Not Happy Together: The Turtles’ Epic Quest for Performance Royalties & the Case for Federalizing Pre-1972 Sound Recordings

Tatsuya Adachi is Editor-in-Chief of the Cardozo Arts & Entertainment Law Journal, Vol. 34, and J.D. Candidate, 2016, Benjamin N. Cardozo School of Law. 

 

Introduction

Flo & Eddie—performers of the Turtles’ hit record “Happy Together”—have recently been engaging in a successful spree of $100 million class action lawsuits against digital broadcaster Sirius XM. With cases in New York, California, and Florida federal courts, the basis for these suits is Sirius XM’s underpayment of royalties and unlicensed public performances of pre-1972 sound recordings. The significance of the year 1972 is that sound recordings were first accorded federal copyright protection that year, but on an exclusively prospective basis. Sirius XM does not dispute the fact that it does not currently pay rights holders for these vintage recordings. In fact, it takes the position that while it may be required under federal law to pay royalties for the public performance of post-1972 sound recordings, it is not required to do so for pre-1972 sound recordings. The reason why requires an examination into a segment of the history of U.S. copyright law.

Part I of this Article provides the legal backdrop for Sirius’ position on pre-1972 sound recordings, in particular why they are not covered under federal law. Part II details Flo & Eddie’s successful lawsuits against Sirius in New York and California which each turn on state—not federal—law. Part III illustrates some of the troublesome downstream effects of these lawsuits, including various policy implications. Finally, Part IV proposes an amendment to the U.S. Copyright Act that would bring pre-1972 sound recordings under the ambit of federal protection.

 

I.     Legal Foundations: Pre-1972 Sound Recordings, Generally

A.    The Sound Recording Amendment of 1971

Congress passed the Sound Recording Amendment to the U.S. Copyright Act in late 1971, making sound recordings fixed on or after February 15, 1972 eligible for federal copyright protection for the first time.[1] Like many of Congress’ amendments to the U.S. Copyright Act, this was a legislative response to technological innovation that enabled a higher volume of music piracy than was previously practicable. Specifically, by 1971 there was a growing concern in Congress that the advent of the home use of audiocassette tapes and recorders meant the unauthorized reproduction and distribution of unlicensed recordings could take place on a commercial scale for the first time ever.[2] Indeed, Congress estimated in the statute’s accompanying House Report that the annual volume of pirated music sales was “in excess of $100 million,” as compared to $300 million annually from legitimate audiocassette tape sales.[3]

The Sound Recording Amendment was further motivated by the lack of uniformity among state law remedies for rights holders in sound recordings.[4] In the 1960s, some states passed criminal laws for the commercial reproduction and distribution of sound recordings,[5] and by now nearly all states have such criminal piracy laws protecting rights holders.[6] A number of states also have relevant civil statutes,[7] and others provide limited remedies under unfair competition law.[8]

B.    Applicability of Federal Copyright Law to Pre-1972 Sound Recordings

Before long, the U.S. Supreme Court addressed the question of whether pre-1972 sound recordings were subject to state or federal law in the seminal case Goldstein v. California,[9] deciding that pre-1972 sound recordings are covered only by state law. The Court held that California’s record piracy statute regarding pre-1972 sound recordings was not preempted by federal law under its decisions in Sears, Roebuck & Co. v. Stiffel Co.,[10] and Compco Corp. v. Day-Brite Lighting.[11] Pursuant to the Supremacy Clause,[12] the Court established that “[n]o comparable conflict between state law and federal law arises in the case of recordings of musical performances,” therefore “no reason exists why the State should not be free to act” in regulating pre-1972 sound recordings.”[13] In 1998, Congress codified the Goldstein decision in Sections 301(c) and (d) of the U.S. Copyright Act, by explicitly limiting federal preemption of state statutes and common law as they relate to pre-1972 sound recordings until 2067.[14]

 

II.    Flo & Eddie’s Lawsuits Against Sirius XM

Part II details two recent cases that address how federal district courts have applied state law to fill the gap in federal law described in Part I.

A.    The California District Court Decision

In September 2014, Flo & Eddie earned their first victory against Sirius over the nonpayment of performance royalties (allegedly amounting to $100 million), when a federal district court in California granted their summary judgment motion on the issue of the existence of performance rights for sound recordings under state law.[15] In reaching its decision, the court looked to the language of California’s copyright statute, which makes explicit mention of the treatment of pre-1972 sound recordings, providing: “The author of an original work of authorship consisting of a sound recording initially fixed prior to February 15, 1972, has an exclusive ownership therein until February 15, 2047[.]”[16]

The court’s analysis regarding public performance rights under the California Code turned on its interpretation of the scope of “exclusive ownership” rights.[17] Invoking a familiar statutory interpretation maxim, the court “presumed the Legislature included all the exceptions it intended to create.”[18] In turn, the court construed the meaning of “exclusive ownership” to infer the state legislature’s intention not to further limit ownership rights beyond the plain language of the statute, “otherwise it would have indicated that intent explicitly.”[19] The decision confirms that Sirius XM and other digital broadcasters will have to license pre-1972 sound recordings broadcasted in California.

B.    The New York District Court Decision

Just two months later, Flo & Eddie gained another victory in a separate $100 million class action suit, this time in New York’s Southern District.[20] As an initial matter, the court established that Flo & Eddie owned common law copyrights in their sound recordings under New York law.[21] Thus, the court recognized, as did the California court, that the theory of liability turned on the question of whether the scope of common law rights included a public performance right requiring Sirius to license and pay royalties for pre-1972 sound recordings.[22] The court acknowledged this was a matter of first impression and looked to New York’s historical treatment of performance rights in plays and films, each of which have long enjoyed public performance rights under the common law.[23] Thus, according to the court, “general principles of common law copyright dictate that public performance rights in pre–1972 sound recordings do exist.”[24]

 

III.   Downstream Effects & Policy Considerations

Part III examines the foreseeable, negative downstream effects of the cases discussed in Part II, and provides the policy basis for this Article’s proposal to bring pre-1972 sound recordings under the ambit of federal copyright law.

A.    The Litigation Bandwagon

One of the primary foreseeable consequences of these decisions is a litigation bandwagon effect. While Flo & Eddie recently lost summary judgment in a similar class action suit in Florida, there is ample evidence that litigation over performance royalties in pre-1972 sound recordings will only increase. To date, in addition to the near-certain appeals of the three Turtles cases, the major recording labels in the U.S. have mounted similar attacks against Pandora, another digital broadcaster.[25] SoundExchange, a rights management organization, also filed suit against Sirius XM for $100 million dollars in unpaid royalties, recently winning $90 million in settlement.[26]

To say that litigation over performance royalties in pre-1972 sound recordings has become unruly would be an understatement. That these disputes are all being litigated simultaneously, under a veritable hodgepodge of state statutory and common law, lends further credence to the notion that the current legal environment surrounding performance rights in pre-1972 sound recordings is unstable. Litigation has become an inefficient tool for dispute resolution between digital broadcasters and owners of pre-1972 sound recordings. It is slow, burdensome, and costly not only for the broadcasters, but for Flo & Eddie as well. Therefore, significant resources are currently being expended in a manner that creates a zero-sum game between the parties.

B.    Access and Preservation Concerns

The current legal environment described above also threatens valuable access and preservation policy principles as they relate to pre-1972 sound recordings. It was widely rumored that Sirius XM’s threat to pull all pre-1972 sound recordings from their services to avoid further disputes precipitated—at least in part—the Second Circuit’s decision to grant Sirius XM’s appeal of the Southern District’s denial of its summary judgment motion. Pandora has also made a similar declaration.[27] Indeed, if the solution adopted by the digital broadcasting industry is to pull pre-1972 content altogether, the negative consequences are two-fold: (1) the public will be deprived of access to culturally valuable content (imagine a world where the next generation has no access to Motown and the Beatles); and (2) rights holders in pre-1972 sound recordings will have effectively shut themselves out from the capture of future performance royalties. Indeed, the U.S. Copyright Office agrees that preservation and access concerns are a major driving force for the need for federal copyright reform in this respect.[28]

C.    A Licensing Mess, Regardless

Even if digital broadcasters elect not to pull pre-1972 content from their broadcasts, the current gap in federal law would result in a licensing mess characterized by prohibitively high administrative costs. Under federal copyright regulations, the Copyright Royalty Board has designated SoundExchange as the rights management organization to collect and distribute performance royalties.[29] Under this system, royalties are calculated according to statutorily-set rates, and payment and distribution is administered via a single entity.[30] However, because pre-1972 sound recordings currently fall outside of this federal regulatory scheme, digital broadcasters will be required to negotiate separate licenses with each individual rights holder per recording.[31] License negotiation will likely also involve the analysis of each of the fifty states’ individual statutes and common law doctrines regarding performance rights for sound recordings. Therefore, from the broadcasters’ perspective, pulling content altogether remains an economically more attractive alternative to such a licensing scheme.

 

IV.   Proposal: Congress Must Federalize Pre-1972 Sound Recordings

Part IV demonstrates that the policy concerns described in Part III would be significantly alleviated by amending the U.S. Copyright Act to bring pre-1972 sound recordings under federal protection.

One potentially positive downstream effect of the problems described above is that the they have highlighted the need for federal reform in the eyes of Congress. Indeed, in May 2014, Congress introduced the Respecting Senior Performers as Essential Cultural Treasures Act (RESPECT) Act,[32] which would largely require digital broadcasters to treat pre-1972 sound recordings the same as post-1972 sound recordings.

This Article argues that federal legislation via the RESPECT Act, or a similar legislative bill, is necessary in order to eliminate the troublesome downstream effects described above. The reasons are three-fold: First, because guidance on pre-1972 sound recordings would be provided by a single clear and unambiguous source of law (the potential federal statute), the litigation bandwagon will come to a halt. Digital broadcasters will be clear on their duties to rights holders, and performance royalties will no longer require messy judicial analysis of state law. Second, because pre-1972 sound recordings would be part of the federal regulatory scheme, the licensing mess described above will be eliminated and therefore streamlined under the terms of the federal regulations. Third, the elimination of the licensing mess will alleviate access and preservation concerns because licensing will no longer be prohibitively costly to administer.

 

Conclusion

It is without a doubt that while owners of pre-1972 sound recording have asserted their rights in their works through proper judicial channels, the current state of the surrounding legal environment is fairly unstable. That pre-1972 rights holders have a judicially recognized basis for engaging in massive litigation may be beside the point. What is troubling about the lack of stability under the current system is the series of negative, downstream effects that are foreseeable due to this type of litigation strategy. Therefore, in order to eliminate these effects, and in order to benefit both digital broadcasters and pre-1972 rights holders in the long run, legislation—not litigation—is the proper avenue to resolve disputes of this nature.

 

[1] Pub. L. No. 92-140, § 3 (1971), 85 U.S. Stat. 391, 392 (1971).

[2] H.R. REP. NO. 92-487, at 2 (1971).

[3] Id.

[4] Id.

[5] In 1967, New York became the first state to make the commercial reproduction and distribution of sound recordings a criminal offense, followed by California in 1968. See U.S. Copyright Office, Federal Copyright Protection for Pre-1972 Sound Recordings: A Report of the Register of Copyrights 20 n.80 (2011), http://www.copyright.gov/docs/sound/pre-72-report.pdf (citations omitted).

[6] See Melville B. Nimmer and David Nimmer, 2-8C Nimmer on Copyright § 8C.03, n.9.1 (Matthew Bender, rev. ed.) (citing U.S. Copyright Office, Federal Copyright Protection for Pre-1972 Sound Recordings: A Report of the Register of Copyrights 22 n.82 (2011), http://www.copyright.gov/docs/sound/pre-72-report.pdf) (noting that Indiana and Vermont are the only states without such statutes).

[7] See, e.g., Cal. Civ. Code § 980(a)(2) (2011) (state protection over sound recordings until 2047); Colo. Rev. Stat. § 18-4-601(1.5) (2011) (“[N]o common law copyright shall exist for a period longer than fifty-six years after an original copyright accrues to an owner.”).

[8] U.S. Copyright Office, Federal Copyright Protection for Pre-1972 Sound Recordings: A Report of the Register of Copyrights 11 (2011) (citations omitted); see, e.g., A&M Records, Inc. v. M.V.C. Distributing Corp., 574 F.2d 312 (6th Cir. 1978); Victor Talking Mach. Co. v. Armstrong, 132 F. 711 (S.D.N.Y. 1904); Capitol Records v. Erickson, 2 Cal. App. 3d 526 (1969); Capitol Records v. Spies, 264 N.E.2d 874 (1970); Columbia Broadcasting System Inc. v. Melody Recordings, Inc., 341 A.2d 348 (1975); Liberty/UA, Inc. v. Eastern Tape Corp., 180 S.E.2d 414 (1971).

[9] 412 U.S. 546 (1973).

[10] 376 U.S. 225 (1964).

[11] 376 U.S. 234 (1964).

[12] “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2.

[13] Goldstein v. California, 412 U.S. 546, 570 (1973).

[14] 17 U.S.C. § 301.

[15] Flo & Eddie Inc. v. Sirius XM Radio Inc., No. CV 13-5693 PSG RZX, 2014 WL 4725382, at *2 (C.D. Cal. Sept. 22, 2014) reconsideration denied, No. CV 13-5693 PSG (RZX), 2015 WL 9690320 (C.D. Cal. Feb. 19, 2015) [hereinafter Flo & Eddie (CA)].

[16] Cal. Civ. Code § 980(a)(2).

[17] Flo & Eddie (CA), 2014 WL 4725382, at *5.

[18] Id. at *5 (citing Reynolds v. Reynolds, 54 Cal.2d 669, 681 (1960)).

[19] Id.

[20] Flo & Eddie, Inc. v. Sirius XM Radio, Inc., 62 F. Supp. 3d 325 (S.D.N.Y. 2014) reconsideration denied, No. 13 CIV. 5784 CM, 2014 WL 7178134 (S.D.N.Y. Dec. 12, 2014) stay granted, motion to certify appeal granted sub nom. Flo & Eddie, Inc v. Sirius XM Radio Inc., No. 13 CIV. 5784 CM, 2015 WL 585641 (S.D.N.Y. Feb. 10, 2015) and stay granted, motion to certify appeal granted sub nom. Flo & Eddie, Inc v. Sirius XM Radio Inc., No. 13 CIV. 5784 CM, 2015 WL 585641 (S.D.N.Y. Feb. 10, 2015) and leave to appeal granted, No. 15-497, 2015 WL 3478159 (2d Cir. May 27, 2015).

[21] Id. at 336.

[22] Id.

[23] Id. (citations omitted).

[24] Id. at 334.

[25] Ben Sisario, SiriusXM Settles Royalty Dispute Over Old Recordings, N.Y. Times (June 26, 2015), http://www.nytimes.com/2015/06/27/business/sirius-xm-settles-royalty-dispute-over-old-recordings.html?_r=0.

[26] Ben Sisario, Pandora and Big Labels Settle Suit for $90 Milion, N.Y. Times (Oct. 22, 2015), http://www.nytimes.com/2015/10/23/business/media/pandora-and-big-labels-settle-suit-for-dollar90-million.html.

[27] See Leigh F. Gil, Heather R. Lieberman, Gregory S. Stein, Time to Face the Music: Current State and Federal Copyright Issues with Pre-1972 Sound Recordings, Leavens, Strand & Glover, LLC (July/Aug. 2014), http://lsglegal.com/index.php/articles/42-uncategorised/280-time-to-face-the-music-current-state-and-federal-copyright-law-issues-with-pre-1972-sound-recordings (citation omitted).

[28] U.S. Copyright Office, Federal Copyright Protection for Pre-1972 Sound Recordings: A Report of the Register of Copyrights 91–100 (2011), http://www.copyright.gov/docs/sound/pre-72-report.pdf.

[29] See 37 C.F.R. § 380.4.

[30] Id.

[31] See supra note 27; see also Steve Gordon & Anjana Puri, The Current State of Pre-1972 Sound Recordings: Recent Federal Court Decisions in California and New York Against Sirius XM Have Broader Implications Than Just Whether Satellite and Internet Radio Stations Must Pay for Pre-1972 Sound Recordings, 4 NYU J. Intell. Prop. & Ent. L. 336, 354 (2015).

[32] RESPECT Act, H.R. 4772, 113th Cong. (2014).

California Resale Royalty Act Struck Down

On Monday, April 11th, U.S. District Court Judge Michael Fitzgerald dismissed a lawsuit brought by a number of artists to recover resale royalties from auction houses that sold their art. The decision is the latest chapter in a legal battle over the California Resale Royalty Act and likely marks its end.

First passed in 1976, the California Resale Royalty Act, Cal. Civ. Code §986, was a groundbreaking statute for the United States. Inspired by similar European legislation, the act incorporates the concept of droit de suite, which is an artist’s enduring moral and economic right to their work. The act requires art sellers to give artists five percent of the resale price if the “seller resides in California or the sale takes place in California.” The act places the burden on the seller to both find and pay the artist these royalties. If the seller is unable to locate the artist within ninety days, the burden transfers to the California Arts Counsel. If the counsel is unable to locate the artist within seven years, it may use the unclaimed funds “for use in acquiring fine art.” These rights exist for the artist’s life, and can also be exercised by the artist’s estate or heirs up to twenty years after the artist’s death.

The suit was brought by a number of California artists, including the estate of sculptor Robert Graham and actress Angelica Huston, against defendants Christie’s Inc., Sotheby’s Inc., and eBay, seeking resale royalties from sales of their art that the defendants performed out of state.

The California Resale Royalty Act was severely limited last year when the case was heard by the Ninth Circuit Court of Appeals. The court found the act to be in violation of the Dormant Commerce Clause, as it allowed California to impose its laws on sales that were made outside of the state. However, instead of striking down the law in its entirely, the court severed the statute, limiting its control to only art sales that occur in California.

Monday’s decision finishes off what remained of the law. In his decision, Judge Fitzgerald held that the Copyright Act of 1976 preempted the California Resale Royalty Act. In particular, the judge upheld the longstanding “first sale doctrine,” which “provides that ‘once the copyright owner places a copyrighted item in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution.’” Therefore, downstream sales of art cannot be subjected to the resale royalty requirements imposed by the California law. Judge Fitzgerald emphasized that this doctrine is an important one, as it “creates robust secondary markets” by shifting “the market power away from copyright holders and toward competition.”

The plaintiffs will likely appeal the decision, which would bring the case back to the Ninth Circuit.

Resale royalty rights have fared better in Europe where they have an extensive history. Artists’ rights first evolved during the renaissance as artists began to develop extensive reputations independent of their patrons. During the eighteenth and nineteenth centuries, France became a strong supporter of these ideals and established four distinct rights for artists: 1) the right to attribution, 2) the right to maintain the integrity of their art, 3) the right to disclose their art, and 4) the right to withdraw or modify their work after disclosure. The droit de suite grew out of this legacy, and was first codified in France in 1920. It has since been included in the Berne Convention for Literary and Artistic Works. Interestingly, the United States is a member of the convention, despite it never having passed federal resale royalty legislation. Most recently, the European Union formally adopted resale royalty rights by passing Directive 2001/84/EC. However, even European resale royalty rights have been controversial. The United Kingdom recently experienced a sudden decline in art sales. Some observers blame this development on resale royalty laws, which they argue are pushing art sales to the United States and Asia at the expense of the local art market.

Although Monday’s decision is a significant setback for artists’ resale royalty rights in the United States, the debate will continue. Ever since the California Resale Royalty Act was first passed in 1976, there has been constant pressure on Congress to incorporate the droit de suite into federal law. If lobbyists are to continue to fight for such a law, they must do so without the help of the California Resale Royalty Act.

 

Anthony Prinzivalli is a second-year law student at the Benjamin N. Cardozo School of Law and a Staff Editor of the Arts & Entertainment Law Journal. He will be a Notes Editor for Volume 35 of the AELJ.

 

Sources and Further Reading:

  1. http://labusinessjournal.com/news/2016/apr/12/federal-ruling-puts-state-artist-royalty-law-jeopa/.
  2. http://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV&sectionNum=986.
  3. http://www.scotusblog.com/wp-content/uploads/2015/09/12-56067.pdf.
  4. http://cdn2.hubspot.net/hubfs/878449/document.pdf?t=1460560905154.
  5. http://digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1297&context=elr.
  6. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32001L0084:EN:HTML.

http://www.spectator.co.uk/2016/03/why-britains-world-class-galleries-and-auction-houses-could-benefit-from-brexit/.

Traditional Fantasy Sports v. DFS, and Why the Former is Escaping Scrutiny

On November 10, 2015, New York Attorney General Eric Schneiderman (pictured) ordered daily fantasy sports (DFS) sites like FanDuel and DraftKings to immediately cease New York operations on the grounds that their businesses constitute illegal gambling. The general public, as well as the companies themselves, believed DFS to be an entirely legal form of fantasy sports wagering. Although discourse has arisen about the legality of DFS, traditional fantasy sports seem to have escaped scrutiny by both Schneiderman and the general public.

Fantasy sports, playable online, have been in existence for two decades. The traditional sports include season-long wagers, mostly between friends and colleagues, which can result in a one-time monetary payout in a sum of money limited to what was provided by these same friends and colleagues. Fantasy football will be our focus: a game-type that consists of about four months of play by up to twenty players. Traditional fantasy football has become a common household activity, and although money may be exchanged, it is perceived in the same “gambling” light as picking a box at a Super Bowl party. This perception used to be matched by a lack of enforcement.

In 2006, however, the federal legislature addressed this gray area by enacting the Unlawful Internet Gambling Enforcement Act (UIGEA). This act, while simultaneously enforcing restrictions on illegal online gambling, carved out an exception for fantasy sports—§ 5362(1)(E)(ix) of the UIGEA makes lawful “participation in any fantasy or simulation sports game….” Following this, DFS sites jumped on the opportunity to change the landscape of fantasy sports wagering. This landscape changed from solely traditional fantasy sports to a distinction between traditional and DFS.

The meteoric rise of DFS sites like Fanduel (first paying customer in 2009 and mega-partnership with NBC in 2013) is attributable to an entirely different fantasy sports experience. On DFS sites, payouts can come within 24 hours of the wager, and the winnings consist of money put up by thousands of other players, not just friends and colleagues. Players can place bets daily and weekly, as opposed to the traditional multiple-month wager lifespan. DFS’s short wager lifespan is the source of its popularity. A short lifespan allows fantasy enthusiasts to put up more money more often, and fantasy amateurs, who otherwise could not complete a season-long activity, to play sporadically. However, this short lifespan also works against DFS in unearthing two arguments that call for the illegalization of DFS.

First, from a public policy standpoint, this ability to put up more money more often awakens the anti-gambling fervor that some states hold. Supporters of Mr. Schneiderman, and those against DFS, claim that the exception carved out in the UIGEA was meant, in the context of legislative intent, to protect only to traditional fantasy sports games and not the lucrative expanse that DFS has become. The second argument, the legal argument used to protect policy, is that the short timespan of wagers opens up the all-powerful game of skill v. game of chance argument. Game of skill v. game of chance is the discourse that is used by the judiciary and legislature to determine whether or not different gambling games are considered legal or illegal. Skill-based games are awarded designation as the former, and therefore have a stronger legal argument of legality.

Therefore, the question becomes whether or not DFS are based on skill or chance in relation to traditional fantasy sports – specifically, in New York, the question becomes whether or not a material issue of chance exists in DFS. Supporters of the AG will claim that more chance exists in DFS than traditional games because of the difference in both the length of the wager and the amount of action taken by players. Keeping with our football base, a traditional season would consist of: a) drafting athletes for your team; b) selecting which of these athletes to play, over others that you own, seventeen times a season; c) replacing athletes who become injured or unproductive throughout the course of the season with other athletes not owned by competing teams; d) trades with other teams; and more. Conversely, a DFS wager consists solely of picking one team, from an unlimited amount of athletes, for one game each. Due to the fact that more action is required by the player in traditional games, the argument rests that more skill is required to end the season victorious traditionally as opposed to ending the week victorious in DFS. How rock solid is this reasoning?

Well, the same exact factors raised above that lend credibility to the argument that traditional games have less chance and take more skill than DFS, can also be used to argue just the opposite: a) as for the draft, the players can spend as much time as they want creating a skill-based strategy to get the best athletes, but if other teams happen to by chance take those athletes right before you, skill is thrown out the window by chance; b) the season consists of seventeen games, but a team can win the first sixteen, by chance lose the last one, and not win any money at all; c) one needs skill to replace injured or unproductive athletes, but any injury itself is a direct result of chance; d) trading with other teams takes the skill of negotiation and team building, but one player can collude with another to create an unfair advantage through trading. None of these listed sources of chance exist in DFS. Therefore, the argument that traditional games take more skill than DFS is suspect.

Where does this leave us? In reality, the legal arguments that are going to be made will not be a distinction between traditional and DFS, but instead of the legality of DFS alone. Does this or does this not raise questions about the legality of traditional fantasy sports? If DFS is found in New York State to be materially based on chance, and therefore illegal, do traditional games also become illegal? Regardless, this entire conversation would be perplexing in the questioning of the legality of DFS, but not the same questioning of traditional games.

DFS sites have been operating under the true belief that they are legal forms of gambling, and now their legality is being questioned by Mr. Schneiderman. Why are traditional fantasy sports left out of the conversation? Food for thought.

 

Michael Kar is a Candidate for Juris Doctor, 2017, at the Benjamin N. Cardozo School of Law. At Cardozo, Michael is a member of the ADR Competition Team as well as a Staff Editor for the Cardozo Arts & Entertainment Law Journal. He is currently interning in the field of matrimonial law and mediation. https://www.linkedin.com/in/michaelkar

 

Sources:

DFS shut down: http://www.nytimes.com/2015/11/11/sports/football/draftkings-fanduel-new-york-attorney-general-tells-fantasy-sites-to-stop-taking-bets-in-new-york.html?_r=0

UIGEA: https://www.fdic.gov/news/news/financial/2010/fil10035a.pdf

Daily Fantasy Café Blog: https://www.dailyfantasycafe.com/academy/undergraduate/is-daily-fantasy-sports-legal

Regulating Crypto-Currencies

Powerball fever recently struck the nation. An estimated $1.5 billion jackpot had everyone talking. Hoping. Dreaming. With a single Powerball ticket cost at $2, one can imagine saving each and every dollar in order to purchase a ticket at a chance to win the big prize. What was new this time around? Individuals were able to purchase Powerball tickets with bitcoin.[1] JackPocket, a mobile lottery ticket application, “integrated bitcoin payments into its offering…allow[ing] users to buy Powerball tickets.”[2] JackPocket CEO Peter Sullivan believed that this move would “attract more affluent and tech-savvy consumers to buy more lottery tickets.”[3]

One may ask, what is the big deal that there is something else out there one can buy with bitcoin? It is important because the use of bitcoin continues to expand despite recent discussion and analysis of the regulatory framework of bitcoin. In the United States, there have been a number of steps taken at aiming to regulate bitcoin. New York adopted the BitLicense[4] making it “the first US state to formally launch a custom-made regulatory approach to bitcoin and digital currencies.”[5] Other regulatory bodies such as the U.S. Securities and Exchange Commission[6] (SEC) and the United States Commodities Futures Trading Commission[7] (CFTC) have either indirectly or directly attempted to assert that bitcoin is a currency[8] or a commodity,[9] respectively. Presumably, this would allow these different regulatory bodies, amongst others, to have some authority at attempting to regulate bitcoin.

As with New York, the SEC, and CFTC, other states, agencies, and regulatory bodies are attempting to regulate bitcoin in their own way.[10] If one were to look from an even broader perspective, there are even changes worldwide. Recently “Russia took a step…that would effectively ban the use of digital currencies like bitcoin domestically.”[11] Additionally, the “UK Treasury has announced a series of initiatives dealing with digital currency”[12] which illustrates the “government’s first major attempt to grapple with the regulatory…issues surrounding digital currencies.”[13]

All in all, it seems fair to say that there are a number of governments and agencies, worldwide, which are evaluating regulatory measures geared toward digital currencies such as bitcoin. The question then becomes, do these additional uses for bitcoin put it and other digital currencies in danger of becoming heavily regulated, more so than they would be otherwise?

Sumit Agarwal is a second-year law student at Benjamin N. Cardozo School of Law and a Staff Editor of the Cardozo Arts & Entertainment Law Journal.

 

[1] For a basic understanding of bitcoin see What is Bitcoin?, CoinDesk (last updated Mar. 20, 2015), http://www.coindesk.com/information/what-is-bitcoin/.

[2] See Pete Rizzo, Tickets for $1.5 Billion Powerball Jackpot Now Selling for Bitcoin, CoinDesk (Jan 13, 2016, 6:21 PM), http://www.coindesk.com/tickets-1-5-billion-powerball-jackpot-bitcoin/.

[3] Id.

[4] See e.g., Stan Higgins, NY Bitcoin Businesses Now Have 45 Days to Apply for BitLicense, CoinDesk (June 24, 2015, 8:42 PM), http://www.coindesk.com/ny-bitcoin-business-45-days-bitlicense.

[5] Id.

[6] For an understanding of the SEC’s responsibilities, see http://www.sec.gov/about/whatwedo.shtml.

[7] For an understanding of the CFTC’s responsibilities, see http://www.cftc.gov/About/MissionResponsibilities/index.htm.

[8] Edward V. Murphy et al., Cong. Research Serv., R43339, Bitcoin: Questions, Answers, and Analysis of Legal Issues (2015). (Discussing how certain perceptions and measures taken by the SEC qualify bitcoin as a currency.)

[9] See Pete Rizzo, CFTC Ruling Defines Bitcoin and Digital Currencies as Commodities, CoinDesk (Sept 17, 2015, 10:06 PM), http://www.coindesk.com/cftc-ruling-defines-bitcoin-and-digital-currencies-as-commodities/; Jared Paul Marx, Bitcoin as a Commodity; What the CFTC’s Ruling Means, CoinDesk (Sept 21, 2015, 11:50 AM), http://www.coindesk.com/bitcoin-as-a-commodity-what-the-cftcs-ruling-means/.

[10] Edward V. Murphy et al., Cong. Research Serv., R43339, Bitcoin: Questions, Answers, and Analysis of Legal Issues 1 (2015) (Analysis and discussion of regulation other states such as California and Connecticut aim to take with regards to bitcoin.).

[11] Daniel Palmer, Bill Seeking Bitcoin Ban Reaches Russian Legislature, CoinDesk (Jan 11, 2016, 10:43 AM), http://www.coindesk.com/bill-bitcoin-ban-russian-legislature/.

[12] Joon Ian Wong, UK’s Plan to Regulate Bitcoin Revealed in Treasury Report, CoinDesk (March 18, 2015, 2:02 PM), http://www.coindesk.com/breaking-uk-treasury-issues-landmark-digital-currencies-report/.

[13] Id.

Is The Martian Just The Latest Example Of A Way To Avoid Liability Copyright Infringement In International Waters?

The 2015 Golden Globe winning Best Motion Picture Musical or Comedy, The Martian,[1] is a movie about an astronaut, played by Matt Damon, who was left stranded on Mars after being presumed dead as the result of a storm.[2] He ended up surviving and was left to find a way to signal Earth that he was alive.[3] Many people may not connect this movie with copyright law, but about three-fourths of the way through the movie, Damon’s character makes the following statement: “I’ve been thinking about law on Mars. There’s an international treaty saying that no country can lay claim to anything that’s not on Earth. By another treaty, if you’re not in any country’s territory, maritime law applies. So Mars is international waters…the second I walk outside I’m in international waters. So I’m going to be taking a craft over in international waters without permission, which by definition…makes me a pirate.”[4] Although not specifically referring to copyright law, it isn’t hard to see the huge issue that this quote exemplifies: people in international waters, and other negative spaces, know that they are outside the jurisdiction of any country and can, therefore, break any laws, including copyright, that they want to without having to face consequences.

Given the evolving nature of international relations, heightened by the globalization of world economies[5] and major technological advances,[6] international law is becoming much more intertwined with domestic law. With copyright law, “as the marketplace becomes more international, the ability to exploit copyright material abroad becomes much easier.”[7] Protected works are reaching individuals throughout the world thanks to the Internet and advanced digital communications, international newspapers, multi-national corporations and global travel.[8] Consequentially, United States courts have more and more often found themselves entangled in transnational copyright disputes.[9] Copyright law, however, operates territorially, as mandated by the Berne Convention, and the U.S. Copyright Act has no extraterritorial effect.[10] Regardless, circuit courts have begun to apply domestic law to infringements that have occurred entirely abroad.[11]

However, there is an even larger problem involving copyright infringement outside of the jurisdiction of any country. The Martian is only the latest example in a trend of individuals and companies finding ways to exploit the lack of law, and therefore avoid liability, for copyright infringement in international waters. Individuals and corporations have been devising and experimenting with ways to avoid domestic copyright laws while on the high seas because international waters are one of the few areas in the world where no country can claim complete control over.[12]

In the 2009 case of Jacobs v. Carnival Corp.,[13] Carnival Cruises was held not to be liable for copyright infringement for putting on an unlicensed production of Grease because the ship was sailing outside of the U.S.’s jurisdiction (i.e. more than 12 miles out into international waters). If taking place on U.S. soil, these performances would clearly require a license.[14] However, being that this performances took place on a cruise ship sailing in international waters,[15] once the ship was outside the 12 nautical mile range of U.S. territory, the ship was in the proverbial no-man’s land,[16] and therefore U.S. copyright laws no longer applied because they have no extraterritorial effect.[17]

The other case documenting this problem involves one of the top BitTorrent websites, The Pirate Bay (TPB), which is an online index of digital content where visitors can search, download and contribute magnet links and torrent files, which facilitate peer-to-peer (“P2P”) file sharing among users of the BitTorrent protocol.[18] In 2012, TPB, on its blog page, announced a proposed plan to fly file-sharing drones in international waters to avoid copyright liability of any nation.[19] By launching their servers through GPS-controlled drones and moving them over international waters, TPB would be able to avoid criminal and civil liability for copyright infringement.[20] Just as with cruise ships publicly performing musical theater works in international waters, TPB providing copyrighted infringement in international waters would allow them to have a good argument that they are free from the laws of any jurisdiction.[21]

The nineteenth century saw a movement to institute a “universal law of copyright…[in] a single code, binding throughout the world.”[22] The Berne convention revisions in the twentieth century incrementally approached this ideal by compelling Berne countries to assure increasingly broader and stronger minimum rights.[23] Advancements in technology and media stimulated these revisions and we now live in a digitally connected world whereby individuals in one country are connected with individuals everywhere else in the world.[24] Cruise ships carry people from one state and/or country to another.[25] Geography is largely irrelevant in P2P file sharing; “[a] computer logging on in Bombay or Brussels becomes part of the same network as a computer in Pittsburgh.”[26] And, with NASA planning a mission to Mars, like in The Martian, space shuttles will be carrying people into outer space, [27] another area of international waters.

We need a broader understanding of international copyright lawmaking because right now, there is a gap in copyright protection. The currently proposed solutions, including the predicate-act doctrine, only go so far. They do not help when the infringement occurs in an area where there is no governing law. We need another solution.

 

Brittany Binderoff is a second-year law student at Benjamin N. Cardozo School of Law and a Staff Editor of the Cardozo Arts & Entertainment Law Journal. She is Theater Chair of the Cardozo Entertainment Law Society and hopes to pursue a career in entertainment law.

LinkedIn: www.linkedin.com/in/brittanybinderoff

 

[1] Ross A. Lincoln, ‘The Martian’ Wins Golden Globe For Best Motion Picture Musical Or Comedy, Deadline (Jan. 10, 2016, 7:44pm), http://deadline.com/2016/01/the-martian-wins-golden-globe-for-best-motion-picture-musical-or-comedy-1201679827/

[2] The Martian (20th Century Fox 2015).

[3] Id.

[4] The Martian Quotes, IMDB, http://www.imdb.com/title/tt3659388/quotes?item=qt2643181.

[5] Jeff Pettit, Note, At Sea, Anything Goes? Don’t Let Your Copyright Sail Away, Sail Away, Sail Away, 93 Tex. L. Rev. 743 (2005).

[6] Gregory Swank, Comment, Extending the Copyright Act Abroad: The Need for Courts to Reevaluate the Predicate-Act Doctrine, 23 DePaul J. Art Tech. & Intell. Prop. L. 237 (2012).

[7] Swank, supra note 6 at 244.

[8] Patricia Scahill, Note, U.S. Copyright Law and Its Extraterritorial Application: Subafilms, Ltd. v. MGM-Pathe Communications, 19 Md. J. Int’l. L. 293 (1995).

[9] Graeme B. Dinwoodie, Article, A New Copyright Order: Why National Courts Should Create Global Norms, 149 U. Pa. L. Rev. 469, 529 (2000).

[10] William F. Patry, 7 Patry on Copyright § 25:86 (2015).

[11] Update Art, Inc. v. Modiin Publ’g, Ltd., 843 F.2d 67, 73 (2d Cir. 1988); L.A. News Serv. v. Reuters TV Int’l., 149 F.3d 987 (9th Cir. 1998); Tire Eng’g & Distrib., LLC v. Shandong Linglong Rubber Co., 682 F.3d 292, 306-307 (4th Cir. 2012).

[12] United Nations Convention on the Law of the Sea, Dec. 10, 1982, 1833 U.N.T.S. 397, arts. 87 and 89, http://www.un.org/Depts/los/convention_agreements/texts/unclos/part7.htm.

[13] 2009 WL 856637 (S.D.N.Y. 2009).

[14] About Publishing, SESAC, http://www.sesac.com/EDU/Publishing.aspx (“The Grand Right is the right of the copyright owner to perform or license others to perform their song in a dramatic matter, which advances the plot of the production in which it is included (such as a Broadway show). This requires a license from the copyright owner separate and distinct from, what is commonly known as, the “small” performing rights…”).

[15] The United Nations Convention on the Law of the Sea (A historical perspective), Division for Ocean Affairs and the Law of the Sea, Office of Legal Affairs, United Nations (2012),

http://www.un.org/Depts/los/convention_agreements/convention_historical_perspective.htm

[16] Id.

[17] Swank, supra note 6, at 239 (“This is because it has long been understood that copyright laws operate territorially.”).

[18] Matt Peckman, How The Pirate Bay’s Anti-Censorship ‘PirateBrowser’ Works, Time (Aug. 12, 2013), http://techland.time.com/2013/08/12/how-the-pirate-bays-anti-censorship-piratebrowser-works/.

[19] Mr. Spock, TPB Loss, The Pirate Bay Blog (March 18, 2012), https://thepiratebay.vg/blog/210.

[20] Eriq Gardner, How Hollywood Could Stop Pirate Bay’s Plan to Launch Servers into the Sky, The Hollywood Report (March 22, 2012: 4:19pm PT), http://www.hollywoodreporter.com/thr-esq/pirate-bay-mpaa-hollywood-servers-303369.

[21] Id; see also Jason Koebler, The Pirate Bay to Fly ‘Server Drones’ to Avoid Law Enforcement, U.S. News (March 19, 2012: 12:15pm EDT), http://www.usnews.com/news/articles/2012/03/19/the-pirate-bay-to-fly-server-drones-to-avoid-law-enforcement.

[22] William Briggs, The Law of International Copyright 162 (1906).

[23] Berne Convention for The Protection of Literary and Artistic Works, arts. 2(1) and 5(1), July 24, 1971, 1971 U.S.T. 263, 1161 U.N.T.S. 35.

[24] Paul Edward Geller, The Universal Electronic Archive: Issues in International Copyright, 25 INT’L REV. OF INDUS. PROP. & COPR. L. [I.I.C.] 54 (1994).

[25] Pettit, supra note 5, at 743-744.

[26] M. Eric Johnson, Dan McGuire, Nicholas D. Willey, The Evolution of the Peer-to-Peer File Sharing Industry and the Security Risks for Users, Hawaii International Conference on System Sciences, Proceedings of the 41st Annual (2008), http://digitalstrategies.tuck.dartmouth.edu/cds-uploads/publications/pdf/30750383_1.pdf.

[27] NASA’s Journey to Mars, NASA (Dec. 1, 2014), https://www.nasa.gov/content/nasas-journey-to-mars.

The CRISPR-Cas9 Patent Dispute

The stage has officially been set for one of the largest biotech patent disputes to date. The stakes are high in this clash between scientific powerhouses: a potential Nobel Prize, the patent rights to a breakthrough gene-editing process, and (of course) a lot of money for the research institution involved.

On one side of this battle stands Feng Zhang, a bioengineer and professor from the Broad Institute of MIT and Harvard. On the other is Jennifer Doudna, a molecular biologist and professor from the University of California, Berkeley.

The United States Patent and Trademark Office (USPTO) commenced an interference proceeding to determine which institution will reap the rewards. On January 11, 2016 the USPTO declared its interference in response to the Suggestion of Interference filed on behalf of the Regents of the University of California, the University of Vienna, and Emmanuelle Charpentier (a microbiologist who collaborated with Doudna on the project).

You may be wondering why the parties were able to ask for an interference proceeding post-AIA. That is part of what makes this case so complicated. Before President Obama signed the Leahy-Smith America Invents Act (AIA) in 2011, the U.S. patent system operated on a first-to-invent system. This meant that inventors had to keep diligent records of their work to prove that they were the first to “reduce the concept to practice.”[1] The AIA took effect on March 16, 2013, meaning that any application filed after that date would be subject to the new—much cleaner—“first to file” system. The “first-to-file” system also eliminated the need for interference proceedings. This case, because of the timing, falls squarely into the inevitable gray area that comes out of the change in the law.

There is no contest that Doudna was the first to file for a patent covering the use of CRISPR-Cas9 to edit genetic code. The problem is that she filed on March 15, 2013– meaning that the first-to-file system would not apply to her application. Zhang then filed on October 15, 2013 (7 months later). Because of this, the USPTO now has the enormous task of determining who was truly the first to invent the gene-editing use of CRISPR-Cas9. Because it filed second, the Broad Institute is named as the “junior party” in the interference proceeding. This means that they must show that Zhang was actually the first to invent.

Let’s take a step back. CRISPR is an acronym that stands for Clustered Regularly Interspaced Short Palindromic Repeats. CRISPR refers to the organization of DNA sequences found in the genomes of microorganisms, but the term has been used to refer to the CRISPR-Cas9 system. Cas9 is an enzyme produced by the CRISPR system that has the ability to shut a targeted gene off.[2] In short, we are looking at technology that can edit the DNA sequence. The implications of the technology spark a separate–larger–debate about whether and how it may be used to edit human DNA (read: designer babies).[3] Of course, it may also prove to be life-saving, allowing doctors to correct the genes of children who would be born with debilitating disorders. But that line becomes very blurry, very quickly. Keep in mind that one of the two institutions named above (Broad or Berkeley) will inevitably have the power to license the technology and set limitations (or, alternatively, refuse to set limitations) on its use. There is currently no regulatory framework governing CRISPR research or technology, although Zhang and Doudna have voiced support for a framework governing its use in people.[4] As I said, the stakes here are high.

So, what is the likely outcome?

According to patent attorney and founder of the IPWatchdog Blog Eugene Quinn, the rules favor the senior party. Here that is Doudna, as she was the first to file the patent. To prevail in the interference proceeding, the junior party must “come up with proof that they conceived of an invention and reduced it to practice first.”[5] Evidence in this type of proceeding would include dated, signed (notarized) lab notebooks.[6] Without this kind of evidence, Quinn says, Zhang will lose. And if there is a tie, he says, it goes to the senior party.

Lawyers on both sides will offer every argument available, and are currently attempting to end the interference before it even begins by arguing threshold issues. The court has granted Broad the opportunity to argue that there is nothing to actually dispute since Zhang’s invention goes beyond Doudna’s. If that threshold argument does not suffice, then Broad will have to argue (and show) that Zhang actually did invent first. Of course, Broad has many other backup arguments as well. As for Berkeley, judges have granted them the opportunity to argue for a reworded count, presumably to include more, to make it a “winner-take-all fight.”[7] This leaves Berkeley with the crucial decision of how to word the new count.

The outcome of the threshold issues is impossible to predict; regardless of which side does eventually prevail, it will probably not be the end of the road for this dispute. The loser will likely appeal to the U.S. Court of Appeals, and exhaust every legal resource available. Other parties with similar technology may also assert claims down the road. In sum, keep a lookout for updates, but don’t hold your breath for a speedy outcome.

 

Katie Thalen is a second-year law student at the Benjamin N. Cardozo School of Law and a Staff Editor of the Arts & Entertainment Law Journal. She will be the Executive Editor of Volume 35 of the AELJ.

[1] https://www.broadinstitute.org/what-broad/areas-focus/project-spotlight/journalists-statement-and-background-crispr-patent-interfer

[2] https://www.broadinstitute.org/what-broad/areas-focus/project-spotlight/questions-and-answers-about-crispr

[3] http://www.nature.com/news/should-you-edit-your-children-s-genes-1.19432

[4] http://phys.org/news/2016-04-crispr-dispute-bigger-patent-issues.html

[5] https://www.statnews.com/2016/03/08/crispr-patent-fight/

[6] http://www.nature.com/news/how-the-us-crispr-patent-probe-will-play-out-1.19519

[7] https://www.genomeweb.com/gene-silencinggene-editing/crispr-patent-interference-parties-argue-over-what-argue-about

Early Concerns over Protecting Consumer Privacy in the Emerging Virtual Reality Market

As Virtual Reality entertainment finally finds itself in consumers’ hands, the leaders have taken a bold stance on what legal rights they claim over user-generated content. While one front runner, Oculus Rift, estimates a shipping date in August 2016, they are accepting pre-orders and have posted their “Terms of Service.”[1] Therein, Oculus states:

“By submitting User Content through the Services, you grant Oculus a worldwide, irrevocable, perpetual (i.e. lasting forever), non-exclusive, transferable, royalty-free and fully sublicensable (i.e. we can grant this right to others) right to use, copy, display, store, adapt, publicly perform and distribute such User Content in connection with the Services.[2]

Per these terms Oculus would have the right to sub-license user-generated content to third parties for Oculus’ own financial gain. Users of Instagram will remember a proposed amendment to the Terms of Service which was redacted after large-scale user backlash to the proposed changes.[3] The proposed changes stated in simple terms that Instagram might profit off of user-generated content:

Some or all of the Service [Instagram] may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.”[4]

While those terms were eventually retracted, the language taking its place seems to legally permit substantially the same action:

“[Y]ou hereby grant to Instagram a non-exclusive, fully paid and royalty-free, transferable, sub-licensable, worldwide license to use the Content that you post on or through the Service, subject to the Service’s Privacy Policy . . . .”[5]

The privacy policy clarifies:

“We may share User Content and your information . . . with businesses that are legally part of the same group of companies that Instagram is part of . . . (“Affiliates”). Affiliates may use this information to help . . . improve . . . Affiliates’ own services (including by providing you with better and more relevant experiences).[6]

Perhaps the most notable of these “Affiliates” is Facebook, which acquired Instagram for $1 billion in 2012.[7] Slightly more than two years later, Facebook bought Oculus Rift for a substantial $2 billion dollars.[8] Another affiliate under this umbrella is Atlas Solutions,[9] which “is a world-class ad-serving and measurement platform, offering services (“Services”) to advertisers and agencies to help them deliver and understand the effectiveness of their ad campaigns.”[10] Plainly, this agreement would permit this information to be used in targeting advertisements.

Users of the service have agreed to allow Oculus to collect and share not only user generated content, but also “[i]nformation about your physical movements and dimensions when you use a virtual reality headset” and “information about the device’s precise location, which is derived from sources such as the device’s GPS signal and information about nearby WiFi networks and cell towers . . . .””[11]

As this these terms are fairly generous to the Facebook family of companies, and seem to be a step forward from the retracted provisions of the Instagram policy, the agreement has drawn significant attention. Notable technology news website Gizmodo ran a story entitled “There are Some Super Shady Things in Oculus Rift’s Terms of Service,” which speculated “that the emergence of VR technology opens up [a] new type of data for companies to mine en masse which can be collected efficiently. The fact that Oculus, the clear leader in the new VR marketplace, is setting this precedent could be dangerous for the future of the technology.”[12]

A more impactful critique may be forthcoming from United States Senator Al Franken, who wrote to Oculus’ CEO Brendan Iribe, expressing concern over privacy protections for users of the new technology. Franken wrote:

I believe Americans have a fundamental right to privacy, and that right includes an individual’s access to information about what data are being collected about them, how the data are being treated, and with whom the data are being shared.[13]

A virtual reality analyst noted that the concerns about the amount of data collected, and the use thereof, have arisen because of Oculus’ lack of transparency regarding its business model.[14] Quite simply, if Oculus sells the $600 unit at a loss[15], that revenue must be collected elsewhere, and the broad license to an unprecedented amount of user data and information certainly has the potential to be that cash cow, considering the relative modicum (as compared to an always-on in-home virtual reality device) of information to be gleaned off of an Instagram user’s account was valued at $30 per user.[16]

Will Mason, Editor-in-Chief at UploadVR imagined a somewhat Orwellian scenario possible under these terms where “[a]n ad executive at Coke, for instance, could tell just how long you stared at the Coke bottle cleverly placed inside your favorite game as an in-game ad and use that data to better place it in the game for you next time.”[17]

Oculus currently denies the presence of such an advertising scheme,[18] but explicitly states “these are things we may consider in the future.”[19] Undoubtedly, it would be naïve to expect that Oculus would forgo profits, but there is something concerning about users giving content and data to a mega-corporation which openly states: “You irrevocably consent to any and all acts or omissions by us or persons authorized by us that may infringe any moral right (or analogous right) in your User Content.”[20]

Perhaps drawing publicity to the surprising terms in this agreement early in the emergence of the industry will protect consumer interests, and draw prospective users to the other terms including their requirement to opt out of the arbitration agreement should litigation be the preferred route.[21]

[1] Terms of Service, Oculus: https://www.oculus.com/en-us/legal/terms-of-service/.

[2] Id.

[3] http://www.forbes.com/sites/tomiogeron/2012/12/20/after-backlash-instagram-changes-back-to-original-terms-of-service/#2bc5124326ab

[4] Proposed Terms of Service update, Instagram, as excerpted in: http://blogs.wsj.com/digits/2012/12/18/why-the-web-is-freaking-out-over-instagrams-new-terms-of-service/. NB: italics are this author’s.

[5] Terms of Use, Instagram: https://help.instagram.com/478745558852511/.

[6] Privacy Policy, Instagram: https://help.instagram.com/155833707900388

[7] http://techcrunch.com/2012/04/09/facebook-to-acquire-instagram-for-1-billion/

[8] http://techcrunch.com/2014/07/21/facebooks-acquisition-of-oculus-closes-now-official/

[9] Related Companies, Oculus: https://www.oculus.com/en-us/legal/related-companies/

[10] Privacy Policy, Atlas Solutions: https://atlassolutions.com/privacy-policy/

[11] Privacy Policy, Oculus: https://www.oculus.com/en-us/legal/privacy-policy/

[12] http://gizmodo.com/there-are-some-super-shady-things-in-oculus-rifts-terms-1768678169

[13] Letter to Oculus from Sen. Franken: http://www.franken.senate.gov/files/letter/160407OculusLetter.pdf

[14] Anshel Sag noted that “Oculus has made their business model a mystery to most . . . . They claim not to make much money on the headset itself, which leads many to believe that they be making money off software. However, software does not exclude the collection of data through the Oculus Store. This privacy issue has arisen due to the fact that Oculus has not been straightforward with their users and made it clear to them that they would be collecting this much data.” Quoted in http://www.forbes.com/sites/jasonevangelho/2016/04/07/senator-al-franken-wants-answers-from-oculus-about-their-privacy-policy/#431ba2ea7bf0/.

[15] http://www.vrfocus.com/2015/10/oculus-rift-to-shift-5-million-2016-sell-at-a-loss-predicts-credit-suisse/.

[16] http://techcrunch.com/2015/10/13/whats-the-value-of-your-data/.

[17] http://uploadvr.com/facebook-oculus-privacy/.

[18] Id.

[19] Id.

[20] Terms of Service, Oculus: https://www.oculus.com/en-us/legal/terms-of-service/.

[21] Terms of Service, Oculus: https://www.oculus.com/en-us/legal/terms-of-service/.

FANDUEL AND DRAFTKINGS: HOW WE GOT HERE AND WHAT’S TO COME

From the moment that FanDuel and DraftKings received the cease-and-desist notice from Attorney General Eric Schneiderman on November 10, 2015,[i] both sides have constantly gone back and forth in the courts to determine the legality of daily fantasy sports. The order insisted that both companies cease operations in the entire state of New York and refuse to accept payments from any citizens from the state. According to Schneiderman, daily fantasy games constitute as gambling, subject to criminal penalties, despite the ambiguous language in the Internet Gaming Prohibition Act (“IGPA”).[ii]

Following the notice, both companies vigorously fought in the courts to vacate the notice, on the grounds that daily fantasy sports exist in almost every state in the United States, and the interpretations of the relevant statutes seems to at least point to the possibility that daily fantasy sports can be viewed as a legal activity.[iii] The companies view daily fantasy as a game of skill and therefore should fall within the definition of legal gaming.[iv] With many court documents exposing the size of these companies, as the two most popular forums for daily fantasy sports, both FanDuel and DraftKings became more publically exposed than ever before, as Schneiderman honed in on ending their operations in New York completely.

Reports show that FanDuel and DraftKings make up more than 96% of the daily fantasy sport market share amongst the top twenty competitors and spent a combined $34 million in advertising with NBC and Comcast in 2015.[v] And with New York acting as the two companies largest market, both FanDuel and DraftKings refuse to simply allow for the government to strip their companies of revenue without a fight.

However, on December 11, 2015, a New York Supreme Court Judge ordered both FanDuel and DraftKings to cease operations, in which both companies filed an expedited stay of the decision.[vi] While this did not result in immediately shutting down operations in New York, this was a big blow to both companies, as the judge consistently referred to daily fantasy as “risking something of value”, the exact wording of New York’s gambling statute.[vii]

Following the decision, Schneiderman insisted that both FanDuel and DraftKings give back all of the revenue that the companies earned in the state of New York from their “illegal gambling operation”.[viii] The companies claim that they received over $600,000 in 2015 from New York players alone.[ix] While this was a farfetched plan, even in Schneiderman’s view, it was a clear sign that the attorney general was going to continue to pressure the two companies into ceasing operations in New York.

 

On January 8, 2016, DraftKings decided that it was time to separate themselves from New York operations a little bit more by closing down their penthouse offices that are located in Manhattan.[x] While the company almost certainly lost some money in this real estate transaction, they felt it was important to distance themselves from the litigation until their appeal can be fully heard.

However, on January 11, 2016, FanDuel and DraftKings finally had their first victory in the courts, when a panel of New York Supreme Court Judges decided to extend the temporary stay to allow the companies to continue operating in New York until their appeal is heard.[xi] The companies still insist that their fantasy sports do not constitute gambling and express confidence in their appeals.

However, although both companies can continue to operate in New York, their reputations and success have been severely impacted from this litigation. After both companies spent nearly $100 million in advertising in the five months prior to the cease and desist notice, each company has now only spent approximately $1 million dollars in the month plus since Schneiderman attacked daily fantasy sports.[xii]

While things seemed to be looking up for both FanDuel and DraftKings following the extension of the stay, each company took a major blow on February 5, 2016, as they lost CitiGroup, the companies’ financial transaction processor and have gone on to block transactions by New York residents.[xiii] This is the second processor to step away from the companies, following Vantiv Entertainment Solutions, due to legal uncertainty.[xiv] While the stay allows for both companies to continue operations in New York until the case is decided, without Citigroup in their corner, it may be much more difficult.[xv]

To make things worse for the companies, ESPN announced on February 9, 2016 that they have made the executive decision to end their exclusive advertising deal with DraftKings.[xvi] DraftKings had previously committed to over $200 million per year in advertising spending on the network. Yet, the board of ESPN felt that the legal battle that DraftKings was facing raised too many red flags to continue to endorse the company. This is arguably the biggest blow yet to DraftKings, as their exclusive advertising on ESPN gave the company a huge advantage in customer acquisition.[xvii] DraftKings now must reassess their marketing strategy and find a new partner to advertise for them.

While it should be of no surprise, following the announcement that ESPN was cutting all DraftKings advertising from its network, Fox announced a large drop off in the DraftKings stock. This drop off consists of almost a 60% drop amid their legal challenges.[xviii] While the company was valued at almost $2 billion in early August, financial analysts are struggling to determine the current value of the company with the risks attached to it, especially as the appeal process continues.[xix]

What is to be said is that whatever does happen in the litigation, both companies are taking huge hits as they continue to lose support from the big advertising companies and lose customers across the country. Even with a positive verdict, it seems as though FanDuel and DraftKings will have to go through a ton of damage control if they plan on getting back to completely monopolizing the daily fantasy sports market.

 

Alexander Mandel is a second-year law student at Benjamin N. Cardozo School of Law and a Staff Editor of the Cardozo Arts and Entertainment Law Journal. He is an active member of Cardozo’s Sports Law Society and has a strong interest in Sports Law and Real Estate Law.

[i] Sharon Terlep, New York Orders Daily Fantasy-Sports Companies FanDuel, DraftKings to Cease Operations, Wall Street Journal (November 10, 2015, 8:07 PM), http://www.wsj.com/articles/n-y-attorney-general-tells-daily-fantasy-sports-companies-to-cease-operations-in-the-state-1447197512.

[ii] Id.

[iii] Associate Press, NY court documents show big business of daily fantasy sports, Ohio (November 20, 2015, 3:14 PM), http://www.ohio.com/business/ny-court-documents-show-big-business-of-daily-fantasy-sports-1.642128.

[iv] Id.

[v] Id.

[vi] Fitz Tepper, Judge Orders DraftKings And FanDuel To Cease Operations In New York, TechCrunch (December 11, 2015), http://techcrunch.com/2015/12/11/judge-orders-draftkings-and-fanduel-to-cease-operations-in-new-york/.

[vii] Id.

[viii] Jonathan Lemire, New York wants FanDuel and DraftKings to give back all the money they made in the state, Business Insider (January 1, 2016, 8:07 PM), http://www.businessinsider.com/ap-new-york-sues-to-get-draftkings-fanduel-to-return-money-2016-1.

[ix] Id.

[x] Biz Carson, DraftKings is moving out of its New York penthouse offices, Business Insider Australia (January 8, 2016, 1:43 PM), http://www.businessinsider.com.au/draftkings-is-moving-out-of-its-new-york-penthouse-offices-2016-1.

[xi] Fitz Tepper, DraftKings And FanDuel Receive Stay In NY, Can Legally Operate Until Final Ruling, TechCrunch (January 11, 2016), http://techcrunch.com/2016/01/11/draftkings-and-fanduel-receive-stay-in-ny-can-legally-operate-until-final-ruling/.

[xii] Wayne Friedman, Daily Fantasy Sports Leagues Dramatically Cut TV Ad Spend, MediaPost (January 22, 2016, 5:26 PM), http://www.mediapost.com/publications/article/267339/daily-fantasy-sports-leagues-dramatically-cut-tv-a.html.

[xiii] Dominic Patten, FanDuel & DraftKings See Citigroup “Block” Transactions In NY State, Deadline (February 5, 2016, 2:31 PM), http://deadline.com/2016/02/fanduel-draftkings-citigroup-new-york-shut-down-injunction-1201697401/.

[xiv] Id.

[xv] Id.

[xvi] Daniel Roberts, ESPN ends exclusive advertising deal with DraftKings, Yahoo Finance (February 9, 2016, 6:22 PM), http://finance.yahoo.com/news/espn-ends-exclusive-draftkings-deal-215455679.html.

[xvii] Id.

[xviii] Curt Woodward, Fox cuts value of DraftKings stake by 60 percent, Boston Globe (February 9, 2016), https://www.bostonglobe.com/business/2016/02/09/fox-cuts-value-draftkings-stake-percent/0RCLppU4LkDreMyUVqZhKJ/story.html.

[xix] Id.

 

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