October Term, 2013
June 25, 2014
Today the Supreme Court issued two decisions, described below, of interest to the business community.
Copyright Act—Right of Public Performance—TV Broadcasting
American Broadcasting Cos., Inc., v. Aereo, Inc., No. 13-461 (described in the January 14, 2013, Docket Report)
Section 106(4) of the Copyright Act of 1976 gives the owner of the copyright in an audiovisual work, such as a television show, the exclusive right to “perform the copyrighted work publicly,” which includes “transmit[ting] or otherwise communicat[ing] a performance or display of the work … to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.” Today, the Supreme Court held in a 6-3 decision that Aereo, an online service that captures and retransmits broadcast television to subscribers over the Internet, infringes the right of public performance held by those who own the copyrights in the television programs.
When a subscriber logs on to Aereo’s website and selects a program to watch, a specific Aereo antenna is assigned to that subscriber and tuned to his or her desired program, which is then captured and streamed to the user over the Internet. Aereo subscribers can use the service to watch live television or schedule programs to be recorded for viewing later.
TV networks and broadcasters brought a copyright infringement suit against Aereo, claiming that Aereo’s business model threatened the future of free, over-the-air television by undermining TV copyright holders’ ability to collect retransmission fees from cable and satellite companies and from licensed Internet services such as Hulu. But a divided Second Circuit panel refused to enjoin Aereo’s service, holding that Aereo does not “perform” television programs “publicly” because each individual transmission from Aereo uses a stream from a different antenna and is received by only one particular subscriber’s household.
In an opinion by Justice Breyer, the Supreme Court reversed. The Court first rejected Aereo’s claim that it is merely an equipment provider and that its subscribers are the parties who “perform” copyrighted TV programs using its service. The Court observed that Congress had amended the Copyright Act in 1976 to make clear that cable systems “perform” broadcast TV programs when they retransmit them. Because Aereo’s service retransmits programs in the same way, Aereo similarly “performs” the TV programs that it streams to subscribers.
The Court went on to hold that Aereo transmits TV programming “to the public,” rejecting the Second Circuit’s reasoning to the contrary. The Court explained that Congress’s intent, reflected in the text of Section 106(4), was to regulate cable systems. Because Aereo’s “commercial objective” was identical to cable providers and “the viewing experience of Aereo’s subscribers” was the same as that of cable-system subscribers, Congress “would as much have intended to protect a copyright holder from the unlicensed activities of Aereo as from those of cable companies.”
Justice Breyer emphasized that the ruling in Aereo is a “limited holding” that does not impose copyright liability on other services such as the “remote storage of content” by cloud network services providers. Like cable subscribers, Aereo’s customers did not “receive performances in their capacities as owners or possessors of the underlying works.” But “an entity that transmits a performance to individuals in their capacities as owners or possessors”—which is what service providers could do when they enable their customers to access remotely-stored works—“does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.”
Justice Scalia dissented, writing for himself and Justices Thomas and Alito. The dissent underscored that the Copyright Act requires a volitional act for direct infringement. In the dissenters’ view, because Aereo’s network system is user-directed, Aereo does not commit any volitional act.
Any questions about this case should be directed to Andrew J. Pincus (+1 202 263 3220) or Paul W. Hughes (+1 202 253 3147) in our Washington office or to Donald M. Falk (+1 650 331 2030) in our Palo Alto office.
ERISA—Fiduciary Duties—Investments In Employer Stock
Fifth Third Bancorp v. Dudenhoeffer, No. 12-751 (described in the December 13, 2013, Docket Report)
Fiduciaries who administer retirement plans governed by the Employee Retirement Income Security Act (“ERISA”) owe a duty of prudence to plan participants. See 29 U.S.C. § 1104(a). To comport with that duty, fiduciaries are generally required to “diversify the investments of the plan so as to minimize large losses, unless under the circumstances it is clearly prudent not to do so.” Id. § 1104(a)(1)(C). But because Congress wanted to encourage employees to invest in their own companies, it waived the duty of prudence “to the extent it requires diversification” for fiduciaries of an “employee stock ownership plan” (ESOP). Id. § 1104(a)(2).
Several federal courts of appeals inferred from this exemption that an ESOP fiduciary’s decision to hold or buy employer stock should be presumed prudent, and that the fiduciary could not be held liable unless the company was in such dire financial straits that its viability as a going concern was in doubt.
Today, in a unanimous decision by Justice Breyer, the Supreme Court rejected a presumption of prudence but replaced it with substantive guidance on the limits of the duty of prudence.
As to the presumption, the Court held that ERISA’s text governs—although Section 1104(a)(2) expressly exempts ESOP fiduciaries from the duty of prudence, to the extent that duty requires diversification, it makes no reference to any special presumption. Slip op. 9-15.
Having resolved the question presented, the Court proceeded to “consider more fully one important mechanism for weeding out meritless claims, the motion to dismiss for failure to state a claim,” and explained how, in light of the substance of the duty of prudence, motions to dismiss should be assessed.
The Court effectively ruled out stock-drop claims based on publicly available information, invoking its two-day-old decision in Halliburton Co. v. Erica P. John Fund, Inc. that investors may reasonably rely on the market to incorporate public information into a stock’s price. For circumstances in which fiduciaries are alleged to possess nonpublic information that belies the prudence of company stock, the Court held that “a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.” Slip op. 18. The Court emphasized that ERISA fiduciaries cannot be required to trade on inside information, in violation of the securities laws. And the Court cast doubt on other theories sometimes offered by ERISA stock-drop plaintiffs—that fiduciaries should have ceased making new investments in company stock or disclosed the previously nonpublic information. The Court noted that ERISA’s requirements must be in harmony with “the complex insider trading and corporate disclosure requirements imposed by the federal securities laws” and the objectives of those laws, and indicated that ERISA’s fiduciary breach requirements do not require plan fiduciaries to take actions that “would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.” Id. at 19-20.
The Court’s decision fundamentally reconfigures the landscape for ERISA stock-drop actions and is significant for public companies offering employer stock through their retirement plans. Although the rejection of the presumption of prudence is likely to result in more suits against retirement plan fiduciaries, the Court’s substantive guidance arms fiduciaries with potent defenses that can be invoked at the motion-to-dismiss stage. The lower courts will be required to define in greater detail when, if at all, fiduciaries must act on public and nonpublic information.
Any questions about the case should be directed to Brian D. Netter (+1 202 263 3339) or Reginald R. Goeke (+1 202 263 3241) in our Washington office.
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