Allen v. Cooper: North Carolina’s Piracy of Blackbeard’s Pirate Ship

In a recent decision by the Supreme Court in Allen v. Cooper, Governor of North Carolina the Court opined that States are immune from copyright infringement. While the Court noted that Congress may still act to remove this blanket immunity that the States have over copyright infringement, this holding makes clear that States generally have freedom to behave as copyright pirates until Congress acts. Following this decision, we have already seen action by multiple members of Congress, asking the U.S. Copyright Office and U.S. Patent and Trademark Office to begin a study on the extent of patent and copyright infringement by State governments.

This case dates back to 1996 when a marine salvage company named Intersal discovered the shipwreck of the Queen Anne’s Revenge off the North Carolina Coast. The ship at the center of this case was a French slave ship that was captured by Blackbeard and became his flagship before running aground on a sandbar in North Carolina. Following the discovery, ownership of the shipwreck was held by North Carolina under federal and state law but the State hired Intersal to conduct recovery operation. Intersal then hired videographer Frederick Allen to document the recovery efforts. Allen recorded videos and took photos of the recovery efforts for over a decade and registered copyrights in all of his works.

The actions the led to the suit started when North Carolina began using Allen’s works in various publications. In 2013, Allen altered the State that it was infringing his copyrights and a settlement was reached where the State paid Allen $15,000 and defined the parties’ respective rights to Allen’s works. Allen later alleged that the State had, without permission and presumably in breach of the settlement, posted more of his videos and photos. The State refused to admit any wrongdoing and Allen filed suit in Federal District Court charging the State with copyright infringement. North Carolina then moved to dismiss the lawsuit on the grounds of state sovereign immunity. Allen argued that the Copyright Remedy Clarification Act (“CRCA”) of 1990 removed the States’ sovereign immunity in copyright infringement cases and the District Court agreed, finding a clear congressional intent in the Act’s text that supported Allen’s argument. The Fourth Circuit then reversed based on an alternative reading of case law and the case was then heard by the Supreme Court.

The primary argument here is whether Congress has the authority to abrogate the State’s immunity. As a general principle, a federal court may not hear a suit brought by any person against a nonconsenting State. However, such a suit is allowed if Congress has (1) enacted unequivocal statutory language abrogating the State’s immunity from suit and (2) there is some constitutional provision that allows Congress to encroach on the State’s sovereignty. In the early 1990s, Congress passed two statutes related to the abrogation of State’s immunity from patent and copyright infringement suits and this case addresses the copyright statute and whether the statue has the necessary constitutional basis to allow a person to file a suit against a nonconsenting State.

The Supreme Court discussed the history of the two statutes passed in the 1990s that intended to remove the States’ immunity from patent and copyright suits. The CRCA specifically states that a State stands in the identical position as a private defendant – exposed to liability and remedies in the same manner and to the same extent. The Court concluded that the first prong described above was met and that there could be no doubt that Congress intended to abrogate the States’ immunity from copyright infringement suits. This left the final prong, whether Congress had authority, as the only question remaining to determine if Allen could bring his case against North Carolina.

The Court then addressed the authority that Allen believed provided Congressional authority. The first was Article I where Congress was provided the power to promote the progress of science and use arts by granting copyrights and patents. However, previous decisions by the Court held that Article I cannot be used to circumvent the limits sovereign immunity places upon federal jurisdiction. The Court summarized this by stating that “the power to secure an intellectual property owner’s exclusive Right under Article I stops when it runs into sovereign immunity.” Next, Allen argued that Section 5 of the Fourteenth Amendment provides the necessary constitutional authority because it gives Congress the power to enforce limitations on the States’ authority it the States’ deprive any person of life, liberty, or property, without due process of law. However, the Court went into detail about how the statute, when created, was not aimed to redress or prevent unconstitutional conduct by the States’ and was therefore does not trigger the power provided by Section 5 of the Fourteenth Amendment. The majority of the Court concluded their opinion by saying that while the arguments presented in this case to do not support the removal of States’ immunity from copyright infringement, Congress is not prevented from utilizing the series of opinions, including Allen v. Cooper, to tailor a statute that would abrogate States’ immunity and “bring digital Blackbeards to justice.”

Trade Secret Damages Expert Blog: Head Start Damages

In this first blog of 2020 in the continuing series on trade secrets and the methodologies utilized in determining damages, we are highlighting “head start” damages as described in the US Court of Appeals case Sabre GLBL, Inc. v. Shan.

The defendant in this case was Shan, who worked for Sabre for nearly 20 years both in the US and China. The Plaintiff, Sabre, is a Texas-based technology solutions provider to the global travel and tourism industry. In 2013, Shan began a new consulting position with Sabre and entered into an Employee Intellectual Property and Confidentiality Agreement with Sabre which prevented her from disclosing Sabre’s confidential information or using the information for her own benefit or for the benefit of a third party. Additionally, this agreement, which included a binding arbitration clause, restricted Shan’s ability to compete with Sabre and interfere with Sabre’s employee, contractor and customer relationships.

In conflict with this agreement and while still employed by Sabre, Shan stated a competing company in China and began recruiting Sabre employees and soliciting Sabre customers to her new company. In 2014, Shan resigned from Sabre and returned to China to continue to work on this competing company. Sabre soon filed a complaint against Shan alleging breach of the agreement and her fiduciary duty to Sabre by misusing Sabre’s confidential and trade secret information. The case was then moved to arbitration pursuant to the binding arbitration clause.

After a five-day arbitration hearing, the arbitrator awarded Sabre two categories or damages for Shan’s breach. The first category of damages was disgorgement of $200,000 in salary Shan received during the period of time where the bad acts occurred. The second category of damages awarded by the arbitrator were head start damages which represented the benefit Shan received from her misconduct. The arbitrator awarded $1.17 million in head start damages based on her equity interest in the new company and a determination that it had obtained an unlawful development and operations head start as a result of Shan’s misconduct. The arbitrator found Shan liable for additional claims and granted Sabre injunctive relief and attorney’s fees. Sabre then moved to confirm the outcome at the District Court and both parties appealed the District Court decision.

The focus of Shan’s appeal related to the head start damages awarded by the arbitrator and confirmed by the District Court. The head start damages were based on an expert report filed on behalf of Sabre on the premise that Shan’s breach gave her company a two-year head start which the company would not have received but for Shan’s misconduct. The damages expert quantified the value Shan obtained through this two-year head start by determining the incremental value of the head start by estimating the value of the company, as of the damages date, with and without the head start and taking the difference between the two. The expert then multiplied this value by Shan’s ownership interest in the company (68%) to determine the amount Shan personally benefitted from her misappropriation. The arbitrator awarded Sabre damages based on this methodology and noted that the expert used an accepted and credible approach in calculating the benefit to Shan.

Shan challenged the award of head start damages on the grounds that the arbitrator manifestly disregarded various aspects of law in granting the relief. One aspect of Shan’s argument is that head start damages and saved development costs are the same thing, a premise the Appeals Court found faulty. The Court noted that the expert in this case made clear in his report and testimony that head start damages and saved development costs are separate damages that seek disgorgement of two different benefits Shan receives as a result of her misconduct. Head start damages represent the benefit to Shan from the increase in her company’s value as a result of it being two years further along that it otherwise would have been in developing and commercializing its products and services. Head start damages are distinct from saved development damages which represent the benefit to Shan from her company’s ability to avoid certain R&D costs by relying on confidential and trade secret information that was misappropriated. In fact, the expert at arbitration calculated both forms of damages but the arbitrator held that Sabre failed to prove the saved development costs.

Shan also challenged the head start damages as being too speculative. However, as we have discussed in a previous blog related to the Investment Value Approach to Damages, the Court here found the expert’s basis for damages credible. The expert in this case calculated head start damages by relying on the valuation of Shan’s company as determined by what an actual outside investor was willing to pay for a certain percentage interest in Shan’s company.  This is another example of the flexible approach being properly utilized by the trade secret damages expert to illustrate the damage to a company from misappropriation of its trade secret. Moreover, this case provides a strong example of how the diligence of the expert enabled the judge in a later proceeding to review the report and testimony from an earlier venue to overcome subsequent challenges.

IP Predictions and Wishes for 2020

Photo courtesy of Efrat Kasznik

At the beginning of a new year, I usually get asked what my predictions are for the coming year. With the beginning of 2020 being also the start of a new decade, I have participated in a survey of IP experts conducted by IPWatchdog, a leading IP blog that I contribute a lot of articles to.  Below are the two questions that were posed to me, along with my predictions and wishes for 2020 and beyond!  

Looking Forward: What are some of your predictions or thoughts on the IP front for 2020? You don’t need to use your crystal ball unless you want to, but what should we be watching/ expecting in 2020?

Thinking about the future of IP in the next decade, I see the biggest challenge facing the business community exemplified in the mismatch between the assets that bring the most value to companies, and the IP protection afforded to them.  The problem has two sides to it: on the one hand, we see the erosion of what used to be the strongest legal protection, patent rights, which largely protect technology assets.  On the other hand, we see new types of digital assets that may be even more valuable than technology in some industries, like data assets, which have little or no IP protection at all.  This is how we get to the extreme situations of Unicorns (startups with valuation higher than $1 billion) having incredible valuations with no patents, and no other meaningful IP protection to speak of.  This problem is mostly pronounced with software companies, who are no longer bothering to patent their underlying technology because of the many hurdles facing software patents, while at the same time developing data-driven assets (collected primarily around their users) which drive their valuation and monetization, but have no legal protection and are easy target for breaches and misappropriation.

As far as activism coming from the IP community, I see a lot of focus on the patent front, and virtually nothing done on the data front.  Even if the strength of the patent system is fully restored to its glory days, this will solve only part of the problem.  Data assets, growing in importance across many industries, from software to biotech, are left unprotected.  The only protection I see is physical protection (limited access or cybersecurity measures), but there is no legal protection.  Without legal protection, there is no way to create or price transfer mechanisms (such as licensing in the case of patents), and no way to remunerate the holder of these data assets in cases of misappropriation.  My call for action to the IP community is to advocate for the IP protection of data assets.  This may require the creation of new classes of IP rights, or at the very least expanding the protection and enforcement of existing types of IP rights.

For the full article, click here.

Your Wildest Dreams: What are your wishes for 2020 (your wildest IP dreams, rather than what you think will really happen). 

My “IP dream” is a simple one: I dream of pricing transparency in patent transactions.  Transparency around patent prices, royalty rates and licensing terms.  Sadly, I have had the same dream over the last 20 years of valuing IP assets, and it is not any closer to materializing now than it has been 20 years ago.  I dream of not having to sort through incomplete and random data sets or redacted SEC filings, that happen to be in the public domain, when looking for a royalty rate to apply in a valuation assignment or in a licensing deal.  Nothing that exists in the market today fills that gap, because there is no requirement of systematic reporting of IP deals by companies, nor is there systematic valuation on the balance sheet due to the lack of such requirement by the accounting rules.  Without this type of transparency, patents will never be managed as the business assets that they are.  Let’s hope that the next decade brings some change in this area.

For the full article, click here.

Arthrex v. Smith & Nephew: Inter Partes Review and Unconstitutional Appointment of APJs

On Halloween, the United States Court of Appeals for the Federal Circuit delivered its opinion in Arthrex, Inc., v. Smith & Nephew, Inc. that the appointment of the Patent Trial and Appeal Board’s Administrative Patent Judges (“APJs”) violates the Appointments Clause of the U.S. Constitution. The background of this case involved Arthrex receiving a final written decision in the inter partes review of its patent finding the claims unpatentable as anticipated. Anthrex subsequently appealed the written decision of the PTAB arguing that the APJs presiding over the inter partes review were not constitutionally appointed.

A brief background on the appointment and power of the APJs is required to understand the potential impact of this decision. APJs are appointed by the Secretary of Commerce in consultation with the Director of the USPTO. This leads to the question of whether the APJs are defined as inferior officers or principal officers. The Court described the functions of APJs in determining how to define these officers and highlighted the significant discretion APJs exercise when carrying out their functions in the inter partes review process. It was noted that their decisions on patentability are final and subject only to rehearing by the Board or appeal to the CAFC. The Court then described the defining characteristics of inferior officers as compared with principal officers as being: (1) whether the officer has a superior, (2) whether the superior was appointed by Presidential nomination, and (3) the level of supervision and direction over the officer by the superior.

The Court then explained that the two presidentially-appointed officers at the USPTO, the Secretary of Commerce and the Director of the USPTO, provide direction to the USPTO. While these officers provide direction, the Court held that neither officer individually nor combined exercised sufficient direction and supervision over APJs to render them inferior officers. The Court’s opinion was based on the lack of independent statutory authority to review the final written decision by the APJs before that decision is issued on behalf of the United States. Another factor considered by the Court was the removal power over an officer, which the Supreme Court described as “a powerful tool for control.” APJs, the court noted, may be removed “only for such cause as will promote the efficient of the service,” meaning that the APJ may be removed when his or her misconduct is likely to have an adverse impact on the agency’s performance. With this in mind, the Court held that APJs are principal officers and thus the current structure of the Board violates the Appointments Clause because the APJs are appointed by the President and confirmed by the Senate.

In an effort to resolve the Constitutional conflict, the Court suggested removal of the employment protections that currently exist and providing the presidentially-appointed officers at the USPTO broad removal powers over APJs. It is unclear what the lasting impact of this decision will be, but recently, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property, and the Internet conducted a hearing that included a discussion of the Arthrex decision. A variety of solutions were presented and discussed to resolve the issue created by the Arthrex decision and time will tell if a legislative fix will soon emerge.

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