• You Need a No-Contest Clause in Your Copyright Licenses

    by  • June 14, 2013 • copyright • 0 Comments

    I recently wrote about a number of cases brought by photography agencies against Pearson Education, alleging that it exceeded the scope of copyright licenses. This led me to ponder the application of the licensee estoppel defense in copyright.

    Licensee estoppel prohibits a licensee from challenging the validity of the rights licensed. Patents have a clear bias against the application of licensee estoppel, originating with Lear, Inc. v. Adkins, 395 U.S. 653, 89 S. Ct. 1902, 162 U.S.P.Q. 1 (1969). Lear invoked the public interest and held that a licensee, even a current licensee of a patent, may challenge the validity of the patent that it has licensed:

    Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain.

    Trademarks are different, though. In general, where there is an express prohibition in the license agreement barring a challenge to the validity of the licensed mark, it is enforceable. After the license terminates, a licensee may be able to challenge the validity based on events occurring after the license terminated. But, in at least some cases a licensee is estopped, even after the license terminates, from challenging the validity of the marks. The reason trademarks are treated differently from patents is that the licensee can be the very agent of the trademark’s demise, for example by misuing the mark in a way that causes it to become a generic term, or by refusing to comply with the licensor’s quality control standards and then claiming that the licensor’s lack of control was a “naked license.” So barring a trademark licensee from challenging validity of a trademark makes eminent sense, at least in some situations.

    Which brings us to copyright and the Pearson Education cases. In the various suits, the plaintiffs allege that Pearson Education had a license to use the photographs but exceeded the scope of the licenses temporally, in the number of copies printed, or in the geographic scope.

    In response, Pearson Education is attacking the copyright ownership of the works to which it took a license. The industry model lends itself to the challenge; that is, photographers grant a license to an agency that allows the agency to sublicense the photographer’s works and enforce the copyrights. This model therefore invites a claim that the agreement between the photographer and the agency doesn’t grant enough ownership in the copyright for the agency to bring suit.

    So where does licensee estoppel fit in, on the patent side or the trademark side? There is apparently no clear answer. In Saturday Evening Post Co. v. Rumbleseat Press, Inc. 816 F.2d 1191 (7th Cir. 1987) (Posner, J.), the defendant alleged that the works to which it had taken a license were in the public domain. There was, though, a no-contest clause in its license. The 7th Circuit’s opinion on the value of the provision was this:

    Such a clause serves a useful purpose in most cases. Without it the licensee always has a club over the licensor’s head: the threat that if there is a dispute the licensee will challenge the copyright’s validity. The threat would discourage copyright licensing and might therefore retard rather than promote the diffusion of copyrighted works. Also, a no-contest clause might actually accelerate rather than retard challenges to invalid copyrights, by making the would-be licensee think hard about validity before rather than after he signed the licensing agreement. Rumbleseat had, in fact, used its expressed doubts of the validity of the Post’s copyrights to obtain a lower royalty rate in the negotiations for the license.

    Saturday Evening Post distinguished Lear because “Our case involves a negotiated clause rather than a doctrine that in effect reads a no-contest clause into every licensing agreement.” But the court distinguished on policy too:

    The logic of Lear does not extend to copyright licenses. The opinion is narrowly written. It emphasizes

    the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification.

    Id. 395 U.S. at 670, 89 S.Ct. at 1911. A patent empowers its owner to prevent anyone else from making or using his invention; a copyright just empowers its owner to prevent others from copying the particular verbal or pictorial or aural pattern in which he chooses to express himself. The economic power conferred is much smaller. There is no need for a rule that would automatically invalidate every no-contest clause. If a particular clause is used to confer monopoly power beyond the small amount that the copyright laws authorize, the clause can be attacked under section 1 of the Sherman Act as a contract in restraint of trade. Rumbleseat does not argue that the clause here restrained trade in that sense.

    The Saturday Evening Post court also noted that the challenge in this case wasn’t to the copyrightability of the licensed works, but rather to the validity of the copyright registrations, so the competitive underpinnings for the holding in Lear weren’t implicated. Summarizing: “So we have a narrow and a broad holding on no-contest clauses: they are valid in copyright licenses (broad); they are valid when no issue of copyrightability is presented (narrow).”

    What if there isn’t a clause in the agreement? Twin Books Corp. v. Walt Disney Co., 877 F. Supp. 496 (N.D. Calif. 1995) sided with Lear and permitted a challenge that the licensed work entered the public domain because the copyright was not renewed. It distinguished Saturday Evening Post, noting that Saturday Evening Post limited its holding to the situation where there was a no-contest clause in the contract. In a case where the defendant acknowledged the plaintiff’s ownership of the copyright in the agreement but where there wasn’t an express no-contest clause, the court followed Twin Books. See FM Industries, Inc. v. Citicorp Credit Services, Inc. 2009 WL 162756 (N.D. Ill. Jan. 14, 2008). (Which makes me wonder what the court thought the purpose of the acknowledgement was, if not at least an admission against interest.) And in Melchizedek v. Holt, 792 F. Supp. 2d 1042 (D. Ariz. 2011), where there was apparently not a no-contest clause, the defendant licensee was allowed to challenge whether the copyright owner had abandoned the copyright in the licensed works prior to or during the license term.

    So where does that leave us? Clearly, copyright owners need to put express no-challenge clause in their license agreements. But beyond that, I’m on the fence. In the past I’ve disagreed with courts that don’t allow defendants to challenge the ownership of the copyright, since proof of ownership is part of the plaintiff’s case-in-chief. And federal courts must have subject matter jurisdiction, one element of which is copyright ownership, which cannot be waived. But should there be no limit to a defendant saying, essentially, “The very rights I paid you for don’t exist?”

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