Fixation by Legal Fiction: Did the Second Circuit’s Fair Use Ruling For Bloomberg Leave Open A Pandora’s Box for Copyright Law?

by Foley Hoag LLP - Trademark, Copyright & Unfair Competition
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Swatch imageAbout ten years ago, I saw an attorney argue a hopeless criminal appeal. He began his remarks with: “Your Honors, I know I’m going to lose this case, but how I lose it is very important.”

Bloomberg News may feel the same way about its recent win in the Second Circuit. The Court ruled that Bloomberg’s unauthorized distribution of the recording of a Swatch Group investor conference call was fair use. However, the Second Circuit refused on technical grounds to review a District Court opinion that could have far broader implications for copyright law and the news industry. That unreviewed opinion concerns what Swatch and others have called the “legal fiction” of simultaneous transmission and fixation.

The Swatch Conference Call

On February 8, 2011, the Swatch Group hosted a telephone conference call for a few hundred investors and analysts to discuss its 2010 financial figures. The press was not invited. Swatch is governed by Swiss law, which allows for such semi-private events. Although Swatch made its own recording of the conference call, the invitees were instructed not to record the call for publication or broadcast. Simple instructions.

Of course, not everyone followed those instructions. Bloomberg crashed the party and made its own recording of the call, which it then promptly distributed it to its “Bloomberg Professional” subscribers. Swatch was not happy. According Bloomberg, Swatch was embarrassed because the recording contained some impolitic remarks by Swatch officers about a business partner. But according to Swatch, this was simply a case of copyright infringement.

The “Legal Fiction” of Simultaneous Transmission and Fixation

On March 3, 2011, Swatch registered the copyright for its recording of the call. Then, on March 31, 2011, it filed a complaint in the Southern District of New York alleging infringement of this copyright. Bloomberg filed a motion to dismiss on the grounds that it didn’t copy anything.

According to Bloomberg, the conference call was not a work of authorship, nor was it “fixed in a tangible medium of expression.” Rather, it was a live news event. Bloomberg didn’t copy Swatch’s recording of that event. It made its own recording. So, you might not like the way the Bloomberg got access to the event, but if it’s not copying, how can it be copyright infringement? As an example, say two parents separately film a live high school sporting event. The parents can’t sue each other for copyright infringement. And presumably neither could the school administrators. Or could they?

Yes they can, said Swatch. Swatch based its claim not on Bloomberg’s recording of the live event, but on the legal fiction that Bloomberg’s recording was the legal equivalent of a copy of Swatch’s recording. Under Section 101 of the Copyright Act, a live transmission is considered “fixed . . if a fixation of the work is being made simultaneously with its transmission.” Swatch argued that this language “creates a legal fiction” that Bloomberg’s recording was actually copied from Swatch’s recording, “notwithstanding that [Bloomberg] actually copied the live performance directly.” Swatch acknowledged that the relevant language in Section 101 was designed to protect live broadcasts of professional sporting events, but argued that it nevertheless applied here as well.

Judge Alvin Hellerstein was persuaded by Swatch’s argument and, in a published opinion, denied Bloomberg’s motion to dismiss. Bloomberg then answered the complaint and filed a counterclaim for invalidity based on the same arguments it had already made. After that, things went south for Swatch. On May 12, 2012, prior to any discovery, Judge Hellerstein granted summary judgment sua sponte in favor of Bloomberg on the grounds of fair use. Swatch appealed, and Bloomberg cross-appealed. With both parties on their way to the Second Circuit, Judge Hellerstein dismissed Bloomberg’s invalidity counterclaim as moot.

You Won, So Stop Complaining

Bloomberg’s briefing to the Second Circuit reprised its argument that Swatch’s conference call was not subject to copyright protection. However, the Court never reached that issue because it held that Bloomberg did not have standing to cross-appeal. If Bloomberg was appealing the denial of its motion to dismiss Swatch’s claim, that claim was ultimately dismissed on fair use grounds anyway, so Bloomberg was not an “aggrieved party” (i.e., you won, so stop complaining). If the appeal, on the other hand, was based on Judge Hellerstein’s subsequent dismissal of Bloomberg’s invalidity counterclaim, Bloomberg forgot to file a supplemental notice of appeal, so that issue was not before the court.

Thus, although Bloomberg won the fair use battle, it arguably lost the validity war because the Second Circuit’s ruling leaves intact Judge Hellerstein’s opinion on the legal fiction of simultaneous transmission. This is notable for a couple of reasons. First, the only case on which Judge Hellerstein and Swatch relied for the “legal fiction” argument, United States v. Moghadam, was about the constitutionality of a criminal statue banning bootlegged tapes of live music concerts. The Moghadam court’s discussion of simultaneous transmission was dicta based on the theoretical musings of Professor Nimmer. Thus, Judge Hellerstein’s application of this doctrine in this or any similar context appears to be novel.

Second, the potential implications of Judge Hellerstein’s opinion, if applied broadly, could change the landscape of modern journalism. Take for example, Governor Mitt Romney’s infamous “47%” speech, secretly recorded by a bartender at a fundraising event. What if the Governor had been making his own recording of the speech and simultaneously transmitting that signal to other donors over the internet? Could he have sued the bartender for copyright infringement, under the legal fiction that the bartender’s recording was a derivative work? Taken to another extreme, could Governor Romney have sought to enjoin distribution of the bartender’s recording in advance of its distribution to the media, just as a professional sports league can do for unauthorized transmissions under 17 USC 411(c)?

I know what you are thinking and you are probably right. If newsworthy, such recordings likely would be protected by fair use, just as they were in this case, so stop complaining. But fair use is a messy and expensive defense, dependent on the individualized circumstances of each case and rarely resolved before discovery. Thus, this fair use win may be cold comfort to Bloomberg and its ilk, especially considering that Judge Hellerstein’s ruling may have blessed, by legal fiction, a whole new class of lawsuits.

The Second Circuit’s Fair Use Analysis

Although the Second Circuit ignored the simultaneous transmission issue, its thoughtful discussion of the fair use factors, which confirmed Judge Hellerstein’s analysis, is interesting in its own right.

Purpose and Character of the Use. Swatch argued that Bloomberg was not engaged in “news reporting,” a favored fair use activity, because transmission of the recording was mere “data delivery” for a fee. The Court held that Bloomberg’s purpose was to deliver important financial information to American investors, and that this was at least analogous to news reporting, despite its commercial nature. In fact, the Court held that this purpose was so important that it outweighed the clandestine nature of the recording and Bloomberg’s “lack of good faith.”

Swatch also argued that simply reproducing the conference call was not transformative — for example, it lacked any commentary or analysis by Bloomberg. However, the Court held that when the purpose at issue is news reporting, whether the use is transformative is less important, in part because news reporting by its nature often makes it desirable to “faithfully reproduce an original work rather than transform it.”

Nature of the Copyrighted Work. Swatch argued that even though the conference call was factual in nature, this factor nevertheless weighed against fair use because the call was “unpublished.” When a work is “unpublished,” the rights of an author to control its first public appearance often outweigh and negate a fair use defense. For example, the court had previously ruled that the unauthorized publication of J.D. Salinger’s private letters was not fair use because of their unpublished nature.

The Court agreed with Swatch that the call was “unpublished” under the definition set forth in Section 101, which defines publication as the distribution of recordings to the public. However, the court refused to limit its fair use analysis to this statutory definition. Even though the recording may have been unpublished, its contents were shared — or performed — during the conference call, and thus “the publication status of the work favors fair use.”

Amount and Substantiality of the Portion Used. The Court held that this factor favored neither side. A defendant’s distribution of an entire work usually weighs against fair use. However, the Court held that “copying the entirety of a work is sometimes necessary to make a fair use,” and this was such a case in light of Bloomberg’s news reporting purpose.

Effect Upon the Market for or Value of the Original. The last fair use factor considers the effect of the infringing use on the potential market for the copyrighted work. Swatch conceded that there is not usually a market for conference call recordings, because their unrestricted distribution is encouraged — if not required — by U.S. securities laws. However, because Swatch did not have to comply with those laws, in theory there is a potential market for the sale of its conference call recordings. The Court disagreed and held that this was not a “traditional, reasonable, or likely to be developed market,” and therefore this factor too favored fair use.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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