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2000 Term, Number 4 / November 6, 2000

Today the Supreme Court granted certiorari in two cases, both of which are of potential interest to the business community. Amicus briefs in support of the petitioner are due on Thursday, December 21, 2000, and amicus briefs in support of the respondent are due on Monday, January 22, 2001. Any questions about these cases should be directed to Donald Falk (202-263-3245) or Miriam Nemetz (202-263-3253) in our Washington office.

1. Copyrights — Electronic Reproductions of Periodical Articles. Until the typical terms of publication agreements recently changed, freelance authors generally retained the copyrights to their individual works that were published in a periodical, anthology, or other collective work. In the absence of an agreement to the contrary, however, a publisher of collective works has "the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series." 17 U.S.C. § 201(c). The Supreme Court granted certiorari in Tasini v. New York Times Co., No. 00-201, to decide whether republication of an entire print periodical in a commercial electronic database is privileged under the Copyright Act and thus does not infringe the copyrights of individual articles.

For many years, print publishers have sold the contents of their periodicals to commercial electronic databases. In 1997, a group of freelance authors sued several print publishers and commercial electronic and CD-ROM databases, alleging that the republication of the freelance articles in the databases infringed the authors' copyrights. The district court granted summary judgment to the publishers, concluding that electronic publication of an entire periodical, subject only to formatting changes and exclusion of graphics, death notices, and the like, was a privileged "revision" of a "collective work" within the terms of Section 201(c) of the Copyright Act, 17 U.S.C. § 201(c). 972 F. Supp. 804 (S.D.N.Y. 1997). 

The Second Circuit reversed. 206 F.3d 161 (1999). In an opinion by Chief Judge Ralph Winter, the court of appeals held that electronic republication of the freelancers' print articles was not a "revision" of the original periodicals under the Copyright Act. Id. at 167. In the court's view, "[t]he most natural reading of the ‘revision' of ‘that collected work' clause is that Section 201(c) protects only later editions of a particular issue of a periodical, such as the final edition of a newspaper." Ibid. The court of appeals also concluded that the electronic publication could not be a "later collective work in the same series," limiting that clause of Section 201(c) to anthologies and encyclopedias that alter the original article slightly in their later work. Ibid. The Second Circuit concluded that, because electronic databases contain "thousands or millions of individually retrievable articles" (id. at 168) and do not retain the arrangement of content that characterized the original periodicals, they do not come within the privilege of Section 201(c). 

The petition asserts that, although the publishers provided complete periodical contents to the databases, the Second Circuit adopted a theory of direct infringement that relied on the ability of third-party users to access individual articles. The petition contends that the decision therefore conflicts with the Betamax case, Sony Corp. v. Universal City Studios, 464 U.S. 417 (1984), in which the Court held that a VCR manufacturer was not liable for contributory infringement based on third-party uses of the device to record copyrighted films, so long as the device had significant non-infringing uses. The petition also claims that the court of appeals effectively held that republication of a periodical in a database creates a new work, a holding that in their view conflicts with the view expressed in Feist Publications v. Rural Telephone Service Co., 499 U.S. 340 (1990), that originality is essential in the creation of a new work for the purposes of the Copyright Act.

This case is important not only for traditional publishers, but also for businesses that distribute databases comprising the contents of periodicals and other collective works, and businesses whose employees rely on such databases. Although licensing practices may mitigate the prospective effect of the decision, the cost of locating and negotiating with authors of past contributions to archived periodicals would be substantial, and the task may be impossible. Electronic archives might have to delete all freelance material not covered by an identifiable copyright license, significantly undermining the integrity and utility of their databases. In addition, the case is of broader interest to copyright owners because the Court's interpretation of the Betamax case may affect the Napster litigation and other cases in which alleged infringers have relied on the pro-technology principles of that decision.

2. Securities — Scope of Antifraud Provisions — Misrepresentation of Intent to Sell Securities. The Supreme Court granted certiorari in The Wharf (Holdings) Ltd. v. United International Holdings Inc., No. 00-347, to decide whether the grantor of an oral option to purchase securities who misrepresents its intent to perform the option violates Section 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934.

The Wharf (Holdings) Limited ("Wharf") sought and ultimately obtained a franchise to operate Cable Network Communications Limited ("CNCL"), a cable television system in Hong Kong. In seeking the franchise, Wharf enlisted the aid of United International Holdings, Inc. ("UIH"), a Denver company that owns, operates and invests in cable systems worldwide, and orally offered UIH an option to purchase 10% of CNCL stock for $50 million. UIH assisted Wharf in obtaining the franchise and implementing the cable system. Although the parties negotiated over the sale of CNCL stock, however, they did not agree to the terms of UIH's investment.

UIH then sued Wharf in federal district court in Colorado, asserting claims under the federal securities laws, as well as pendent state-law contract and tort claims. Specifically, UIH alleged that Wharf's oral statements granting UIH an option to purchase CNCL stock were deliberately misleading because Wharf never intended to honor the option. After an eleven-week trial, a jury awarded UIH $67 million in compensatory damages and $58.5 million in punitive damages. 

The Tenth Circuit affirmed. 210 F.3d 1207 (2000). The court of appeals held that Rule 10b-5 applied because Wharf made false representations in connection with the actual purchase and sale of a security — the oral option itself. Id. at 1221. It also rejected Wharf's contention that "misrepresentations regarding intent to sell securities or disputes over a right to purchase stock necessarily are outside the scope of Rule 10b-5." Ibid. The Tenth Circuit observed that other courts of appeals had found that Rule 10b-5 was violated where a party "enter[ed] into a contract to sell a security with a secret reservation not to fully perform the contract," ibid., and distinguished cases from several other circuits that disapproved the application of the Rule to contractual disputes over options or other securities contracts. The extent to which Rule 10b-5 may be applied to disputes over the bona fides of oral agreements (as opposed to misrepresentations about a security or its issuer) is important for all businesses that may discuss stock options and other potential securities transactions with current or prospective business partners or employees. 

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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