys.

The outcome of the Stagliano case stands in stark contrast to the outcome of the obscenity prosecution of Jim Schaffer and Jeffrey Kilbride who were represented in their obscenity trials by counsel that were not known by me, or any of my colleagues, as adult entertainment attorneys or obscenity defense experts. The contrasting results couldn’t be clearer, John Stagliano is free, Schaffer and Kilbride are serving time.

As to the performance of the government’s attorneys, well, I think that a statement by federal U.S. District Judge Richard Leon who presided over the case states it best:

“I trust the government will learn a lesson from its experience in this case.”

The implications of the ruling and, perhaps even more importantly the events that led to it, will be the subject of a separate upcoming article about the risks of obscenity prosecution in the wake of the Stagliano decision.

Viacom vs. Google, a big win for the tubes. On June 23, U.S. District Judge Louis L. Stanton threw out Viacom’s lawsuit against Google in which Viacom originally alleged $1 billion of copyright infringement damages resulting from unauthorized copying and distribution of its content via YouTube.

In granting Google’s motion for summary judgment, Stanton said the company was shielded from Viacom’s copyright claims by the “safe harbor” provisions of the Digital Millennium Copyright Act (DMCA). These statutory procedures can be used to protect a web site operator from contributory copyright infringement liability for content uploaded by users, provided that the operator takes down the material in response to proper notification by the content’s rightful owner that it was uploaded without permission. These provisions provide the protections that have been heavily relied upon by many adult content tube sites to fend off copyright infringement claims.

So the issue of whether a tube site operator can rely on those protections even when the operator knows there is rampant copyright infringement occurring on the site has been a critical question in the determination of whether the operator is effectively shielded from contributory infringement or has huge infringement liability.

Viacom filed the case in 2007 alleging that Google was not entitled to the DMCA protections because it had deliberately turned a blind eye and profited from rampant piracy on YouTube after tens of thousands of its videos were uploaded to the site.

But while acknowledging that Google certainly knew that large amounts of copyrighted material had been uploaded to YouTube, Stanton refused to impose contributory liability for the infringements on Google because of Google’s lack of knowledge regarding specifically which clips had been uploaded with permission and which had not.

Stanton also refused to recognize any obligation by Google to police every video uploaded to their sites stating that to do so “would contravene the structure and operation of the DMCA.”

Praising the statute’s structure and operation, the judge went on to observe “The present case shows that the DMCA notification regime works efficiently: when Viacom over a period of months accumulated some 100,000 videos and then sent a mass takedown notice on Feb. 2, 2007, by the next business day YouTube had removed virtually all of them.”

Not surprisingly, Google’s general counsel, Kent Walker, hailed the decision as a victory for creative artists stating that the ruling “was an affirmation of the emerging legal framework and ratifies the rules we have all been living under.” Also, as expected, Viacom will appeal the decision.

Because the decision is a ruling by a federal district court, and not a federal court of appeal, it is not binding law on courts outside the federal courts for the Southern District of New York. Nevertheless, that particular court is very well-regarded by many other courts and its rulings are often emulated in other jurisdictions. As a result, the ruling might rightly be viewed as perhaps the biggest legal setback yet for content producers battling rampant online infringement of their works.

For such content providers, including adult producers, who are already desperately struggling with the disastrous consequences of online piracy, the Viacom ruling will likely seem like nothing less than a green light to continued online infringement of their content.

While it is true that content providers still have remedies to combat such infringers under the DMCA, the likely practical impact of the of the decision was well stated by Eric Goldman, director of the High Tech Law Institute at the Santa Clara University School of Law: “The ruling should give online service providers a lot of comfort that copyright owners aren’t going to be able to force them to change their behavior or put them on the hook for problems that their users create.”

So, for more conservative adult entertainment entrepreneurs who would like to cash in on the traffic generated by adult tube sites, but have heretofore refrained due to legal concerns, the Viacom decision begs the question of whether it is now possible to create a “legal” adult tube site. Well, thanks to Judge Stanton’s ruling, it certainly is beginning to look like that might well be possible, at least from a contributory copyright infringement standpoint.

But I think a great deal of cautious consideration still needs to be exercised before going into the adult tube business and Stanton’s decision should not by any means be viewed as a legal carte blanche for adult tubes.

It is critically important to remember that the Viacom case was about YouTube and not a sexually explicit adult content tube site. Many serious legal issues remain regarding adult tubes regardless of whether they comply with the DMCA and are shielded for contributory copyright infringement. This is because many laws other than copyright apply to adult tube sites.

For example, not all adult tube sites appear to be in compliance with all of the 2257 regulations that may apply to them. And, of course, the Viacom decision does not address a hardcore tube site operator’s exposure to potential obscenity prosecution regarding material distributed from the operator’s servers via the tube site. Because of this, obtaining appropriate legal guidance should be considered before commencement of any operation of a tube site depicting explicit sexual content.

Also, because Stanton reached his decision in large part because of what he deemed to be Google’s effective compliance with the DMCA’s takedown procedures, anyone operating a content tube or building one should become very familiar with these and other requirements that must be complied with in order to obtain the kind of protection provided to Google.

The procedures are available at the Copyright Office’s website (www.copyright.gov). But, as is often the case when it comes to government online publication of regulations, the rules are just the beginning. This is another area that really requires counseling by a qualified adult industry attorney given the enormous potential financial consequences of getting it wrong.

The Viacom case will now go before the 2nd U.S. Circuit Court of Appeals. Regardless of the outcome there, I predict that the losing party will almost certainly petition the U.S. Supreme Court to reverse the 2nd Circuit decision. So I think its safe to say that this case will be one to watch for sometime to come.

Business method patents survive Bilski vs. Kappos ruling. As discussed in many of my previous XBIZ articles many adult entertainment companies are increasingly becoming the targets of patent infringement lawsuits, particularly regarding their use of technologies or business methods associated with their online businesses.

Currently, I am aware of no less than five active patent lawsuits cumulatively involving scores of adult companies in actions involving a broad range of technologies and business methods including video streaming, live content presentation, thumbnail video content previews, whitelabeled services, and affiliate marketing programs.

The growing number of patents involving technologies commonly used by adult entertainment companies is an important matter with serious ramifications for adult companies because the patent owners possess the broadest and most powerfully enforceable of all the intellectual property rights provided by law.

This is because patent owners wield the power of a government enforced monopoly resulting from the patent owner’s right to exclude others from making, using, offering for sale, or selling the invention in the U.S. or importing the invention into the U.S.

And when it comes to damages for patent infringement, the sky is the limit. For example, not long ago, Sony Corp. was held to be an infringer of patents pertaining to certain tactile sensation technologies owned by Immersion Corp.

The amount of damages Sony was required to pay to Immersion Corp. amounted to more than $150 million. Now if you are thinking that a damage award of that size must be unprecedented or that a case like Immersion vs. Sony couldn’t possibly involve the adult industry, you would be wrong on both counts.

Patent damage awards over $10 million are actually fairly common, and larger awards have ranged as high as the $1.5 billion award to Lucent Technologies in a patent infringement suit against Microsoft (Lucent Technologies, Inc. vs. Gateway Inc. and Microsoft Corp.).

Further, it may surprise you that Immersion Corp.’s victory has a direct connection to the adult industry. This is because the patent rights exploited by AEBN regarding its revolutionary RealTouch haptic product come from the tactile sensation technology patents owned by none other than Immersion Corp.

As I indicated in an article last year regarding the recent increase in patent infringement filings, we are likely at the only at the beginning of what may grow to be a torrent of Internet litigation based on patent rights (see “Another “Patent Troll” Attacks The Business And It’s VS Media To The Rescue Again” at www.xbiz.com). This is because the following factors have come together to strongly encourage such litigation:

• Almost every aspect of ecommerce and the technologies that provide the means to engage in it are now likely to be either covered by existing patents or are the subject of pending patent applications.

• Patents take a long time to issue. For reasons beyond the scope of this article, patent issuance in recent years has been even slower than the norm. As a result, applications covering e-commerce technologies and business methods that were filed as long ago as ten years are now finally issuing in very large numbers.

• Significantly contributing to the number of patent infringement lawsuits is the proliferation of companies, called “patent trolls,” that specialize in buying of large numbers of patents for the express purpose of enforcing rights under the patents to obtain royalty payments.

Mounting a defense against a patent troll, even if the defendant is in the right and never infringed the patent in question, can easily cost millions of dollars in legal fees that are not generally recoverable if the defendant prevails.

In fact, even if a defendant is successful in convincing the court to rule that the patent claims asserted by a plaintiff are entirely invalid to begin with, the defendant is still unlikely to get any reimbursement of attorney’s fees unless the defendant can show that the patentee committed fraud on the patent office, which is rare and very difficult to prove.

So given the fact that patent rights owners hold some pretty powerful cards, the fact that thousands of patents covering business methods have been issued since they were formally recognized as patentable processes in the late 1990s has been a matter of great controversy and legitimate concern to companies that fear that their business models might actually be owned by other parties.

As expected, the enforcement of business method patents has resulting in a lot of litigation. It has also stirred a great debate over whether the allowing business methods to be monopolized via patents will encourage business model innovation or stifle it.

As a patent attorney who has represented clients on both sides of the issue, I have been deeply involved in the debate. I have also known from the beginning that the matter would eventually have to be resolved by the U.S. Supreme Court. And then came the patent infringement case of Bilski vs. Kappos.

The Bilski case. This case started when the applicants (Bilski, et al) were denied a patent by the U.S. Patent and Trademark Office for a process of managing risk in commodities trading. The USPTO patent examiner assigned to process the Bilski’s patent application deemed the invention not to be of patentable subject matter under the patent statute (35 U.S.C. § 101). The decision was appealed by the applicants to the Board of Patent Appeals and Interferences, which affirmed the examiner’s decision.

On further appeal by the applicants, to the U.S. Court of Appeals for the Federal Circuit, the decision was again affirmed. The Federal Circuit court based its decision on Supreme Court precedent stating that an invention is patentable if: “(1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.” Reasoning from this, it held that the applicants’ invention clearly failed this test (“machine-or-transformation test”) and therefore did not constitute patentable subject matter.

The applicants then sought and received review by the U.S. Supreme Court regarding the questions of (1) whether the Federal Circuit erred by using the machine-ortransformation test in determining patentable subject matter, and (2) whether the machine-or-transformation test would effectively prevent patent protection for many business methods contradicting congressional intent to protect “methods of doing or conducting business.”

In on June, the court issued its long awaited ruling. In its opinion, the court affirmed the Federal Circuit, holding that the invention is not patentable subject matter.

All nine justices agreed that Bilski’s method of hedging risk was not patentable because it is an abstract idea, which is not patentable subject matter under the Patent Act. With Justice Anthony M. Kennedy writing for the majority, the court held that, “The concept of hedging, described in Claim 1 and reduced to a mathematical formula in Claim 4, is an unpatentable abstract idea .... Allowing petitioners to patent risk hedging would preempt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea.”

The court also reasoned that the Federal Circuit did not err by using the “machine-or-transformation test” to determine patentability. Interestingly, however, the court also held that the machine-or-transformation test is not the sole test for determining patent eligibility.

In the opinion, the court also noted that Section 273(b)(1) of the Patent Act providing for a type of defense to patent infringement “explicitly contemplates the existence of at least some business method patents.... [B]y allowing this defense the statute itself acknowledges that there may be business method patents.”

By acknowledging the validity of business method patents, the court dashed the hopes of opponents to such patents who wanted a clear indication that they were categorically invalid. Instead, just the opposite occurred. Specifically, business methods have now been clearly recognized by the court as a valid type invention contemplated by the Patent Act.

But also true is the fact that there is now nothing resembling clarity as to where the line will be drawn between a merely abstract idea and a patentable business method. All we know is that machine-or-transformation test can be used as a method to make that determination.

So, you may be asking, what does this mean and how is it going to affect my business?

The Supreme Court’s opinion in Bilski will likely have profound implications for companies across the broadest spectrum of commerce imaginable. But now, because of the Bilski opinion, patents issued for business methods that passed the machine-or-transformation test at the patent application stage are much more likely to be viewed as valid and enforceable.

This will likely have significant implications for businesses using business methods involving computers, especially if the business methods involve the Internet.

Clearly this will include computer driven means of providing entertainment, including adult entertainment.

So, in light of the decision, I believe following guidance, which is, in part, what I am providing to my clients, is now warranted:

• Be aware that business method patents are not going away. As such, it is important to know that there will likely be an increasing amount of patent infringement litigation. The Bilski ruling is great news for the patent trolls

• Consult with patent counsel to evaluate your company’s exposure to patent infringement directly and through others providing technology and other services to your company by upsell fulfillment, white-labeling, etc. Often patent infringement liability can be avoided by modification of the way something is done so that it does not infringe the patent.

Unfortunately, most companies skip the evaluation suggestion above to save money and proceed unknowingly to infringe one or more patents in a way that could have easily been avoided.

Once the infringement starts, however, even if it is innocent or unknowing, it is still patent infringement with all the associated liability potential discussed above. Unlike other forms of intellectual property like copyrights, there is no “fair use” or innocent use of patent rights that can shield an infringing party from damages for infringement.

• If your company is considering or commencing a new business model involving the use of computers, in the wake of the Bilski decision, you are well advised to at least consider (1) conducting a patent search to determine if the method of doing business will infringe an issued patent and (2) if the business model your company is considering was created by you or your company, you want to consider filing a patent application to acquire valuable patent rights in the invention.

But note, for reasons beyond the scope of this article, the right to obtain a patent can be easily lost due to public use of the invention, public disclosure and for other reasons.

So if there is any consideration of the possibility of pursuing a patent application regarding the invention, immediate consultation with a patent attorney is strongly recommended.

Gregory A. Piccionelli is an intellectual property and adult entertainment attorney. He can be reached at Piccionelli & Sarno at (805) 497-5886 or greg@piccionellisarno.com.

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