What’s Happening in Technology, Arts, Small Business & Contracts – November 2017

Technology News

Update – SEC complaint against initial coin offerings (ICOs) by companies REcoin and Diamond Reserve Club as well as individual Maskim Zaslavskiy. SEC v. REcoin Group Foundation, LLC, et al., 17 Civ. 5725 (E.D.N.Y., Sep. 29, 2017

On November 8, 2017, the Securities and Exchange Commission filed a letter endorsing a Proposed Agreed Order granting a preliminary injunction, asset freeze and other relief.

This case was discussed in Gayton Law News for October. Briefly, this the first SEC complaint filed after it issued a warning related to its investigative report on July 25, 2017 finding that The DAO was offering unregistered securities in the form of tokens in exchange for “ether” a cryptocurrency developed by Ethereum.  

Intellectual Property – Patents

Update – Mylan Pharmaceuticals Inc., et al. v. Allergan, Inc.

Key terms:  Patents, Sovereign American Tribes, Pharmaceuticals, Inter Partes review

On October 16, 2017, Judge William J. Bryson issued a Memorandum and Order regarding briefs filed by the parties related to Allergan’s intent when it sold its patents to the Mohawk Tribe. Judge Bryson said: “it is clear that Allergan’s motivation for the assignment was to attempt to avoid the IPR proceedings that are currently pending in the PTO by invoking the Tribe’s sovereign immunity as a bar to those proceedings.” The judge ordered that the tribe be joined as co-plaintiff in the litigation. The Judge also ruled that the patents were invalid. Judge Bryson said: The Court … holds that while Allergan has proved by a preponderance of the evidence that the defendants have infringed the asserted claims of the Restasis patents, the defendants have proved by clear and convincing evidence that the asserted claims of the Restasis patents are invalid for obviousness.

This case was discussed in Gayton Law News for October 2017. Briefly, this case tests the sovereignty limits of American Tribes as it relates to intellectual property and patents in particular, as well as efforts to get around the inter partes process.

Intellectual Property – Copyright

Key terms:  Copyright infringement, licensing, Universal Copyright Convention

Copyright infringement action against the New Zealand National Party by copyright co-owners and exclusive licensee of the song “Lose Yourself” in New Zealand under New Zealand copyright law and the Universal Copyright Convention. Eight Mile Style, LLC v. New Zealand National Party.

This case offers an opportunity to review New Zealand law along with the Universal Copyright Convention for works created under United States copyright law.


The New Zealand National Party engaged three media consultants to provide services related to the Party’s election campaign in 2014. One consultant synchronized animated stills with a sample from the song Lose Yourself. The song was composed by Marshall Mathers III (Eminem), Jeffrey Bass and Luis Resto in 2002, the same year it was recorded and released. Under an exclusive recording and operating agreement dated 1/9/2003, Eight Mile Style (“EMS”) became the owner of 50 percent of the song and exclusive licensee of the other 50 percent of the song.

The animated stills, or “animatics” were coordinated with the beat and rhythm of the song. This media company used the services of an audio production studio to find a song that would work with the proposed advertisement. The studio tested two songs with a focus group, one of which was entitled Eminem Esque. The focus group preferred the Eminem Esque track which was written by Michael Alan Cohen who also had the copyright to the song and licensed the song to a music library. Cohen granted permission to license the song to Labrador Entertainment, Inc. based in California, who in turn licensed the work to Beatbox Music. Beatbox Music, which had permission to make the song available in Australia, Fiji and New Zealand, licensed the song to the National Party.

On June 28, 2014, the advertisement with the song Eminem Esque was played at the National Party conference. In August 2014, the advertisement was uploaded to YouTube and the National Party’s Facebook page and played on New Zealand television. Upon learning that the song Eminem Esque sounded like the song Lose Yourself, EMS’s lawyers sent a letter to the National Party alleging that the organization had not obtained a license to use the song. At the end of August, the National Party replaced the music in the ad with another song.


EMS claimed that the National Party infringed its copyright by using “Lose Yourself or a substantially similar version or adaptation of it called Eminem Esque, in National Party campaign advertisements on television, the internet and a National Party video.” EMS sought copyright infringement damages.

National Party denied that there was any copyright infringement because “there was no reproduction or copying of Lose Yourself; that not every aspect of Lose Yourself was original; and the National Party had paid for a synchronization license to use the music sound-alike Eminem Esque.  

Copyright and New Zealand Law

The NZ court identified the three copyright rights to the original song: 1) Sound recording; 2) Lyrics; and 3) Music. The court said that only the copyright in the music was being addressed in the instant case and that its principle focus was to determine whether the song Lose Yourself was substantially copied or reproduced in Eminem Esque.

The agreed to issues before the court were: 1) Is there actionable copyright in Lose Yourself? 2) Was there copying of Lose Yourself? 3) Was there copyright infringement? 4) What relief, if any, should be awarded?

Actionable Copyright. Under New Zealand’s 1994 Copyright Act, U.S. citizens can enforce copyrights through the Universal Copyright Convention. The court found that since EMS owns of 50% of the song and 50% exclusive licensees for the remainder, it could bring a copyright infringement action. The court determined that Lose Yourself qualified as an original work under New Zealand law.

Copying and Infringement. For EMS to succeed for an infringement claim, it had to show that it is the owner of the copyright and that the defendant infringed. The New Zealand elements of infringement by copying are that: 1) The reproduction must be either of the entire work or a substantial part; 2) There is sufficient objective similarity between the infringing work and the copyright work or a substantial part; and 3) There is a causal connection between the copyright work and the infringing work. The test that the New Zealand court used was comprised of principles derived from a number of legal sources. These principles were: 1) “[W]hether the substance of the work is taken, not a note by note comparison (which was derived in part to the California District Court’s decision upholding the jury verdict for the Blurred Lines case which was appealed to the Ninth Circuit in 2016. Oral arguments on the case were heard on October 6, 2017, watch here); 2) “The sounds of the work are determinative;”3) “The copying must be substantial;” 4) “A combination of non-copyright elements can amount to substantial similarity;” 5) “The hook of a musical work is protected;” 6) The degree of similarity must be considerable;” 7) “There must be causal connection, not just coincidence;” 8) “Coincidence is not infringement where there is no conscious copying.”

The parties presented their own experts, Dr. Zemke (for National Party) and Dr. Ford (for EMS) with regard to similarities between Lose Yourself and Eminem Esque. The court considered the evidence presented by the experts and other witnesses and found that the similarities between the works were extensive, that Lose Yourself was copied in the production of Eminem Esque, and the causal connection between the works was not coincidental.

Conclusion. The court determined, in response to the 3 elements a plaintiff has to show for infringement, that: 1) There was actionable copyright in Lose Yourself; 2) Eminem Esque was objectively similar to Lose Yourself; and 3) There was a causal connection between Lose Yourself and Eminem Esque. The court awarded NZ$600,000 in license fees starting on June 28, 2014 when the breach occurred, and an additional 3 years’ interest at 5% to the date of payment. The court concluded that additional damages would not be appropriate since National Party was acting on industry advice and not in blatant disregard of EMS’s right nor was it acting in an outrageous manner.

Sometimes non-profit organizations, governments and individuals use copyright protected music openly and subsequently claim, upon discovery by the copyright owner, that use of the work comes under the category “fair use.” In this case, it was clear that the ultimate users of Eminem Esque preferred a version of Eminem’s song and chose it because it was sufficiently similar to the original. Compare for yourself here. This case is a little unusual because money exchanged hands resulting in a synchronization license with someone who allegedly owned a copyright to a similarly sounding song. It suggests that the political party didn’t have a problem paying something for the song’s use, but were unwilling to license the sound recording properly through the publisher/owner. I would commend anyone who is interested in the interplay of international law and country-specific copyright law to read this case. The decision is 20 pages long, but the judge is exceedingly thorough and summarizes clearly the legal issues and related conclusions. According to AVClub, Eminem will donate his award from the lawsuit in the amount of approximately $415,000 to hurricane relief. Lesson here: contact the rights holder for original music you want to use for your project. If you need help securing copyright licenses, contact Gayton Law. 

Contracts – Construction

Tomlinson v. Douglas Knight Construction Inc.

Key terms:  Construction contracts, warranty transfers and assignments

Contracts establish relationships between parties. Generally, only the parties to an agreement have the right to seek legal remedies if the terms are breached. That relationship is called “privity of contract.” Many construction projects are comprised of several contracts. For example, a prime contractor may have a subcontract with a plumber, whereas the prime contractor may have a separate agreement with the property owner. Each contract has its owns terms and conditions and if there are any disputes related to the plumber’s performance, as a general matter, only the prime contractor would have the right to a remedy. If the prime contractor does not pay the plumber, the plumber usually cannot sue the property owner directly. The plumber would have to seek relief under mechanic’s liens laws which are created by state statutes and designed to enable people who do not have a “privity of contract” relationship, but who have provided some benefit to a property owner despite not having a direct contractual relationship.

In the Tomlinson case, the Supreme Court of Utah found that a homebuyer’s construction defect claims against the company that built his home failed because there was a lack of privity.

Under Utah law it says that “an action for defective design or construction is limited to ‘an action for ‘breach of … contract, whether written or otherwise, including both express or implied warranties.’” The Utah statute also says that only a person in privity with the original contractor has a right to bring a claim. 1 Utah Code section 78B-4-513(1).

Douglas Knight Construction (“DKC”) entered into an agreement with Lot 84 Deer Crossing, LLC to build a house on the property. DKC provided a one-year warranty on the construction. Later, Lot 84 assigned all rights in the home as well as the construction contract to Outpost Development, Inc. Outpost sold the home to Joseph Tomlinson, but importantly, did not assign interest in the construction agreement with DKC to Tomlinson.

Before the sale to Tomlinson, Outpost became aware of leaks which caused water damage to the property. Outpost asked DKC to fix the leaks under the warranty and DKC attempted to do so. The leaks were still apparent when Tomlinson purchased the property. Over time, Tomlinson found several other leaks and hired a contractor to fix and repair. Tomlinson later found other defects and decided to file a suit against DKC and Outpost to recover compensation for the damages. Outpost then declared bankruptcy and was dismissed from the lawsuit. As a result of the bankruptcy proceeding, Tomlinson was assigned all of Outpost’s “right title and interest in and to any and all rights, claims, causes of action, choses in action, rights to payment, and judgments of any kind that Outpost has asserted” against DKC. Tomlinson claimed that this assignment included claims against DKC for breach of the construction contract and amended his complaint to reflect this assignment.

District Court Decision

At the district court, Tomlinson claimed that there was a breach of an implied warranty of workmanlike manner and habitability. DKC was able to show successfully that since it was not a vendor and never owned or sold the property, the breach of implied warranty could not stand. The district court also found that Tomlinson had not acquired from Outpost any “viable construction claims” against DKC since the bankruptcy assignment did not establish a direct interest in the construction contract and dismissed Tomlinson’s claim. The reasoning behind this finding was that since Outpost was never found liable for Tomlinson’s harm, Tomlinson did not have a direct claim under the bankruptcy assignment. Tomlinson appealed the district court’s decision to the Utah Supreme Court.

Utah Supreme Court Findings

In reviewing the case, the Utah Supreme Court determined that all of Tomlinson’s claims came under the Utah Code with respect to defective design or construction. While the statute permits assignment related to construction contracts, the bankruptcy assignment did not align with the contractual assignment requirement. Specifically, the court said: “By clear implication, the bankruptcy assignment omitted claims that had not been asserted and could not be asserted by Outpost – such as claims that it hypothetically could have brought against DKC at an earlier time.” Because Outpost did not own the home at the time of the bankruptcy assignment, Outpost could not have brought a claim to be assigned to Tomlinson. Because Tomlinson’s claims against Outpost were dismissed as a result of the bankruptcy proceeding, there were no claims Tomlinson could have acquired as a result of the assignment.

While this case was decided by the Utah Supreme Court, bankruptcy law is federal law, meaning that the decision as it relates to bankruptcy is relevant in all states. Because Outpost had not assigned its interests in the construction contract with DKC to Tomlinson, Tomlinson was not able to establish the necessary direct relationship with DKC to pursue remedies against DKC after Outpost filed for bankruptcy. Since the bankruptcy court discharged Tomlinson’s claim against Outpost during the bankruptcy proceeding, Outpost no longer had any damages or claims related to a breach of contract with DKC at the time that the assignment was given to Tomlinson. The bankruptcy assignment only covered current claims or other claims that could be made in the future. Because Outpost had no outstanding claims against DKC, Tomlinson was not assigned any rights related to them. Bankruptcy laws are powerful tools and it is important to protect your rights as a potential claimant during bankruptcy proceedings.

Programs and Publications

Art on the Blockchain (AOTB). Cynthia Gayton is a co-host and co-founder with Jeff Clarkin of Art on the Blockchain podcast and MeetUp. This podcast and MeetUp intend to spread some light on the issues facing artists in this new technology and distribution space. Learn more here.

Legal Aspects of Engineering, Design and Innovation 10th edition by Cynthia Gayton

This edition was released in January 2017 and is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.

Thank you for reading and for your business!

The information contained in this newsletter is for general guidance on matters of general interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this newsletter connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.

© 2017 Gayton Law

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