NYU_Jipel_F13

NEW YORK UNIVERSITY

JOURNAL OF INTELLECTUAL PROPERTY AND ENTERTAINMENT LAW VOLUME 3

FALL 2013

NUMBER 1

CONTENTS ON THE DUALITY OF INTERNET DOMAIN NAMES: PROPERTIZATION AND ITS DISCONTENTS Frederick Abbott

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HANDLE WITH CARE: THE EVOLVING ACTUAL MALICE STANDARD AND WHY JOURNALISTS SHOULD THINK TWICE BEFORE RELYING ON INTERNET SOURCES Kimberly Chow

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THE MERGER AND THE DAMAGE DONE: HOW THE DOJ ENABLED AN EMPIRE IN THE LIVE MUSIC INDUSTRY Josh Baker

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SIGNING IN GLITTER OR BLOOD?: UNCONSCIONABILITY AND REALITY TELEVISION CONTRACTS Catherine Riley

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Haochen Sun

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THE DISTINCTIVENESS OF A FASHION MONOPOLY

http://jipel.law.nyu.edu

NEW YORK UNIVERSITY

JOURNAL OF INTELLECTUAL PROPERTY AND ENTERTAINMENT LAW VOLUME 3

FALL 2013

NUMBER 1

ON THE DUALITY OF INTERNET DOMAIN NAMES: PROPERTIZATION AND ITS DISCONTENTS FREDERICK M. ABBOTT * Domain names may have substantial economic and social value. They are often the object of dispute, whether based on allegations of abuse or in contests over ownership. There is a recent judicial trend, particularly in the Court of Appeals for the Ninth Circuit, toward characterizing domain names as “property” (and more specifically, “intangible property”) subject to rules of sale and transfer typical of personal property. This judicial characterization identifies “alienability” as a fundamental characteristic of domain names. This sets up a real or potential conflict with jurisdictions or forums where domain names have been judicially or administratively characterized as “contract rights” based on the legal relationship between the domain name registrant and the registrar.

Pursuant to the contract rights characterization, sales and transfers of domain names are subject to rules flowing from the Internet Corporation for Assigned Names and Numbers (ICANN) that govern the relationship among registries, registrars and registrants, and prescribe certain representations and warranties in connection with sales and transfers. This includes subjecting domain name * Edward Ball Eminent Scholar Professor of International Law, Florida State University College of Law. The author regularly serves as an administrative panelist in proceedings under the Uniform Domain Name Dispute Resolution Policy for the WIPO Arbitration and Mediation Center. The author notes with appreciation the research assistance of Ms. Sabina Kania, a JD candidate at FSU College of Law. A presentation regarding the subject matter of this article was made and discussed at the Annual Meeting of WIPO Domain Name Panelists in October 2012 (Geneva), and the author has benefited from discussion with members of the WIPO Arbitration and Mediation Center Secretariat, including Erik Wilbers (Director) and David Roache-Turner (formerly Head, Internet Dispute Resolution Center). This article, however, expresses solely the personal views of its author.

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registrants to alternative dispute settlement under the Uniform Domain Name Dispute Resolution Policy (UDRP). Several recent decisions among Ninth Circuit courts applying the federal Anticybersquatting Consumer Protection Act (ACPA), on one side, and administrative panels applying the UDRP, on the other, call attention to the possibility for different dispute settlement outcomes depending on whether domain names are treated as freely alienable property or contract rights incorporating various obligations on transferors and transferees. In this article, the author, an experienced administrative panelist for the WIPO Arbitration and Mediation Center, analyzes the legal bases used to characterize Internet domain names, and suggests that it may not be necessary to draw a line between “intangible property” and “contract rights”. Domain names may be treated as both. There is nothing unique about attaching conditions to the transfer of intangible property. For example, U.S. law that authorizes assignment and transfer of trademarks conditions the transfer on associating the goodwill of the business. Similarly, domain names in transfer may be treated as intangible property conditioned with contract representations and warranties made pursuant to ICANN rules. The UDRP and ACPA provide for flexible assessment of the rights and legitimate interests of domain name registrants. These rules have allowed UDRP panels to consider the circumstances prevailing when a domain name transfer takes place, whether between related or unrelated parties, and this type of flexibility should appropriately take account of rights of transferors and transferees. Given the different contexts in which the UDRP and ACPA were adopted, and in which they are implemented, it should be expected that jurisprudential conflicts will from time to time arise and require attention. This article calls attention to one such conflict and proposes to resolve it through recognition that the legal character of the domain name need not be limited to a single class of subject matter.

INTRODUCTION ............................................................................................................3 I. THE LEGAL FRAMEWORK .................................................................................6 A. ICANN and the UDRP ................................................................................6 B. The ACPA ...................................................................................................9 C. ACPA as recourse from the UDRP ..........................................................11 II. DOMAIN NAMES AS INTELLECTUAL PROPERTY...............................................13 A. The Technical Domain Name Function ...................................................13 B. The Domain Name as Identifier ...............................................................13 C. Domain names as intellectual property....................................................15 D. Trademarks as property ...........................................................................16 1. Assignment and transfer ......................................................................16 2. Antidilution ..........................................................................................17 3. Intangible asset value ..........................................................................18 III. DOMAIN NAMES IN THE COURTS ....................................................................18 A. Domain names as contract rights .............................................................18 B. Domain names as intangible property .....................................................24

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1. Conceptually ........................................................................................24 2. Ninth Circuit Precedent ......................................................................25 C. Domain names as tangible property ........................................................28 A DUAL NATURE ............................................................................................30 UNDERVALUING THE DUAL NATURE ..............................................................31 A. Propertization standing alone ..................................................................31 1. GoPets v. Hise .....................................................................................31 2. AIRFX.com v. AirFX LLC ...................................................................35 B. WIPO panelists react ................................................................................37 C. The ACPA and the UDRP ........................................................................39 1. Bad faith ..............................................................................................39 2. A class of insulated domain names .....................................................42 TREATING UNRELATED TRANSFERS AS NEW REGISTRATIONS .......................44 A. Related party transfers .............................................................................44 B. New registration and contract ..................................................................45 1. A new assessment ................................................................................45 2. Rights or legitimate interests...............................................................46 C. The sale and purchase of a business ........................................................48 D. Other rights or legitimate interests ..........................................................50 E. The ACPA revisited ..................................................................................50 THE CONTINUING ROLE OF TRADEMARK LAW ...............................................51 THE WIDER PICTURE ......................................................................................52 INTRODUCTION

There is a great deal of activity taking place in the world of Internet domain names. First, the opening up of the top-level domain name space by the Internet Corporation for Assigned Names and Numbers (ICANN) promises to transform the Internet space by widening the number of available second-level domains, by creating a range of new registrars and registries regulating their own space, and by introducing new and different mechanisms for resolving disputes regarding toplevel and second-level domains. 1 Second, security-related developments in the digital environment suggest that the Internet as we have known it may not be with 1

See Benefits and Risks of Operating a New GTLD, ICANN: NEW GENERIC TOP-LEVEL DOMAINS, http://newgtlds.icann.org/en/about/benefits-risks, (last visited Jan. 28, 2013). The author of this article as sole panel expert recently rendered one of the first decisions under ICANNâ&#x20AC;&#x2122;s New gTLD Dispute Resolution Procedure for Existing Legal Rights Objections See Express, LLC v. Sea Sunset, LLC, WIPO Case No. LRO2013-0022 (<.express>).

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us for much longer. 2 Unless urgent steps are taken to improve security in the digital environment, it seems likely that greater controls will be exercised in the future regarding individual access to the commercial Internet environment. 3 Third, there is no assurance that domain names will retain their importance as a means of identifying locations on the Internet. The pace at which technology in the digital arena has evolved, and the ways in which individuals access content, provide assurance only that the future is uncertain. The gales of creative destruction blow through the digital environment at a pace unknown to most other fields of technology.

In this respect, an inquiry into the fundamental nature of the domain name may seem (and may in fact be) a quaint exercise. 4 Nonetheless, to the extent that courts and alternative dispute resolution bodies are called upon to resolve issues concerning ownership and use of domain names â&#x20AC;&#x201D; and, for that matter, other types of identifiers of places on the Internet (such as locators in social network environments)â&#x20AC;&#x201D; it will be important to understand what those identifiers are. Legal rules regulating sales and transfers of property are different than legal rules regulating contract rights and regulation of behavior under contract.

While it is typically inexpensive to register and maintain a domain name, some of these names are created with or develop very substantial financial value. 5 2

See, e.g., Bernard R. Horovitz, Blunting the Cyber Threat to Business; Hackers target firms world-wide, yet insurance policies rarely cover the damage, Wall St. J., (Jan. 9, 2013), http://online.wsj.com/article/SB10001424127887323374504578220052106443158.html; Nicole Perlroth, Attacks on 6 Banks Frustrate Customers, N.Y. Times, Sept. 30, 2012, at B1, available at http://www.nytimes.com/2012/10/01/business/cyberattacks-on-6-american-banks-frustratecustomers.html.

3 See, e.g., Ryan Abbott, Big Data and Pharmacovigilance: Using Health Information Exchanges to Revolutionize Drug Safety, 99 IOWA L. REV. (forthcoming 2013) (manuscript at 89, 37), available at http://ssrn.com/abstract=2246217 (discussing security and privacy issues that might arise in connection with an initiative that uses health information exchanges to inform a pharmacovigilance system).

4 Previous consideration of the legal character of domain names and related rights can be found in Daniel Hancock, Note: You Can Have It, But Can You Hold It?: Treating Domain Names As Tangible Property, 99 KY. L.J. 185 (2010-11); Sean Price, Case Note: A Reasonable Rendition of Registration: GoPets v. Hise, Schmidheiny v. Weber, and Congressional Intent, 22 DEPAUL J. ART TECH. & INTELL. PROP. L. 449 (2012); Ned Snow, The Constitutional Failing of the Anticybersquatting Act, 41 WILLAMETTE L. REV. 1 (2005).

5 See, e.g., List of most expensive domain names, WIKIPEDIA, http://en.wikipedia.org/wiki/List_of_most_expensive_domain_names (last visited Sept. 21, 2013). The Wikipedia list includes a number of domain names sold for over U.S. $10 million. Id.

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That financial value may be a consequence of a corresponding trademark, but it may also be a consequence of the dictionary meaning and significance of a common term. 6 Putting aside financial value, domain names and related disputes may concern important social interests, implicating rights of speech, expression and fair use. 7 Disputes may involve issues of privacy. In these various spheres of interest, the characterization of the disputing parties’ claims from a legal standpoint may have significant consequences. Specifically, whether such disputes are characterized as disputes concerning ownership of property or disputes regarding contract relationships may influence the outcome.

The matter of defining the "domain name" has a substantial history. The Report of the First WIPO Domain Name Process defined domain names as "… the human-friendly form of Internet addresses." 8 This definition is accurate from a functional standpoint. The domain name is an alphanumeric string that is associated with an Internet protocol (IP) address that identifies a particular computer server or other location of data. 9 The domain name is created or selected by a person (the "registrant") that registers the name with a "registrar" that maintains data regarding the identity and contact information for the registrant.

The registrant enters into a contract with the registrar defining the terms of service

However, Wikipedia’s list, unlike Business Insiders’ list, may include the sale of websites with other business assets or goodwill that extend beyond the sole value of the domain name. Alyson Shontell, The 25 Most Expensive Domain Names of All Time, BUSINESS INSIDER, (Dec. 23, 2012, 8:03 AM), http://www.businessinsider.com/the-20-most-expensive-domain-names-201212?op=1.

6 Both the Wikipedia list and Business Insider list are dominated by common terms, including "sex.com”, “toys.com”, clothes.com”, “investing.com” and “insure.com”. WIKIPEDIA, supra note 5; Shontell, supra note 5.

7 See discussion and references in FREDERICK ABBOTT, THOMAS COTTIER & FRANCIS GURRY, INTERNATIONAL INTELLECTUAL PROPERTY IN AN INTEGRATED WORLD ECONOMY, 457-76 (2d ed.

2011).

8 World Intellectual Property Organization [WIPO], The Management of Internet Names and Addresses: Intellectual Property Issues, Final Report of the WIPO Internet Domain Name Process, at Executive Summary, WIPO Publication No. 439 (April 30, 1999), available at http://www.wipo.int/amc/en/processes/process1/report/finalreport.html, [hereinafter WIPO First Report]; accord id. ¶ 4 ("A domain name is the human-friendly address of a computer that is usually in a form that is easy to remember or to identify, such as www.wipo.int.”).

9 Id. See also Office Depot Inc. v. Zuccarini, 596 F.3d 696, 698-99 (9th Cir. 2010); Hancock, supra note 4, at 187-90; Price, supra note 4, at 451.

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for maintaining the domain name registration. 10 The registrar transmits data concerning the association of the domain name (or aIphanumeric string) to a "registry" that maintains a database of the domain name/IP address associations, and facilitates the technical process through which queries on the Internet are routed to the appropriate server or other location from and to which data may be retrieved and/or stored. When a domain name is initially registered, it is not uncommon for the registrar's server to act as the location of the registrant on the Internet (e.g., as a "parking page"). 11 I THE LEGAL FRAMEWORK A. ICANN and the UDRP Domain names are a global phenomenon, as are domain name disputes. 12 While this paper is focused on the U.S. in that it addresses specific U.S. laws and jurisprudence addressing domain names, the discussion of basic principles may nonetheless be relevant to other jurisdictions.

Domain names may be used in the commission of trademark infringement.

A domain name may, for example, use the same (or a confusingly similar) alphanumeric string as a trademark. The domain name may be registered by a person other than the trademark owner (and otherwise without the owner's consent) and direct Internet users (e.g., consumers) to a website where products competing with those covered by the trademark are offered for sale. 13 Such third-party use of a domain name may constitute an act of trademark infringement within the 10

The WIPO Second Report refers to the integrated registration system flowing from ICANN to the registrant as the "ICANN Contractual Model". See World Intellectual Property Organization [WIPO], The Recognition of Rights and the Use of Names in the Internet Domain Name System, Report of the Second WIPO Internet Domain Name Process, ¶¶ 73-76, WIPO Publication No. 843 (Sept.

3, 2001), available at http://www.wipo.int/amc/en/processes/process2/report/html/report.html, [hereinafter WIPO Second Report].

11 For additional details regarding registrant-registrar-registry relations, see, e.g., Office Depot, 596 F.3d at 699; Price, supra note 4, at 451.

12 The transnational character of the domain name system played a significant role in motivating development of ICANN management and related dispute settlement rules. See WIPO First Report, supra note 8, ¶¶ 14-21.

13 Trademark rights may be based on registration or they may be unregistered/common-law rights.

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meaning of the Lanham Act (in the United States (U.S.)). 14 The trademark owner may proceed against the accused infringer in a federal district court seeking an injunction and damages. 15 This is not a type of action unique to domain names.

Use of a trademark without the consent of the owner (whether in a domain name, on product packaging or on a product, on a television advertisement, etc.) may give rise to an infringement cause of action. 16 In the late 1990s it was apparent that domain names presented a unique set of issues with respect to abusive acts. 17 First, domain names were inexpensive to register, and typically were not subject to screening ex ante for potential conflict with existing trademarks. Only informal procedures with the registration authority (i.e., the combined registrar/registry, Network Solutions) existed by which trademark owners could challenge domain name registrations alleged to be improper. This informal procedure was not effective. A domain name registrant might at a very low cost engage in a financially significant abusive act toward a trademark owner. Yet the remedy for the trademark owner might well involve multiyear litigation in federal or state courts at considerable expense. Second, although registration of a domain name was geography specific, 18 the use (and abuse) of the domain name was theoretically global. A domain name through a registry located in the United States might be used to abuse the rights of a trademark owner in Spain, Japan or Australia. Because an effective remedy against a registrant engaged in abuse required action at the registry (i.e. by termination of the link), and because the trademark owner might be located far from the U.S., securing an effective remedy posed serious problems. Some means for addressing abusive domain name registration and use that did not involve the complexities of enforcing foreign judgments in the U.S. was considered necessary.

These challenges were addressed through the adoption of the Uniform Domain Name Dispute Resolution Policy (UDRP) on August 26, 1999 by the Internet Corporation for Assigned Names and Numbers (ICANN). The implementing documents of the UDRP and associated Rules were approved by 14

15 U.S.C. § 1125(c) (2006).

15 U.S.C. § 1114(2)(D)(iv-v) (2006).

16 Id. § 1114(1) (2006). Of course, there are many potential defenses to infringement, including fair use defenses.

17 For a discussion of the historical background of domain names and the issues that arise, see WIPO First Report, supra note 8, ¶¶ 1-25.

18 In the late 1990s, exclusively within the U.S. 15

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ICANN on October 24, 1999. 19 ICANN also accredited four dispute resolution service providers, including the WIPO Arbitration and Mediation Center (based in Switzerland) and the National Arbitration Forum (NAF) (based in the U.S.). 20 ICANN rules for registrars require that domain name registrants enter into a service agreement that incorporates the UDRP and subjects domain names to mandatory administrative proceedings conducted by an authorized service provider.

Under the UDRP, a complaining party must establish three elements to succeed against a respondent registrant of the disputed domain name: (1) that the complainant has rights in a trademark, and that the disputed domain name is identical or confusingly similar to that trademark; (2) that the respondent does not have rights or legitimate interests in the disputed domain name, and; (3) that the respondent registered and is using the disputed domain name in bad faith. 21 The rules for establishing elements (2) and (3) include nonexhaustive lists of acts that represent ways to address those elements.

Disputes under the UDRP are heard by single-member panels appointed by the service provider, or by three-member panels if elected by either the complaining or responding party. 22 A panel may reject a complaint, and even find that it was brought in bad faith (i.e., reverse domain name hijacking). If the panel finds in favor of the complainant, it has only two potential remedial orders. It can 19

See Internet Corp. for Assigned Names & Nos. (ICANN), Uniform Domain Name Dispute Resolution Policy (Oct. 24, 2009), http://www.icann.org/en/help/dndr/udrp/policy (last visited Feb. 1, 2013) [hereinafter UDRP]. See also WIPO Second Report, supra note 10, ¶¶ 8-12 (discussing adoption of UDRP and Rules by ICANN).

20 Id. ¶ 10. The initial group of approved dispute settlement service providers included eResolution and CPR Institute for Dispute Resolution. e-Resolution no longer exists, and the CPR Institute no longer provides UDRP dispute resolution services.

21 UDRP, supra note 19 ¶ 4(a).

22 Internet Corp. for Assigned Names & Nos. (ICANN), Rules for Uniform Domain Name Dispute Resolution Policy, ¶ 3(b)(iv) (Oct. 24, 2009), http://www.icann.org/en/help/dndr/udrp/rules (last visited Feb. 1, 2013) [hereinafter Rules for UDRP].. For three-member panels, each party selects a panelist (from an approved roster), and the parties attempt to agree upon the third panelist (in default of which, the service provider selects that panelist). A prospective panelist submits a declaration regarding potential conflict of interest prior to appointment. Once appointed, the panel receives a file that includes the complaint, response, incorporated evidence, and the chain of correspondence by all parties with the service provider. The appointed panelist has fairly broad discretion to seek additional information from the parties. Absent some special circumstance, the panel is expected to transmit its decision to the service provider within 14 calendar days. Id. ¶ 15(b).

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direct the registrar to "cancel" the disputed domain name (i.e., deleting the respondent's registration and making available the domain name to the public). Or, the panel can direct the registrar to "transfer" the disputed domain name to the complaining party. 23 When a domain name is transferred, the transferee-registrant enters into a new service agreement with the registrar (or a different registrar).

The UDRP provides a 10-day window following notification of a decision ordering cancellation or transfer of a domain name during which the responding party may initiate an action before a court objecting to the cancellation or transfer by the registrar. 24 Filing by the losing respondent triggers an automatic stay of the cancellation or transfer, pending review by the court.

B. The ACPA The U.S. Congress also reacted to the problem of abusive domain name registration and use by adoption of the Anticybersquatting Consumer Protection Act (ACPA) in 1999. 25 The ACPA is part of the Lanham Act (the general trademark statute). It generally authorizes causes of action in federal district courts where jurisdiction is found based on ownership of trademark rights, including personal names protectable as trademarks. 26 In addition to in personam jurisdiction, the ACPA allows for establishing jurisdiction in rem against domain names when certain preconditions are met, though in such cases remedies are limited to cancellation or transfer. 27 23

UDRP, supra note 19, ¶ 4(i).

UDRP, supra note 19, ¶ 4(k).

25 Anticybersquatting Consumer Protection Act, Pub. L. No. 106-113, 113 Stat. 1501A-445552(1999) (codified at 15 U.S.C. § 1125(d) and 15 U.S.C. § 8131) [hereinafter ACPA]. This article is principally concerned with 15 U.S.C. § 1125(d) — titled "Cyberpiracy prevention" — that addresses abuse of trademark rights. 15 U.S.C. § 8131 — titled “Cyberpiracy protections for individuals” — addresses protection of names of living persons in the limited context of registration with intent to sell for financial gain to that person or third party, with remedy apparently limited to injunctive relief, including forfeiture, cancellation or transfer. See 15 U.S.C. § 8131(2). Unlike the trademark protective provisions, the provisions directed to protecting living persons names do not require that conflicting trademark rights exist at the time of the complained-of domain name registration. See also Hancock, supra note 4, at 189-90; Price, supra note 4, at 455.

26 15 U.S.C. § 1125(d)(1)(A)(ii) refers to, “A person shall be liable in a civil action by the owner of a mark, including a personal name which is protected as a mark under this section . . . .”

27 Id. § 1125(d)(2).

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There are differences in the legal rules between the ACPA and the UDRP. The ACPA perhaps “more expressly” provides that a cause of action may only arise if the defendant registered the disputed domain name after the complaining party had established rights in a trademark. 28 As discussed later, this has been a general rule also adopted by UDRP panelists, but it is not stated in such direct terms as in the ACPA text. The ACPA incorporates a somewhat longer list of actions that might constitute evidence of bad faith than the UDRP, though it is not clear that the ACPA list adds significantly to the potential grounds of bad faith under the UDRP, particularly as the UDRP list of potential evidence of bad faith is non-exhaustive. Like the UDRP, the ACPA incorporates exceptions from findings of liability based on fair use and other protective doctrines. 29 The most important difference between the ACPA and the UDRP concerns remedies. The ACPA authorizes a federal court to order the cancellation or transfer

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The ACPA in so far as it protects trademarks limits actions to those where the claimant had trademark rights at the time the disputed domain name was registered. 15 U.S.C. § 1125(d)(1)(A)(ii) limits actions against domain name registrants to those: “(I) in the case of a mark that is distinctive at the time of registration of the domain name, is identical or confusingly similar to that mark; (II) in the case of a famous mark that is famous at the time of registration of the domain name, is identical or confusingly similar to or dilutive of that mark . . . .” (emphasis added).”

The UDRP requires that a disputed domain name has been "registered and used in bad faith".

UDRP, supra note 21, ¶ 4(a). The preponderance of panelists (supported by the legislative history of the UDRP) have concluded that registration in bad faith can only be found where trademark rights exist for the complaining party. See WIPO Overview of WIPO Panel Views on Selected UDRP Questions, Second Edition ("WIPO Overview 2.0"), “Consensus view: Generally speaking, although a trademark can form a basis for a UDRP action under the first element irrespective of its date [see further paragraph 1.4 above], when a domain name is registered by the respondent before the complainant's relied-upon trademark right is shown to have been first established (whether on a registered or unregistered basis), the registration of the domain name would not have been in bad faith because the registrant could not have contemplated the complainant's then non-existent right.” WIPO Overview 2.0, para. 3.1 See further discussion of the timing/sequencing issue under the ACPA and UDRP infra.

29 15 U.S.C. § 1125(d)(1)(B) provides that “(ii) Bad faith intent described under subparagraph (A) shall not be found in any case in which the court determines that the person believed and had reasonable grounds to believe that the use of the domain name was a fair use or otherwise lawful.” Also, three of the nine factors that the ACPA prescribes for assessing bad faith intent of the domain name registrant are similar to factors that the UDRP uses to assess rights or legitimate interests in a disputed domain name (compare 15 U.S.C. §1125(d)(1)(B)(i)(III-IV),) with UDRP, supra note 21, ¶ 4(c)).

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of the domain name in a manner similar to the UDRP. 30 However, under the ACPA a federal court also has the authority to issue an order directed against the person who registered a disputed domain name or names, enjoining them from committing future acts against the plaintiff trademark owner, including registering confusingly similar domain names. 31 The federal court may award damages in favor of the complainant, including statutory damages. 32 While it will almost certainly be more costly and time-consuming to proceed against a third-party domain name registrant in federal court than under the UDRP, the reward from successful prosecution may be more substantial. However, it is useful to bear in mind that winning a money judgment against an abusive domain name registrant and collecting that judgment are different things. 33 C. ACPA as recourse from the UDRP For losing respondents seeking to block the cancellation or transfer of the domain name in the U.S. based on an adverse finding of a UDRP panel, the ACPA establishes the legal basis for doing so. 34 An action may be filed in an appropriate federal district court seeking to enjoin the carrying out of the order of cancellation or transfer. It is a curious feature of the UDRP that a request to block a transfer in the U.S. is governed by the provisions of the ACPA (and, possibly, by the provisions of the Lanham Act as a whole). 35 In practical effect, a decision by a UDRP panel is not reviewed on the basis of application of UDRP rules, but rather on the basis of de novo consideration of the case under the ACPA. Federal courts generally have decided against providing any deference to the decisions of UDRP panels. 36 Moreover, there is nothing that prevents either party (i.e. the domain 30

15 U.S.C. § 1125(d)(1)(C).

Id. §§ 1125(d)(3), 1116(a).

32 Id. § 1117(a), (d).

33 See, e.g., Office Depot Inc. v. Zuccarini, 596 F.3d 696 (9th Cir. 2010).

34 A petition to the U.S. courts seeking an injunction to prevent an order of transfer by a UDRP panelist is governed by the ACPA (15 U.S.C. §1114(2)(D)(v); see Barcelona.com, Inc. v.

Excelentisimo Ayuntamiento de Barcelona, 330 F.3d 617 (4th Cir. 2003). The ACPA (and perhaps the Lanham Act as whole) is applied to determine whether the transfer should be allowed or blocked (compare id., with Storey v. Cello Holdings, L.L.C.,, 347 F.3d 370 (2d Cir. 2003)). Thus, in effect, the enforceability of UDRP decisions depends on interpretation of the ACPA. 35 The Federal Circuits have divided on that latter extension.

36 See, e.g., Barcelona.com, 330 F.3d at 626 (“[a]ny decision made by a panel under the UDRP is no more than an agreed-upon administration that is not given any deference under the ACPA.”).

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name registrant challenging a transfer or cancellation order, and the party asserting trademark rights and abuse) from providing new and/or different evidence before the federal court.

A complaining party that has been denied relief by a UDRP decision may pursue the same respondent and same domain name before the federal courts under the ACPA. US federal courts have decided that there is no res judicata or collateral estoppel effect of UDRP panel decisions, and have declined to accord deference to those decisions. 37 They have primarily done so on the basis that the UDRP process is designed as an expedited and streamlined process that does not involve the same evidentiary standards as federal court proceedings. 38 As a UDRP panelist, this author has noted that UDRP panels do not enjoy the same control over parties as federal courts, nor do they have judicial enforcement powers similar to those of federal courts.39 All of this may, in fact, give rise to circumstances in which the same parties in federal court are litigating a different case involving the same domain name than that presented to a UDRP panel. 40 However, it is shortsighted that federal district court judges do not give some degree of deference to UDRP panels. The more frequently selected UDRP panelists are likely to have substantially more experience in assessing trademark-domain name claims than federal and state court trial judges who may hear only a few such cases over a span of years.

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E.g., Barcelona.com, 330 F.3d at 626 (UDRP panel decision was relevant only insofar as it enabled plaintiff to file an action under the ACPA); Storey 347 F.3d at 378, 380-82 (2d Cir. 2003) (stating that “an administrative proceeding does not preclude the registrant from vindicating his rights under the ACPA or trademark law in court.”).

38 See, e.g., Storey, 347 F.3d at 382-83. Cf. Sallen v. Corinthians Licenciamentos Ltda, 273 F.3d 14, 28 (1st Cir. 2001) (recognizing the overlap of the UDRP and ACPA).

39 See Diet Center Worldwide, Inc. v. Jason Akatiff, WIPO Case No. D2012-1609, n.13.

Other references have taken place in the context of termination orders based on contemporaneous federal court proceedings.

40 A complainant may lose a case under the UDRP because it has failed to adequately substantiate its claim, and may initiate a federal court proceeding in order to rectify its prior failure. Compare Super-Krete Int’l, Inc. v. Concrete Solutions, Inc., WIPO Case No. D20081333, and Super-Krete Int’l, Inc. v. Sadleir, 712 F. Supp. 2d 1023 (C.D. Cal. 2010). In the UDRP proceeding, the complaining party argued (and lost) on the basis of common-law trademark rights, presenting no evidence to support such rights. The plaintiff thereafter provided evidence of pre-existing trademark registrations to the federal court, and succeeded. The district court did not take note of the difference between the case pleaded by the complaining party in the UDRP proceeding and the case presented to the federal court.

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II DOMAIN NAMES AS INTELLECTUAL PROPERTY A. The Technical Domain Name Function A domain name shares characteristics with various forms of intellectual property as traditionally understood, but it does not fall neatly within "traditional" categories. To begin with, a domain name is similar in function to an old-fashioned telephone number. It tells a caller (in this case, the person through a device submitting an Internet query) where to route the call (in this case, to a particular server and/or sub location). That function could be performed by a random character string associated with an IP address, and it can be performed simply by entering the appropriate IP address in a browser. But, it would be very difficult for Internet users to remember and enter strings of numbers to find who or what they are looking for, and the domain name is the "human friendly" way of solving the memory and data entry problem. 41 B. The Domain Name as Identifier Broadly speaking, domain names fall into a number of different categories as identifiers. Some make use of generic or commonly descriptive terms, e.g., “health”, “drugs”, “travel”, as a means to attract Internet users to sources of information for goods and services that may or may not be associated with a particular supplier/provider. Despite lacking trademark status, these domain names may have a substantial financial value because of the likelihood that Internet users will use these terms, perhaps along with a generic top-level domain (gTLD) such as “.com”, when broadly searching for information and resources. 42 Many domain names incorporate the trademark or service mark of a business. Internet users seeking a business or its products (or services) commonly enter the trademark or service mark along with a gTLD to find the relevant resources, or enter the trademark or service mark in a browser and select the search result incorporating the trademark or service mark of the business. 43 The trademark or service mark of 41

It is a wonder, perhaps, that in the "old days" individuals were expected to remember 20 or so seven-digit telephone numbers to contact their family, friends and business relations.

42 See note 5, supra.

43 See 1 J. THOMAS MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION § 7:17.50, (4th ed. 2013) (“In the same way that businesses sometimes desire to have a prestige business address, businesses want a prestige address in cyberspace that corresponds to the trade name of the company or to a company trademark.”).

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a business may appear in a domain name for reasons other than providing the location for goods and services. It may be used by commentators or critics of the business in a legitimate way. 44 Typically with respect to legitimate noncommercial or fair use, the trademark or service mark will be combined with additional terms. 45 A subtype of the trademark-incorporating domain name is the "trade name" incorporating domain name. 46 From a technical lP standpoint, a trademark identifies a good or service that distinguishes one enterprise from another in commerce. A trade name is the name of a business that may or may not have trademark status. A third type of domain name is effectively a random or quasirandom alphanumeric string that does not signal the nature of the web location to which it will route the Internet user. There are a range of reasons why such random or quasi-random alphanumeric strings may be used.

"Identifiers" have constituted intellectual property rights (lPRs) subject matter since the inception of commerce. 47 Artisans' "marks" are as old as the crafting of pottery, whereby the artisan would identify his or her creation on the object. From the standpoint of the modern era, trademarks are subject matter of the Paris Convention on the Protection of Industrial Property of 1883 (and trade names are covered by that agreement). 48 There are other forms of IP that are identifiers, including geographical indications, appellations of origin, and other ways by which agricultural products have been designated.

While some forms of intellectual property require a creative element (e.g., patent and copyright), the trademark does not.49 A trademark must be distinct from other trademarks for identical or similar goods, but it does not need to meet a

44

See, e.g., Pfizer Inc v. Van Robichaux, WIPO Case No. D2003-0399, <lipitor-info.com>; Sutherland Inst. v.

Continuative L.L.C., WIPO Case No. D2009-0693, <sutherlandinstitute.com>.

45 See discussion of relationship between domain names incorporating trademark alone, and domain names using trademark in combination with other terms, in Toyota Motor Sales, U.S.A. v. Tabari, 610 F.3d 1171 (9th Cir. 2010).

46 See ABBOTT, COTTIER & GURRY, supra note 7, at 342. For discussion of trade names under the TRIPS Agreement, see Appellate Body Report, United States — Section 211 Omnibus Appropriations Act of 1998, ¶¶ 333–41, WT/DS176/AB/R (Jan. 2, 2002).

47 MCCARTHY, supra note 43, § 5:1 (describing the early origins of trade symbols).

48 Paris Convention for the Protection of Industrial Property, Mar. 20 1883, 21 U.S.T. 1583, 828 U.N.T.S. 305.

49 See ABBOTT, COTTIER & GURRY, supra note 7, at 318.

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standard of novelty or originality (although it may not be generic or commonly descriptive). 50 C. Domain names as intellectual property The domain name as an identifier may share characteristics with the trademark and trade name, but is it a distinct form of “intellectual property”? 51 To illustrate the question, suppose a person starting a new financial services consulting business registers as a domain name a previously unused alphanumeric string, “1q2r3s.com” and creates a commercial website. The name of the business on the website is “Financial Planning Associates”, and the unique alphanumeric string in the domain name is not identifying the services business on the website.

As a unique alphanumeric identifier, is the domain name “1q2r3s.com” a form of intellectual property distinct from a service mark or trade name because its sole function is to direct users to a location on the Internet? Is it intellectual property as such?

The U.S. Lanham Act defines “domain name” 52 and provides remedies against its misuse (see discussion of the ACPA supra), but the domain name as such is not accorded specific rights typical of IP. For example, the domain name is not associated with a specific statutory right to exclude third parties from infringing use. Moreover, U.S. statutory law does not include general provisions according protection to “intellectual property” as such, as distinct from the enumerated forms (e.g., patent, copyright and trademark). A domain name may be a trademark, no doubt (e.g., Amazon.com). 53 To be clear concerning the illustration above, “1q2r3s.com” may well be registered as a trademark (or service mark) to the extent that it is used to identify the services of Financial Planning Associates.

But the domain name is not accorded its own unique statutory protection, though it may be protected on application of general unfair competition law. It may (or may 50

As discussed below, there are forms of intangible property that protect compilations of commercial information — database protection (e.g., in the European Union) and protection of undisclosed information in the form of regulatory data on pharmaceutical and agricultural chemical products (per Article 39.3 of the TRIPS Agreement) — that fall outside traditional notions of intellectual property.

51 See MCCARTHY, supra note 43, § 7.17.50 (“Out of the millions of domain names, probably only a small percentage also play the role of a trademark or service mark.”).

52 15 U.S.C. §1127 states: “The term “domain name” means any alphanumeric designation which is registered with or assigned by any domain name registrar, domain name registry, or other domain name registration authority as part of an electronic address on the Internet.”

53 See, e.g., AMAZON.COM, Registration No. 2078496.

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not) be that domain names (and other “non-traditional” forms of identifier) should be accorded their own unique forms of protection. But, as a matter of current law, they are not.

D. Trademarks as property 1. Assignment and transfer Legislatures and courts have long treated trademarks as a form of property capable of ownership. But, the transferability of trademark ownership has a complex history, and even today includes ambiguous elements and a divergence between U.S. law and international trademark law. In the United States, it has long been thought that a trademark should not be assigned and transferred without the business with which it is associated. 54 Since the function of a trademark is presumed to be providing consumers with information concerning relevant goods, or protecting trademark owners against misappropriation of their valuable corporate reputation, it is thought a logical corollary that the trademark should not be disassociated from the product purchased by the consumer or the reputation of the business owner. This concept or principle has been embodied in the U.S. both at common law and in Section 10 of the Lanham Act as a rule against “assignments in gross”. 55 A trademark is assignable only with the goodwill of the business with which the mark is used. 56 That being said, the U.S. appears to be acting inconsistently with Article 21 of the WTO TRIPS Agreement by maintaining Section 10 of the Lanham Act. Article 21 provides in relevant part, “the owner of a registered trademark shall have the right to assign the trademark with or without the transfer of the business to which 54

See generally, MCCARTHY, supra note 43, §§ 18:1–:11. A related discussion concerning licensing of trademarks is discussed in K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 313–15 (1988).

55 15 U.S.C. § 1060(a)(1)–(5) (2006) provides, inter alia, "A registered mark or a mark for which an application to register has been filed shall be assignable with the good will of the business in which the mark is used, or with that part of the good will of the business connected with the use of and symbolized by the mark." See MCCARTHY, supra note 43, at § 18:2.

56 Although there may be some hints at a move away from strict application of this rule in the U.S., it appears still to represent good law. MCCARTHY, supra note 43, § 18:10. McCarthy does not condone this as a mechanism for circumventing the anti-assignments-in-gross rule, but notes that goodwill “denotes only an intangible and ineffable concept: A concept which lies in the eye of the beholder.” Because “goodwill” is a fairly flexible concept, the rule may not have great practical effect on transactions that realistically are assignments in gross. A recital of “associated goodwill” as part of transferring a trademark asset may be sufficient to satisfy most purposes.

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the trademark belongs.” This provision reflects the rule that apparently is most common outside the U.S.,57 and it is difficult to stretch an interpretative argument that somehow the U.S. requirement to include the goodwill of a business in an assignment does not involve a requirement to transfer the business.

There are arguments on each side of the “assignments in gross” discussion.

The U.S. position reflects the “world as it should be.” If the trademark sends a signal to the consumer, why should the consumer bear the risk and consequences of new trademark ownership by an unrelated business? The TRIPS international position may better reflect the “world as it is.” Trademarks have largely become commoditized. “Brands” include sports teams emblems more or less randomly placed on consumer goods. Should the law reflect preferred expectations or reality?

Fundamentally, trademarks are treated as a form of property that may be sold, assigned and transferred, both in the U.S. and elsewhere. In the U.S., there is a “rider” or condition attached to the property for purposes of assignment and transfer.

It must be accompanied by the goodwill of the business.

2. Antidilution A second element in the propertization or commodification of trademarks is the adoption of “antidilution” legislation and international rules. Article 6bis of the Paris Convention provides special protection for “well-known” trademarks, which protection has been supplemented by TRIPS Agreement rules. 58 Domestic U.S. legislation extends rights to owners of famous trademarks to prevent third parties from using the mark on dissimilar goods or services (i.e., blurring) or from disparaging the trademark (i.e., tarnishment). 59 These rules in effect establish a property boundary around the trademark, protecting its owner against a third-party diminishing the value of its trademark asset. This goes beyond protecting the traditional trademark function of informing consumers as to the quality or characteristics of products, and towards protecting the trademark as property of its owner.

57

Id. See generally ABBOTT, COTTIER & GURRY, supra note 7, at 363-70, 375-78.

59 See 15 U.S.C. § 1125(c) (2006); see also Nabisco, Inc. v. PF Brands, Inc., 191 F.3d 208 (2d Cir. 1999).

58

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3. Intangible asset value The typical business accounting treatment of the trademark is as an intangible asset. 60 The accounting treatment varies depending on the jurisdiction.

In the United States, the accounting and tax treatment may depend on whether the trademark was internally developed or purchased. 61 Regardless of the precise accounting treatment, the intangible asset value of trademarks is routinely calculated and reported by business information services, and the value of a brand may reach into the billions of U.S. dollars. 62 III DOMAIN NAMES IN THE COURTS U.S. courts have expressed different viewpoints on the legal characteristics of domain names. There are principally three lines of reasoning: (1) domain names are a contract right (i.e., established by a service agreement between the registrant and the registrar); (2) domain names are a form of intangible property; and (3) domain names are a form of tangible personal property.

A. Domain names as contract rights The domain name registrant advises the registrar of the alphanumeric string that it wishes to register. If the domain name is available at the registry, the registrar provides a contract to which the registrant must adhere in order to register the domain name. That registration agreement includes representations and warranties from the registrant, establishes a term of registration, terms for payment, and incorporates the UDRP as a mandatory dispute settlement procedure to which the registrant agrees to be subjected. 63

60

See MCCARTHY, supra note 43, at § 2:19 (“In this sense, good will can be defined as the intangible value of a business beyond the value of its physical assets.”).

61 See, e.g., Donald E. Kieso, Jerry J. Weygandt & Terry D. Warfield, Intermediate Accounting, ch. 12 (14th ed. 2012).

62 Manish Modi, Coca-Cola Retains Title as World’s Most Valuable Brand, BLOOMBERG (Oct. 2, 2012, 11:57 PM), http://www.bloomberg.com/news/2012-10-03/coca-cola-retains-titleas-world-s-most-valuable-brand-table-.html (based on Interbrand’s Best Global Brands 2012 report).

63 See, e.g., Go Daddy Domain Registration Agreement, GODADDY, http://www.godaddy.com/Agreements/ShowDoc.aspx?pageid=reg_sa (last revised Aug. 27, 2013).

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Typically the domain name registration agreement provides the registrant with the right to renew the registration indefinitely, and includes a grace period provided by the registrar and/or registry in the event that the registrant allows the registration to lapse. 64 The registration agreement provides that the registrar may cancel the domain name registration in the event of a material breach of the agreement. The domain name registrant is permitted by the terms of the typical service agreement, and as mandated by ICANN rules, to transfer its domain name registration between registrars. 65 The registrant’s right in a domain name is established by contract with the registrar. But, the terms are broadly established by ICANN rules governing the registry and the registrar. 66 The registrar does not have a possessory interest in individual domain names registered by third parties. 67 The registrar has limited control over the registrant of the domain name in the sense that it may not cancel the domain name “without cause.” 68 Domain name registration is renewed absent the registrant’s failure to consent to renewal. 69 If a registrar ceases doing business, domain name registrations will survive on the database of the registry, and can be transferred by the registrant to a different registrar. 70 The registrar essentially serves as a database administrator, with a variety of secondary functions.

64

Id. See Policy on Transfer of Registrations between Registrars, ICANN, http://www.icann.org/en/resources/registrars/transfers/policy (effective June 1, 2012).

66 See WIPO Second Report, supra note 10, regarding the ICANN Contractual Model; see also Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 395–96 (2d Cir. 2004) (discussing relationship between registrar and ICANN).

67 Registrar Accreditation Agreement, ICANN ¶ 3.5, http://www.icann.org/en/resources/registrars/raa/ra-agreement-21may09-en.htm#3 (last updated Aug. 2, 2012) (registrar expressly disclaiming all rights to exclusive ownership or use of registered names and associated IP addresses).

68 Id. ¶¶ 3.7.5.1–.7 (placing detailed renewal limitations and notification requirements on the registrar).

69 Id. In any case, the domain name registration is effectively of indefinite and continuing duration because domain name registrants may transfer domain names between registrars in the event that registrars do not wish to continue renewal of a particular registration.

70 The registrar is not the owner of registration of a domain name, but rather an intermediary service provider. See id. ¶ 3.5. The Registrar Accreditation Agreement requires that registrars have in place procedures for transferring domain names to other registrars in the event of a suspension or termination of operations. Id. ¶ 4.2.8–.9.

65

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Thus, while there is a reciprocal relationship between a domain name registrant and a registrar, ICANN exercises a superior authority over the relationship by prescribing mandatory rules and supervising the activities of the registrars and registries. 71 The service agreement between the domain name registrant and the registrar establishes a legal “construct” that is at least somewhat unique. The registrant has more than the typical rights of a party to a services agreement because the registrar (and registry) are not free to “breach and pay” through a voluntary election to refuse to provide services in the sense of canceling a domain name registration. Cancellation may only result if the registrant is in breach of the contract. 72 71

Id. ¶¶ 2–3.

See Registrant Rights and Responsibilities Under the 2009 Registrar Accreditation Agreement, ICANN.,, http://www.icann.org/en/resources/registrars/registrant-rightsresponsibilities (last visited Feb. 1, 2013) (the “right for the Registrar to cancel the registration . . . is not absolute.”).

By way of illustration, the provision for termination in the GoDaddy.com domain name registration agreement provides as follows: 72

7. SUSPENSION OF SERVICES; BREACH OF AGREEMENT You agree that, in addition to other events set forth in this Agreement: i. Your ability to use any of the services provided by Go Daddy is subject to cancellation or suspension in the event there is an unresolved breach of this Agreement and/or suspension or cancellation is required by any policy now in effect or adopted later by ICANN; ii. Your registration of any domain names shall be subject to suspension, cancellation or transfer pursuant to any ICANN adopted specification or policy, or pursuant to any Go Daddy procedure not inconsistent with an ICANN adopted specification or policy (a) to correct mistakes by Go Daddy or the registry operator in registering any domain name; or (b) for the resolution of disputes concerning any domain name.

"You agree that your failure to comply completely with the terms and conditions of this Agreement and any Go Daddy rule or policy may be considered

by Go Daddy to be a material breach of this Agreement and Go Daddy may provide you with notice of such breach either in writing or electronically (i.e. email). In the event you do not provide Go Daddy with material evidence that you have not breached your obligations to Go Daddy within ten (10) business days, Go Daddy may terminate its relationship with you and take any remedial action available to Go Daddy under the applicable laws. Such remedial action may be implemented without notice to you and may include, but is not limited to, cancelling the registration of any of your domain names and discontinuing any

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There is limited U.S. case law jurisprudence regarding the nature of domain names either as contractual rights or property. The leading decision supporting characterization of domain names as contract rights is that of the Supreme Court of Virginia in Network Solutions v. Umbro. 73 In this case, the holder of a money judgment sought to garnish a group of domain names registered by the judgment debtor with a view to sale by the sheriff’s office. Network Solutions, the registrar of the domain names, objected to the garnishment on grounds that domain names are the product of a conditional contract for registration services, and are not subject to garnishment and execution. It should be noted that the facts at issue in this case preceded ICANN’s adoption and implementation of rules regulating registration of domain names, and the establishment of the UDRP. The judgment creditor, Umbro, argued that the exclusive right granted to a domain name registrant is intangible property subject to garnishment. The Supreme Court of Virginia said: Irrespective of how a domain name is classified, we agree with Umbro that a domain name registrant acquires the contractual right to use a unique domain name for a specified period of time. However, that contractual right is inextricably bound to the domain name services that NSI provides. In other words, whatever contractual rights the judgment debtor has in the domain names at issue in this appeal, those rights do not exist separate and apart from NSI's services that make the domain names operational Internet addresses. Therefore, we conclude that “a domain name registration is the product of a contract for services between the registrar and registrant.” . . . A contract for

services provided by Go Daddy to you. No fees will be refunded to you should your Services be cancelled or terminated because of a breach.

Go Daddy's failure to act upon or notify you of any event, which may constitute a breach, shall not relieve you from or excuse you of the fact that you have committed a breach."

Go Daddy Domain Registration Agreement, GODADDY, http://www.godaddy.com/agreements/showdoc.aspx?pageid=REG_SA (last revised Aug. 27, 2013).

73 Network Solutions, Inc. v. Umbro Int’l, Inc., 529 S.E.2d 80 (Va. 2000). See also Hancock, supra note 4, at 191–94.

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services is not “a liability” as that term is used in [the enforcement of judgments statute] and hence is not subject to garnishment. 74 In its decision, the Virginia Supreme Court expressed concern that allowing garnishment of a domain name services contract would open the door to garnishment of practically any services contract (e.g., prepaid services for satellite television) as well as garnishment of corporate names. The Court recognized that some jurisdictions had allowed jurisdiction over property including telephone numbers that are products of services contracts, but disagreed with those holdings.

The court distinguished contract rights for a sum of money due under a contract (which might be garnishable) from a contract for the performance of the service.

The Court refused to allow the judgment creditor to “step into the shoes” of the judgment debtor. 75 Two dissenting Justices, including the Chief Justice, said “Because NSI has received everything required to give the judgment debtor the exclusive right to use the domain names registered, the contractual right, a valuable asset, is the intangible personal property in which the judgment debtor has a possessory interest.” Such intangible personal property, they believed, was subject to garnishment under the relevant statute.

It should be noted that because the Virginia Supreme Court rendered its decision prior to establishment by ICANN of rules that largely standardize obligations of domain name registrars and registrants, the Court was not addressing the same type of “regulated contract” to which domain name registrants are subject today. This might have influenced its reasoning about the contingent nature of the services Network Solutions would be performing.

A California State appellate court decided in Palacio Del Mar Homeowners Ass'n v. McMahon that “Domain name registration supplies the intangible ‘contractual right to use a unique domain name for a specified period of time.’ . . .

Even if this right constitutes property, it cannot be taken ‘into custody.’” 76 In 74

Network Solutions, 529 S.E.2d at 86 (quoting Dorer v. Arel, 60 F. Supp. 2d 558, 561 (E.D. Va. 1999)).

75 See Hancock, supra note 4, at 191-94 (arguing that the majority opinion in Network Solutions v. Umbro is often misread for the proposition that a domain name cannot be a property right). It is correct that the court did not expressly reject the proposition that a domain name may constitute property (intangible or otherwise). But, the court refused to treat the domain name as a liability within the meaning of the garnishment and execution statute because the domain name was "inextricably bound" to a contingent services contract with the registrar.

76 Palacio Del Mar Homeowners Ass'n v. McMahon, 95 Cal.Rptr.3d 445, 449 (Cal. Ct. App. 2009) (footnote omitted) (quoting Network Solutions, 529 S.E.2d at 86). See also In re Forchion,

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Palacio Del Mar, the principal rationale of the California Court of Appeal was that domain names should not be considered the equivalent of tangible property, citing with supporting Ninth Circuit precedent, as discussed below, that domain names are “intangible property.”

Domain name registration agreements are not by any means the only type of contract that is regulated, and that may not be cancelable absent certain conditions. 77 The situation of domain names is not dissimilar from some other forms of intellectual property, such as the patent. Once a patent is registered with the national patent office, that office may not cancel (for example, invalidate) the patent absent some defect or dereliction on the part of the patent holder. Indeed, the patent only exists because it is granted by the patent office. But, the granted patent is regulated by rules superior to those of the patent office that are established by the national legislature. 78 It is because of these superior rules that the patent is often referred to as a form of property, even though it is only a form of legislated “temporary property” because it is defined by a term of years. It expires.

A domain name effectively has an indefinite duration and is durable. This is more characteristic of property than of typical contract rights. 79 In this respect, a domain name might alternatively be considered some form of “legislated property” in that its operational life depends on the train of legislation from the establishment 130 Cal. Rptr. 3d 690, 709-10 (Cal. Ct. App. 2011) (“Regardless of whether a domain name is a registrant's property or merely the product of a services contract . . .”).

77 For example, many utility contracts between suppliers of goods and services, on one side, and consumers on the other, may not be canceled by the provider absent some specified type of default by the consumer. See, e.g., Consumer Protection, MARYLAND OFFICE OF PEOPLE’S COUNSEL, http://www.opc.state.md.us/ConsumerCorner/ConsumerProtection.aspx (“Maryland law permits non-regulated competitive companies to offer electricity and gas supply services to residential customers in Maryland. These companies must receive a license from the [Maryland Public Service Commission], and must follow the Commission’s rules on marketing and solicitation, non-discrimination, contracts and termination of service.”) (emphasis added).

This is because utilities (e.g., electricity suppliers) often provide essential services for which there are no alternatives available in a particular area.

78 Within parameters defined by international intellectual property rules.

79 BLACK'S LAW DICTIONARY 1335–36 (9th ed. 2009) (defining property as “1. The right to possess, use, and enjoy a determinate thing (either a tract of land or a chattel); the right of ownership <the institution of private property is protected from undue governmental interference>. — Also termed bundle of rights. 2. Any external thing over which the rights of possession, use, and enjoyment are exercised <the airport is city property>.”).

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of ICANN through establishment of registries and registrars, and the registrant’s act of requesting registration. But, it remains that the rights and obligations of the domain name registrant are expressly defined by contract with the registrar, and are not a direct product of legislation.

B. Domain names as intangible property 1. Conceptually A domain name is an alphanumeric string that is electronically encoded to function on and through a computing device connected to a network (and a network of networks). The electronically encoded alphanumeric string that constitutes the domain name ultimately has a physical reality in the sense of being stored as magnetic charges on a disk drive or other electronic storage device, but it is not a human-tangible physical reality. Similarly, the domain name typically appears as an alphanumeric string entered into a web browser address line, but that also is an electronic representation that is not human-tangible, although it is “perceptible”. The domain name might be represented in a tangible medium, such as in plastic signage, but that would be a transformative expression of the functional electronic coding, not the “thing itself”. Although some U.S. courts have differed (see discussion below regarding tangible property), it is reasonable to conclude that the domain name is “intangible” in its primary functional state.

Property is traditionally defined as a determinate thing over which ownership and control may be exercised. Because the registrant of a domain name holds the exclusive right to control the use of that specific alphanumeric string (subject to various limitations and exceptions typical of trademark law) the domain name may be characterized as a form of property.

Because the domain name is “intangible” and a form of “property”, it seems reasonable to conclude that the domain name is a form of “intangible property,” though not to be conflated with “intellectual property”. 80

80

There are many things that are “intangible property”, but not “intellectual property”. For example, the electronic records of a hospital are “intangible” and a determinate thing over which the hospital may exercise control (i.e., property), but generally lack the characteristic of the established forms of intellectual property (e.g., as recognized in the WTO TRIPS Agreement).

World Trade Organization Agreement on Trade-Related Aspects of Intellectual Property Rights, arts. 15-39. While the European Union has created a system of rights in favor of database owners, these rights are not generally considered “intellectual property”. Similarly, an electronic

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As discussed earlier, a domain name may share characteristics with one or more forms of intellectual property (e.g., a trademark or trade name), but not in all cases. In that regard, some domain names may be intellectual property because they share attributes of recognized forms, e.g. the trademark, others not. 81 That, however, is a different question than whether domain names are considered “intellectual property” as a class.

2. Ninth Circuit Precedent The leading case in which the Ninth Circuit Court of Appeals determined domain names to constitute intangible property, Kremen v. Cohen, 82 is important both because of its basic holding, and also because of the facts that distinguish it from those that today are generally operative with respect to domain names. The case involved a domain name, “sex.com”, registered and subject to fraud in 1994.

This was prior to the establishment of ICANN rules regarding activities of registries, registrars and registrants, including ICANN’s rules regarding the contract rights of registrants. The registry, Network Solutions, was accused, inter alia, of breaching an implied contract with the initial registrant and true owner of the subject domain name when it allowed a fraudulent transfer. The Ninth Circuit found that there was no contract or contract right, express or implied, between the registrant and Network Solutions primarily on grounds of lack of consideration. 83 The court went on to consider whether domain names as a class “are a species of property” 84 by applying a three-part test: is a domain name (1) an interest capable of precise definition, (2) capable of exclusive possession or control, and (3) with a legitimate claim to exclusivity? It compared domain names to corporate stock and plots of land, finding they are precisely defined. It found that registrants control the location to which domain names direct Internet users. It determined that registrants have a legitimate claim to exclusivity because the act of wire transfer instruction of a bank is intangible, and is a determinate thing over which the bank exercises control, but it is not “intellectual property”.

81 See Int'l Bancorp, L.L.C. v. Societe des Baines de Mer et du Cercle des Etrangers a Monaco, 192 F. Supp. 2d 467, 488-89 (E.D. Va. 2002) (discussing whether trademark infringement by a domain name is an injury to property), aff'd on other grounds, 329 F.3d 359 (4th Cir. 2003).

82 Kremen v. Cohen, 337 F. 3d 1024 (9th Cir. 2003). See also Hancock, supra note 4, at 19496.

83 Registration was free at the relevant time.

84 Kremen v. Cohen, 337 F.3d at 1030 n.5.

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registration excludes others from registering the same domain name. In a concise and straightforward manner, the Ninth Circuit found that domain names as a class are intangible property. 85 The Ninth Circuit thereupon rejected a distinction drawn by the lower district court between types of intangible property. In doing so, it conceptually declined to follow a proposal by the Restatement (Second) of Torts § 242 (1965) to differentiate between intangibles “merged” in a document and those that are not. It read the leading California Supreme Court decision and subsequent lower court and federal precedent to reject such a requirement. Nonetheless, the Ninth Circuit said that it did not need to “settle the issue once and for all” in this particular case because, “Assuming arguendo that California retains some vestigial merger requirement [with a document], it is clearly minimal, and at most requires only some connection to a document or tangible object -- not representation of the owner’s intangible interest in the strict Restatement sense.” 86 The Ninth Circuit found that the distributed electronic database (i.e. the Domain Name System, or DNS) that associates domain names with particular computers is “a document (or perhaps more accurately a collection of documents)”, albeit an electronic one. 87 The Court rejected arguments from Network Solutions that because DNS records may be stored in more than one place, the DNS is not a document, and that the DNS is not a document because it is refreshed every twelve hours. 88 The Court 85

Id. at 1030.

Id. at 1033.

87 Id. at 1033-34.

88 Id. at 1034-35. Hancock argues against characterization of domain names as intangible property largely because of some apparent inconsistency among U.S. states regarding whether the Restatement’s merger requirement allows such treatment. Hancock, supra note 4, at 197. The decision cited by Hancock to substantiate this concern is a 2007 District Court decision from the Northern District of Texas indicating that Texas conversion law concerns only physical property, and would apparently not extend to intangible domain names. Emke v. Compana, L.L.C., No. 3:06-CV-1416-L, 2007 WL 2781661 (N.D. Tex. Sept. 25, 2007). More recently, see Entm't Merch. Tech., L.L.C. v. Houchin, 720 F. Supp. 2d 792, 799 (N.D. Tex. 2010) (holding that no cause of action arises under Texas law for conversion of intellectual property rights). A similar conversion statute problem leads the court in In re Paige, 413 B.R. 882 (D. Utah 2009), discussed infra note 91, to characterize domain names as tangible property. In In re Paige the bankruptcy court based its refusal to characterize domain names as intangible property on grounds that a prior federal district court decision considered that the Utah Supreme Court would follow the Restatement approach and reject the flexible document merger approach of the Ninth Circuit in Kremen v. Cohen (not that the Utah Supreme Court had actually done that). See Margae, Inc. v. Clear Link Techs., LLC 620 F.Supp.2d 1284, 1286-88 (D. Utah 2009) . But 86

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held that Network Solutions should be open to liability for the tort of conversion of intangible property because it gave away the rightful owner’s domain name, whether or not it did so negligently (saying “the common law does not stand idle while people give away the property of others” 89).

In a subsequent case, Office Depot v. Zuccarini, the Ninth Circuit affirmed that domain names are intangible property under California law, subject to a writ of execution, for purposes of establishing quasi in rem jurisdiction over property as a predicate to having it used to satisfy a money judgment. The Court determined that for purposes of asserting quasi in rem jurisdiction domain names are located where the registry is located as well as (in self-acknowledged dictum) where the relevant registrar is located. In other words, domain names can be seized and executed against as intangible property for the purpose of satisfying a money judgment. 90

even if some states have yet to recognize the importance of various forms of intangible property to modern commerce, this does not argue in favor of re-characterizing modern commerce to fit the mold of the steamboat era. The law of the State of New York appears to be evolving toward recognition of intangibles as the subjects of conversion. See generally Mark A. Berman and Aaron Zerykler, Can ‘Intangible’ Electronic ‘Property’ Be ‘Converted’ in NY?, NEW YORK LAW JOURNAL (Apr. 26, 2006), http://www.newyorklawjournal.com/PubArticleNY.jsp?id=900005452214.

89 Kremen, 337 F.3d at 1036.

90 In Office Depot v. Zuccarini, 596 F.3d 696, 701-02 (9th Cir. 2010), the Ninth Circuit acknowledged that the California Court of Appeal in Palacio Del Mar Homeowners Ass'n v.

McMahon, 95 Cal.Rptr.3d 445 (Cal. Ct. App. 2009), had decided that domain names were not property subject to a turnover order because they cannot be taken into custody, but observed that the California Court had cited Kremen with approval, and had made its decision on the basis of a specific interpretation of language in the California Civil Procedure Code. The California Court of Appeals in Palacio Del Mar reasoned that the relevant California Code provision: [L]imits itself to tangible property that can be “levied upon by taking it into custody” (or tangible, “documentary evidence of title” to property or a debt). . . . Domain name registration supplies the intangible “contractual right to use a unique domain name for a specified period of time.” . . . Even if this right constitutes property, it cannot be “taken into custody.”

Palacio, 95 Cal.Rptr.3d at 448-49 (citations omitted). In this regard, the California Court of Appeals appeared to set a limit on the extent to which the database referred to by the Kremen court constituted a document for purposes of serving as a proxy for property. Presumably, the electronic database is not sufficiently tangible to be taken into custody.

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C. Domain names as tangible property At least one US court has characterized domain names as “tangible property”. It did so on the theory that domain names can be perceived by the senses and access to them can be restricted by passwords and other security measures.

The case in question, In re Paige, was in federal bankruptcy court, and involved a complex dispute over ownership of registration of a valuable domain name, <freecreditscore.com>, contested as to forming part of a Chapter 7 bankruptcy estate. 91 The allegation of the trustee in bankruptcy was that a party claiming adverse ownership had unlawfully converted the domain name from its true owner who was the subject of the bankruptcy. In a lengthy factual finding the court determined that the bankrupt party owned the domain name, and prepared to consider whether certain defendants had unlawfully converted the asset. Before doing so, it needed to determine whether a domain name is property capable of conversion. The court rejected the contract right approach of the Virginia Supreme Court in Umbro, 92 because that court applied Virginia state law, and the bankruptcy court was obligated to apply Utah law. For similar reasons, the bankruptcy court rejected reliance on Kremen because the Ninth Circuit had applied California law, and because it accepted that Utah would not follow Kremen, though in fact the state courts of Utah had not reached that question or made such a decision. Instead, the bankruptcy court followed the reasoning of a federal court case applying Utah law, Margae, Inc. v. Clear Link Techs., LLC, that considered conversion of webpages and other intellectual property (not domain names). 93 The Margae court relied on precedent from the Utah Supreme Court addressing the characteristics of computer software that it held to be “tangible personal property” for purposes of applying a state sales tax.94 The bankruptcy court in In re Paige concluded: Based on the reasoning in Margae, which the Court elects to follow, the Court determines that like web pages and software, domain names can be perceived by the senses and access to them can be physically restricted by the use of passwords and other security 91

In re Paige, 413 B.R. 882 (D. Utah 2009).

Network Solutions, Inc. v. Umbro Int’l, Inc., 529 S.E.2d 80 (Va. 2000), discussed supra [text at note 73].

93 Margae, Inc. v. Clear Link Techs., LLC 620 F.Supp.2d 1284 (D. Utah 2009).

94 Id. at 1288 (citation omitted).

92

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measures. In fact, the reason that the Plaintiffs cannot access the Domain Name at this point is because [the defendant] has “locked out” or physically restricted their access by changing the username and password. Moreover, unlike a mere idea that can only be stored in a person's mind, domain names can and do have a physical presence on a computer drive. Accordingly, the Court concludes that like web pages and software, the Domain Name at issue is a type of tangible property that is capable of conversion. 95 On the question of perception by the senses, if this court was correct, then “light” would presumably constitute “tangible” property because it is perceived by the senses. It is hard to accept the idea that because something can be perceived (e.g., a movie on a screen) it is therefore tangible. The fact that access to an electronically encoded alphanumeric string can be restricted by a password or other security device may be a factor in characterizing the domain name as “property”, but that does not make it “tangible”. Access to an online science database may be restricted by a password, but that does not make it physical or tangible property. 96 It may be that courts are somewhat more reluctant to treat “intangible property” as assets that can be blocked, transferred, restricted, etc. because of concerns about whether such intangible assets are capable of “possession” and “control”. Additionally, it may be that certain statutes address personal property in a way that might seem to exclude intangible property. 97 But, if these concerns are present, it may be preferable to revise the way the rules are framed than to attempt to characterize something that is electronic and cannot be touched by a human as “tangible”. “Perceivable” and “tangible” are different concepts. 98

95

In re Paige, 413 B.R. 882, 918 (D. Utah 2009).

Hancock, supra note 4, at 200-02, highlights the distinctions between domain names and websites to argue that the district court in In re Paige should have concluded that websites would meet the Restatement merger requirement as a collection of electronic documents, but that domain names do not meet the merger requirement because they are only data points on the DNS database.

97 See supra note 90.

98 The author is aware of science-fiction works, in particular those of Philip K. Dick (see, e.g., VALIS (1981)), suggesting that there is no definable separation between intangible data, electronic or otherwise, and human biological material, but is reluctant to transpose this philosophical construct to the legal sphere.

96

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IV A DUAL NATURE Based on the foregoing analysis, it may be suggested that domain names have a dual or two-fold nature. They are contract rights created on the basis of a regulated contract between the registrant and registrar, and of indefinite duration pursuant to that contract (contingent on the payment of renewal fees). They are also intangible property insofar as the registrant may exercise a right to exclude others from using the same domain name, and may control use of the domain name. They are not, however, tangible, and are not tangible personal property. 99 In their two-fold nature, domain names seem to be relatively unique. Typical “intellectual property” is not a creation of contract. Trademarks are registered by a trademark office, but their use is governed legislatively, and not by a contract between the trademark office and the trademark owner. Unregistered trademarks may arise on the basis of use, and be recognized by judicial authorities, but they are not creations of contract. Trade names may arise on the basis of use, and also may be registered with local authorities. But, trade names are not created or regulated by a contract. Much the same is true for patents. Patents are granted by a patent office, and registered with that office. Patents are the subject of extensive legislation. But, they are also not created by contract (though they are subject to payment of renewal fees).

As discussed earlier, domain names share characteristics with forms of intellectual property, and might constitute their own type or class. 100 But that is not something yet accorded by statute. And, since U.S. law does not provide a general catch-all form of intellectual property protection, it would be premature to suggest that the courts use the concept of “intellectual property” as something distinct from contract rights and intangible property. Because domain names overlap with trademarks and trade names, careful consideration would need to be accorded to defining this new form of IP. 99

Hancock, supra note 4, at 202-09, acknowledges that treating domain names as tangible property is problematic from a conceptual standpoint, but argues that it makes better sense to treat them as such because it would facilitate legal actions based on ownership of property, such as conversion actions. In other words, because legislatures and courts in some jurisdictions refuse to acknowledge that intangible property is subject to conversion rules, they should be characterized as tangible property, something they clearly are not.

100 See, e.g., Ryan B. Abbott, Treating the Health Care Crisis: Complementary and Alternative Medicine for PPACA, 14 DEPAUL J. HEALTH CARE L. 35, 73 (2012) (discussing sui generis regimes for protecting unique IP subject matter).

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Bearing that in mind, the introduction by ICANN of open registration of toplevel identifiers may accelerate interest in establishing a new form of protection.

Given the level of investments being made in new domain name rollouts, the entities relying on those domain names may consider that the additional layer of protection would be useful.

V UNDERVALUING THE DUAL NATURE A. Propertization standing alone We have observed that domain names are reasonably characterized as both contract rights and intangible property. Yet, a recent line of decisions in the Ninth Circuit Court of Appeals cast doubt as to whether federal courts are prepared acknowledge this dual nature. There is a nascent trend to treat domain names as intangible property subject to the ordinary rules of personal property, but without taking into account the “contract model” (to use the terminology of the WIPO Second Report) under which domain names are registered and regulated. Under the emerging jurisprudence, the domain name “owner” of the property is entitled to sell or transfer the property to a third-party along with accrued rights. The purchaser takes the property along with the accrued rights that may insulate it from third-party claims. The fact that the purchaser enters into a new contractual arrangement with the registrar is not taken into account despite the fact that the purchaser makes representations and warranties as part of its contract with the registrar that might otherwise preclude it from asserting rights previously acquired by the seller.

1. GoPets v. Hise The first decision by a federal appellate court to explicitly adopt the characterization of a domain name as intangible property in order to protect the transferee of a domain name is GoPets v. Hise, 657 F.3d 1024 (9th Cir. 2011). 101 Although the express characterization by the Ninth Circuit was novel, the result in in the case was consistent with customary administrative panel practice under the UDRP, and for this reason the decision may not have attracted significant attention. In GoPets, the initial domain name registration was undertaken prior to the acquisition of trademark rights by the complaining party that sought a finding

101

For a more detailed discussion of the case history, see Price, supra note 4, at 461-67.

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of abusive domain name registration and use, first before a UDRP panel. 102 The UDRP panelist, consistent with long-standing precedent on this issue, decided that the initial registration could not have been undertaken in bad faith within the meaning of Paragraph 4(b) of the UDRP because the initial registrant/respondent could not have intended to abuse trademark rights that did not exist at the time of registration. 103 Subsequently, the initial registrant transferred the disputed domain name to a related party/family member. 104 By that time, the complaining party had established trademark rights. The complaining party sought relief in the federal courts under the ACPA, arguing that the related-party transfer constituted a “new registration” within the meaning of the ACPA so that the prior rights of the initial domain name registrant were extinguished. 105 Again consistent with the preponderance of UDRP panel practice, the Ninth Circuit decided that the related party transfer undertaken by the initial domain name registrant did not constitute a new registration within the meaning of the ACPA. 106 UDRP panelists have generally not regarded related party transfers as new registrations because there are a substantial number of good faith business reasons why holders of registrations may want to transfer registration to a related entity, and depriving the domain name owner of its pre-existing registration rights in such circumstances ordinarily would be unfair. 107 102

GoPets v. Hise, 657 F.3d 1024, 1027 (9th Cir. 2011).

The Ninth Circuit decision in GoPets followed a WIPO panel decision, GoPets Ltd. v.

Edward Hise, WIPO Case No. D2006-0636, that rejected the complaint based on respondent registration prior to complainant acquisition of trademark rights, although prior to related party transfer. The panelist in that decision quoted the first WIPO Overview of WIPO Panel Views on Selected UDRP Questions that stated “The UDRP makes no specific reference to the date of which the owner of the trade or service mark acquired rights. However, it can be difficult to prove that the domain name was registered in bad faith as it is difficult to show that the domain name was registered with a future trade mark in mind.” As the Ninth Circuit noted: “… the arbitrator held that WIPO rules only compel the transfer of a disputed domain name if the name was initially registered in bad faith. Since Edward Hise had registered gopets.com five years before GoPets Ltd. was founded, gopets.com was not registered in bad faith.” GoPets v. Hise, 657 F.3d 1024, 1028. See also Digital Overture Inc. v. Chris Bradfield, WIPO Case No. D20080091.

104 GoPets, 657 F.3d at 1028.

105 Id. at 1030.

106 Id. at 1032.

107 Transfers between related entities are generally not considered "new registration“, see, e.g., Schweizerische Bundesbahnen SBB v. Gerrie Villon, WIPO Case No. D2009-1426, absent 103

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To illustrate, imagine that an individual in 2003 registered the domain name “facebook.com” and was using that to host a high school yearbook website. The Facebook social media website of 2013 did not exist in 2003, and there was no service mark associated with it. The social media company registered FACEBOOK at the USPTO in 2010. Under long-standing UDRP panel practice, the social media company could not successfully pursue a claim for abusive domain name registration and use against the individual 2003 registrant of “facebook.com” because the initial registrant could not have undertaken its registration in bad faith when no adverse trademark rights existed. It is now 2013. Imagine that the individual registrant from 2003 has formed a limited liability company (LLC) through which to operate his/her high school yearbook website. The domain name registration from 2003 is transferred into the name of the LLC, but nothing about the high school yearbook website changes. Should this now allow the Facebook social media company to successfully pursue a claim for abusive domain name registration and use? The answer from UDRP panelists generally has been “no”.

From the standpoint of UDRP precedent, there was nothing about the result reached by the Ninth Circuit in GoPets out of line with the way the case would ordinarily have been decided under the UDRP. However, the express reasoning of the Court raised an issue. The Ninth Circuit said: [T]he text of § 1125(d)(1) considered in isolation does not answer the question whether “registration” includes re-registration.

Looking at ACPA in light of traditional property law, however, we conclude that Congress meant “registration” to refer only to the initial some exceptional circumstance demonstrating that the related party transfer was itself undertaken for bad faith purposes. See, e.g., Intelligen LLC v. Converg Media LLC, WIPO Case No. D2010-0246. The WIPO Overview of WIPO Panel Views on Selected UDRP Questions, Second Edition ("WIPO Overview 2.0"), http://www.wipo.int/amc/en/domains/search/overview2.0/, states: Panels have tended to the view that formal changes in registration data are not necessarily deemed to constitute a new registration where evidence clearly establishes an unbroken chain of underlying ownership by a single entity or within a genuine conglomerate, and it is clear that any change in WhoIs registrant data is not being made to conceal an underlying owner's identity for the purpose of frustrating assessment of liability in relation to registration or use of the domain name.

WIPO Overview 2.0, para. 3.7.

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registration. It is undisputed that Edward Hise could have retained all of his rights to gopets.com indefinitely if he had maintained the registration of the domain name in his own name. We see no basis in ACPA to conclude that a right that belongs to an initial registrant of a currently registered domain name is lost when that name is transferred to another owner. The general rule is that a property owner may sell all of the rights he holds in property. GoPets Ltd.'s proposed rule would make rights to many domain names effectively inalienable, whether the alienation is by gift, inheritance, sale, or other form of transfer. Nothing in the text or structure of the statute indicates that Congress intended that rights in domain names should be inalienable.

We therefore hold that Digital Overture's re-registration of gopets.com was not a registration within the meaning of § 1125(d)(1).

Because Edward Hise registered gopets.com in 1999, long before GoPets Ltd. registered its service mark, Digital Overture's reregistration and continued ownership of gopets.com does not violate § 1125(d)(1). 108 Recall that the facts of GoPets involved a related party transfer. The Ninth Circuit did not allude to this factor in the reasoning quoted above. It plainly stated that domain names constitute property, subject to traditional property law, and that the rights of domain name owners are “alienable” or transferable. 109 While the

108

GoPets, 657 F.3d at 1031-32.

Neither GoPets v. Hise on the definition of "registration" nor Kremen v. Cohen on domain names as "intangible property" are the uniform law of the United States. For example, in Schmidheiny v. Weber, 319 F.3d 581 (3d Cir. 2003), the Court of Appeals for the Third Circuit held that registration under a new contract at a different registrar to a different registrant constituted a new registration under the ACPA: 109

[W]e conclude that the language of the statute does not limit the word “registration” to the narrow concept of “creation registration.” . . . We hold that the word “registration” includes a new contract at a different registrar and to a different registrant. . . . To conclude otherwise would permit the domain names of living persons to be sold and purchased without the living persons' consent, ad infinitum, so long as the name was first registered before the effective date of the Act. We do not believe that this is the correct construction of the Anticybersquatting Act. Schmideiny, 319 F.3d at 583 (citations omitted).

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Court noted that it was engaged in statutory interpretation of the ACPA, it did not provide further guidance as to how the property characteristic of domain names might influence results in contexts different than the related party transaction undertaken in GoPets.

2. AIRFX.com v. AirFX LLC While the decision of the Ninth Circuit in GoPets mirrored the result that would in all likelihood have been reached by a UDRP panel, a subsequent federal district court decision from Arizona applied the language of GoPets in a different, yet foreseeable, factual context where the results would likely (and did) differ.

AIRFX.com v. AirFX LLC involved the purchase of a domain name by a party unrelated to the initial registrant. 110 The initial registration took place prior to the complaining party’s establishment of trademark rights, but the purchase and Note, however, that (as discussed and distinguished by the Ninth Circuit in GoPets) the decision in Schmidheiny v. Weber (1) addressed a claim under the living persons names provisions of the ACPA, (2) the domain name at issue had been registered before the effective date of the ACPA, and (3) this otherwise insulated it under those provisions. Unlike the trademark protective provisions of the ACPA, living person‘s name protection is not predicated on a pre-existing trademark. Had the disputed domain name in Schmidheiny v. Weber been registered after the effective date of the ACPA, it would have been subject to liability as abusive irrespective of whether a subsequent transfer was considered a new registration. The Ninth Circuit suggested this would eliminate the Third Circuit‘s cause for concern, though it did not explain how that might eliminate concerns raised by its own GoPets decision. GoPets, 657 F.3d at 1031.

110 AIRFX.com v. AirFX LLC, No. CV 11-01064-PHX-FJM, 2012 WL 3638721 (D. Ariz.

Aug. 24, 2012). In a subsequent order, AIRFX.COM v. AIRFX, LLC, No., CV 11–01064–PHX– FJM, 2013 WL 857976 (D. Ariz. March 7, 2013), the Arizona District Court went on to consider a motion to award attorney's fees to the plaintiff on grounds that defendant’s action (in the form of a counterclaim) was groundless and unreasonable. The District Court agreed and awarded attorney’s fees. The Court affirmed its reliance on GoPets in strong terms, saying: As we noted in our order, GoPets is squarely on point in this matter, and there is nothing it its language indicating that it should be read as narrowly as defendant suggested in its briefs. . . . Defendant should have withdrawn its ACPA counterclaim once it discovered that the original registration date of airfx.com preceded the registration of the AirFX mark.

Id. at *2.

Clearly, the District Court has not had "second thoughts".

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reregistration by an unrelated party took place after the establishment of trademark rights. 111 In holding that the purchaser/transferee could not have registered the domain name in bad faith under the ACPA, the Arizona District Court said: Defendant argues that GoPets is distinguishable, because in GoPets Hise transferred the domain name to an entity he co-owned, and here Lurie purchased airfx.com from an unrelated third party.

According to defendant, the purpose of the ACPA will be undermined if a cybersquatter who purchases a domain name in bad faith is immune from liability simply because the domain name he purchased existed before a mark was distinctive. Nothing in the language of GoPets indicates that it should be read as narrowly as defendant suggests. GoPets did not distinguish between transfers of a domain name to related parties and other kinds of domain name transfers. To the contrary, GoPets broadly reasoned that if an original owner's rights associated with a domain name were lost upon transfer to "another owner," the rights to many domain names would become "effectively inalienable," a result the intention of which was not reflected in either the structure or the text of the ACPA. Id. at *4 [citation omitted].

The District Court went on to hold that the issue whether the domain name holder registered in bad faith was determined at the time of the initial registration by an unrelated third party when the complaining party had not yet established trademark rights. 112 In AirFX.com the District Court departed from general UDRP panel practice that has treated the acquisition of a domain name by a party unrelated to the previous registrant as a new registration within the meaning of the UDRP. The circumstances existing at the time of that new registration govern whether the new holder has undertaken the registration in bad faith. 113 UDRP panels have not

111

AIRFX.com v. AirFX LLC, No. CV 11-01064-PHX-FJM, 2012 WL 3638721, at *2.

See Id. In so holding the District Court was rejecting a contrary determination under the Policy made by a National Arbitration Forum panel in AirFX, LLC v. ATTN AIRFX.COM, NAF Claim No. FA1104001384655. In the NAF case, the panelist was aware of a potential sequencing problem, but did not address it to any meaningful extent in ordering the transfer.

113 See, e.g., Ticketmaster Corporation v. Global Access, WIPO Case No. D2007-1921, and references therein.

112

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generally treated domain names as freely alienable property carrying the preexisting interests of prior registrants through to unrelated transferees.

Following the reasoning of the Arizona District Court, derived from seemingly unambiguous language of the Ninth Circuit, might result in a significant change to panel practice under the UDRP, unless there is some difference between the ACPA and UDRP that would provide a basis for distinguishing the way the same terms should be interpreted.

B. WIPO panelists react WIPO panels have addressed the holding in GoPets regarding the meaning of â&#x20AC;&#x153;registrationâ&#x20AC;? and unrelated transferees. The first such decision preceded the AIRFX.com District Court decision: Twitter, Inc. v. Geigo, Inc, WIPO Case No. D2011-1210. The second post-dated AIRFX.com: Diet Center Worldwide, Inc. v.

Jason Akatiff, WIPO Case No. D2012-1609. 114 Employing very similar reasoning, these panels rejected the GoPets approach, finding that transfers between unrelated parties constitute new registrations. Both panels relied on the contractual relationship between the domain name registrant-transferee and the registrar, and the representations made at the time of modification of registrant data or registrar change. In the decision post-dating AirFX.com, this author (sitting as sole panelist) said: As other UDRP panels have also done in cases such as Twitter, Inc. v. Geigo, Inc, WIPO Case No. D2011-1210, this Panel will continue to follow the general approach of WIPO UDRP panelists and consider that the transfer of a domain name to an unrelated third party constitutes a new registration for purposes of assessing bad faith.

Although the Panel recognizes that domain names have attributes of intangible property, the rights of the domain name registration holder are contractual in nature and subject to the terms and conditions of a registration agreement. 115 When an unrelated third party changes registrant data and/or re-registers with a new registrar, that party is accepting representations and warranties under the registration 114

See also, by this author as panelist, more recently, Urban Home v. Technology Online LLC / Whois Privacy Service Pty Ltd., WIPO Case No. D2012-2437.

115 The question of the contract and/or property characteristics of domain names is addressed differently by courts in the United States. Compare Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003) with Network Solutions v. Umbro, 529 S.E.2d 80 (Va. 2000).

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agreement as of the date of the change. 116 These effectively include that the new registration is being undertaken in good faith (see paragraph 2 of the Policy).

With the greatest deference owed to the national courts, 117 this Panel observes that the Ninth Circuit Court of Appeals decision in GoPets v. Hise was interpreting the ACPA, not the Policy. The precise holding addressed the situation of related party transfers and in that regard was consistent with general WIPO UDRP panel practice under the Policy. The language used by the Ninth Circuit can also be read more broadly, as the Arizona District Court did in AIRFX.com v.

AirFx LLC. But, again, that court was interpreting the ACPA. Given the significant differences in the legislative history and the language of the ACPA and the Policy, this Panel is not inclined to extrapolate from the apparent ACPA-related development in the Ninth Circuit, noting that there is at least some disagreement among the Circuits regarding interpretation of the term “registration” as it is used in the ACPA. 118 While administrative panels under the Policy tend to look 116

See, applicable to the parties in this proceeding, Network Solutions Service Agreement Version 9.22, Schedule A, para. 3, and Incorporated Schedule F, Registrant Name Change Agreement, para. 3 (“By applying for this Registrant Name Change, you agree to be bound by and to perform in accordance with the terms and conditions of the Agreement, which includes Network Solutions' current Domain Name Dispute Policy.”)

117 See Twitter, Inc. v. Geigo, Inc, supra.

118 Compare Kremen v. Cohen with Schmidheiny v. Weber, 319 F.3d 581 (3d Cir.2003). In the Schmidheiny case, the Third Circuit stated: The words “initial” and “creation” appear nowhere in § 1129, and Congress did not add an exception for “non-creation registrations” in § 1129(1)(B). . . . The District Court's rationale that “if Congress chose to treat reregistrations as registrations, it could have used words appropriate to impart that definition,” is not a sufficient reason for courts to infer the word “initial.”

Instead, we conclude that the language of the statute does not limit the word “registration” to the narrow concept of “creation registration.” See Sweger v.

Chesney, 294 F.3d 506, 516 (3d Cir.2002) (holding that if the language of a statute is plain, we need look no further to ascertain the intent of Congress). . . . We hold that the word “registration” includes a new contract at a different registrar and to a different registrant. In this case, with respect to Famology.com that occurs after the effective date of the Anti-cybersquatting Act. To conclude otherwise would permit the domain names of living persons to be sold and purchased without the living persons' consent, ad infinitum, so long

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to the law of the country of the parties when they are within the same country, the Policy is a set of rules that operates within its own unique context. 119 The UDRP incorporates generally accepted principles of trademark law, without representing a linear application, to the extent that this would even be possible in its international setting. For example, in order to provide safeguards for registrants, a UDRP transfer requires bad faith on behalf of the registrant, going in this respect beyond conventional trademark law. In this connection, the Panel further notes the mutual jurisdiction provisions which enable party recourse to national courts. The Panel observes that it will assess the bad faith element as of the time Respondent by its own account acquired the disputed domain name…. [Footnotes renumbered from original] C. The ACPA and the UDRP 1. Bad faith Both under the ACPA, and under the UDRP as predominantly interpreted by panelists, a finding of bad faith registration is predicated on the existence of a conflicting or adverse trademark at the time of domain name registration. 120 The statutory language of the ACPA clearly establishes this predicate (and it has been

as the name was first registered before the effective date of the Act. We do not believe that this is the correct construction of the Anti-cybersquatting Act. We are therefore satisfied that Famology.com, Inc. engaged in a “registration” that is covered by the Anti-cybersquatting Act…. 319 F.3d at 582-83.

The Panel in the present proceeding further notes that although Respondent in this proceeding is situated within the Ninth Circuit, Complainant is situated within the Sixth Circuit.

119 The Panel notes, however, that subject to meeting jurisdictional requirements, a domain name registrant may seek an injunction from a US court to prevent a registrar from transferring that name pursuant to a panel decision, and that the US court will thereupon apply the ACPA, and potentially the Lanham Act more broadly (compare, e.g., Barcelona.com, Inc. v.

Excelentisimo Ayuntamiento de Barcelona, 330 F.3d 617 (4th Cir. 2003) with Storey v. Cello, 347 F.3d 370 (2d Cir. 2003)). Thus, while a panelist may choose to apply the Policy consistently with norms that have evolved within the WIPO UDRP administrative system, the panelist is also cognizant that enforceability of his or her decision may depend on interpretation of the ACPA (see Barcelona.com).

120 As noted earlier, e.g., supra notes 25 and 107, the living persons name protection provisions of the ACPA do not establish the predicate of pre-existing trademark rights.

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confirmed by court decision). 121 UDRP panelists have applied the logic that a domain name registrant cannot act in bad faith by taking unfair advantage of trademark rights that do not exist. 122

121

In order to successfully pursue a claim under the ACPA, the express language requires that the complaining party possess trademark rights at the time the disputed domain name was registered. See 15 USC 1125(d)(1)(A) and Storey v. Cello, 347 F.3d 370, 386 (2d Cir. 2003) (cited by Lahoti v. Vericheck, 586 F.3d 1190 (9th Cir. 2009)) (followed in DSPT International v.

Nahum, 624 F.3d 1213 (9th Cir. 2010)).

122 See WIPO Overview 2.0, supra note 107, para. 3.1: Consensus view: Generally speaking, although a trademark can form a basis for a UDRP action under the first element irrespective of its date …, when a domain name is registered by the respondent before the complainant's relied-upon trademark right is shown to have been first established (whether on a registered or unregistered basis), the registration of the domain name would not have been in bad faith because the registrant could not have contemplated the complainant's then non-existent right.

There has been a minority view expressed by certain WIPO panels. As stated by the WIPO Overview 2.0, id., Irrespective of whether the domain name was registered before the relevant trademark was registered or acquired, a small number of panels have begun to consider the effect of the requirement of paragraph 2 of the UDRP, which states: "By applying to register a domain name, or by asking us to maintain or renew a domain name registration, you hereby represent and warrant to us that . . . (d) you will not knowingly use the domain name in violation of any applicable laws or regulations. It is your responsibility to determine whether your domain name registration infringes or violates someone else's rights." Some panels have regarded this as a warranty at the time of registration that the domain name will not be used in bad faith, finding that, by breaching such warranty, use in bad faith may render the registration in bad faith. Other panels have looked at the totality of the circumstances in assessing "registration and use in bad faith," as a unitary concept, given that some of the circumstances listed as evidence of bad faith registration and use in paragraph 4(b) of the UDRP appear to discuss only use and not registration. Still other panels that have considered these approaches have instead reaffirmed the "literal" interpretation of bad faith registration and bad faith use regardless of paragraphs 2 or 4(b) of the UDRP. This is a developing area of UDRP jurisprudence.

Proponents of a minority approach taken, for example, in City Views Limited v. Moniker Privacy ServiceslXander, Jeduyu, ALGEBRALlVE, WIPO Case No. D2009-0643, <mummygold.com>, read the conjunctive “and” out of “has been registered and is being used in

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There is a perhaps-subtle distinction between ACPA jurisprudence and the prevalent UDRP panel approach regarding post-registration evidence of bad faith.

Under the ACPA, if the predicate of a pre-existing conflicting trademark is met, the court may determine that the domain name was registered and used in bad faith based on conduct subsequent to registration. 123 From the perspective of most UDRP panelists, on the other hand, while the prior existence of trademark rights is a predicate to finding bad faith, it is not the end of the inquiry with respect to bad faith which must exist at the time of domain name registration. Additional factors concerning the intent of the registrant remain to be assessed under Paragraph 4(b) as of the time of registration. For example, if on registration a domain name registrant commences operation of a legitimate web-based business, but later on engages in conduct that might appear to take unfair advantage of a trademark owner, the subsequent conduct is generally not the basis for a finding of bad faith registration and use. Bad faith “registration” entails bad faith at the time of registration. 124

bad faith”. Decisions by such panelists might not be directly influenced by GoPets/AIRFX.com because there apparently is no need to find bad faith registration. Whether the complainant holds a trademark at the time of registration is presumably not determinative; an unrelated transferee is subject to the same “use” rules as the initial registrant. Application of this approach, of course, would not resolve a conflict with the ACPA, since the ACPA imposes the condition that a trademark exist at the time of initial domain name registration.

123 See Lahoti v. Vericheck, 586 F.3d 1190, 1202 (9th Cir. 2009): “Evidence of bad faith may arise well after registration of the domain name. See Storey v. Cello Holdings, LLC, 347 F.3d 370, 385 (2d Cir. 2003) (‘Congress intended the cybersquatting statute to make rights to a domain-name registration contingent on ongoing conduct rather than to make them fixed at the time of registration.’).” See also DSPT International v. Nahum, 624 F.3d 1213, 1220 (9th Cir. 2010). Some language in the GoPets decisión, 657 F. 3d 1024, 1030, might seem to suggest otherwise: To prevail on its ACPA claim, GoPets Ltd. must show (1) registration of a domain name, (2) that was “identical or confusingly similar to” a mark that was distinctive at the time of registration, and (3) “bad faith intent” at the time of registration. See 15 U.S.C. § 1125(d)(1). [italics added] 124

UDRP, supra note 19, ¶ 4(a)(iii) & (b). The difference in jurisprudence between courts interpreting the ACPA and UDRP panelists regarding post-registration conduct has a basis in differences in terminology between the statute and the UDRP. Pursuant to the ACPA, liability attaches to a person who “registers, traffics in, or uses a domain name” [italics added] in bad faith.124 Registration and use are in the disjunctive “or.” Pursuant to the UDRP, a determination

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The distinction between ACPA jurisprudence and UDRP panelist jurisprudence on this timing issue is referred to as “perhaps-subtle” because there are contexts under the UDRP in which after-the-fact conduct can be used as evidence of intent at the time of registration. The language of paragraph 4(b) of the UDRP suggests that. But, there are limits to how far after-the-fact conduct can be stretched to determine intent at the time of registration. A link back to the initial registration is needed. 125 To be clear, however, under both the ACPA and UDRP there must be a conflicting trademark in existence at the time of registration for bad faith to be found. 126 2. A class of insulated domain names The combined holdings of GoPets and AirFX.com create a perpetually protected set of domain names under the ACPA. A domain name initially registered or created when no conflicting trademark rights were in existence can never be successfully claimed against because neither a related or unrelated party transfer triggers a reassessment of the conditions of registration, while a preexisting trademark is an express condition to a finding of bad faith.

On its face, direct transposition of the GoPets and AirFX.com decisions into UDRP jurisprudence -- removing unrelated party transfers from treatment as new registrations -- likewise would create a class of “insulated” domain names that were initially registered prior to the acquisition of trademark rights by third parties.

Because bad faith under the UDRP requires that a trademark be in existence at the time of registration, and because the rights acquired by the initial registrant would be freely transferable, a domain name initially created prior to the establishment of the trademark could never be successfully attacked. They would, as under the ACPA, be “alienable without limit”. 127

of abusive conduct requires “registration and use” in bad faith. Bad faith “use” in the absence of bad faith “registration” does not meet the UDRP abuse standard.

125 See The Proprietors of Strata Plan No. 36, A Turks and Caicos Corporation v. Gift2Gift Corp., WIPO Case No. D2010-2180 (noting that ”allowing subsequent conduct to override actual intentions at the time of registration, as opposed to providing an inference about what those intentions were, would appear impermissible.”).

126 Although in a few exceptional circumstances under the UDRP abuse has been found when trademark rights have not yet ripened (see WIPO Overview 2.0, para. 3.1).

127 The author is not aware of an estimate of the number of such potentially "immunized domain names", though it would not be surprising if a distinct market developed for them.

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The decision by the Ninth Circuit in GoPets did not flow from any express statutory requirement. The court was interpreting an otherwise undefined term in the ACPA, that is, “registration” (as used in the phrase “at the time of registration”). It decided that the term “registration” was addressed to the initial or creation registration of a domain name, and not to a subsequent registration by an unrelated transferee because of the transferor’s property interest in the domain name. That interpretative approach did not take into account the contract accepted upon acquisition of the domain name by the transferee, which contract incorporates a proviso that the transferee not registering the domain name in bad faith. Other than articulating an interest in an apparent supra-sanctity of property rights, the Ninth Circuit did not explain why the new registrant/transferee of a domain name that conflicts with an existing trademark and evidences other bad faith elements should be subject to different contractual treatment than the “creation” registrant.

It appears that under the Ninth Circuit’s rationale, the owner of a domain name registration that has risen in value because a third party has developed trademark rights in the same or a substantially similar term is encouraged to take advantage of that newly established trademark-based value through sale of the domain name. It can be argued that no enterprise starting a business and developing a valuable trademark should do so without first securing the corresponding domain name, and that an enterprise that does so should be subject to paying whatever the market dictates to acquire the domain name after-the-fact.

And, it may be that the Ninth Circuit was engaged in a conscious exercise in risk allocation, adjudging the enterprise developing a new trademark in a better position to assess its own domain name-related situation than the holder of the creation registration. The Ninth Circuit may have intended to send a message that no one should develop a business name or trademark without having first secured the relevant Internet address.

The value to the creation-owner of the domain name in such circumstance may well be serendipitous. It may just have happened to register a term or string that someone later developed into a valuable brand. Just as likely, the registered term (i.e. domain name) may be held by a firm that registers domain names speculatively in the expectation that some percentage of those names will eventually acquire a value as a consequence of the development of third-party trademark rights. The Ninth Circuit approach in GoPets (as applied by the District Court in AirFX.com) encourages the speculative registration business model by

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immunizing transfers of previously created domain names from scrutiny. 128 If transposed to the UDRP, because domain names created prior to the existence of trademark rights may never be attacked as abusive, transferees would never be subject to comparatively fast and efficient dispute settlement proceedings. Only traditional trademark infringement proceedings would remain in the trademark ownerâ&#x20AC;&#x2122;s arsenal, but typically at substantial expense.

Because the registration of a domain name is typically very inexpensive (in the range of US$10 or less), the Ninth Circuitâ&#x20AC;&#x2122;s reason for elevating the interests of the creation registrant over that of the subsequent trademark owner is not clear. If the creation-owner and the transferee are engaged in a good-faith enterprise, and this has value, it should be protected under the UDRP (as well as under the ACPA) at the time of the new registration (as discussed below). The creation-owner may lose the serendipitous benefit of a sale and transfer to a transferee without legitimate interests in the domain name, or that is acting in bad faith, but it is not apparent why such benefit should be superior to the interests of the owner of a newly developed trademark.

VI TREATING UNRELATED TRANSFERS AS NEW REGISTRATIONS A. Related party transfers As discussed earlier, UDRP panels have so far distinguished transfers between related parties (as in GoPets) and unrelated parties (as in AirFX.com).

UDRP panelist practice can be analogized to the U.S. rule requiring that assignments and transfers of trademarks be accompanied by the goodwill of the business. In the U.S., if a trademark is assigned and transferred for corporate organization purposes (e.g., for beneficial tax treatment or change in corporate form), the nature of the underlying business is not changed. Goods or services, for example, continue to be provided with the same quality. A company that has owned and developed rights in a trademark or brand over the course of 50 years does not give up the strength of the brand (such as is gained, for example, by filing of a certificate of incontestability) merely because of the intra-firm transfer. It seemed logical to extend this general principle to domain names. UDRP panels have presumed that transfers between related parties involve a continuity of ownership that entitles the registrant to maintain its rights and financial position, and have been unwilling to penalize domain name registrants because of a mere 128

Accord Price, supra note 4, at 482.

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change in form. Some exceptions from this general rule have been recognized when a related party transfer had been viewed as a bad faith transaction.

However, related party transfers are not the only circumstances where the rights of the domain name registration owner/seller and purchaser/transferee should be protected.

B. New registration and contract 1. A new assessment The courts in GoPets and AirFX.com assessed the rights of domain name registrants and transferees as if their relationship was governed solely on the basis of property rights. However, the better approach both under the ACPA and UDRP may be to accept that domain names have a two-fold or dual character. They have attributes of intangible property, yet the rights of the domain name registration holder also are contractual in nature and subject to the terms and conditions of a registration agreement. When an unrelated third party changes registrant data and/or re-registers with a new registrar, that party is accepting representations and warranties under the registration agreement as of the date of the change. These effectively include that the new registration is being undertaken in good faith. 129 Assume that the transferor initially registered the disputed domain name when there was no adverse trademark, and thus had been insulated from a finding of abusive domain name registration and use. If the unrelated transferee acquires the domain name when there is an existing adverse trademark, under the ACPA and UDRP it would have met the predicate or but for condition for a finding of bad faith. However, the fact that there is an existing adverse trademark does not mean that the unrelated purchaser/transferee is engaging an abusive domain name 129

Paragraph 2 of the UDRP reads as follows: 2. Your Representations. By applying to register a domain name, or by asking us to maintain or renew a domain name registration, you hereby represent and warrant to us that (a) the statements that you made in your Registration Agreement are complete and accurate; (b) to your knowledge, the registration of the domain name will not infringe upon or otherwise violate the rights of any third party; (c) you are not registering the domain name for an unlawful purpose; and (d) you will not knowingly use the domain name in violation of any applicable laws or regulations. It is your responsibility to determine whether your domain name registration infringes or violates someone else's rights.

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registration and use. Although the assessment criteria under the ACPA and UDRP may be somewhat different, the complaining party/trademark owner must still demonstrate -- in terminology of the UDRP -- that the new registrant lacks rights or legitimate interests in the disputed domain name, and has otherwise registered the domain name in bad faith. The brief discussion of the assessment criteria that follows is based on the terms of the UDRP and administrative panel precedent, but the statutory assessment criteria used to determine bad faith under the ACPA are substantially similar.

2. Rights or legitimate interests The fact of a trademark ownerâ&#x20AC;&#x2122;s rights in a mark, and that the disputed domain name is identical or confusingly similar to the trademark, is the beginning of the analysisâ&#x20AC;&#x201D;not the end. Most of the more important decisions under the UDRP from a jurisprudential standpoint address whether the complained-against domain name registrant has rights or legitimate interests (or has registered and used in bad faith, which may involve similar factors). In focusing on the alienability of domain names, the Ninth Circuit appears to be expressing concern over the risk that legitimate owners of domain names will be deprived of rights in property without adequate justification. But, paragraph 4(c) of the UDRP is intended to give domain name registration owners, and transferees of domain names, opportunity to defend their right to ownership. It places the burden of establishing lack of rights or legitimate interests on the complaining party. 130

130

Paragraph 4(a) of the UDRP provides: a. Applicable Disputes. You are required to submit to a mandatory administrative proceeding in the event that a third party (a "complainant") asserts to the applicable Provider, in compliance with the Rules of Procedure, that (i) your domain name is identical or confusingly similar to a trademark or service mark in which the complainant has rights; and (ii) you have no rights or legitimate interests in respect of the domain name; and (iii) your domain name has been registered and is being used in bad faith.

In the administrative proceeding, the complainant must prove that each of these three elements are present.

Paragraph 4(c) of the UDRP provides: Any of the following circumstances, in particular but without limitation, if found by the Panel to be proved based on its evaluation of all evidence presented,

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Similarly, four of the nine factors used to assess bad faith intent under the ACPA are directed toward establishing the legitimate interests of the domain name registrant, and there is a general defense for registering based upon reasonable belief regarding lawfulness. 131 Up until now, there has not been significant issue within UDRP jurisprudence arising from an inability of third-party transferees of domain names initially registered prior to existence of trademark rights to establish rights in the transferred domain names. This is probably because transferees with legitimate interests in those domain names have been able to establish that before the panels. shall demonstrate your rights or legitimate interests to the domain name for purposes of Paragraph 4(a)(ii): (i) before any notice to you of the dispute, your use of, or demonstrable preparations to use, the domain name or a name corresponding to the domain name in connection with a bona fide offering of goods or services; or (ii) you (as an individual, business, or other organization) have been commonly known by the domain name, even if you have acquired no trademark or service mark rights; or (iii) you are making a legitimate noncommercial or fair use of the domain name, without intent for commercial gain to misleadingly divert consumers or to tarnish the trademark or service mark at issue.

131

15 USC §1125 (d)(1)(B)(i) provides, inter alia, In determining whether a person has a bad faith intent . . . a court may consider factors such as, but not limited to— (I) the trademark or other intellectual property rights of the person, if any, in the domain name; (II) the extent to which the domain name consists of the legal name of the person or a name that is otherwise commonly used to identify that person; (III) the person’s prior use, if any, of the domain name in connection with the bona fide offering of any goods or services; (IV) the person’s bona fide noncommercial or fair use of the mark in a site accessible under the domain name;

Also, 15 USC §1125 (d)(1)(B)(ii), provides: Bad faith intent . . . shall not be found in any case in which the court determines that the person believed and had reasonable grounds to believe that the use of the domain name was a fair use or otherwise lawful.

The ACPA does not expressly allocate the burden of proof regarding rights and legitimate interests as those paragraph 4(a) of the UDRP.

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But, it may be that administrative panelists need to be particularly watchful in cases of such transfers, especially when the transferee is acquiring some type of ongoing enterprise that has a substantial commercial value.

C. The sale and purchase of a business While there is a market for domain names “standing alone”, a valuable domain name may well be so because it is associated with a successful ongoing business. That business may have been established by the domain name registration owner when there was no “adverse trademark”, and the business may be insulated against a claim of abusive registration and use under either the ACPA or the UDRP because of the initial domain name registration date.

This paper has suggested that the good or bad faith of an unrelated domain name purchaser/transferee should be tested at the time of purchase and reregistration. But, might not such a general rule have an unduly harsh effect on the initial registrant owner of the website business identified by that domain name?

Would an unrelated third party purchaser be able to purchase the business, including the domain name, without being subject to a finding of abusive domain name registration and use?

If there was an ongoing business associated with the complained-against domain name that predated the acquisition by the trademark owner of its trademark rights, the purchaser of that ongoing business may be determined to have a legitimate interest in the domain name because of the continuity of the business.

This would seem to depend on the characteristics or facts of individual cases, but some possible general cases might be anticipated. For example, it may be that the initial registrant/transferor of the disputed domain name commenced its business (but did not register its domain name) before the “newer” trademark owner secured rights in the trademark (such as by registering with the USPTO). 132 In such case, 132

Coincidently, this author as sole panelist has just rendered a decision involving just such a set of facts. Saltworks, Inc. v. Gary Pedersen, Salt Works, WIPO Case No. D2013-0984. In this case, an Arizona provider of salt for utility purposes (e.g., to soften water for hotels) had engaged in business under the name "Salt Works" for a number of years prior to a Washington State business commencing the sale of gourmet and bath salts under the name SaltWorks, primarily on the Internet. The Arizona commercial supplier registered its disputed domain name after the Washington gourmet and bath salt retailer secured registration for the trademark Salt Works. The panel found that the domain name registrant established rights or legitimate interests in the disputed domain name because it had been commonly known by that name, and because it had made good-faith use of the term corresponding to the domain name in connection with the sale of

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the registrant/transferor of an ongoing business (and domain name) would likely have a priority right under traditional trademark law principles to continue using its domain name because it was using the relevant term earlier than the trademark owner. The disputed domain name registrant should be able to establish its rights or legitimate interests under paragraph 4(c)(i) and/or (ii) of the UDRP. Under the ACPA, there is a similar assessment factor as in UDRP paragraph 4(c)(i), which should yield a comparable result. In such circumstances, the subsequent transfer of the domain name to a new business owner should not affect the rights or legitimate interests in the domain name since, inter alia, the business has been commonly known by the domain name and/or there has been a prior good-faith offering of goods or services.

If the initial domain name registrant-transferor establishes an online business subsequent to the acquisition by the trademark owner of rights (such as evidenced by registration), the issues with respect to a third-party transferee of the domain name may be more contestable. Traditional trademark infringement analysis may again factor in. An analysis of rights or legitimate interests may turn on whether the initial domain name registrant/transferor is operating in the same class or line of business as the trademark owner, and might assess evidence regarding whether the initial registrant/transferor was aware of the trademark owner when it began to operate its online business. If the initial registrant-transferor and the transferee are in different national jurisdictions than the trademark owner, this might well influence an assessment of the extent of knowledge (and intent).

It is important to note that the individual factors listed in paragraph 4(c) of the UDRP as potentially establishing rights or legitimate interests are expressly non-exhaustive. A panel may consider whatever evidence or factors it considers appropriate to jurisprudential analysis of the rights or legitimate interests of a thirdparty transferee of a disputed domain name. A panel may determine that the issues are sufficiently close that the complaining party has not carried its burden of persuasion, and that a federal court may be a more appropriate forum for a full domain name/trademark infringement proceeding, with more extensive submissions of evidence, testimony, etc. 133 products and services prior to notice of the dispute. There was, however, no transfer to an unrelated third party domain name purchaser involved in this case.

133 It would also be possible to assess the purchase and sale transaction between unrelated parties under paragraph 4(b) of the UDRP dealing with the element of bad faith. Generally speaking, the good-faith purchaser of a domain name and associated business should not have

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D. Other rights or legitimate interests Rights or legitimate interests are not limited to ongoing commercial enterprises. A domain name may be used for fair use or legitimate noncommercial purposes and not be subjected to a finding of abusive domain name registration and use under the UDRP or ACPA. Should interest in such use be transferable to unrelated parties? The answer to this question is likely to be quite fact specific. An unrelated purchaser/transferee may present evidence of intention to continue a legitimate use. As a practical matter, the same elements that would establish a defense prior to a transfer are likely to be relevant after the transfer. Under the UDRP, since the complaining party bears the burden of proof to demonstrate that the domain name registrant lacks rights or legitimate interests, this should not place an undue burden on unrelated purchaser-transferees. Under the ACPA, there is a general defense of reasonable good faith belief in fair or other lawful use.

Conversely, an unrelated purchaser/transferee that is unable to demonstrate rights or legitimate interests should not have grounds for retaining a domain name that is subject to an adverse trademark right.

E. The ACPA revisited The suggestion of this author is fairly modest: that when the Ninth Circuit has the opportunity to revisit the definition of “registration” within the meaning of the ACPA that it limit the holding of GoPets to the factual context in which it was adopted. That is, the Ninth Circuit might maintain the interpretation of “registration” that excludes related party transfers (as per the facts of GoPets), but clarify that unrelated party transfers of domain names (and the accompanying transferee provision of new registrant information and acceptance of the registration agreement) are within the definition of “registration”. Indeed, the author is encouraging the Ninth Circuit to bring its jurisprudence into line with that so far developed by UDRP panels, and naturally does so with deference to the difficulty demonstrating that it did not make the purchase with the intent to sell the domain name to the trademark owner or a third-party, to prevent the trademark owner from registering its trademark as a domain name (as part of a pattern), or to disrupt the competitor’s business, although specific evidence provided by the complaining party might prove otherwise. Analysis under paragraph 4(b)(iv) regarding confusingly similar use in connection with a website for commercial gain would be context specific.

A third-party purchaser/transferee of a domain name that finds itself subject to an adverse ruling by a UDRP panel, and an order of transfer (or cancellation), may file a petition in federal court to block the transfer by the registrar. A UDRP panel ruling does not deprive the purchaser/transferee of its day in court.

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place of the Ninth Circuit in the U.S. jurisprudential hierarchy. Yet it is only the “philosophical language” in GoPets that has given rise to the apparent conflict in jurisprudence (as per AirFX.com). A different formulation limited to related party transferees would have achieved the same result.

At least one commentator has suggested to amend the ACPA so as to expressly define “registration” and to broaden the category of domain name transfers that are treated as new registrations. 134 Opening up a broad statutory scheme for a minor change not infrequently serves as a prelude to a larger scale exercise in legislative revision. The law of unintended consequences is always at work. This article is not encouraging amendment of the ACPA for purposes of addressing what is a comparatively modest issue.

Perhaps more important, the ACPA is invoked much less frequently than the UDRP. UDRP panelists are not obligated to follow jurisprudential developments under the ACPA, or to take into account the language of the ACPA. As a practical matter, UDRP panelists can maintain their current practice more or less irrespective of how jurisprudence in the Ninth Circuit develops. The UDRP is not explicitly tied to any national jurisdiction, and less to any particular Court of Appeals of the United States. Nonetheless, UDRP panelists pay attention to such jurisprudence, and there are good reasons to seek an approximation of the rules, if for no other reason than to provide more legal certainty to domain name registrants.

VII THE CONTINUING ROLE OF TRADEMARK LAW It must be emphasized that trademark law, e.g., the Lanham Act in the U.S., continues to apply to potential abuse of domain names. 135 A domain name may infringe a trademark, and a website incorporating a domain name may infringe a trademark, whether or not the domain name was acquired in good faith or bad, and whether the domain name owner or its predecessor at some time in the past had rights or legitimate interests in that domain name. A domain name owner may escape an order of transfer or cancellation under the UDRP, or a finding of abusive 134

See Price, supra note 4, at 482. Note that Price does not suggest a specific definition, but rather one that would cast a wide net.

135 15 USC § 1125(d)(3) provides: “The civil action established under paragraph (1) and the in rem action established under paragraph (2), and any remedy available under either such action, shall be in addition to any other civil action or remedy otherwise applicable."

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conduct under the ACPA, yet still face a claim for trademark infringement on grounds outside those found in these two legal mechanisms. In that regard, one should not over-emphasize the role of the UDRP and ACPA. Trademark owners can protect their valuable identifiers -- assuming they have legitimate causes of action -- against infringers more or less irrespective of the “container” in which the infringing item is placed.

VIII THE WIDER PICTURE At the outset of this article, the author observed that an inquiry into the “fundamental nature” of the domain name may be a quaint exercise. Yet there are “real world” circumstances in which it is important to determine whether a domain name is “property” that can be freely assigned and transferred, or is a contract right subject to the conditions established by a chain leading from ICANN. There is a third option suggested by this article, that domain names are “both”. They are a form of intangible property that is created by and subject to contract. As intangible property, they may be subject to security interests, considered assets in bankruptcy, and generally assigned and transferred. But being also contract rights, they are subject to certain conditions when acquired by new (unrelated) owners. They should not be acquired in bad faith. They may legitimately be acquired as part of an ongoing business in order to protect the interests of the seller built up in that business, even in the presence of an adverse trademark if the initial registrant/seller had been operating legitimately and in good faith.

It is difficult to foresee all of the circumstances in which the legal characterization of domain names will be important. Given the different contexts in which the UDRP and ACPA were adopted, and in which they are implemented, it should be expected that jurisprudential conflicts will from time to time arise and require attention. This article calls attention to one such conflict and proposes to resolve it through recognition that the legal character of the domain name need not be limited to a single class of subject matter. This characterization might become more important as ICANN’s rollout of new top-level domains begins to transform the domain name space.

HANDLE WITH CARE: THE EVOLVING ACTUAL MALICE STANDARD AND WHY JOURNALISTS SHOULD THINK TWICE BEFORE RELYING ON INTERNET SOURCES KIMBERLY CHOW ∗ This note examines two phenomena at the intersection of traditional media law and evolving forms of expression on the Internet, focusing on whether courts’ increasing tendency to view Internet sources as dubious will result in more findings of defamation among journalists who rely on those sources. Both phenomena are examined through the lens of traditional defamation law, under which a defendant may be found guilty of defamation if he is guilty of possessing “actual malice” in publishing the offending material—in one case, defined as writing “based wholly on” a source the defendant had obvious reasons to doubt.

The first phenomenon is the pressure that the “24-hour news cycle” has put on journalists, who with increasing frequency are relying on what they read on the Internet as research for their articles. When those Internet sources turn out to be incorrect, the harm has often already been done because a respected news outlet such as CNN has re-reported the incorrect news. The second phenomenon is the recent cases in which courts have stated that certain Internet sources should automatically be viewed with skepticism, including sites that do not undergo a rigorous editorial process. Given these developments and the recent spate of embarrassing mistakes by news media in high-profile cases such as the reliance on false reports on Twitter of the chaos in New York after Hurricane Sandy and the misreporting of the name of the Sandy Hook shooter, the author advocates for greater diligence by reporters in checking the Internet sources upon which they rely, and discusses how societal recognition of the dubious nature of Internet sources could chip away at the significant protection against legal action traditionally given to journalists.

INTRODUCTION ..........................................................................................................54 I. THE HISTORY OF THE ACTUAL MALICE STANDARD FOR DEFAMATION ..........56 II. SKEPTICISM TOWARD INTERNET SOURCES COULD CAUSE A REEVALUATION OF DEFAMATION ..................................................................................................58 A. Internet Journalism Emphasizes Speed Over Accuracy ..........................58 ∗

Kimberly Chow is a 2014 J.D. candidate at NYU School of Law. Her academic and professional interests lie in traditional media law and its intersection with new technologies and forms of expression. She received a B.A. in History from Yale University in 2009. She would like to thank Barton Beebe, Lynn Oberlander, David McCraw, and the JIPEL editorial team for their thoughtful comments and editing.

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B. Courts Have Encouraged Skepticism Toward Internet Sources .............59 C. Redmond v. Gawker Takes a Different Tack ...........................................61 NEW TIMES MAY MEAN A NEW ACTUAL MALICE STANDARD .......................62 A. News Organizations Are Not Being Careful Enough ..............................62 B. Courts May Impose Additional Duties on Journalists.............................67 C. The Ingrained Legal Standards Will Be Resistant to Change ..................70 HOW WRITERS CAN ADAPT WITH THE TIMES .................................................71 A. What Can Be Done to Encourage More Responsibility Among Writers? ..................................................................................................................71 B. Practical Advice to Journalists and Other Writers .................................73 CONCLUSION...................................................................................................75 INTRODUCTION

Readers of the People’s Daily November 27, 2012 online version were largely mystified to read that North Korean ruler Kim Jong-Un had been named the “Sexiest Man Alive.” 1 Quoting the original article in The Onion, the People’s Daily (the Chinese Communist Party’s official newspaper) extolled the leader’s “devastatingly handsome, round face, his boyish charm and his strong, sturdy frame,” and his “air of power that masks an unmistakable cute, cuddly side.” 2 The Onion is an American satirical newspaper and website. Previous winners of its Sexiest Man Alive title included Unabomber Ted Kaczynski and disgraced financier Bernie Madoff, 3 both of whom had as little in common with conventional sex symbols as Kim. The online version of the People’s Daily is apparently less rigorously edited than the print version, 4 and someone had fallen into the trap of giving too little scrutiny to a source that, on its face, should have prompted skepticism. This pattern of taking sources at face value has become too common in the current journalistic landscape in which Internet sources play a large part in breaking the news.

News outlets reporting on a 24-hour news cycle place a premium on speed.

Unfortunately, that emphasis, coupled with a distressing lack of caution when 1

Edward Wong, Kim Jong-Un Seems to Get a New Title: Heartthrob, N.Y. TIMES (Nov. 28, 2012), http://www.nytimes.com/2012/11/28/world/asia/chinese-news-site-cites-onion-piece-onkim-jong-un.html.

2 See id.

3 See Kim Jong-Un Named The Onion’s Sexiest Man Alive for 2012, THE ONION (Nov. 14, 2012), http://www.theonion.com/articles/kim-jongun-named-the-onions-sexiest-man-alivefor,30379.

4 Wong, supra note 1.

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journalists use sources from the Internet, threatens standards for accuracy. When journalists republish material found on the Internet without conducting their own fact-checking, they run the risk of putting their stamp of approval on source material that has not been properly vetted or edited in the first instance. The tendency, even among established news organizations, to blindly trust what they read online is troubling, even more so given how quickly news spreads.

The actual malice standard for defamation is deeply engrained in judicial opinions dating back to the 1960s, with subsequent case law fine-tuning its requirements. As new forms of media and speech have arisen, commentators have increasingly questioned whether the structures for finding defamation should change. The Internet has spurred a disconcerting practice of irresponsible journalism, but when established defamation law is applied, writers are largely protected from being found guilty of actual malice. When both professional and less-traditional writers rely on Internet sources in their work, they engage in journalistic practices that are removed from traditional reporting methods— information found on the Internet is inherently different from information gathered by speaking to sources or witnessing events firsthand. When use of Internet sources erodes the accuracy of reporting, journalists relying on them risk becoming the target of defamation suits. A goal of this paper is to help those in the media industry avoid such suits by recommending best practices with respect to web sources.

As defined in the seminal 1964 First Amendment case New York Times Co. v. Sullivan, a defendant may be found guilty of defamation if actual malice was present, “that is, with knowledge that it was false or with reckless disregard of whether it was false or not.” 5 Later cases such as St. Amant v. Thompson proposed specific sources that might provide circumstantial evidence of actual malice. 6 One of St. Amant’s suggestions was that actual malice might be found if writing were “based wholly on” a source the defendant had obvious reasons to doubt. 7 The possibility of courts’ viewing a writer’s use of dubious sources as proof of actual malice becomes more striking when viewed in the context of recent decisions about information on the Internet. In light of some courts’ statements that Internet material should always be viewed with skepticism and doubt, 8 there is a strong 5

New York Times Co. v. Sullivan, 376 U.S. 254, 280 (1964).

See St. Amant v. Thompson, 390 U.S. 727 (1968).

7 Id. at 732.

8 See, e.g., Obsidian Fin. Grp., LLC v. Cox, 812 F. Supp. 2d 1220, 1231 (D. Or. 2011) (holding that blog entries posted on an obviously critical website should be viewed with a skeptical eye); Too Much Media, LLC v. Hale, 20 A.3d 364, 379 (2011) (explaining that posts 6

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possibility that courts may begin to view a journalist’s use of Internet sources as circumstantial evidence of actual malice, and may even impose additional duties of fact-checking.

The first section of this note outlines the history of the actual malice standard for defamation through landmark cases. In it I also define terms and provide background for understanding the current state of the law and how susceptible it is to change. The second section discusses the current state of information dissemination on the Internet, explaining how the focus is a 24-hour news cycle. Part two also examines many courts’ belief that consumers should be skeptical of information they read online and points out reasons why these developments could indicate a need for reform. The third section presents possible ways the actual malice standard could change based on the nature of Internet sources, using current examples to demonstrate why changing the standard is necessary and considering whether such changes will realistically occur. The fourth section addresses the overarching policy concern of encouraging increased responsibility among writers and offers practical advice to professional journalists and other writers.

I THE HISTORY OF THE ACTUAL MALICE STANDARD FOR DEFAMATION In the United States, defamation is a false statement of fact that tends to harm the reputation of the subject of the statement or deter others from associating with him. 9 To find a party guilty of defaming a public figure or official, that party must have possessed “actual malice.” The Supreme Court first articulated the concept of actual malice in 1964 in Times v. Sullivan, defining it as a statement made, “with knowledge that it was false or with reckless disregard of whether it was false or not.” 10 Gertz v. Robert Welch further elucidated the definition, explaining that the actual malice standard applied when public figures and officials are subjects of defamation, while each state could set the standard for private individuals. 11 The St. Amant court expanded the requirements for a finding of actual malice, stating, “[t]here must be sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of his publication. Publishing with such doubts shows reckless disregard for truth or on Internet message boards do not undergo a rigorous editorial oversight process and do not have the credibility of publications that do).

9 Restatement (Second) of Torts §559 (1977).

10 Times v. Sullivan, 376 U.S. at 280.

11 See Gertz v. Robert Welch, Inc., 418 U.S. 323 (1974).

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falsity and demonstrates actual malice.” 12 St. Amant identified three types of circumstantial evidence that could support a finding of recklessness and lack of good faith: Professions of good faith will be unlikely to prove persuasive, for example, where a story is fabricated by the defendant, is the product of his imagination, or is based wholly on an unverified anonymous telephone call. Nor will they be likely to prevail when the publisher's allegations are so inherently improbable that only a reckless man would have put them in circulation. Likewise, recklessness may be found where there are obvious reasons to doubt the veracity of the informant or the accuracy of his reports. 13 Similarly, the 1989 Harte-Hanks v. Connaughton decision defined actual malice as occurring when a defendant made the false publication with a high degree of awareness of probable falsity. 14 One of the biggest obstacles to plaintiff victories in defamation suits is the subjectivity of the standard. According to St. Amant, the defendant must have “in fact entertained serious doubts.” 15 Likewise, Gertz described actual malice as having “subjective awareness of probable falsity.” 16 While the court in St. Amant conceded that such subjectivity might appear to put “a premium on ignorance,” the use of the recklessness standard and requirement of subjective belief were actually the most effective measures to protect First Amendment values and promote the public interest. 17 While the three types of circumstantial evidence that indicate recklessness are indeed important, the subjective belief requirement remains a prerequisite to a finding of actual malice. For example, in 1984 the court in Bose Corp v. Consumers Union distinguished a finding of actual malice from a finding of falsity, stating that even when the information disseminated was found to be false, it did not necessarily follow that the disseminator knew it was false. 18 Similarly, the First Circuit used the subjectivity requirement to justify the lower court’s holding in Levesque v. Doocy, refusing to impute serious doubts to news

12

St. Amant, 390 U.S. at 727, 731.

Id. at 732.

14 See Harte-Hanks Communications, Inc. v. Connaughton, 491 U.S. 657, 667 (1989).

15 St. Amant, 390 U.S. at 731.

16 Gertz, 418 U.S. at 335 n.6.

17 St. Amant, 390 U.S. at 731.

18 Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 511 (1984).

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commentators even though the commentators/anchors were relying on an Internet source that the court pointed out was ridiculous.19 Another wrinkle in the analysis is whether the defendant’s statement was an asserted fact (which is actionable) or if it was simply an opinion (which is generally not actionable). It is possible, though, to sue for defamation based on a hybrid opinion that includes both elements of fact and opinion. According to Milkovich v. Lorain Journal Co., statements of opinion can be actionable if they imply a provably false fact, whereas the First Amendment protects pure opinions. 20 Furthermore, in Gross v. New York Times Co., the New York Court of Appeals explained that a statement of opinion could be actionable if it implied a basis in facts that are not disclosed to the reader or listener. However, the court also held that a statement of opinion is not actionable when accompanied by a recitation of the facts upon which it is based or when it does not imply the existence of undisclosed underlying facts. 21 In spite of the actual malice line of cases, recent cases pose challenges for the courts hearing them, as they bring up novel issues of journalistic practice and technologies that did not exist when courts first articulated defamation law.

Increasingly, it appears that the old guidelines are inadequate to address these new problems. Whether or not the courts or legislators will fashion new tools remains unknown.

II SKEPTICISM TOWARD INTERNET SOURCES COULD CAUSE A REEVALUATION OF DEFAMATION A. Internet Journalism Emphasizes Speed Over Accuracy The Internet has created new forms of journalism that are vastly different from the traditional forms used in the past. In particular, the “24-hour news cycle” allows news outlets to post articles and updates on their websites, broadcasting them at any time, day or night, rather than waiting for the next day’s newspaper or the next week’s magazine. 22 With each outlet racing to be the first to post breaking news, a premium is placed on speed at the expense of accuracy. 23 The 24-hour 19

See Levesque v. Doocy, 560 F.3d 82, 92-93 (1st Cir. 2009).

See Milkovich v. Lorain Journal Co., 497 U.S. 1, 20 (1990).

21 See Gross v. New York Times Co., 623 N.E.2d 1163, 1168 (N.Y. 1993).

22 David A. Logan, All Monica, All the Time: The 24-Hour News Cycle and the Proof of Culpability in Libel Actions, 23 U. ARK. LITTLE ROCK L. REV. 201, 205-06 (2000).

23 See id. at 213.

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news cycle, which began with CNN’s coverage of the Gulf War in 1991, 24 has transformed both the quality of news and the format in which it is presented.

Editors must now make on-the-spot decisions about whether to publish or send a story back for additional fact-checking. Previously, such decisions were made with a comfortable next-day or next-week deadline. 25 As a result, more opinions, sometimes masquerading as facts or interpreted as facts, are part of the collective consciousness of news. This development is leading courts to reevaluate the role of media and the professional responsibility of journalists, particularly on the Internet.

B. Courts Have Encouraged Skepticism Toward Internet Sources Strikingly, courts have begun placing the onus on consumers of Internet information, ruling that they should be skeptical of what they read. This warning reflects courts’ awareness of the often-unverified nature of information disseminated on the Internet. With the ever-evolving nature of Internet sources, courts are addressing each new source as it enters the marketplace—from standard websites, to blogs, to Twitter feeds. While these cases do not always directly implicate the actual malice standard, that traditional measure remains the backdrop against which courts shape standards of journalistic responsibility.

In the 2011 case Obsidian Finance Group v. Cox, an Oregon federal district court warned of the danger in relying on blogs for information, writing that they are “a subspecies of online speech which inherently suggest that statements made there are not likely provable assertions of fact.” 26 Similarly, a federal court in California addressing personal websites and Internet discussion groups held that, “[i]n this context, readers are less likely to view statements as assertions of fact.” 27 In Too Much Media, LLC v. Hale, the New Jersey Supreme Court distinguished online message boards from other information sources on the Internet because of the lack of editorial oversight. 28 New Jersey’s high court explained that hyperbole, exaggeration, and a “looser, more relaxed communications style” 29 promote an environment in which the border between fact and opinion is blurred, and commenters should not be taken at their word. In fact, as discussed in Obsidian Finance Group, just the name of a website can be enough to alert the reader that he 24

Lili Levi, A New Model for Media Criticism: Lessons from the Schiavo Coverage, 61 U. MIAMI L. REV. 665, 686 (2007).

25 See id.

26 Obsidian Fin. Group, LLC v. Cox, 812 F. Supp. 2d 1220, 1223 (D. Or. 2011).

27 Nicosia v. De Rooy, 72 F. Supp. 2d 1093, 1101 (N.D. Cal. 1999).

28 Too Much Media, LLC v. Hale, 20 A.3d 364, 379-80 (N.J. 2011).

29 Krinsky v. Doe 6, 72 Cal. Rptr. 3d 231, 238 (App. Dep’t Super. Ct. 2008).

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should be skeptical of what he finds therein. For example, a site such as www.romneyexposed.com can indicate a one-sided opinion. 30 Such rulings seem to make the consumers responsible for determining what is an untrustworthy source.

The distinction between fact and opinion becomes especially confusing when writers make claims supposedly based on research, but expressed as statements that are deemed too informal to be trustworthy. For example, in Too Much Media v. Hale, the defendant wrote many posts on message boards that cited extensive research she had conducted on the pornography industry, including interviews with participants and her congressional representatives and studying websites and information in the mainstream media. Based on her purported research, the defendant made accusations in these posts regarding a security breach that released identifying information of adult website subscribers and singled out specific individuals as responsible for the breach and subsequent cover-up. 31 The court rejected Hale’s argument that she should benefit from the New Jersey shield law, which requires a “sufficient relationship or connection to the ‘news media,’” 32 holding that as a mere writer of posts on a message board, she did not have a strong enough relationship to the media. 33 Even if the writer claims to have done research, the medium of the message—in this case, an online forum—should make consumers skeptical of such claims. Most importantly, consumers should attempt to differentiate pure opinion from opinion purporting to be fact. This distinction is important because, as discussed in Part I, pure opinion is not actionable under defamation law, while opinion masquerading as fact can be actionable. 34 The dividing line between fact and opinion is especially fuzzy in the context of blogs, web forums, and other unedited content. For example, in Obsidian Financial Group, a blogger used the website “obsidianfinancesucks.com” to accuse members of Obsidian of violating bankruptcy laws. 35 As the court noted, the hostile tenor of the comments suggested that the blogger had a personal vendetta against the targets of her accusations and the vitriolic language she used

30

See Obsidian, 812 F. Supp. 2d at 1232.

See Too Much Media, 20 A.3d at 369-70.

32 Id. at 238.

33 The court explained that message boards were too far removed from traditional media outlets to be eligible for shield law protection, in part because writers in those forums were not subject to any editorial scrutiny. See id at 235.

34 See Gross v. New York Times Co., 623 N.E.2d at 1167-68 (N.Y. 1993).

35 See Obsidian, 812 F. Supp. 2d at 1230.

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invited further comment and debate. 36 Such biased content “undermine[s] the reader’s expectations that defendant’s statements are to be understood as assertions of provable fact.” 37 Thus, even if a defendant includes statements that imply provable assertions, the statements “lose the ability to be characterized and understood as assertions of fact when the content and context of the surrounding statements are considered.” 38 Regarding the actual malice standard, the problem with opinions is that the protection for republishing them grossly expands the First Amendment freedom of speech principles at the heart of Times v. Sullivan—there is no actual malice when a writer republishes something he believes is opinion, since by definition he has no reason to doubt the facts therein since he does not realize that there are even facts there, thinking he is simply restating another’s beliefs. Because the actual malice standard’s heavy-handed exclusion of opinion from defamation shows no signs of revision in the foreseeable future, such instances of over-protection where journalists republish what they believe to be purely opinion ends up distributing false or misleading information to the public, thereby undermining journalistic responsibility.

C. Redmond v. Gawker Takes a Different Tack While exercising suspicion towards Internet sources has become the judicial position, the 2012 case Redmond v. Gawker seems to push back against this stance. 39 The Redmond ruling shielded defendant bloggers from defamation charges, in part because their piece had cited to a multitude of other Internet sources. The court reached this result even though the bloggers had not verified the sources’ accuracy before citing to them. Gawker’s Gizmodo blog published a post on plaintiff Scott Redmond’s business ventures, including Peep Wireless Telephony Company, entitled Smoke & Mirrors: The Greatest Scam in Tech. The article questioned whether or not Redmond’s inventions actually did what they promised. The piece went on to note that Redmond had a pattern of getting funding for projects that never materialized. The writers provided links to websites that described now-defunct past projects of Redmond’s. 40 The court stated that providing the links made the article “transparent” because it cited to many Internet sources:

36

Id. at 1232.

Id. 38 Id. at 1234.

39 Redmond v. Gawker Media, LLC, No. CGC–11–508414, 2012 WL 3243507 (Cal. App. Dep’t Super. Ct. Aug. 10, 2012) (unpublished decision).

40 See id.

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Having ready access to the same facts as the authors, readers were put in a position to draw their own conclusions about Redmond and his ventures and technologies. As shown by the comments posted, many readers did view these sources, and not all of them agreed with the authors’ views. Statements are generally considered to be nonactionable opinion when the facts supporting the opinion are disclosed. 41 The court’s statement raises two key issues. First, it can be argued that the skeptical tone of Redmond’s post and the questions the authors raised might, by themselves, qualify the authors’ assertions as opinions. Yet, the court’s declaration that revealing the facts behind the opinions rendered the opinions nonactionable means the court viewed the other Internet sources as facts. This leads to the second issue of whether the Gross court was using the proper definition of facts; perhaps Redmond did not disclose facts at all, and instead merely cited other unverified articles. 42 Notwithstanding Redmond, the judicial position of distrusting Internet sources suggests that journalists should be on notice that courts will begin considering their use of online sources in determining the presence of actual malice. Essentially, courts are ruling that everyone should be skeptical of Internet sources that have not undergone significant editing. Hence, one would expect that it should be easier to find actual malice, using a defendant’s reliance on Internet sources as circumstantial evidence of recklessness and subjective doubts. However, such circumstantial evidence may be rebutted by evidence of diligent factchecking.

III NEW TIMES MAY MEAN A NEW ACTUAL MALICE STANDARD A. News Organizations Are Not Being Careful Enough Myriad examples illustrate how the current standard for defamation combined with the need for speed in the 24-hour news cycle encourage mistakes that are difficult for courts to prevent and punish. While thus far courts have focused on informal Internet information sources such as blogs or message boards, 41

Id. at *6.

As a side note, I would advocate an examination of Redmond with regard to its treatment of unverified Internet sources as facts. Awarding defendants an automatic out just for pointing readers to other, possibly dubious source material is poor policy that does not encourage factchecking.

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more established news media are also susceptible to the inaccuracy that accompanies tight deadlines. Driven by the pressure to constantly disseminate information, news outlets often rush to publish before their reports have been adequately checked. This practice has far-reaching consequences, as other outlets rely on the first outlet’s reporting, taking the initial story at face value without vetting it themselves and thereby falling prey to spreading misinformation.

In the fall of 2012 during Hurricane Sandy, the Twitter handle “@comfortablysmug” published several Tweets on the social media site Twitter.

The Tweets, which alarmingly reported that the New York Stock Exchange floor was flooded with three feet of water, Governor Andrew Cuomo was trapped in Manhattan, and other such panic-inducing statements, were later revealed to be lies created by Shashank Tripathi. 43 During the storm, Tripathi’s Tweets were retweeted on Twitter more than six hundred times, heightening anxiety during the disaster. 44 Unfortunately, several news outlets including CNN and the National Weather Service (“NWS”) picked up the Tweets. 45 Reporting them as news, CNN and the NWS gave the Tweets a legitimacy they had not had when they were merely posts on Twitter. CNN and the NWS’s decision to republish implied editorial oversight and a degree of fact-checking. While it was reported that law enforcement officials were pursuing action against Tripathi, claiming that he endangered the public by stirring hysteria without a proper foundation, 46 currently no action is being taken against the news outlets for furthering the spread of false information even though their actions seem to constitute a much graver lapse of judgment as the public places tremendous trust in the media.

Immediately following the December 2012 Sandy Hook Elementary School shooting in Newtown, Connecticut, police found Ryan Lanza’s ID card at the

43

Kim LaCapria, Twitter Sandy Hoaxer May Face Criminal Charges for Spreading False Information, THE INQUISITR (Nov. 1, 2012), http://www.inquisitr.com/384679/twitter-sandyhoaxer-may-face-criminal-charges-for-spreading-false-information.

44 Mark Duell, Hoaxer, 29, who fooled CNN with false ‘NYSE has flooded’ tweet during Superstorm Sandy is outed as Wall Street Analyst, THE DAILY MAIL ONLINE (Nov. 1, 2012), http://www.dailymail.co.uk/news/article-2226188/Superstorm-Sandy-Twitter-user-fooled-CNNbelieving-NYSE-flooded-Wall-Street-analyst-Shashank-Tripathi.html.

45 See id.

46 Suzanne Choney, Man Who Made False Tweet about Sandy Apologizes; Could Face Prosecution, http://www.nbcnews.com (Nov. 2, 2012), http://www.nbcnews.com/technology /man-who-made-false-tweet-about-sandy-apologizes-could-face-1C6807076.

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scene of the shooting. 47 Citing Connecticut law enforcement officials, early reports identified Ryan Lanza as the shooter. These reports sparked a veritable witch-hunt that spread to many other news organizations. By 5pm that day, Ryan Lanza’s Facebook profile picture had been shared more than fourteen thousand times, 48 and websites such as Slate and The Huffington Post displayed a screenshot and provided links to the profile. 49 Ryan Lanza received countless messages from Facebook users vilifying him, and people listed as his Facebook friends were harangued for being connected to the suspected shooter. 50 When it turned out that the initial reports had mistakenly identified Ryan Lanza instead of his brother Adam, the media was quick to issue retractions and expose CNN as the source of the inaccurate reporting. 51 CNN defended itself by noting that it had continued to report new information as it developed, and the information had come from law enforcement officials. 52 Still, as Washington Post writer Eric Wemple points out, while it is difficult to do rapid fact-checking of police statements, other outlets that were heavily covering the Sandy Hook story did not simply take the police’s word for it and directly report, choosing instead to report with a citation to CNN. 53 In an apparently unique attempt to fact-check, among the reporting outlets, at approximately 3pm a former Jersey Journal reporter said he had spoken with Ryan Lanza earlier in the day and that Ryan denied his involvement. 54 Unfortunately, by that point Ryan Lanza’s reputation had already been subject to hours of damage.

47

Brian Ross, Chris Cuomo, & Richard Esposito, Connecticut Shooter Adam Lanza: ‘Obviously Not Well’, ABC NEWS THE BLOTTER (Dec. 14, 2012), http://abcnews.go. com/WNT/video/conn-shooter-adam-lanza-17979660.

48 Spencer Ackerman, Internet Identifies, Threatens Wrong Man as Newtown Shooter, WIRED (Dec. 14, 2012), http://www.wired.com/dangerroom/2012/12/newtown-shooter-face book.

49 Adam Serwer, How the Press Got It Wrong on the Newtown Shooter, MOTHER JONES (Dec. 14, 2012), http://www.motherjones.com/mojo/2012/12/ryan-lanza-newtown-shooting-med ia-fail.

50 Alyson Shontell, What It Was Like Being Ryan Lanza’s Facebook Friend When The World Thought He Was A Killer, BUSINESS INSIDER (Dec. 17, 2012), http://www. businessinsider.com/what-it-was-like-to-be-ryan-lanzas-facebook-friend-when-the-worldthought-he-was-a-killer-2012-12.

51 Erik Wemple, CNN Addresses Ryan-Adam Lanza Mis-ID, THE WASHINGTON POST (Dec. 15, 2012), http://www.washingtonpost.com/blogs/erik-wemple/wp/2012/12/15/cnn-addresses-rya n-adam-lanza-mis-id.

52 Id. 53 Id. 54 Terrence T. McDonald, Facebook page of Hoboken man identified as Connecticut shooter: ‘It wasn’t me’, NJ.COM (Dec. 14, 2012), http://www.nj.com/hudson/index.ssf/2012/12 /hoboken_man_identified_by_medi.html.

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The summer before, ABC News had been the culprit, due to its coverage of the July movie theater shooting in Aurora, Colorado. After federal law enforcement officials released the name of the shooter, James Holmes, to media outlets, ABC reporter Brian Ross speculated, on air, that an Aurora man named Jim Holmes who had a page on the Colorado Tea Party website was the suspect. 55 In fact, Jim Holmes was a 52-year-old father and former law enforcement officer, 56 and was not the actual shooter, who was a 24-year-old. 57 In ABC’s apology, the network acknowledged its error in “disseminating . . . information before it was properly vetted.” 58 According to Wemple, by reporting this unverified story, Ross committed a serious “journalistic felony.” As Wemple explains, “[y]ou can speculate on air about Mitt Romney’s motives for not releasing his tax returns; you can speculate on air about whether the heat wave will pass; [but] you cannot speculate on air about the identity of an alleged mass murderer.” 59 The consequences for the other Jim Holmes could have been disastrous. Apart from allegations of political bias, many criticized ABC for not adequately checking its facts. 60 Fortunately for ABC, Jim Holmes did not bring an action for defamation against the network, and as I will discuss, under the current state of defamation law, he probably would not have been successful anyway.

Thus far, the courts have only heard a handful of cases brought against news outlets for irresponsibly reporting information found on the Internet without first conducting proper fact-checks. However, the recent case Levesque v. Doocy illustrates how the subjective belief requirement of the actual malice standard can sink a plaintiff’s case even when the news outlet did not properly fact-check their 55

Jack Mirkinson, Aurora Shooting: ABC’s Brian Ross Incorrectly Suggests Tea Party Link, THE HUFFINGTON POST (July 10, 2012), http://www.huffingtonpost.com/2012/07/20/brian-rosstea-party-colorado-shooting_n_1689471.html.

56 Alex Pappas, Colorado tea partier describes ‘surreal’ day of wrongly being linked to theater massacre, THE DAILY CALLER (July 20, 2012), http://dailycaller.com/2012 /07/20/colorado-tea-partier-describes-surreal-day-of-wrongly-being-linked-to-batman-massacre.

57 Id. 58 Matthew Mosk, Brian Ross, Pierre Thomas, Richard Esposito, & Megan Chuchmach, Aurora Suspect James Holmes’ Mother: ‘You Have the Right Person’, ABC NEWS THE BLOTTER (July 20, 2012), http://abcnews.go.com/Blotter/aurora-dark-knight-shooting-suspect-identifiedjames-holmes/story?id=16818889#.UVc9Jqsjr4g.

59 Erik Wemple, Colorado Shootings: ABC News’s bogus report, WASH. POST (July 20, 2012), http://www.washingtonpost.com/blogs/erik-wemple/post/abc-news-invites-bias-claimswith-bogus-aurora-report/2012/07/20/gJQAJJWCyW_blog.html.

60 Erik Wemple, Aurora shootings: Was Brian Ross’s mistake evidence of bias?, WASH. POST (July 24, 2012), http://www.washingtonpost.com/blogs/erik-wemple/post/aurora-shootings-wasbrian-rosss-mistake-evidence-of-bias/2012/07/24/gJQACCu76W_blog.html.

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sources, in some cases reporting information that on its face alone is plainly ridiculous. 61 At issue in Levesque was an incident that occurred in a middle school cafeteria in Maine. A student put a bag containing ham on a table where some Muslim students were eating lunch. After the Muslim students became upset and reported the incident to the school administration, the offending student was suspended for ten days and the incident was reported to local police as a hate crime. Plaintiff Leon Levesque, the superintendent of the school district, gave an interview to a local paper, the Lewiston Sun Journal, and was quoted as saying that the incident was being taken seriously: “All our students should feel welcome and safe in our schools.” 62 Upon seeing this article, freelance writer Nicholas Plagman wrote a parody piece that was mostly true but changed some of the facts and quotes to mock what he saw as an excessive emphasis on political correctness. 63 The ham became a ham sandwich and Plagman fabricated quotes by Levesque including, “[t]hese children have got to learn that ham is not a toy, and that there are consequences for being nonchalant about where you put your sandwich” and “[a]ll our students should feel welcome in our schools, knowing that they are safe from attacks with ham, bacon, porkchops, or any other delicious meat that comes from pigs.” 64 The website Associated Content published the piece, which falsely cited the Associated Press as a source. 65 On April 24, 2011, Fox and Friends, a daily morning television show hosted by defendants Steve Doocy and Brian Kilmeade, included a segment on the Plagman article, which they did not realize was a fabrication. 66 A Fox News researcher had done a web search on the incident to confirm certain facts reported in the Plagman piece such as the existence of the school. The researcher found the local news article and confirmed that the Sun Journal was legitimate. 67 After the news bit was passed on to the hosts, Doocy used Google News to find both the Plagman and Sun Journal articles as well as a Boston Globe article, sourced to the Associated Press, confirming the general facts of the incident. The hosts appeared on the show that morning speaking derisively of Levesque’s involvement in the ham incident. 68 Doocy and Kilmeade attempted to interview Levesque on-air, 61

Levesque v. Doocy, 560 F.3d 82 (1st Cir. 2009).

Id. at 84.

63 Nick Plagman, The Ham Hate Crime, NICK PLAGMAN FOR DAILY SHOW INTERN http://nplagman.myweb.uga.edu/lawsuit.html (last visited Apr. 29, 2013).

64 Levesque, 560 F.3d at 85.

65 See Plagman supra note 63.

66 Levesque, 560 F.3d at 85.

67 Id. 68 Id. 62

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leaving two messages at his office at 8AM. 69 Levesque, who did not return the calls, sued for defamation and false light invasion of privacy. 70 The crux of the case was the actual malice inquiry. Although the district court found that the defendants had conducted very limited research on the Internet before broadcasting, 71 the First Circuit emphasized that “[a]ctual malice then is measured neither by reasonably prudent conduct nor an industry’s professional standards; rather, it is wholly subjective.” 72 Levesque pointed to both the defendants’ failure to adequately check the outrageous quotes in the Plagman article as well as their statements during the broadcast that they hoped they weren’t being “duped,” as evidence of reckless disregard for the truth. The court disagreed: It is true that a more deliberate consideration of the Plagman article should have caused reasonable skepticism about the source and that the defendants were careless in relying on it, but this is an indication of negligence, not actual malice, and Superintendent Levesque faces the heavy burden of providing evidence that the defendants recognized the carelessness with which they were proceeding. 73 Thus the court recognized that despite the absurdity of the defendants’ actions, because they did not actually entertain serious doubts, their conduct did not amount to reckless disregard of the truth and therefore was not actual malice, however professionally irresponsible their behavior may have been.

B. Courts May Impose Additional Duties on Journalists In light of incidents such as those described in the previous section, it is worth considering whether additional duties should be imposed on reporters to make it more difficult to republish untrustworthy material found on the Internet without conducting adequate fact-checking. Currently, there is no duty to investigate. Still, perhaps there should be an intermediate duty of care that is higher than the current duty of not being reckless while not as strict as requiring 69

Id. at 86.

Id. False light invasion of privacy is a tort that occurs when a non-public figure is portrayed in a misleading way to the public, thereby having his privacy invaded. See generally, Time, Inc. v. Hill, 385 U.S. 374 (1967).

71 See Levesque, 560 F.3d at 92.

72 Id. at 90, internal citations omitted.

73 Id. at 91, internal citations omitted.

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investigation. Courts should consider using the established dubious nature of Internet sources to justify requiring increased vigilance for reporters relying on them.

One possible revision of the actual malice standard is the creation of a heightened duty to investigate when citing to Internet sources. The Redmond decision illustrates the ease with which defendants may protect themselves in defamation actions by simply using their citation of unverified Internet sources to reveal the supposed facts behind their stated assertion(s). 74 While this appears to be the Gross designation of facts making opinions unactionable, 75 courts’ view of Internet sources as dubious casts doubt on whether Internet sources can be treated as “facts.” In Redmond, some of the “facts” the bloggers relied on were websites and online promotional material posted by the plaintiff himself 76 (and thus were more likely to be actual facts than if the bloggers had only read third-party accounts of the plaintiff’s work). But the court’s reasoning does not seem to rely on the quality of the facts; it wrote that the blog post was “transparent,” holding that citing sources (the “facts”) made the piece unactionable. 77 The court did not say what would result if the piece had cited to sources that were less favorable to the plaintiff’s work. For example, what would have been the result if the bloggers had cited to a website such as Obsidianfinancesucks.com? The court in Obsidian Financial indicated that the very name of the website, as well as the personal tone of its criticism, should put the reader on alert that this was a possibly biased source. 78 Would this qualify as citing to a fact under Redmond?

The uncertainty of what ought to be treated as a fact should encourage a heightened fact-checking standard when using Internet sources. Arguably, forming an opinion based on Obsidianfinancesucks.com when that source should obviously be subject to further investigation is not a journalistic practice that should be automatically shielded from a defamation action. At the very least, the source should not be cited baldly without any couching to indicate its potential bias. 79 It is one thing to report that such allegations exist, but it is another to use them as support for one’s own argument. For example, a reporter for the New York Times 74

See Redmond v. Gawker Media, LLC, No. CGC–11–508414, 2012 WL 3243507 at *1 (Cal. App. Dep’t Super. Ct. Aug. 10, 2012) (unpublished decision).

75 See Gross v. New York Times Co., 623 N.E.2d at 1167-68 (N.Y. 1993).

76 See Redmond, 2012 WL 3243507 at *2.

77 See id. at *6.

78 See Obsidian Fin. Grp., LLC v. Cox, 812 F. Supp. 2d 1220, 1232-33 (D. Or. 2011) 79 Journalistically, making clear that a site has a prejudiced opinion may not even be as good as trying to avoid such extremely biased sites altogether if trying to publish a responsible piece.

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would not use a person screaming conspiracy theories on a street corner to support an article she was writing on possible corrupt bank practices. The existence of Obsidianfinancesucks.com gives it a guise of respectability, albeit thin, because it is written down in some form. But it is important to remember that it is not much harder to obtain a domain name than it is to shout theories on the street.

When sources report information quickly, basing their information on unchecked sources that subsequent news outlets republish without checking the sources themselves, an additional difficulty arises. Should there be a heightened standard to investigate even when a supposedly reliable outlet reports first? The more these incidents happen with a specific outlet, such as CNNâ&#x20AC;&#x2122;s reporting the Hurricane Sandy Twitter rumors and the incorrect name of the Newtown shooter, the more other publications should be on notice that they need to check the facts behind what CNN reports before putting the information under their own names and exacerbating the problem. Most likely, CNN trusting the Twitter reports would fall under the previous discussion of the Obsidian hypothetical, since courts would likely hold that Twitter, as a journalistic source, should be viewed skeptically like a website with a name such as Obsidianfinancesucks.com, since there is no editorial oversight of Tweets. Other news outlets certainly have a reasonable belief that CNN is trustworthy because it has historically been a mostly accurate, dependable news source. Still, the frequency with which established news organizations are now stumbling should put other outlets on notice. Perhaps even more significantly, the rapidity with which information can spread online means that reputations can be destroyed within moments and may even endanger peopleâ&#x20AC;&#x2122;s lives. By naming the wrong suspect in the Aurora shooting, Brian Ross could have instigated a vigilante justice lynch mob. The same could have happened to Ryan Lanza, and indeed there was a huge backlash online. With such high stakes, a heightened standard of fact-checking, even when the information comes from other news outlets, should be encouraged as industry practice.

As such, the current subjective belief standard is too forgiving. The defendantâ&#x20AC;&#x2122;s victory in Levesque signified a victory for the stringent subjective belief standard that is unsettling. By relieving the defendant of liability for beliefs that when examined are clearly ridiculous simply because he subjectively held them, stretches the desire to protect journalistic freedom too far. Where it is absurd for defendants to believe they were reporting the truth or that the underlying facts could be relied upon, their actions should rise to the level of recklessness. At the very least, such defendants ought to be punished more severely than merely having to issue a retraction. Such a revision in the subjective belief standard might amount

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to courts viewing the use of Internet sources, when unverified, as circumstantial evidence of the defendant possessing serious doubts as to their sources.

C. The Ingrained Legal Standards Will Be Resistant to Change Despite the impulse to impose heightened obligations or revise the subjective belief requirement, courts and legislators (as well as journalist interest groups) will likely resist such change. Traditional defamation standards are extremely protective of writers in order to protect their First Amendment rights and avoid chilling their ability to report. New York Times v. Sullivan established the rationale for this protectiveness, citing “a profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wideopen.” 80 In defending the often-harsh results of the subjective belief requirement, the Supreme Court in St. Amant balanced the interest of plaintiffs in achieving justice against society’s interest in protecting the press, emphasizing the importance of furthering First Amendment values: “[T]o insure the ascertainment and publication of the truth about public affairs, it is essential that the First Amendment protect some erroneous publications as well as true ones.” 81 These cases push back against tightening the actual malice standard.

One factor that might impact a court’s decision of whether to view a writer’s use of Internet sources as a reason to impute doubts to them is whether society, as a whole, believes what is read on the Internet. According to a Pew Research Center study, twenty-nine percent of Americans believe that news organizations get the facts straight, and forty-two percent of Americans use the Internet as their primary news source. 82 While a significant part of society may be aware that they should not trust everything they read on the Internet, not every reader is savvy enough to know that what he reads on a blog, or even on CNN.com, may not have been verified.

It may be possible for the unreliable nature of Internet sources to be integrated into defamation law in the category of “dubious sources.” 83 Some courts have said that a journalist’s reliance on such untrustworthy sources may support a 80

New York Times Co. v. Sullivan, 376 U.S. 254, 270 (1964).

St. Amant v. Thompson, 390 U.S. 727, 732 (1968).

82 PEW RESEARCH CTR., PUBLIC EVALUATIONS OF THE NEWS MEDIA: 1985-2009, PRESS ACCURACY RATING HITS TWO DECADE LOW (2009), http://people-press.org/reports/pdf/543.pdf (last visited Apr. 20, 2013).

83 Foretich v. Am. Broad. Cos., Nos. Civ.A. 93–2620, Civ.A. 94–0037(HHG), 1997 WL 669644, at *8 (D.D.C. Oct. 17, 1997).

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finding of actual malice, while St. Amant states, “recklessness may be found where there are obvious reasons to doubt the veracity of the informant or the accuracy of his reports.” 84 Similarly, in Foretich v. American Broadcasting Companies, the district court stated, “[a] broadcaster’s complete reliance on dubious sources can support a finding of actual malice.” 85 Likewise, in Bentley v. Bunton, the court laid out the requirements for finding actual malice based on unprofessional reporting: The defendant's state of mind can—indeed, must usually—be proved by circumstantial evidence. A lack of care or an injurious motive in making a statement is not alone proof of actual malice, but care and motive are factors to be considered. An understandable misinterpretation of ambiguous facts does not show actual malice, but inherently improbable assertions and statements made on information that is obviously dubious may show actual malice. A failure to investigate fully is not evidence of actual malice; a purposeful avoidance of the truth is. 86 Given the receptiveness of courts to treat at least some sources as dubious, it seems probable that they would consider use of dubious Internet sources as circumstantial evidence of recklessness.

IV HOW WRITERS CAN ADAPT WITH THE TIMES A. What Can Be Done to Encourage More Responsibility Among Writers?

A judicial revision of the actual malice standard would be a forceful way to crack down on irresponsible journalism stemming from the use of Internet sources, and, as seen above, would likely meet strong resistance due to traditional First Amendment values. Nevertheless, judicial enactment of less dramatic changes might be feasible. Such changes could ensure recognition of the need for greater responsibility when dealing with Internet sources. Likely all journalists can agree that the 24-hour news cycle has increased the frequency of instances in which unverified reports go viral.

In the case of informal journalists, greater enforcement of professional standards is highly desirable since they do not have editors to keep them in line.

84

St. Amant, 390 U.S. at 732.

Foretich, 1997 WL 669644, at *8.

86 Bentley v. Bunton, 94 S.W.3d 561, 596 (Tex. 2002).

85

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However, how such enforcement would be carried out is unclear. As seen in Obsidian Financial, anyone who can afford a domain name (which can be obtained for an average of eight to ten dollars a year) 87 can buy a mouthpiece to the world.

Blogs are even more accessible as they are free on most platforms. 88 Additionally, commenting on message boards and articles published by other news sources is free, though one might have to first register with the website. 89 Admittedly, people who utilize these channels to disseminate information are at the extreme end of the spectrum of types of journalists. They are not usually subject to any editorial scrutiny and despite their lack of affiliation with an established news organization, their words have power and are often the subjects of defamation suits. The New Jersey Supreme Court discussed this phenomenon in Too Much Media: [S]elf-appointed journalists or entities with little track record … claim the [shield law] privilege require[s] more scrutiny…The popularity of the Internet has resulted in millions of bloggers who have no connection to traditional media. Any of them, as well as anyone with a Facebook account, could try to assert the privilege. 90 The question is whether traditional defamation standards are enough to encourage professionalism among these writers whose voices are disproportionately loud compared to the legitimacy of their messages. When respected news outlets rely on sources like these, the problem is compounded.

One solution would require bloggers and anonymous disseminators of information to show that what they publish has been vetted by others in the form of acknowledgements attached to their pieces. Both Obsidian Financial Group, LLC and John Dougherty’s Reformulating Shield Laws to Protect Digital Journalism in an Evolving Media World, suggest that this vetting process is necessary to encourage accurate reporting. 91 Digital authors could provide proof of editorial 87

Martin Zwilling, Get a Domain Name without Bankrupting Your Start-Up, FORBES (Jan. 14, 2013), http://www.forbes.com/sites/martinzwilling/2013/01/14/get-a-domain-name-withoutbankrupting-your-startup/.

88 See, e.g., TUMBLR, http://www.tumblr.com (last visited Oct. 16, 2013); WORDPRESS, http://www.wordpress.org (last visited Oct. 16, 2013).

89 See, e.g., GAWKER, www.gawker.com (last visted Oct. 16, 2013).

90 Too Much Media, LLC v. Hale, 20 A.3d 364, 383 (N.J. 2011) (explaining why courts should give extra scrutiny to non-traditional writers who claim shield law protection).

91 John J. Dougherty, Comment, Obsidian Financial Group, LLC v. Cox and Reformulating Shield Laws to Protect Digital Journalism in an Evolving Media World, 13 N.C.J.L. & TECH. ON. 287, 320 (2012), available at http://ncjolt.org/obsidian-financial-group-llc-v-cox-andreformulating-shield-laws-to-protects-digital-journalism-in-an-evolving-media-world.

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oversight in the form of a colleague, co-contributor, or traditional editor, or there could be an area for comments to enable crowd-sourcing. 92 In Wiki Authorship, Social Media, and the Curatorial Audience, Jon Garon encourages the development of citizen journalism and new media, while emphasizing that only those who maintain standards of accuracy, attribution, impartiality, and integrity will survive. 93 Unfortunately, due to lack of resources or the fact that most bloggers work alone and are not sponsored by a larger organization, it may be difficult for informal journalists to provide such assurances of editorial oversight to their readers. Still where possible, bloggers would be well advised to strive for standards of accuracy.

B. Practical Advice to Journalists and Other Writers What constitutes due diligence when relying on Internet sources? The root of the problem for professional journalists is that the time pressure of the news cycle encourages publishers to be irresponsible, whereas less-established writers simply may not know how to be responsible. Given the growing recognition among courts that what one reads on the Internet should be questioned, all writers, amateur and professional alike, should take note.

The level of fact-checking most journalists must adhere to should be above merely republishing Internet sources without any attempt to verify them. An encouraging development in this direction took place in the aftermath of the Boston Marathon bombings on April 15, 2013. Two days after the bombing, CNN reported that authorities had identified and arrested a suspect. 94 The Associated Press followed suit, citing an unnamed law enforcement official. 95 While many other news outlets hurried to republish the material and announce the arrests, some remained skeptical and attempted to verify the reports before getting on the bandwagon. NBC and CBS, citing their own sources, reported that no arrest had 92

See id.

Jon M. Garon, Wiki Authorship, Social Media, and the Curatorial Audience, 1 HARV. J. SPORTS & ENT. L. 95, 137 (2010). As new media experiment with tools for accuracy, such as crowd-sourcing, Garon cautions that traditional media must continue to uphold rigorous factchecking methods. See id. at 138.

94 Gary Levin, News outlets retract claim of Boston bomber arrest, USA TODAY (Apr. 17, 2013), http://www.usatoday.com/story/life/tv/2013/04/17/boston-bomb-ap-cnn-foxnews/2091127.

95 Denise Lavoie & Rodrique Ngowi, Correction: Boston Marathon-Explosions Story, THE ASSOCIATED PRESS (Apr. 18, 2013), http://bigstory.ap.org/article/fbi-appeals-help-solvingmarathon-bombings.

93

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been made and held firm to this line despite numerous reports to the contrary. 96 Their refusal to publish unverified news was rewarded when the FBI released a statement that refuted arrest reports and asked for better fact-checking: Contrary to widespread reporting, there have been no arrests made in connection with the Boston Marathon attack. Over the past day and a half, there have been a number of press reports based on information from unofficial sources that has been inaccurate. Since these stories often have unintended consequences, we ask the media, particularly at this early stage of the investigation, to exercise caution and attempt to verify information through appropriate official channels before reporting. 97 Based on the case law and trend of unreliability of Internet sources, the following is a list of basic tips to guide journalists and other writers faced with the task of searching for truth on the World Wide Web: • When evaluating a website’s trustworthiness, do not overlook the name of the site. Obsidianfinancesucks.com, a site that obviously has a strong opinion, should be met with more skepticism than a wellestablished news organization known for impartial reporting such as nytimes.com.

• Check the website for evidence of editorial oversight. A one-man blogging operation should be viewed differently than a site known for the rigor of its editorial process. In the same vein, a Tweet, even by a professional journalist, usually does not undergo a second look from an editor or colleague.

• Be aware of a website’s record for accuracy. If a website is known to have frequent slip-ups, it is not wise to take its reporting at face value.

• When republishing what other well-respected news organizations have reported, it is advisable to corroborate the facts before putting one’s own imprimatur on the news. NBC’s reluctance to republish news that an arrest had been made in Boston, based on its own 96

See Levin, supra note 94.

No Arrest Made in Bombing Investigation, THE FED. BUREAU OF INVESTIGATION (Apr. 17, 2013), http://www.fbi.gov/boston/press-releases/2013/no-arrest-made-in-bombing-investigation.

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sources’ insistence that no arrest had been made, provides a perfect illustration. Furthermore, in the digital age in which we live, accounts and websites of even the most respected institutions can be hacked, allowing for the spread of misinformation. 98 Where possible, it is always preferable to speak with live people to confirm or deny a story or fact, rather than relying solely on an unconfirmed Internet report.

• Keep in mind that there are many joke news sites, most of which do not make it obvious that their content is tongue-in-cheek. For example, The Duffel Blog posts satirical content about the U.S. Military, but its name is less recognized than other sites like The Onion. 99 As a result of an article published therein, in the fall of 2012 Senator Mitch McConnell’s office sent a letter to the Pentagon complaining about the Department of Defense offering veterans’ benefits to prisoners at Guantanamo Bay. 100 The Army veteran who created the site told the Wall Street Journal, “Incidents like this only illustrate a serious problem with our education system [.] …

Apparently, they aren't teaching skepticism or critical thinking in some parts of the country anymore." 101 CONCLUSION While this paper has discussed possible ways to revise the actual malice standard, including imposing additional duties journalists should follow, making it easier to punish journalists is not my intent. Rather, I am striving to convey a cautionary tale for writers who may not fully grasp the dubious nature of many sources of information they encounter each day. To avoid defamation actions, journalists of all stripes, from the New York Times to the solo blogger, should operate under high standards of accuracy. Today, anyone with an Internet connection wields power, thus those who choose to make their voices heard must do so responsibly.

98

See, e.g., Nicole Perlroth & Michael D. Shear, In Hacking, A.P Twitter Feed Sends False Report of Explosions, N.Y. TIMES (Apr. 23, 2013), http://thecaucus.blogs.nytimes.com /2013/04/23/hacked-a-p-twitter-feed-sends-erroneous-message-about-explosions-at-white-house.

99 THE DUFFEL BLOG, http://www.duffelblog.com (last visited Apr. 29, 2013).

100 Dion Nissenbaum, Prank and File: These Military Reports are Out of Line, WALL ST. J. (Apr. 21, 2013), http://online.wsj.com/news/articles/ SB10001424127887324345804578426881030734960.

101 Id.

THE MERGER AND THE DAMAGE DONE: HOW THE DOJ ENABLED AN EMPIRE IN THE LIVE MUSIC INDUSTRY JOSH BAKER * In 2010, the Antitrust Division of the Department of Justice approved the merger of Ticketmaster and Live Nation, who combined to form Live Nation Entertainment. This paper revisits the Department's antitrust analysis from its merger investigation in light of recent trends in the live music industry. It explores alternative theories of antitrust scrutiny that the Department either did not emphasize or omitted discussion of. Finally, it concludes that the merger posed a more significant threat to competition than the Department acknowledged, and that the remedies the Department imposed as conditions on the merger were insufficient to preserve effective competition in the relevant markets. The Department missed a tremendous opportunity to establish longterm competition in the nascent market for vertically integrated services. Artists, competing service providers, and ultimately consumers are worse off for it.

INTRODUCTION ..........................................................................................................77 I. THE LIVE MUSIC INDUSTRY ............................................................................78 A. Yesterday: A Brief History of the Music Industry ....................................78 B. A Day In The Life: Staging a Concert ......................................................79 C. Hello, Goodbye: Recent Industry Developments .....................................80 D. Come Together: Live Nation, Ticketmaster, and the Merger ..................81 1. Live Nation: History and Strategy ......................................................81 2. Ticketmaster: History and Strategy ....................................................83 3. The Merger Investigation and Consent Agreement ............................84 II. THE DEPARTMENT OF JUSTICEâ&#x20AC;&#x2122;S ANTITRUST ANALYSIS .................................85 A. Jigsaw Puzzle: Horizontal Components of the Merger............................86 1. The Market for Primary Ticketing Services ........................................86 2. The Market for Integrated Service Packages ......................................90 B. All Down The Line: Vertical Components of the Merger ........................92 1. Anticompetitive Concerns of Vertical Integration ..............................93 2. The Firmsâ&#x20AC;&#x2122; Asserted Procompetitive Justifications ............................96 *

J.D., 2013, New York University School of Law; B.A., 2009, University of Maryland. This Article was originally written for Prof. Daniel Rubinfeld's seminar on Antitrust Law and Economics. I would like to thank Prof. Rubinfeld and the members of the JIPEL staff for their assistance with this Article.

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C. Under My Thumb: The DOJ’s Final Judgment .......................................97 III. REMEDIES .......................................................................................................97 A. I Want To Break Free: Structural Remedies ............................................98 B. Don’t Stop Me Now: Behavioral Remedies............................................101 CONCLUSION ...........................................................................................................103 INTRODUCTION In February 2009, Ticketmaster Entertainment and Live Nation announced a “merger of equals” that would unite these two titans of live entertainment, sending shockwaves through the industry.1 On January 25, 2010, the United States Department of Justice approved the merger. When the Antitrust Division of the Department of Justice (“DOJ”) announced its decision, it encountered harsh criticism and backlash from within the industry for allowing these alreadydominant firms to join forces. Spurred on by outcries from rock stars and politicians, the public regarded this deal with serious skepticism. 2 Nevertheless, the merger went through and Live Nation Entertainment (“LNE”) was born. A close examination of the merger can shed light on aspects of the music industry that inform the antitrust analysis, the efficacy of the remedies imposed in the consent decree, and the effects of the merger on the live music industry. This analysis will show that the DOJ should not have permitted the merger to proceed.

In Part I of this Note I will detail the aspects of the music industry that are relevant to an examination of this merger. In Part II I will reexamine the DOJ’s antitrust analysis of the merger while Part III will explain how the structural and behavioral remedies imposed have failed to engender competition. Finally, I will argue that the DOJ overlooked a vital opportunity to create competition in the budding market of fully integrated live performance services.

1

Live Nation, Ticketmaster Announce Merger, POLLSTAR (Feb. 2, 2009), http://www.pollstar.com/news_article.aspx?ID=647940.

2 See, e.g., Daniel Kreps, Bruce Springsteen “Furious” At Ticketmaster, Rails Against Live Nation Merger, ROLLING STONE (Feb. 4, 2009), http://www.rollingstone.com/music/news/brucespringsteen-furious-at-ticketmaster-rails-against-live-nation-merger-20090204; Cecilia Kang, Senator Urges Scrutiny of Ticketmaster Deal, WASH. POST (July 28, 2009) (referring to Sen. Herb Kohl), http://articles.washingtonpost.com/2009-07-28/politics/36776418_1_ticket-pricespaperless-tickets-ticketmaster; Alfred Branch Jr., Ticketmaster/Live Nation merger: Pascrell letter to Justice Department yields impressive numbers, TICKET NEWS (July 29, 2009) (referring to Rep. Bill Pascrell), http://www.ticketnews.com/features/Ticketmaster-Live-Nation-mergerPascrell-letter-to-Justice-Department-yields-impressive-numbers7092917.

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I THE LIVE MUSIC INDUSTRY A. Yesterday: A Brief History of the Music Industry Since the turn of the century, the music industry has been popularly characterized as a sinking ship, doomed by the prevalence of piracy and filesharing. However, this depiction ignores half of the story. From 1999 to 2009 as the recording industry flailed, revenue from concert ticket sales in the United States skyrocketed from $1.5 billion to $4.6 billion. 3 It should be noted that such figures are a relatively new phenomenon, as the live music industry was not always so profitable.

Prior to the 1950s, live concerts were only seen at nightclubs, dance halls, and restaurants. In the decade following World War II, technological advances helped create a mass market for recorded music. Record companies formed, signing artists to multi-album contracts and helping artists expand their audiences.

The record companies encouraged artists to perform large concerts to draw fans and drive record sales. As some artists began to surge in popularity they were able to tour regionally, and the more successful ones, nationally. These artists would use local promoters to market their performances at each venue. The mass market for popular music grew rapidly, and soon enough promoters and other entrepreneurs began to build concert venues to accommodate larger audiences.

Artists with a substantial fan base would perform in indoor clubs and artists who could draw a larger audience played in amphitheaters. The most popular artists began performing in arenas and stadiums. These “superstar” artists typically generated the lion’s share of ticket sale revenues. By 2009, gross revenues from the top one hundred tours had reached $2.5 billion. 4 However, superstar artists are few and far between. In 2009 fewer than one hundred artists worldwide were capable of drawing enough fans to fill amphitheaters or larger venues, and not all of these superstars tour each year. 5 The services of superstar artists are thus a scarce and crucial resource, fervently sought after by concert promoters.

3

Timothy B. Lee, Why We Shouldn’t Worry About The (Alleged) Decline Of The Music Industry, FORBES (Jan. 30, 2012), http://www.forbes.com/sites/timothylee/2012/01/30/why-weshouldnt-worry-about-the-decline-of-the-music-industry.

4 Steve Jones, 2010 wasn’t exactly rocking for the music concert industry, USA TODAY (Jan. 12, 2011), http://usatoday30.usatoday.com/life/music/news/2011-01-12-touring12_ST_N.htm.

5 Complaint at ¶¶ 53-54, It’s My Party, Inc. v. Live Nation, Inc., No. 109CV00547, 2009 WL 1473260 (D. Md. Mar. 5, 2009) [hereinafter “IMP Complaint”].

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B. A Day In The Life: Staging a Concert A complex string of relationships is required to produce a concert. The key figures and entities in the chain are the artist, manager, booking agent, promoter, venue, venue service providers (including the ticket distributor), secondary ticket market, and consumers. Understanding each role in the process is crucial to analyzing the Live Nation-Ticketmaster merger under antitrust law.

The first link is the artist’s personal manager. The manager serves a variety of purposes, one of which is arranging performances via the booking agent. The booking agent contracts with a promoter (such as Live Nation) to produce either an individual show or a multi-performance tour. The artist generally receives a guaranteed payout from each performance, or alternatively, a percentage of revenues. The manager and agent receive percentages of the artist’s income (typically 15% and 5%, respectively).

The promoter is responsible for obtaining the performance space and marketing the event. The promoter usually receives a guaranteed payout, subordinate to the artist’s. After the guaranteed payouts are made, the remaining revenue is split between the artist and the promoter.

The venue rents out the performance space and contracts for ticket distribution, concessions, merchandise, security and other services, or provides them in-house. The venue receives a percentage of the ticket distributor’s fees as well as a percentage of the concessions and merchandise sold during the performance. Artists receive the largest share of merchandise revenue.

The ticket distributor delivers tickets to consumers (“primary ticketing services”). The distributor receives a portion of the ticket service fees, which are added to the face value of the tickets. To clarify a common misunderstanding, the face value of the ticket is split between, and determined by, only the artist and the promoter. It is beyond the purview of ticket distributors. Critics of surging ticket prices must understand that ticket distributors (such as Ticketmaster) should only be held responsible for increases in service fees, not increases in ticket prices.

Finally, the consumer pays the face value of the ticket, plus the service fees, in exchange for admission to the concert. Once the tickets are purchased, secondary ticketing services (such as StubHub.com) allow for the resale of tickets between consumers. On the secondary market, prices may fluctuate considerably.

The secondary ticketing service provider also charges a fee for each sale.

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C. Hello, Goodbye: Recent Industry Developments For a litany of reasons, sales of physical albums have declined precipitously from levels seen at the turn of the century. Per Nielsen SoundScan, total album sales in 1999 reached 755 million—648 million from CDs and 105 million from cassettes. 6 By 2009, total album sales had dropped to 374 million. 7 Digital sales, which accounted for 40% of all music purchases in 2009, are increasing but have not yet replaced the losses incurred from declining physical sales.

Conversely over the same time period, revenue from live performances has been steadily increasing. Even with ticket prices on the rise, concert attendance is growing. Artists used to go on tour to promote album sales, but now the relationship has flipped. In 1999, Millenium by the Backstreet Boys was the top selling album, generating $187 million in sales. 8 The Backstreet Boys’ touring revenues however only came to $37.1 million. 9 In contrast, U2’s record-breaking 2011 tour grossed $156 million in ticket sales, while the band pulled in a mere $4.8 million from combined album and digital sales. 10 Another significant trend the music industry has recently experienced is the emergence of “360 deals.” While the proliferation of these deals may seem revolutionary, this is not an altogether unexpected phenomenon. For years, record companies were models of vertical integration, providing artists with distribution, marketing, promotion, production and other services that were crucial to commercial success. Artists dreamed of signing “the big record deal,” seeking a big company to provide them with everything needed to release a successful album, since that used to translate into financial success. There is a well6

Nielsen SoundScan is the official method of tracking sales of music throughout the United States. SoundScan 1999 Year-End Music Industry Report, BACKSTREET.NET (Jan. 6, 2000), http://www.backstreet.net/www.cgi?x=show&d=news&i=000106-0859-01&c=0.

7 The Nielsen Company 2009 Year-End Music Industry Report, BUS. WIRE (Jan. 6, 2010), http://www.businesswire.com/news/home/20100106007077/en/2009-U.S.-Music-Purchases-2.12008-Music. The top selling album of 2009 (Taylor Swift’s Fearless) would not have ranked in the top ten in 1999.

8 musicNEWS: The Top 10 Biggest Sellers of ’99, http://www.antimusic.com/news /2000/jan/item3.shtml (last visited Oct. 26, 2013).

9 Id. 1999’s top grossing tour (the Rolling Stones) earned $64.7 million. Mick Jagger, Rolling Stones Top Grossing At $64.7 Million, CHI. TRIBUNE (Dec. 30, 1999), http://articles.chicagotribune.com/1999-12-30/news/9912310378_1_rolling-stones-reunion-tourricky-martin.

10 Randy Lewis, U2 is tops again in concert and music-sales revenue, L.A. TIMES (Jan. 8, 2012), http://latimesblogs.latimes.com/music_blog/2012/01/u2-is-the-top-grosser-in-concertand-music-sales-revenues.html.

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documented history of artists agreeing to long-term contracts with the biggest labels, pursuing lucrative upfront advances and instant celebrity. The recent change has not been the behavioral pattern of artists, but rather that companies on the live performance side of the industry have begun consolidating their many roles. Artists still demand one-stop shopping, and with touring replacing album sales as the primary source of revenue, the major entities in the concert business are developing their capacity to supply those services.

D. Come Together: Live Nation, Ticketmaster, and the Merger Live Nation and Ticketmaster were the two premier examples of increasingly vertically integrated firms in the live performance industry. Each had a history of pursuing vertical integration by acquiring companies in complementary markets. The merger of these two firms demonstrated their commitment to this strategy.

1. Live Nation: History and Strategy Live Nation was principally a promotion company that started in the late 1990s as SFX Entertainment. Around 1997, SFX Entertainment began acquiring competing major promoters around the country to develop a national network. As SFX expanded, it introduced the practice of exclusively promoting significant portions, or even the entirety, of an artistâ&#x20AC;&#x2122;s national tour. Previously, artists (via their booking agents) would contract with individual local promoters in the regional markets where they wished to perform. In 2000, Clear Channel bought SFX and renamed it Clear Channel Entertainment. 11 Over the next few years, Clear Channel Entertainment significantly increased its share of the concert promotion market and acquired exclusive rights (via sale or contract) to numerous prestigious amphitheaters and other performance venues across the country. In 2005, following antitrust investigations, Clear Channel was forced to spin off Clear Channel Entertainment as a new entity, Live Nation.

In 2008, Live Nation boasted that it was â&#x20AC;&#x153;the largest producer of live concerts in the world, annually producing over 16,000 concerts for 1,500 artists in

11

In recent years Clear Channel has owned or operated a stable of over 1,200 radio stations across the country (a figure estimated to be closer to 850 presently), an extremely dominant position in a market that was once crucial to promotional efforts. The increasing influence of social media and shifting consumer listening habits have eroded the position of radio as the only medium for reaching potential fans.

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57 countries.” 12 In the United States alone, Live Nation owned 18 venues, held leases on 70 more, and operated many beyond that. Live Nation also owned or operated approximately 90% of the amphitheater venues in the United States.

Additionally, Live Nation’s subsidiaries held booking rights for 159 venues around the world, and their events represented between 35-58% of all concerts, depending on the estimate. 13 In addition to achieving horizontal integration through the acquisition of competitors, Live Nation began to expand its reach vertically as well. In 2006, Live Nation acquired MusicToday, an online retailer for music merchandise.

Although Live Nation was a longtime Ticketmaster client, in 2008 Live Nation announced that it would partner with CTS Eventim (Europe’s largest ticket distributor) to create its own ticket distribution platform. This platform was expected to compete directly with Ticketmaster in the market for primary ticketing services. 14 That same year, Live Nation also announced an agreement with SMG, a venue operator and former Ticketmaster client, to provide ticketing services for SMG venues.

Live Nation has drawn antitrust scrutiny and allegations of engaging in anticompetitive behavior on multiple occasions. A set of class action lawsuits commencing in 2002 claimed that Clear Channel (prior to divesting Live Nation) restricted airplay on its radio stations for artists that competing promoters had booked. 15 A 2009 claim brought by an independent promoter claimed that Live Nation engaged in anticompetitive tying arrangements by leveraging its venues and promotional services, illegally monopolizing markets for amphitheater venues and promotional services, and denying competitors access to major artists (a “critical input”). 16 After the merger, in 2011, a separate class action by concertgoers claimed that Live Nation imposed mandatory parking fees as a form of illegal tying.17

12

Alan J. Meese & Barak D. Richman, A Careful Examination of the Proposed Live NationTicketmaster Merger 16 (William & Mary Law School Research Paper No. 09-41, 2009).

13 Id. 14 An errant prediction, discussed in greater detail in Part II. 15 See In re Live Concert Antitrust Litigation, 863 F.Supp.2d 966 (C.D. Cal. 2012) (consolidating claims brought by Malinda Heerwagen and Nobody in Particular Presents).

16 IMP complaint, supra note 5, ¶¶ 177-85.

17 See Batson v. Live Nation Entertainment, Inc., No. 11 C 1226, 2013 WL 992641 (N.D. Ill. Mar. 13, 2013); Concert Fan Scream At Live Nation’s Fees For Phantom Parking Spaces, ANTITRUST TODAY (Mar. 18, 2011), http://www.antitrusttoday.com/2011/03/18/concert-fansscream-at-live-nation%E2%80%99s-fees-for-phantom-parking-spaces/.

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2. Ticketmaster: History and Strategy Ticketmaster offers integrated, full-service ticket distribution, which includes online sales, retail outlets, call centers and venue box office operations.

In its early years, Ticketmaster competed with Ticketron, another primary ticket distribution service provider. With superior online technology and service, Ticketmaster surpassed and eventually acquired Ticketron. Over the past decade, Ticketmaster.com has grown into one of the five largest e-commerce sites in the world, with over 26 million unique visitors each month. 18 Ticketmaster has also demonstrated a predilection for pursuing vertical integration. In 2008, Ticketmaster acquired Front Line Management Group. Front Line is the worldâ&#x20AC;&#x2122;s leading artist management firm, representing over 250 artists. 19 Ticketmaster also acquired Paciolan, a leading supplier of ticketing software, as well as TicketsNow and GetMeIn, which offer secondary ticketing services. Both Ticketmaster and its subsidiary Front Line have distinct histories of acquiring rivals and companies in complementary markets.

Ticket buyers and artists have launched a bevy of complaints over the years alleging that Ticketmaster charges excessive fees on primary ticket sales as a result of its monopoly power. 20 Pearl Jam was involved in a very public (if ultimately fruitless) spat with Ticketmaster over excessive service fees in the mid-1990s. 21 In 2003, The String Cheese Incident and its associated booking group claimed Ticketmaster had abused its market power by denying the group a customary percentage of the tickets to a concert through the use of exclusive contracts. 22 In another case which began in 2003, the Superior Court of California granted class certification on allegations that Ticketmaster misrepresents or omits the fact of a profit component in its shipping and processing fees. 23 Immediately preceding the 18

Who We Are, TICKETMASTER, http://www.ticketmaster.com/h/about_us.html (last visited Oct. 26, 2013).

19 Id. 20 Campos v. Ticketmaster Corp., 140 F.3d 1166 (8th Cir. 1998); Another TM Suit In Canada, POLLSTAR.COM (Feb. 17, 2009), http://www.pollstar.com/news_article.aspx?ID= 649152.

21 Chuck Philips, U.S. Drop Ticketmaster Antitrust Probe, L.A. TIMES (July 6, 1995), http://articles.latimes.com/1995-07-06/business/fi-20602_1_antitrust-probe.

22 Ben Sisario, A Band Battles Ticketmaster on Sales Fees, N.Y. TIMES (May 15, 2012), http://www.nytimes.com/2012/05/16/arts/music/string-cheese-incident-takes-onticketmaster.html?_r=0.

23 The parties settled the litigation in December 2010. Live Nation Entertainment, Inc., Annual Report (Form 10-K) at 38-39 (Feb. 26, 2013), available at http://phx.corporate-

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merger with Live Nation, Ticketmaster faced public outcry and claims that it had conspired to divert tickets for popular events directly to TicketsNow, where tickets were sold at substantially higher prices. 24 A series of class action complaints regarding this alleged behavior were filed in Canada in February 2009, and later settled in February 2012. 25 3. The Merger Investigation and Consent Agreement On February 10, 2009, Live Nation and Ticketmaster entered into an agreement under which they would merge into a new entity called Live Nation Entertainment. The companies joined in a tax-free, all-stock merger with a combined enterprise value of approximately $2.5 billion. 26 Over the course of the following year, the DOJ conducted an investigation into the effects the merger might have on competition. A number of competitors and interested parties submitted comments opposing the merger. 27 Ultimately, the DOJ found that the merger would substantially decrease competition in primary ticketing services for major concert venues. To allay this concern, on January 25, 2010, the DOJ and the parties entered into a consent agreement that would permit the merger provided that specific measures were taken to address the effect on the primary ticketing market. Although the DOJâ&#x20AC;&#x2122;s Competitive Impact Statement said its only concern was the primary ticketing market, their remedies and analysis touched on other potential anticompetitive effects. 28 These secondary concerns will be discussed in Part II, infra.

ir.net/phoenix.zhtml?c=194146&p=irol-reportsAnnual [hereafter Live Nation Entertainment 10K].

24 Matt Oâ&#x20AC;&#x2122;Donnell, Ticketmaster, TicketsNow Fee Class Action Settlement, TOPCLASSACTIONS.COM (Oct. 24, 2011), http://www.topclassactions.com/lawsuit-settlements/ lawsuit-news/1430-ticketmaster-ticketsnow-fee-class-action-settlement.

25 Live Nation Entertainment 10-K, supra note 23, at 39.

26 Live Nation, Ticketmaster Announce Merger, supra note 1.

27 See The Ticketmaster/Live Nation Merger: What Does it Mean for Consumers and the Future of the Concert Business: Hearing Before the Subcomm. on Antitrust, Competition Policy and Consumer Rights of the S. Comm. on the Judiciary, 111th Cong. (2009) (written testimony of Jerry Mickelson, Chairman and Executive Vice President, JAM Productions) [hereinafter Mickelson testimony]; David A. Balto, Senior Fellow, Center for American Progress Action Fund [hereinafter Balto testimony]; Seth Hurwitz, Co-Owener, I.M.P. Productions and 9:30 Club [hereinafter Hurwitz testimony]), available at http://www.judiciary.senate.gov/hearings/ hearing.cfm?id=e655f9e2809e5476862f735da143edaa.

28 Competitive Impact Statement, United States v. Ticketmaster Entm't Inc., et al., No.1:10cv- 00139, 13 (D.D.C. Jan. 25, 2010).

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The ten-year consent agreement—still in effect—includes both structural and behavioral remedies. Ticketmaster agreed to license its ticketing software to AEG, the second leading promoter in the United States, and to divest its Paciolan division to Comcast-Spectacor, one of Ticketmaster’s competitors in the primary ticketing services market. 29 The consent agreement also prohibits LNE from misusing proprietary ticketing information. 30 Promoters that were Ticketmaster clients would be at a significant disadvantage if their chief rival, Live Nation, were privy to such sensitive information, so LNE is restricted from sharing this information between their ticketing and promotion operations. The agreement also stipulates that Ticketmaster provide these clients with a copy of this information should the clients decline to renew their contracts with Ticketmaster. 31 Further, the agreement forbids LNE from engaging in retaliatory measures against competitors, which might occur via anticompetitive tying practices involving their venues, ticketing services, promotional services and Front Line-managed artists. 32 To enforce the agreement, the DOJ established a new Compliance Committee to monitor industry developments and encourage consumers and competitors to report violations. The Committee is authorized to interview employees of the firm and demand corporate documents regarding matters relating to the consent decree. 33 II THE DEPARTMENT OF JUSTICE’S ANTITRUST ANALYSIS The Clayton Act prohibits combinations and acquisitions where “the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.” 34 A central tenet of antitrust law is that effective competition drives prices towards marginal costs, spurring innovation, incentivizing efficiency, and benefiting consumers.

The antitrust analysis resulting from the DOJ’s investigation into the Live Nation-Ticketmaster merger formed the basis for the consent order and the remedies included therein. This section will scrutinize the DOJ’s antitrust analysis and examine alternative theories the DOJ should have considered.

29

Final Judgment, United States v. Ticketmaster Entm't Inc., et al., No.1:10-cv- 00139, 2010 WL 5699134, at *4-7 (D.D.C. July 30, 2010).

30 Id. 31 Id. 32 Id. at *9-10.

33 Aaron Silvenis, Live Aid? Assessing the Ability of the Ticketmaster-Live Nation Consent Decree to Restore Competition Levels in the Primary Ticketing Market 18 (The Am. Antitrust Inst., Working Paper No. 11-02, 2011).

34 15 U.S.C. § 18.

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A. Jigsaw Puzzle: Horizontal Components of the Merger The focus of the DOJ’s antitrust analysis was the market for primary ticketing services, the sole significant market in which Ticketmaster and Live Nation both already participated and where they had been chief rivals. When Live Nation partnered with CTS Eventim to enter the primary ticketing services market, it became Ticketmaster’s fiercest competitor. The merger threatened to eliminate this significant competitive force.

1. The Market for Primary Ticketing Services A proper analysis of the horizontal effects of this merger must begin with a definition of the competitive market at stake. A standard test for appropriate market definition, the “SSNIP test,” entails identifying a set of products or services over which a hypothetical monopolist (i.e. the merged firm) could profitably impose a small but significant and non-transitory increase in price. For the merger at hand, the relevant market included major concert venues and primary ticketing service providers. 35 If a monopolist in this market were to impose a SSNIP above the otherwise competitive pricing level, major concert venues would not be able to freely substitute an alternative. Venues must provide a primary ticketing service to consumers, and there are no viable alternatives to providing such a service outside of the identified market.

In the market for primary ticketing services, sellers are able to price discriminate among different venues, as contracts between ticketing companies and venues are individually negotiated and typically prohibit the resale of those services. 36 Price discrimination could therefore result in the merger affecting each class of venues differently. Hence, the antitrust analysis focused on venues with few alternate service providers because the merger could disproportionately disadvantage such venues. The analysis found that the venues most affected by this merger were major concert venues. 37 These venues require sophisticated 35

Primary ticketing services can be obtained through a third party, such as Ticketmaster, or provided in-house with the assistance of firms that facilitate self-distribution. Meese, supra note 12, at 41 n. 116. Notably, consumers are not relevant participants in this market. Although effects on consumer welfare are important to consider, and consumers will surely feel the effects passed on through end prices, they have no bearing on the immediate inquiry. See Campos, 140 F.3d at 1174.

36 Competitive Impact Statement, supra note 28, at 6.

37 The DOJ defined “major concert venues” as the top 500 venues by annual revenue, as reported to Pollstar. Id. at 4 n. 2. Alternative proposed definitions restrict the number of distinctly affected venues to those with a capacity of over 8,000. See Plaintiff United States’

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ticketing services that can withstand heavy transaction volume and complex marketing and distribution needs. 38 Only a limited set of firms was capable of providing these specialized services and fewer still had the proven track record that these venues desired. Live Nation and Ticketmaster were both among this select group.

Defining the market at issue also requires examining geographical boundaries. For this merger, the relevant geographic market was the United States. 39 Although foreign ticketing services could potentially enter into the domestic market, at the time of the merger they were not significant market participants and have still not exerted much competitive influence within the domestic market. Therefore, the relevant market was defined as major concert venues within the United States.

Once the market is defined, market participants must be identified and their respective market shares need to be calculated. Ticketmaster has long been the dominant supplier of primary ticketing services to major venues, with over an 80% market share before 2009. 40 In fact, in 2008 no other firm held more than a 4% share. 41 In the months preceding the merger, Live Nation declined to renew its contract with Ticketmaster and began to compete in primary ticketing services.

According to TicketNews, the power scores (a market share approximation using an estimation of actual transactions) of Ticketmaster.com and LiveNation.com at the end of August 2009 were 60.32 and 16.02, respectively. 42 Using these power score figures, the Herfindahl-Hirschman Index (HHI)â&#x20AC;&#x201D;a metric used by the DOJ as well as the Federal Trade Commission since 1982 to measure market concentrationâ&#x20AC;&#x201D;for this market was nearly 4,000 prior to the merger, even ignoring all other firms. 43 The DOJ-FTC 1992 Horizontal Merger Guidelines regard a Response To Public Comments, United States v. Ticketmaster Entm't Inc., et al., No.1:10-cv00139-RMC at 20 (D.D.C. June 21, 2010) [hereinafter Response To Public Comments]. Others have argued that venue size is an altogether arbitrary and improper distinction for identifying relevant market participants. Meese, supra note 12, at 32.

38 Meese, supra note 12, at 31 n.70 (citing Evren Ergin, Barclays Capital, Ticketmaster-Live Nation Antitrust Analysis, Apr. 30, 2009, at 5).

39 Competitive Impact Statement, supra note 28, at 8.

40 Id. 41 Id. 42 Top Primary Ticket Sellers, TICKETNEWS, http://www.ticketnews.com/view/ TopPrimarySellers?page=4 (week ending Aug. 29, 2009). The next closest competitor, Telecharge.com, had a score of 5.03.

43 HHI is the sum of the squares of the market shares of each participant, so including other firms would only increase the HHI.

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market with a HHI greater than 1,800 as “highly concentrated.” 44 The Merger Guidelines declared that a merger is presumed “likely to create or enhance market power” if it increases the HHI of a highly concentrated market by more than one hundred. 45 Based on the power score figures, this merger increased the HHI by almost two thousand. Although this illustration omits important parts of the market, such as companies that enable self-distribution, the merger still presented significant concerns under traditional horizontal merger analysis.

However, calculating the HHI of a potential merger produces only a presumption of market power. It does not constitute a full analysis of the effects the transaction could have on competition. Accordingly, the DOJ has stated that the calculation of market shares and concentration ratios “provide only the starting point for analyzing the competitive impact of a merger.” 46 Importantly, the presumption that the merger is likely to increase market power does not necessarily indicate that the merged firm will, or has the ability to, act anticompetitively.

One key factor the HHI calculation does not take into account is potential competitors not presently participating in the market. A hypothetical price increase by the merged firm could entice outsider firms to enter the market, making the price increase unsustainable. However, in the primary ticketing market, substantial barriers to entry prevent potential entrants from supplying a competitive check on LNE’s behavior. The DOJ identified a number of these barriers to entry in its investigation of the merger.

Providing ticket distribution services to major concert venues requires platforms that are technologically complex and expensive to develop. 47 The high fixed costs necessary for developing and maintaining such platforms are especially problematic for potential entrants because they exacerbate the difficulty of achieving sufficient scale to provide effective market competition. 48 Furthermore, after years of operating at an impressive scale, LNE has unparalleled access to

44

U.S. DEPARTMENT OF JUSTICE AND FEDERAL TRADE COMMISSION, 1992 Horizontal Merger Guidelines, available at http://www.ftc.gov/bc/docs/horizmer.shtm [hereinafter 1992 Guidelines].

The Guidelines were updated on August 19, 2010, available at http://www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter 2010 Guidelines]. The threshold for “highly concentrated” markets in the 2010 Guidelines is 2,500.

45 1992 Guidelines, supra note 44. The 2010 Guidelines threshold for mergers “likely to enhance market power” is an increase of 200 points.

46 Id. at 18.

47 Competitive Impact Statement, supra note 28, at 9.

48 Id.

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individual consumer data. The firm can leverage this data to provide marketing services that others could not initially offer venues. 49 Other aspects of Ticketmaster’s business model also discourage market entry. Ticketmaster regularly uses medium- to long-term exclusive contracts with venues (averaging six years in duration), with approximately twenty percent of these contracts expiring each year. 50 These contracts limit how quickly another firm could obtain a competitively effective scale. Venues also incur costs to install and teach employees to use new platforms; these costs act as counterincentives to the venue switching its primary ticketing service provider. 51 To evade these prohibitive cost barriers, new entrants might adopt software platforms that offer cheaper, yet effective, online distribution alternatives. 52 The licensing of webbased ticketing platforms involves extremely low marginal costs, which may help attract potential entrants. However, this would still not avoid the scale effects and costs to venues of switching service providers.

Even firms already engaged in the business of ticket distribution face barriers to real competition for major concert venues. The major venues have complex ticketing needs, such as a high volume of sales upon initial ticket availability, and accordingly can be extremely reluctant to sign long-term deals with unproven ticketing companies. The slightest hiccup in primary ticketing services can produce disastrous effects for a venue, so a track record of reliability is a prized commodity. 53 Ticketmaster has established a strong reputation for capably providing complex ticketing solutions. Immediately prior to the merger, Live Nation, in an effort to establish a reputation for its own ticketing platform, was attempting to build experience handling ticketing services for its own venues.

As the DOJ stated in its Competitive Impact Statement assessing the merger, “[n]o primary ticketing company other than Ticketmaster and Live Nation has amassed or likely could have amassed in the near term sufficient scale to develop a reputation for successfully delivering similarly sophisticated primary ticketing services.” 54 The DOJ recognized that potential entrants would be hard-pressed to convince venues to gamble on unproven ticketing partners that may encounter growing pains.

49

Id. at 9-10.

Meese, supra note 12, at 62.

51 Competitive Impact Statement, supra note 28, at 9.

52 Meese, supra note 12, at 33.

53 See JAMES D. HURWITZ, COMMENTARY: TICKETMASTER – LIVE NATION 34 (The Am. Antitrust Institute, 2009).

54 Competitive Impact Statement, supra note 28, at 7.

50

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The DOJ identified one firm who could potentially provide direct competition in the primary ticketing services market: CTS Eventim, a German ticketing firm. While the DOJ pointed to Live Nation’s agreement with CTS as evidence that former Ticketmaster clients could emigrate to newer competitors, the merger itself showed that such competition was not yet viable on a significant scale. 55 After Live Nation explored engaging in direct competition with Ticketmaster via licensing CTS software and adapting it to the North American market, it decided to forego this option. According to LNE’s own 10-K filing, the company terminated its agreement with CTS because the German firm “fail[ed] to deliver a North American ticketing system that met the contractual requirements of being a ‘world class ticketing system . . . that fits the needs of the North American market.’” 56 While new competitors may be better equipped to compete with LNE in the primary ticketing market, CTS was the most likely entrant and most viable competitor at a significant scale. Live Nation’s decision to join, rather than compete, was at least partially motivated by a lack of competing services capable of rivaling Ticketmaster’s dominant platform.

One consideration the DOJ omitted from its analysis was the potential for substitution, specifically in the form of self-distribution. Rather than contract out to Ticketmaster or Live Nation for primary ticketing services, venues could turn, and have turned, to companies that offer software solutions that enable venues to handle ticket distribution in-house. Even with a dearth of effective competitors in the market for third-party ticketing services, were LNE to significantly raise prices for its ticketing services, venues in that market could substitute this in-house distribution option. In fact, a number of former Ticketmaster clients did just that. 57 Companies that offer these services have already developed the capacity to serve major venues and thus face fewer cost barriers to entry. This in-house option provides at least a plausible restraint on the sustainability of potential price increases from LNE. 2. The Market for Integrated Service Packages The second horizontal concern the DOJ identified in its analysis of the merger was the effect on the market for vertically integrated service packages. 58 55

See id. at 10.

Live Nation Entertainment 10-K, supra note 23, at 37.

57 Examples include the Houston-Toyota Center, Kroenke Sports Enterprises, Lollapalooza, International Speedway Corporation and the New York Metropolitan Opera. Meese, supra note 12, at 36-39.

58 Although the DOJ framed this issue as an increased barrier to entry rather than a separate horizontal component of the merger, it undoubtedly recognized this as a competitive concern.

56

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The DOJ noted that prior to the merger, both companies strove to supply a package that included both primary ticketing services and access to concert content. 59 Live Nation was able to offer this bundle (at least implicitly) when it entered the primary ticketing services market, and showed it could serve both the ticketing and promotional needs for venue clients. 60 In response, Ticketmaster acquired a majority stake in Front Line, allowing Ticketmaster to grow its capacity to offer its own ticketing and concert content package. 61 As the DOJ explained, “the merged firm’s ability to bundle primary ticketing services (implicitly or explicitly) with access to artists managed by Front Line and/or promoted by Live Nation would require competitors to offer venues both primary ticketing services and access to content in order to compete effectively.” 62 In 2009, the American Antitrust Institute published an article alleging that “[i]f the merger is consummated, firms seeking to enter the market would, to an even greater extent than at present, need to enter on several levels at once,” which would serve as a significant barrier to entry. 63 The issue was not that the firms engaged in bundling—which the DOJ did not deem anticompetitive behavior—but that save for the merger, the companies would have competed with each other in a newly minted market for integrated service-and-content packages.

The DOJ should have expanded on this insight. For a brief few months, Live Nation had spurred Ticketmaster into a new arena of competition—albeit one which included only these two firms—forcing both Ticketmaster and Live Nation to experiment with innovative business models that championed vertically integrated services. Regardless of whether this development is characterized as having birthed a new market or having transformed the existing one, the two firms were nevertheless engaged in productive competition. Based on the companies’ respective histories of pursuing vertical integration, the DOJ anticipated that both would have continued on this path, save for the merger. The DOJ surmised that, “but for the proposed transaction, venues and concertgoers would have continued

59

Competitive Impact Statement, supra note 28, at 11.

Id. 61 Id. 62 Id. at 11-12. It should be noted that the bundling practice itself was not deemed anticompetitive. The bundling by each company resulted in a new market comprised of competing bundles of integrated services.

63 HURWITZ, supra note 53, at 49. The essay continued, conjecturing that “[t]he available evidence provides no indication that a substantial competitor can or will be created within any reasonable time horizon.” Id. at 53.

60

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to enjoy the benefits of competition between two vertically integrated competitors.â&#x20AC;? 64 Notably, the merger proposal itself evidenced the intentions of both Live Nation and Ticketmaster to pursue vertical integration. The firms were not mirror images, as they were direct competitors only in the individual market for primary ticketing services. Aside from primary ticketing services, each firm had access to markets that the other had yet to penetrate, suggesting that Ticketmaster and Live Nation, respectively, were significant and likely entrants into a number of markets in which the other already participated. Competition likely would have spurred the firms to expand into these complementary markets. For instance, Live Nation could have entered (via acquisition) the markets for artist management and/or secondary ticketing. Conversely, Ticketmaster could have entered the markets for promotions and/or merchandising. Even if they never actually entered those markets, the standing threat of entry would have exerted significant competitive effects on those markets. 65 These complementary markets may have been competitive in their own right, but the merger eliminated significant potential competition in each of them. The DOJ should have recognized that two vertically integrated competitors, each with a history of pursuing vertical integration, were well-positioned to compete or threaten to compete in complementary markets. 66 B. All Down The Line: Vertical Components of the Merger Vertical mergers, and the vertical components of mergers, have historically received lower antitrust scrutiny than their horizontal counterparts. Enforcement agencies rarely view these types of mergers as posing competitive risks since they are most often motivated by efficiency concerns rather than efforts to grow or maintain market power. 67 Nevertheless, certain vertical behaviors still draw antitrust scrutiny.

Vertical combinations and agreements can be illegal if they injure the competitive process. The â&#x20AC;&#x153;principal concern with vertical transactions is the possibility that companies will be denied significant access to suppliers and

64

Competitive Impact Statement, supra note 28, at 12.

Just as current competitors exert downward price pressure on each other, a monopolistic price increase could also invite firms outside the market to enter at a lower price point.

66 The DOJ likely neglected to include this theory because of its admittedly speculative nature.

67 Meese, supra note 12, at 80.

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customers.” 68 The Financial Times, considering the Live Nation - Ticketmaster merger in 2009, opined that a vertically integrated firm “running the entire process… would stifle competition. This would work against fans in the longer term, no matter what innovations were on offer initially.” 69 The DOJ neglected to include potential anticompetitive effects arising from the vertical components of the merger in its analysis, but did address some of these concerns by imposing behavioral remedies in its Final Judgment.

1. Anticompetitive Concerns of Vertical Integration The Ticketmaster-Live Nation merger implicated some of the worrisome behaviors associated with vertical integration. One such behavior relating to the vertical components of this merger was anticompetitive tying or bundling practices. Although most tying is lawful, courts have held parties liable for “anticompetitive forcing,” where a firm coerces buyers of the tying product to also buy the tied product. 70 For example, here the concern was that LNE could require that venues exclusively book Live Nation artists (the “tied” product) as a condition for access to Ticketmaster’s ticketing services (the “tying” product). 71 Mere bundling, however, is often a desirable procompetitive behavior, which does not violate federal antitrust laws. 72 For a tying practice to be considered anticompetitive, the firm must use its market power in the tying market to coerce buyers to purchase the firm’s products or services in the tied market for reasons unrelated to the quality or price of the products offered. 73 Traditional industrial organization economics suggest that this strategy often makes little economic sense, as the firm would prefer to market its monopolized product independently. 74 Yet, there is reason to believe that in the primary ticketing services industry, LNE might have sufficient incentive to pursue this anticompetitive strategy.

Competitors have asserted that, prior to the merger, Live Nation unlawfully tied the purchase of its promotional services to the use of its venues and venue services, with the intent to foreclose competing promoters and venues from

68

HURWITZ, supra note 54, at 50 (quoting ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 380 (6th ed. 2007)).

69 Best Show in Town, FIN. TIMES (March 1, 2009), http://www.ft.com/intl/cms/s/0/5f7ecefe06a0-11de-ab0f-000077b07658.html?nclick_check=1#axzz2NAGYGivJ. 70 Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 14–16 (1984).

71 See Balto Testimony, supra note 27; Mickelson Testimony, supra note 27.

72 See Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 276 (2d Cir. 1979).

73 Meese, supra note 12, at 108–09.

74 Id. at 109–10.

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accessing major artists. 75 Live Nation was (and remains) the only promoter capable of booking an artist’s entire national tour—its competitors tend to be concentrated in local markets—arguably providing Live Nation with substantial market power on its own (an issue distinct from the immediate merger). Live Nation could exert its market power to coerce artists not to partner with a competing regional promoter or venue. Without access to artists, these smaller rivals cannot compete effectively, giving Live Nation sufficient incentive to tie its products as a means of further entrenching its dominance in promotions and choking off competition in the market for venues. The merger could aggravate this concern, affording LNE increased leverage (in its superior market position in ticketing services) to persist in this exclusionary strategy. LNE incurred operating losses of $203.8 million, $70.4 million and $161.9 million in 2010, 2011 and 2012, respectively, possibly indicating an anticompetitive strategy of offering artists and venues unsustainable supercompetitive prices in order to exclude and eliminate competitors. 76 On the other hand, neither Live Nation nor Ticketmaster has yet been found liable for such conduct, as the IMP suit is still pending. In its response to public comments regarding the proposed final order in the DOJ’s investigation, the DOJ expressed doubts that Live Nation wields the significant market power alleged. 77 If the DOJ is correct, concerns over anticompetitive tying are purely speculative.

However, the DOJ did specifically account for the increased potential for coercive tying in its behavioral remedies, in the form of anti-retaliation provisions. 78 Retaliation represents the enforcement or punishment side of anticompetitive tying offers. 79 Another antitrust concern relating to the vertical components of this merger was the use of exclusive contracts. Long-term exclusive contracts can be used by firms with strong market power to prevent competitors from entering a market, an anticompetitive practice that may violate sections 1 or 2 of the Sherman Act. 80 Ticketmaster has been accused of using such contracts to foreclose rivals in 75

See IMP complaint, supra note 5, ¶¶ 139–45.

Live Nation Entertainment 10-K, supra note 23, at 22.

77 See Response to Public Comments, supra note 37, at 18–21.

78 Id. at 16–17.

79 The efficacy of the DOJ’s solution is addressed infra Part III.B. 80 See, e.g., United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005); see also 15 U.S.C. § 1 (2006) (“Every contract . . . in restraint of trade or commerce . . . is declared to be illegal.”); 15 U.S.C. § 2 (2006) (prohibiting “Every person who shall monopolize, or attempt to monopolize…any part of the trade or commerce . . . . ”).

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precisely this manner. 81 Likewise, Live Nation has been accused of abusing exclusive dealings contracts to foreclose competition. 82 However, the use of exclusive agreements is generally seen as efficient, procompetitive conduct. 83 Finally, a number of competing independent promoters related concerns that the merger would give Live Nation access to their proprietary information. As a primary ticketing service provider, Ticketmaster has access to this information as a result of its independent contracts with venues. Seth Hurwitz, a prominent independent promoter, described this issue in his testimony before the Senate subcommittee, explaining, “my biggest competitor will have access to all of my sales records, customer information, on sale dates for tentative shows, my ticket counts, they can control which shows are promoted and much more. This will put ALL independent promoters at an irreparable competitive disadvantage.” 84 The 81

In 1992, a California consumer group filed a class action antitrust suit against Ticketmaster, alleging the company’s contracts with venues and promoters constituted exclusive dealings agreements in restraint of trade and were therefore prohibited by antitrust law. See Kevin E. Stern, The High Cost of Convenience: Antitrust Law Violations in the Computerized Ticketing Services Industry, 16 HASTINGS COMM. & ENT. L.J. 349, 358 (1994). Pearl Jam spearheaded a well-publicized antitrust investigation against Ticketmaster in 1994, alleging that Ticketmaster’s exclusive contracts foreclosed access to “a significant percentage of the suppliers of services necessary to hold entertainment events.” Wanda Jane Rogers, Beyond Economic Theory: A Model for Analyzing the Antitrust Implications of Exclusive Dealing Arrangements, 45 DUKE L.J. 1009, 1016 n.28 (1996); Pearl Jam Musicians Testify On Ticketmaster’s Prices, N.Y. TIMES (July 1, 1994), http://www.nytimes.com/1994/07/01/arts/pearl-jam-musicians-testify-onticketmaster-s-prices.html. The investigation closed in 1995 with no finding of anticompetitive conduct. Press Release, Dep’t of Justice, Antitrust Division Statement Regarding Ticketmaster Inquiry (July 5, 1995), available at http://www.justice.gov/atr/public/press_releases/1995/ 0264.pdf.

82 In a pre-merger suit that is still pending, a prominent independent promoter claimed that Live Nation used exclusive contracts with artists to prevent other promoters and venues from competing for their business. IMP complaint, supra note 5, ¶¶ 83-91. When Live Nation was a subsidiary of Clear Channel Communications, another independent promoter made similar claims regarding the company’s practice of securing exclusive contracts to promote artists’ entire national tours, precluding competing promoters from bidding on local engagements. See Amended Complaint at ¶ 52, NIPP v. Clear Channel Communications, Inc., 311 F. Supp. 2d 1048 (D. Colo. 2004) (No. 01-N-152). The case was eventually settled out of court.

83 When Tickets.com brought suit against Ticketmaster for similar claims (among other antitrust allegations), the court ruled that the long term exclusive contracts were used by Ticketmaster to “accommodate their customers’ desires, to their mutual benefit.” The court held that these exclusive contracts represented “a mutually desired reasonable business practice from which no antitrust inferences may be drawn.” Ticketmaster Corp. v. Tickets.com, Inc., No. CV99-7654-HLH(VBKX), 2003 WL 21397701, at *5 (C.D. Cal. March 7, 2003).

84 Hurwitz Testimony, supra note 27.

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DOJ directly addressed this problem in the Final Judgment through a firewall provision. 85 2. The Firms’ Asserted Procompetitive Justifications Vertical mergers are generally presumed procompetitive, but courts and enforcement agencies still inquire into the particular efficiency gains asserted by the merging parties. In this case, the DOJ refused to credit a number of LNE’s asserted efficiencies. The DOJ's Merger Guidelines require that the claimed efficiencies be merger-specific and non-speculative; the burden of substantiating the claims is imposed on the merging firms. 86 Ultimately, “if cognizable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive in any relevant market,” the DOJ will not challenge the merger. 87 The press release announcing the merger of Ticketmaster and Live Nation claimed that the firms anticipated “approximately $40 million of operating synergies through the combination of their ticketing, marketing, data centers and back-office functions." 88 A few weeks later, the CEOs of the two companies— Michael Rapino (Live Nation) and Irving Azoff (Ticketmaster)—outlined the benefits of the merger during a congressional hearing. 89 According to Azoff, "[i]t is designed to address the obvious inefficiencies in the supply chain -- the large volume of unsold tickets to events, higher costs, surcharges and the explosion of the resale market." 90 The DOJ largely rejected the procompetitive efficiencies claimed, explaining that the parties “could realize many of the asserted efficiencies without consummating the proposed transaction,” pointing to the fact that each company had already started to pursue strategies of vertical integration before the merger agreement. 91 The DOJ debunked claims of increased innovation by describing how a vertically integrated monopolist is actually less likely to innovate and yield efficiency gains than two competing firms would be. The DOJ also noted that a 85

See Competitive Impact Statement, supra note 28, at 17. How effective this behavioral remedy might be is discussed infra Part III.B. 86 1992 Guidelines, supra note 45, at 30-32.

87 Id. 88 Live Nation, Ticketmaster Announce Merger, supra note 1.

89 Live Nation and Ticketmaster CEOs Outline Benefits of Merger, BLOOMBERG (Feb. 24, 2009), http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRuTxkXLh0Pk. 90 Id. 91 Competitive Impact Statement, supra note 28, at 12.

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pair of competing firms had a greater likelihood of passing these advantages on to consumers. 92 C. Under My Thumb: The DOJ’s Final Judgment After weighing the anticompetitive effects and the firms’ procompetitive justifications, the DOJ determined that the merger could not proceed as proposed.

In its Final Judgment, the DOJ allowed the merger, provided that certain steps were taken to alleviate the anticompetitive effects on the primary ticketing services market. 93 The remedies stipulated therein indicate the DOJ’s concern with horizontal effects in the market for vertically integrated services.

However, the Final Judgment neglected to address how the merger extinguished the competitive effects of having potential entrants to complementary markets (promotions, artist management, etc.). With its proscription against retaliation, the DOJ subtly attempted to remedy the increased potential for LNE to engage in anticompetitive exclusive dealings and coercive tying. 94 In sum, although the DOJ spoke warily of the anticompetitive effects of the merger and discredited the parties’ explicit procompetitive efficiency claims, it nevertheless allowed the merger to proceed. While the Final Judgment was an effort to quell the DOJ’s antitrust concerns and produce effective competitive markets, as the next section will explain, that effort fell short.

III REMEDIES The DOJ’s Final Judgment employed a hybrid solution to address the anticompetitive concerns raised by the merger, including both structural and behavioral remedies. This section will argue that the structural remedies implemented were insufficient to cure the anticompetitive ills. Furthermore, in employing a then-novel enforcement strategy of imposing behavioral restrictions along with structural fixes, the DOJ imprudently neglected to address a number of concerns inherent with behavioral remedies in general. In the case of the behavioral restrictions on the Live Nation-Ticketmaster merger, those concerns are particularly apparent.

92

Id. See id. at 13–18.

94 The DOJ did not explicitly identify this concern in its Competitive Impact Statement, but the inclusion of this remedy speaks to the DOJ’s apprehension regarding the issue. See id. at 16– 17.

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A. I Want To Break Free: Structural Remedies The primary distinction between structural and behavioral remedies is that structural remedies create or preserve independent firms to maintain market competition, while behavioral remedies permit integration, subject to operating rules that aim to prevent the newly formed firm from undermining competition post-merger. 95 Historically, structural remedies have been preferred in addressing antitrust concerns over proposed mergers. The DOJ’s 2004 Antitrust Division Policy Guide to Merger Remedies (“2004 Guide”) stated that structural remedies, compared to behavioral remedies, “are relatively clean and certain, and generally avoid costly government entanglement in the market.” 96 The DOJ followed this preference in many merger investigations, both before and after publication of the 2004 Guide. 97 A number of studies, including reports by the FTC as well as European and Canadian agencies, have examined the strengths and limitations of structural remedies, concluding that they have been “largely effective —and superior to alternatives—in accomplishing their stated goal.” 98 The DOJ viewed decreased competition in the market for primary ticketing services as the primary evil presented by the Live Nation-Ticketmaster merger, and imposed two structural remedies to combat it. First, the DOJ sought to establish AEG as a viable, vertically integrated competitor in the primary ticketing services market because it was LNE’s most likely competitor. The DOJ required LNE to grant AEG a perpetual license of its Host ticketing platform, believing this would

95

JOHN E. KWOKA & DIANA L. MOSS, THE AMERICAN ANTITRUST INSTITUTE, BEHAVIORAL MERGER REMEDIES: EVALUATION AND IMPLICATIONS FOR ANTITRUST ENFORCEMENT 3–4 (2011).

96 U.S. DEP’T OF JUSTICE, ANTITRUST DIV. POL’Y GUIDE TO MERGER REMEDIES § III(A) (Oct. 2004) [hereinafter 2004 GUIDE], available at http://www.justice.gov/atr/public/guidelines/ 205108.pdf. The DOJ updated the Guide in 2011, incorporating significant policy shifts. The 2011 Guide omits an explicit preference for structural remedies and no longer restricts when it is appropriate to institute behavioral relief (previously limited to ancillary restrictions on vertical mergers). See U.S. DEP’T OF JUSTICE, ANTITRUST DIV. POL’Y GUIDE TO MERGER REMEDIES (June 2011) [hereinafter 2011 GUIDE], available at http://www.justice.gov/atr/public/guidelines/ 272350.pdf. Notably, the updated Guide deletes without explanation all mention of the four substantial costs associated with conduct remedies, costs that were central to the approach taken in the 2004 Guide. Kwoka, supra note 95, at 6 n.8.

97 Kwoka, supra note 95, at 11.

98 Id. at 12. Some drawbacks of structural remedies include information asymmetries between the agency, merging parties and third-party buyers; incentives to dispose assets that may insufficiently restore competition; an altered market post-remedy; and the conduciveness of the market to collusion following a divestiture. However, the failures and limitations of structural remedy policies have generally been addressed and improved over time. Id. at 10.

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fill the market’s competitive void. 99 Second, the DOJ wanted to “establish another independent and economically viable competitor” in the primary ticketing services market and thus directed the divestiture of Ticketmaster’s Paciolan division to Comcast-Spectacor. 100 In February 2011, one year after the DOJ closed its merger investigation, AEG announced that rather than implementing Ticketmaster’s Host platform, it would be partnering with Outbox Enterprises. 101 Prior to the merger, AEG had been a Ticketmaster client. As the prime competitor affected by the merger, it follows that AEG sought to replace Ticketmaster as the provider of its in-house ticketing services and compete with LNE in that market generally. The fact that AEG chose Outbox over the DOJ-prescribed Host platform shows that this structural remedy had no appreciable effect on competition in this market. The intended effect of this remedy was to provide a competing platform seller. By rejecting the option to license the Host platform, AEG nullified any possible remedial effect on the competitive imbalance that concerned the DOJ. Conversely, the AEG-Outbox partnership demonstrated that competing promoters and venues may have more options available to fulfill their ticketing needs than the DOJ anticipated. Outbox, which operates on a venue’s website as opposed to a ticket company’s site, allows venues more power and control over customer service, and the venue retains consumer data and profiles without any third party involvement. 102 Other ticketing service purveyors have lauded this approach as embracing innovation and opening the door for viable competition. 103 In the wake of the merger, other competing venues have followed suit, so as not to 99

AEG was the second leading promoter in the country, owned or operated more than thirty major concert venues, and held a 50% share of a reputable talent management agency.

Competitive Impact Statement, supra note 28, at 13.

100 Id. at 15. Paciolan occupied 3% of the market for direct ticketing services at major concert venues, and an additional 4% of the market through sublicenses (half of which already included Comcast’s New Era division). Id. Comcast was, and still is, seen as a potential competitor in ticketing services, but the company’s central focus remains with sports teams and arena venues. See Ray Waddell, Brave New World, BILLBOARD (Mar. 27, 2010), http://start.ticketfly.com/blog/brave-new-world-after-the-ticketmasterlive-nation-merger/.

Though somewhat vertically integrated, Comcast has yet to venture substantially into the other elements of the live music industry.

101 Ethan Smith, Promoter Crowds Ticketmaster, WALL ST. J. (Feb. 3, 2011), http://online.wsj.com/article/SB10001424052748704775604576120361649762354.html.

102 Alfred Branch Jr., AEG teams with Outbox Technology to compete with Ticketmaster on ticketing, TICKETNEWS (Feb. 3, 2011), http://www.ticketnews.com/news/AEG-teams-withOutbox-Technology-to-compete-with-Ticketmaster-on-ticketing021103456.

103 See id.

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provide business to LNE. 104 However, as promising as these developments may be with regard to increased innovation and competition in the primary ticketing services market, it remains unclear whether these cases are examples of a trend or temporary aberrations. If the newcomers prove sustainable, they may obviate the need for the DOJ’s structural remedies altogether.

Prior to the merger, Ticketmaster’s usual renewal rate with venue clients was higher than 85%. 105 In 2010, the rate increased to 95%. 106 According to LNE’s Supplemental Operational and Financial Information, Ticketmaster “again achieved a net renewal rate of over 100% for 2012.” 107 In the company’s 2012 year-end financial report, it showed growth of 3.6% and 5.6% for the adjusted operating incomes of its concerts and ticketing divisions, respectively, over the previous year. Since 2010, the firm’s revenue has increased from $5.1 billion in 2010, to $5.4 billion in 2011, to $5.8 billion in 2012. 108 LNE has also continued to pursue its strategy of acquiring competitors. 109 Furthermore, Outbox and other upstart challengers have only just reached a scale where they can compete, so it remains to be seen whether their new technologies will prove viable substitutes.

To truly exert a competitive influence on the market, the firms will need to attract more than just sympathetic (or vindictive) venue clients. These upstarts will need to prove that they can provide reliable service for venues with various capacities and ticketing needs. Until they do, current Ticketmaster clients will be reluctant to risk a change by implementing unproven software, no matter how innovative.

104

See Alfred Branch Jr., Merriweather Post Pavilion switches from Ticketmaster to TicketFly, TICKETNEWS (Feb. 19, 2010), http://www.ticketnews.com/news/Merriweather-PostPavilion-switches-from-Ticketmaster-to-TicketFly2101954. In May of 2010, even before AEG made the switch, Merriweather Post Pavilion became the country’s first major venue to leave Ticketmaster for another competing ticketing service provider, Ticketfly. Scott Bernstein, Considering The Ticketfly Alternative, GLIDE MAG. (May 13, 2010), http://www.glidemagazine.com/hiddentrack/considering-the-ticketfly-alternative.

Ticketfly offers an integrated content management system, lower service fees and social networking platforms to facilitate distribution and marketing services. Silvenis, supra note 33, at 24; see also About, TICKETFLY, http://www.ticketfly.com/about-us (last visited Oct. 12, 2013).

105 Silvenis, supra note 33, at 6.

106 Id. 107 LIVE NATION ENTERTAINMENT, FOURTH QUARTER AND FULL YEAR 2012 SUPPLEMENTAL OPERATIONAL AND FINANCIAL INFORMATION 1 (Feb. 26, 2013), available at http://phx.corporateir.net/phoenix.zhtml?c=194146&p=quarterlyEarnings.

108 LIVE NATION ENTERTAINMENT 10-K, supra note 23, at 41.

109 Its acquisitions include Coppel (a concert promoter based in Australia and New Zealand), Cream (a festival promoter based in the United Kingdom) and HARD (a festival promoter based in Los Angeles) in 2012 alone. Id. at 7.

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B. Don’t Stop Me Now: Behavioral Remedies Behavioral or “conduct” remedies allow merging parties to consummate the deal, subject to conditions on their operational behavior. The aim is to create room for the procompetitive efficiencies gained from the merger while regulating anticompetitive behavior that the newly-merged firm might pursue. 110 Naturally, this creates a tension with the firm’s profit-maximizing incentives. A number of significant concerns derive from this tension and therefore behavioral remedies must be supplemented with continuous oversight of the firm’s conduct. 111 Such oversight is analogous to the work of a regulatory body; hence conduct remedies face shortcomings similar to those associated with industry regulation. 112 These shortcomings include informational asymmetries, vagueness, inconsistent incentives, implementation costs, and enforcement problems.

The 2004 Guide warned that behavioral remedies are typically “more difficult to craft, more cumbersome and costly to administer, and easier than a structural remedy to circumvent.” 113 Firewalls, fair-dealing, and transparency provisions were all characterized as posing “substantial policy and practical concerns,” requiring considerable resources to oversee and carrying potential for “harm as well as good.” 114 Nevertheless, the DOJ’s Final Judgment imposed a set of behavioral remedies including anti-retaliation and firewall provisions as well as establishing a Compliance Committee. These remedies implicate a number of the general concerns with behavioral remedies and regulation.

The anti-retaliation provisions of the consent agreement demonstrate the asymmetry of information between the firm and its regulating agency. In the Final Judgment the DOJ defined retaliation as [R]efusing to Provide Live Entertainment Events to a Venue Owner, or Providing Live Entertainment Events to a Venue Owner on less favorable terms, for the purpose of punishing or disciplining a 110

Kwoka, supra note 95, at 4.

Id. at 5.

112 Mounting empirical evidence establishes that traditional industry regulation is not consistently effective at modifying firm behavior and often incurs distorting economic effects on the industry or market being regulated. Id. at 22 (citing Paul Joskow & Nancy Rose, The Effects of Economic Regulation, in 2 HANDBOOK OF INDUS. ORG., 1449 (Richard Schmalensee & Robert D. Willig eds., 1989); KIP VISCUSI, JOSEPH HARRINGTON & JOHN VERNON, ECONOMICS OF REGULATION AND ANTITRUST (2005)).

113 2004 GUIDE, supra note 96, at § III(A).

114 Id. at §§ III(E)(2) & III(E)(2)(b).

111

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Venue Owner because the Venue Owner has contracted or is contemplating contracting with a company other than Defendants for Primary Ticketing Services. The term “Retaliate” does not mean pursuing a more advantageous deal with a competing Venue Owner. 115 It is readily apparent that this definition may be subject to multiple interpretations, with the inquiry into a retaliatory action resting on a determination of the firm’s motives. The firm is considerably better positioned than the agency to know or obtain knowledge as to the motivation driving a particular business decision. This inherent informational disadvantage leaves the agency in the uncomfortable and ineffective position of deferring to the firm’s proffered explanation for engaging in the behavior in question. 116 Even a marginally clever company can understand this flaw and manipulate evidence to support a permissible motive. When the proscribed behavior is vague and motivedependent, this type of remedy does mere lip service to actual behavioral modification.

The firewall provisions of the consent order present another significant flaw with behavioral remedies: countervailing incentives. Although the DOJ prohibited LNE’s ticketing service from sharing sensitive promotional and consumer data with LNE’s promotional arm, the company’s profit-maximizing incentives run counter to this firewall. Hence, LNE will consistently be confronted with opportunities to misuse the firewalled information. 117 The firm is thereby incentivized to subvert the restrictions and avoid detection; such behavior is illegal, socially inefficient and, more importantly, undermines the effectiveness of the firewall provision. 118 Inconsistent incentives have a similar effect on the aforementioned anti-retaliation provisions, which require LNE to forego the full exertion of its vertical integration leverage. In effect, LNE is directed to “leave money on the table,” which will only encourage the company to exploit the vague boundaries of the consent order and find ways to circumvent the restrictions. 119 Behavioral remedies also carry significant costs to implement. Conduct restrictions must be monitored, interpreted, and enforced at the expense of the 115

Final Judgment, supra note 29, at *3.

Kwoka, supra note 95, at 23.

117 Id. at 25-26.

118 It does not strain the imagination to envision a company surreptitiously transferring valuable information from Employee A to Employee B, staying one step ahead of the regulators.

119 Kwoka, supra note 95, at 26.

116

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DOJ. This expense may be substantial and will draw resources from the agency’s total budget. In 2010, the Federal Energy Regulatory Commission (“FERC”) and Federal Communications Commission (“FCC”) each spent close to 15% on oversight and enforcement expenses. 120 The DOJ also has to develop an expertise in regulatory oversight and the appropriate accompanying structure, requiring institutional changes and associated personnel costs. 121 When behavioral remedies are compared with traditional regulation, additional enforcement challenges come to light. Where traditional regulators such as the FERC or the FCC have broader powers to restrict a firm’s conduct, the procedural and control rights of the DOJ are limited to ensuring compliance with consent orders. 122 The DOJ is also limited to ex post intervention for a limited term, rather than being afforded ex ante authority. 123 Finally, behavioral remedies enhance the risk of agency capture, through increased interactions between the large firm and the government enforcers. 124 LNE will have strong incentives to lobby agencies and legislative bodies for certain types of behavioral restraints that allow the firm to pursue its natural profit-maximizing tendencies. 125 The ineffective consent order constraining LNE in this case may be a good example of this sort of lobbying at work. LNE had considerably more lobbying resources than any of its competitors and the Final Judgment employed a then-novel enforcement strategy that, as I have explained, was largely ineffective in restraining LNE’s conduct. The DOJ has its own interests in effective enforcement, but in the end the agency is a political entity.

CONCLUSION The Department of Justice recognized anticompetitive harm stemming from the horizontal components of the Ticketmaster-Live Nation merger, specifically within the primary ticketing services market. However, it did not adequately identify the serious potential harms involved in the combination of two vertically integrated competitors in the live music industry. The DOJ also ignored the loss of significant potential entrants to the various markets complementing ticket 120

Id. at 27 (citing FERC, FISCAL YEAR 2012 CONGRESSIONAL PERFORMANCE BUDGET REQUEST, at 2 & 4, available at http://www.ferc.gov/about/strat-docs/FY12-budg.pdf and FCC, FISCAL YEAR 2012 BUDGET ESTIMATES SUBMITTED TO CONGRESS, at 39 & 69 (Feb. 2011), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-304636A1.pdf).

121 See id. at 27.

122 Id. at 30-31.

123 Id. 124 Id. at 34.

125 Id. at 35.

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distribution. Although the DOJ refused to credit many of the merging parties’ procompetitive efficiency claims, it failed to recognize the perils associated with the vertical components of the merger. Ultimately, the DOJ settled on structural remedies to address the horizontal concerns in the primary ticketing services market and instituted behavioral remedies to placate distressed competitors.

The remedies imposed by the DOJ as conditions to the merger’s approval were insufficient to maintain or stimulate competition. The Paciolan divestiture transferred a small slice of the market share for primary ticketing services to a legitimate, vertically integrated competitor, Comcast-Spectacor.

However, Comcast does not participate in the other complimentary markets involved in the live music industry, save for a few sports arenas. Furthermore, granting a favorable license of the Host software to AEG was rendered completely ineffective

by AEG’s decision to partner with Outbox Technologies instead. Only after years of successful, reliable, large-scale service by innovative competitors, will a substantial number of major concert venues decide to risk a partnership with market newcomers such as Outbox or Ticketfly. Until such time, or until a competitor attains a significant market share in a bundle of complementary fields, LNE will stand alone as the dominant firm in the market for vertically integrated live music services.

Most importantly, the DOJ missed a glaring opportunity to restructure a nascent industry. It should have recognized the burgeoning trend toward vertical integration in the live music industry, with two market leaders forging the way.

Artists are growing increasingly reliant on touring income to support their careers and historically have been inclined to utilize one-stop shopping. 126 Vertically integrated firms like Ticketmaster and Live Nation stood ready to replace record companies in providing these services, capable of signing artists to lucrative 360 deals. Thus it seemed inevitable that Ticketmaster and Live Nation would become each other’s chief competitor, lowering prices for consumers, spurring innovation and generating efficiencies. Now, as a single firm, such benefits remain unrealized and LNE stands alone in its capabilities.

The merger of Ticketmaster and Live Nation had an undeniable impact on the live music industry. Artists and competing service providers would all likely be better off had the DOJ prevented the merger and forced the firms to compete.

Now it is up to the market to recognize the trends set by LNE and take advantage of a reconfigured landscape. Competitors in primary ticketing should take advantage of new technology to establish a reputation for reliability with new 126

See supra Part I.

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clients and eventually erode LNEâ&#x20AC;&#x2122;s dominance in the market. Other entities in the music industry, such as record labels, should follow LNEâ&#x20AC;&#x2122;s lead in creating fullservice packages that center on live performances. The concert industry provides fertile ground for profitable competition in this new market and enterprising challengers would be wise to seize this opportunity.

SIGNING IN GLITTER OR BLOOD?: UNCONSCIONABILITY AND REALITY TELEVISION CONTRACTS CATHERINE RILEY ∗ Reality television is a modern phenomenon that can be found on both daytime and primetime television. Using “real” people creates unique problems for production teams. Real people do not have the industry knowledge or legal assistance from industry professionals to actively participate in contract negotiations. As “unscripted” shows, reality television presents new risks the producers must consider while developing contracts. While most entertainment contracts are longer and more restrictive than employment contracts for other industries, reality television contracts are even more complex. Recently, questions about the enforceability of these contracts have begun to emerge. If litigated, the courts, rather than a jury, would decide whether these contracts were void due to unconscionability. This note argues that as currently drafted, reality television contracts are not unconscionable, even though at first read they might seem unfair.

INTRODUCTION ........................................................................................................107 I. BACKGROUND IN REALITY TELEVISION ........................................................109 A. Defining Reality Television as a Genre ..................................................111 1. The Scope of Reality Television in This Note ....................................112 B. Legal Activity in Reality Television ........................................................113 II. WHAT IS THE UNCONSCIONABILITY DOCTRINE? ...........................................115 A. The Test for Unconscionability ..............................................................117 1. Procedural Unconscionability .........................................................118 2. Substantive Unconscionability ..........................................................119 3. Application of the Two-Part Test ......................................................120 B. Unconscionability under California Law ...............................................120 C. Unconscionability under New York Law ................................................122 III. THE CONTRACTS ...........................................................................................123 A. Measures for Protection of Production Companies and Networks .......123 B. Typical Contractual Language ...............................................................124 IV. COULD UNCONSCIONABILITY BE USED TO VOID THE CONTRACTS?..............130 ∗

Catherine Riley is a 2014 JD Candidate at NYU School of Law. She received her Bachelor of Science in Industrial and Labor Relations from Cornell University in 2011. A big thank you to the staff of the Journal of Intellectual Property and Entertainment Law at NYU and my parents for all of their help.

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A. Unconscionability in Reality Television Contracts According to the Los Angeles County Superior Court and the Second District of the Court of Appeal .....................................................................................................130 1. The Higgins Cases .............................................................................130 2. The Dr. Phil House Case...................................................................133 B. Applying the Test and Concluding That the Contracts Are Not Unconscionable ......................................................................................135 1. Free Will and Informed Decisions in the Procedural Unconscionability Analysis ...............................................................135 2. Commercial Setting and Industry Norms as Part of the Scrutiny for Substantive Unconscionability ..........................................................137 3. Shocking the Conscience – The Crux of the Substantive Unconscionability Analysis ...............................................................138 4. Available Opportunities to the Participants Weighing in on the Substantive Unconscionability Analysis ...........................................139 5. The Production Companies Bear the Financial Risk – Turning Away from Finding of Substantive Unconscionability................................140 CONCLUSION ...........................................................................................................140 INTRODUCTION How fair is the ninety-page, fine print hurdle that a young singer, dancer, or fame-starved twenty-something has to sign in order to fulfill his or her dreams?

Reality television contracts are a growing topic for legal discussion. The contracts tend to be extremely long, even for entertainment contracts, and include language protecting the producers and networks from liability in almost any situation. Are these contracts excessive to the point of unconscionability? Should courts be intervening on behalf of the participants to void certain clauses within the agreements?

“No contract can prevent someone from suing. It can prevent them from winning,”1 is the attitude taken by producers and networks when limiting their liability to contestants of reality television shows. While there have not been many direct attempts to seek legal remedies under the unconscionability doctrine, the mass media and scholars alike have focused on the harshness, constraints, length,

1

Brian Lowry, Be Sure to Read the Fine Print, L.A. TIMES, Aug. 20, 2002, at F1, available at http://articles.latimes.com/2002/aug/20/entertainment/et-lowry20 (quoting Jonathan Anschell).

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and complexity of the contractual language. 2 One Comment claims that reality television contracts force participants to give up all rights of publicity and should therefore be void. 3 Another article, summarizing legal concerns of reality television contracts, argues that courts could, and arguably should, find these contracts unconscionable. 4 Other articles and Comments, while addressing the possibility that contracts could be found unconscionable, fail to delve into the issue thoroughly. 5 The explicit question of unconscionability in reality television contracts has only been handled by two courts: the Superior Court of Los Angeles County followed by the Second District of the Court of Appeal of California State, reviewing the Superior Court of Los Angeles County’s decisions. 6 While many of the clauses of reality television show contracts appear excessive, even appalling, in light of the rights and protections the contestants are signing away, these contracts are not currently considered unconscionable.

However, the opportunity to bring and win unconscionability claims may arise, especially if the contracts continue to evolve in ways that increasingly violate public policy. There may be a line, not yet established, that even the networks cannot cross.

This note will discuss the development of reality television contracts.

Further, it will argue that, at present, the terms of such contracts are not unconscionable because they do not satisfy the two-part test for determining unconscionability: the finding of both procedural and substantive unconscionability. Specifically, this note argues that the “shock the conscience” standard for substantive unconscionability is not met when the risk to the producers, commercial background, benefit, and potential return to the contestants are taken into account. While a lay reader may view the language of the agreements as extreme and unwarranted in isolation, when considered in the larger 2

See, e.g., Lin Burress, The Bachelor Contract, TELLING IT LIKE IT IS (March 7, 2010), http://www.tellinitlikeitis.net/2010/03/the-bachelor-contract-reality-steve’s-blog-andbachelorette-ali-fedotowsky.html.

3 Porsche T. Farr, Comment, What Good Is Fame if You Can't Be Famous in Your Own Right?: Publicity Right Woes of the Almost Famous, 16 MARQ. INTELL. PROP. L. REV. 467 (2012).

4 Katie Hopkins, Staff Article, Unique Legal Considerations in Reality Television, 13 U. PITT. J. TECH. L. & POL'Y 1, 9-16 (2012), available at http://d-scholarship.pitt.edu/17865/.

5 See, e.g., Melody Hsiou, Harsh Reality: When Producers and Networks Should Be Liable for Negligence and Intentional Infliction of Emotional Distress, 23 SETON HALL J. SPORTS & ENT. L. 187, 218-19 (2013).

6 E.g., Higgins v. Disney/ABC Int’l Television, Inc. (Higgins III), No. BC B200885, 2009 WL 692701 (Cal. Ct. App. Mar. 18, 2009).

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economic and industry framework of reality television, the terms are not unconscionable.

I BACKGROUND IN REALITY TELEVISION More than twenty-five percent of primetime broadcast programming is now comprised of unscripted television shows. 7 Primetime television has not been so dominated by unscripted shows since the game show fad during the 1950s. 8 Writers’ strikes, actor holdouts, economic downturns, and audience weariness inspired experimentation on the part of the networks to keep their costs down and primetime ratings high. 9 Reality television shows, which are cheaper and faster to produce, and achieve similar audience numbers, emerged as the new model. 10 The popularity of unscripted television commenced with game shows in the 1950s. Game shows were an “early incarnation of highly profitable TV programming that hinged on the popular appeal of real people placed in dramatic situations with unpredictable outcomes.” 11,12 Next were prank shows, led by Candid Camera, followed by makeover and charity shows. 13 Subsequently, amateur talent contests, pioneered by Star Search, entered the viewers’ living rooms. 14

7

Edward Wyatt, On Reality TV, Tired, Tipsy and Pushed to Brink, N.Y. TIMES, Aug. 1, 2009, at A1, available at http://www.nytimes.com/2009/08/02/business/media/ 02reality.html?pagewanted=all&_r=0.

8 Susan Murray & Laurie Ouellette, Introduction to REALITY TV: REMAKING TELEVISION CULTURE 6 (Susan Murray & Laurie Ouellette eds., 2d ed., N.Y. Univ. Press 2009).

9 Thomas Fenoglio, The Economics of Reality TV: Why Is the Genre So Darn Cheap?, TEX. CHRISTIAN UNIV., http://www.rtvfmediastudies.tcu.edu/Economics Why the Genre is Cheap.htm (last visited Mar. 24, 2013).

10 Ted Magder, Television 2.0: The Business of American Television in Transition, in REALITY TV: REMAKING TELEVISION CULTURE, supra note 8, at 142-44.

11 Murray, supra note 8, at 6.

12 Some scholars have questioned whether some reality television contest-like shows should be illegal under 47 U.S.C. § 509 (for competitions of knowledge, skill, or chance). The statute was enacted after the game show scandals in the 1950s of rigging the results. See Kimberlianne Podlas, Primetime Crimes: Are Reality Television Programs “Illegal Contests” in Violation of Federal Law, 25 CARDOZO ARTS & ENT. L.J. 141 (2007). Section 509 makes it illegal to prearrange or predetermine outcomes in “contests of knowledge, skill, or chance.” 47 U.S.C. § 509. This question is beyond the scope of this paper, but is another proposed argument against reality television.

13 Murray, supra note 8, at 4.

14 Id.

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The model for the contemporary archetypal reality show was MTV’s The Real World, which first aired in 1991,15 followed by CBS’s Survivor and Big Brother, both premiering in 2000. 16 The show that arguably initiated the explosion of reality television contest shows, however, was American Idol, débuting in 2002 to extraordinary success. 17 “This was 2002, so the only reality shows were really this and Survivor. American Idol was a breakthrough.” 18 Viewers knew of individual shows, but talk of the reality genre was insignificant. However, it did not take long for the large networks to recognize the benefits reality television could bring to their primetime lineups. 19 Several factors contributed to the success of reality television besides simply popularity and creative ideas. In the 1990s, the most profitable advertising spot was Thursday night primetime, which NBC dominated. 20 With Friends opening the evening at 8:00pm and ER closing it at 11:00pm, NBC was all but unbeatable.

In fact, NBC had been at the top of the rankings for fifteen years. 21 However, once CBS put Survivor up against NBC’s Friends, NBC’s dominance took a hit. 22 Survivor had competitive viewership numbers at significantly lower production costs. 23 NBC was slower to adopt reality television as a major component of its headlining shows, but in 2006 NBC announced its new strategy, “NBCU 2.0,” whose goal was to cut costs significantly. 24 Announcing NBCU 2.0, Jeff Zucker, the then-head of NBC Universal’s television division, stated, “[w]e have to

15

Id. Magder, supra note 10, at 142.

17 American Idol, IMDB.COM, http://www.imdb.com/title/tt0319931/?ref_=fn_al_tt_1 (last visited Mar. 11, 2013).

18 Telephone Interview with Carmen Rasmusen Herbert, former American Idol contestant, Season 2 (Sept. 28, 2012).

19 Fenoglio, supra note 9.

20 Magder, supra note 10, at 141.

21 Id. at 141-43 (with Cheers, Seinfeld, Hill Street Blues, The Cosby Show, Will & Grace, and Just Shoot Me).

22 This occurred during the 2000-2001 season when NBC had four of the top five shows in terms of advertising cost. By the end of the season, CBS had doubled its Thursday primetime viewership. Magder, supra note 10, at 143.

23 Friends was the most expensive half hour show on television, mainly because of on-air talent: the six celebrity leads were paid $1 million an episode by the last season, while Survivor was paying close to nothing for its “cast” of real people. Madger, supra note 10, at 142-44.

24 Magder, supra note 10, at 141-42.

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recognize that the changes of the next five years will dwarf the changes of the last 50.” 25 At this point, it became apparent that reality television was not a passing fad.

The growth in reality television necessitated protections for production companies and the networks. As the number of lawsuits and threatened lawsuits increased, so too did the number of contract pages, resulting in a common complaint that reality television contracts are excessively lengthy and contain clauses that are unfair to the contestants. 26 This led to questions of unconscionability. Is the contract unfair to the participant? Are reality television contracts generally contracts of adhesion? Do these contracts violate public policy or shock the conscience in a way that is extraordinary for the commercial context?

Could a reality television star win a case claiming his contract is unconscionable, rendering it void? Thus far, no reality television contract has been held unconscionable, even when it is found to be a contract of adhesion.

A. Defining Reality Television as a Genre Scholars writing on reality television have made attempts to define and categorize the genre. “This fixation with ‘authentic’ personalities, situations, problems, and narratives is considered to be reality television’s primary distinction from fictional television and also its primary selling point.” 27 Reality television is split into many sub-genres, as well as what can only be described as sub-subgenres. 28 The initial shows fit within the established categories, but now shows are blurring the lines, leading to even more sub-genres. While a comprehensive list is impossible, there is a common core of sub-genres. There is the “gamedoc,” which includes programs like Survivor, America’s Next Top Model, and Project Runway. 29 There are also talent contests, including American Idol, The X Factor,

25

At this time, reality television was capturing fifteen hours of primetime, while sitcoms were only ten hours per week. Id. at 142.

26 See, e.g., Camille Dodero, We Have Obtained a Copy of MTV's Standard Real World CastMember Contract, THE VILLAGE VOICE BLOG (Apr. 1, 2011, 7:45 PM), http://blogs.villagevoice.com/runninscared/2011/08/mtv_real_world_contract.php; Breeanna Hare, The ‘Real World’ of Reality Show Contracts, CNN.COM (Dec. 30, 2009), http://articles.cnn.com/2009-12-30/entertainment/legal.reality.contracts_1_show-hopefulsreality-show-contracts/3?_s=PM:SHOWBIZ. 27 Murray, supra note 8, at 5.

28 Id. 29 These shows have similarities to game shows, with an ultimate winner based on some sort of skill or knowledge. However, producers must be careful to avoid any conflict with quiz show laws that were enacted after the game show scandals of the 1950s, as it is a federal crime to rig contest shows with the intent of deceiving the public. See 47 U.S.C. § 509.

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and So You Think You Can Dance, which incorporate a popular vote. 30, 31 Others are dating programs, like The Bachelor and Beauty and the Geek; makeover programs, including What Not to Wear and Made; “docusoaps,” such as The Real World, The Real Housewives series, and Teen Mom; reality sitcoms like The Osbournes, Kendra, and Joan and Melissa: Joan Knows Best?; reality investigation shows; court programs; and charity programs, including Oprah’s Big Give and Extreme Makeover: Home Edition.

1. The Scope of Reality Television in This Note Because many shows are borrowing attributes from multiple sub-genres, categorization by cast type rather than subject structure is more effective for the purposes of this paper. The broadest definition used by the networks is “unscripted television,” but reality television in a colloquial context tends to exclude the more traditional unscripted formats, such as talk shows and game shows. In particular, this note focuses on unscripted shows featuring “real people” as contestants (as opposed to unscripted shows using celebrities/personalities like Dancing with the Stars or Keeping Up with the Kardashians). 32 Aside from this distinction in casting, there is little else excluded from the broad category of reality television discussed here, and the references to “reality television” or “reality TV” within this note will reflect that definition only. The focus for discussion is the contracts that underlie shows that “provide non-scripted access to ‘real’ people in ordinary and extraordinary situations.” 33 Contestants in these types of programs have less familiarity with the language of the industry and are less able to negotiate individual contracts. Most sign form contracts that are essentially contracts of adhesion created by production companies and networks. This is very different from the contract negotiations for established actors like the cast of Friends, particularly as the show approached its

30

Some shows, such as America’s Next Top Model, are now combining the original gamedoc format with popular talent vote to blur these lines further. In Season 19, the show incorporated audience vote as a component of the models’ results each week (along with point value scores from the judges and “challenges”).

31 A sub-sub-genre extending from both of the aforementioned categories is a contest program with expert infusion, where contestants are “coached” by experts in the relevant field.

32 “Real people” being those who do not have celebrity status. This is mostly for the purpose of discussing the unconscionability of the contracts, of which bargaining power is an important factor. The bargaining power of celebrities is arguably significantly different and enables more contract-specific negotiation on behalf of the celebrity-contestant.

33 Murray, supra note 8, at 3.

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final seasons. 34 Mark Andrejevic, former professor in the Department of Communication Studies at University of Iowa, believes “[r]eality TV cast members are subject to totally unequal terms of negotiations. They are essentially a disposable commodity, and if they don’t sign the contract there are hundreds of other people lining up for their spot.” 35 There is little to no bargaining power for the contestants in the contract signing process for reality television.

While their lack of bargaining power may give the contestants pause, the networks, too, have concerns when approaching these contracts. They must protect themselves from the significant risks posed by reality television production, namely that they are dealing with people who are naïve about Hollywood processes and who lack a reputation in the industry sufficient to carry the show or to demonstrate that they will perform to a certain level. Most importantly, the fact that these shows are unscripted means, beyond editing, the networks have little control over what is said or done on screen. 36 Producers have to keep in mind that “[they] are shooting real people with real emotions and [they] can be 100% certain they will often do or feel things that are not part of your plan. This will and should happen.” 37 Writer and producer Pamela Berger has equated creating a reality show to the Heisenberg Uncertainty Principle. 38 The more “care and focus” the producers put into creating a reality television show, the more they “interfere with the very realness [they] are trying to convey.” 39 Therefore, to achieve the best show, producers have to allow for more uncertainty and insecurity, which leads to the incredible breadth of the contracts they draft.

B. Legal Activity in Reality Television To date, the discussion and legal action surrounding reality television has had little to do with contract theory. However, networks and producers are using the contracts as a defense, stating that the participants consented to any consequences resulting from their involvement.

34

Bill Carter, ‘Friends’ Deal Will Pay Each Of Its 6 Stars $22 Million, N.Y. TIMES, Feb. 12, 2002, at C1, available at http://www.nytimes.com/2002/02/12/business/friends-deal-will-payeach-of-its-6-stars-22-million.html (the six stars were able to hold out contract negotiations with, arguably greater bargaining power than the network).

35 Wyatt, supra note 7.

36 Pamela Berger, What It Takes to Make Good Reality TV, CNN.COM (Oct. 27, 2011, 10:42 AM), http://www.cnn.com/2011/10/27/showbiz/tv/good-reality-tv-berger.

37 Id. 38 The more precisely one property is measured, the less precisely the other can be controlled, determined or known.

39 Berger, supra note 36.

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The actions contestants have brought against producers cover a wide range of claims and are not all governed by the same laws.

State law claims involving reality television shows include common law and statutory right of publicity claims, defamation, intentional infliction of emotional distress, fraud, trademark infringement, and even violation of civil rights. Much of the recent focus in these cases, however, has been on claims that producers and broadcasters have violated the plaintiffs’ common law or statutory rights of publicity. 40 Contestants have also sued for defamation based on “frankenbiting,” 41 (such as the BBC Castaway case 42 and Fox’s Temptation Island case 43). As previously mentioned, the networks’ response is that in signing their contracts, the parties consented to any reputational results. The Writers’ Guild of America (WGA) also sued over “frankenbiting,” insisting that this extensive editing is actually writing the show and, therefore, should be done by union members. 44 Other common claims are privacy and right of publicity, 45 racial discrimination, 46 breach of

40

William Archer, Getting Real Reality TV Shows Continue to Be Sued by Unwilling Participants and Wannabe Producers, L.A. LAW., May 2012, at 28.

41 Frankenbiting is the rearranging of dialogue and sequences of events to make the situation more dramatic. The WGA argued that this is a form of writing for reality shows. See, e.g., Newsday, ‘Frankenbiting’ Scares up Reality Controversy, CHI. TRIB (July 21, 2005), http://articles.chicagotribune.com/2005-07-21/news/0507210334_1_bachelor-producer-showrunners-reality.

42 Joel Ugolini, So You Want to Create the Next Survivor: What Legal Issues Networks Should Consider Before Producing a Reality Television Program, 4 VA. SPORTS & ENT. L.J. 68, 75-76 (2004).

43 Jennifer L. Blair, Surviving Reality TV: The Ultimate Challenge for Reality Show Contestants, 31 LOY. L.A. ENT. L. REV. 1, 22 (2011).

44 Newsday, supra note 41.

45 See, e.g., Nieves v. Home Box Office, Inc., 817 N.Y.S.2d 227 (App. Div. 2006).

46 Reality TV Show Subject of Breach of Contract Lawsuit, PAYTON & ASSOCIATES, LLC (Oct. 25, 2012), http://www.payton-law.com/blog/2012/10/reality-tv-show-subject-of-breach-of-contractlawsuit.shtml.

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contract, 47 abnormally dangerous activities, 48 invasion of privacy, slander and intentional infliction of emotional distress. 49 In a recent and highly publicized case, contestant Tanya Cooley of the Real World/Road Rules Challenge: The Ruins, sued Viacom and MTV, claiming she was raped during filming. Cooley alleged that when she notified the show’s producers, they told her to “just deal with it” and eventually sent her home. 50 In her claim Cooley stated producers encouraged intoxication and “scandalous behavior.” 51 MTV responded by claiming “affirmative defenses including Cooley's assumption of risk, consent, a waiver, a release and the argument that there were legitimate business reasons for sending her home—that she was removed from the show because ‘she violently struck another contestant,’” behavior that Cooley did not deny. 52 The case settled in October 2012 53 but had it gone to trial, could Cooley have successfully argued that the waiver violated public policy or that it was unconscionable? Based on current case law, it is unlikely that she could have succeeded on those claims. This is not to say there were no other potentially successful claims outside the realm of contract waivers that Cooley could have brought.

All of these suits and settlements in which the networks and production companies escaped liability have raised general awareness regarding reality television contracts. Discussion revolves around the validity of the actual terms of the contract, examining whether or not the contracts are just an example of the “big guys” taking advantage of the average Joe. 54 II WHAT IS THE UNCONSCIONABILITY DOCTRINE? Unconscionable contracts are those that “no man in his senses and not under delusion would make on the one hand and as no honest and fair man would accept 47

Martin Austermuhle, Woman Sues MTV for Depiction on The Real World D.C., DCIST.COM (Mar. 5, 2010, 10:06 AM), http://dcist.com/2010/05/ woman_sues_mtv_for_depiction_on_the.php 48 Ugolini, supra note 42, at 77.

49 Eric Gardner, The Bachelor Racial Discrimination Lawsuit, THE HOLLYWOOD REP. (Apr. 18, 2012, 12:05 PM), http://www.hollywoodreporter.com/thr-esq/the-bachelor-lawsuit-racialdiscrimination-313734.

50 Eric Gardner, MTV Settles Lawsuit with ‘Real World’ Cast Member Who Alleged Rape, THE HOLLYWOOD REP. (Oct. 24, 2012, 1:49 PM), http://www.hollywoodreporter.com/thresq/real-world-rape-mtv-tanya-382809.

51 Id. 52 Id. 53 Id. 54 Blair, supra note 43, at 18.

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on the other.” 55 The unconscionability doctrine is meant to extend protection to parties that sign unfair contracts and are not otherwise protected under contract law by duress, fraud, or misrepresentation. 56 For a contract to be unconscionable, an exacting standard must be met in order to prevent exploitation by parties who have simply exercised bad judgment. 57 The unconscionability doctrine allows a court to refuse to enforce contracts. 58 However, the court’s ability to intervene raises the inherent conflict between freedom of contract and protection from lack of bargaining during the formation of contracts.

There exists an unavoidable tension between the concept of freedom to contract, which has long been basic to our socioeconomic system, and the equally fundamental belief that an enlightened society must to some extent protect its members from the potentially harsh effects of an unchecked free market system… [T]he law has developed the concept of unconscionability so as to prevent the unjust enforcement of onerous contractual terms which one party is able to impose under the other because of a significant disparity in bargaining power. 59 The majority of discussions and case law concerning unconscionability focus on Section 2-302 of the Uniform Commercial Code (“UCC”) and involve the sale of goods. However, this provision is not applicable to service contracts and therefore contracts involving personnel in the entertainment industry. 60 The Restatement (Second) of Contracts takes the UCC language, but applies it to contracts generally rather than limiting it to sale-of-goods contracts. 61 The Restatement (Second) of Contracts Section 208 states:

55

Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (Ch. 1750).

Paul Bennett Marrow, Contractual Unconscionability: Identifying and Understanding Its Potential Elements, N.Y. ST. B.J., Feb. 2000, at 18; RESTATEMENT (SECOND) OF CONTRACTS §164 (1981); RESTATEMENT (SECOND) OF CONTRACTS §175 (1981).

57 Marrow, supra note 56, at 18.

58 Larry A. Dimatteo & Bruce Louis Rich, A Consent Theory of Unconscionability: An Empirical Study of Law in Action, 33 FLA. ST. U. L. REV. 1067, 1068 (2006).

59 Rowe v. Great Atl. & Pac. Tea Co., 385 N.E.2d 566, 569 (N.Y. 1978).

60 Harry G. Prince, Unconscionability in California: A Need for Restraint and Consistency, 46 HASTINGS L.J. 459, 462, 492 (1999).

61 RESTATEMENT (SECOND) OF CONTRACTS §208 (1981). The Reporter’s Note to §208 observes that while §2-302 is literally inapplicable outside of sale of good contracts, it has proven very influential in non-sales cases. Id. 56

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If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result. 62 Although the Restatement is not legally binding, most states have adopted its principles and extended the applicability of the unconscionability doctrine to all contracts. 63 The theory behind unconscionability and Section 208 is based on the concepts of freedom of contract 64 and laissez-faire doctrine. 65 There is a tension between being permitted to sign any contract and being limited and controlled by the government and the courts out of paternalistic, but perhaps necessary, protection. 66 The unconscionability doctrine is an attempt to strike a balance between these two extremes, allowing the courts to police contracts without causing undue interference. 67 A. The Test for Unconscionability “Whether a contract or any clause of the contract is unconscionable is a matter for the court to decide against the background of the contract’s commercial setting, purpose, and effect.” 68 Most courts “have shown restraint in examining contracts or clauses for unconscionability” to avoid encroaching on the parties’ freedom of contract. 69 But how far courts should be allowed to go in their interpretation of contracts has yet to be settled.

“Usually, but not always, neither the substance nor the circumstances alone leads to the conclusion that unconscionability exists. To reach such a result, there

62

Id. See e.g., Perdue v. Crocker Notional Bank, 702 P.2d 503, 511-12 (Cal. 1985); Soltani v.

Western & Southern Life Ins. Co., 258 F.3d 1038, 1042 (9th Cir. 2001).

64 See generally A.H. Angelo and E.P. Ellinger, Unconscionable Contracts: A Comparative Study of the Approaches in England, France, Germany, and the United States, 14 LOY. L.A. INT'L & COMP. L. REV. 455 (1992), available at http://digitalcommons.lmu.edu/ilr/vol14/iss3/3 (discussing the origins of unconscionability doctrine in the United States and European Civil law countries).

65 Richard Craswell, Professor of Law, University of Chicago, Freedom of Contract, Ronald H. Coase Lecture at the University of Chicago Law School (Dec. 6, 1994).

66 Id. 67 Prince, supra note 60, at 461-62.

68 Wilson Trading Corp v. David Ferguson, Ltd., 24 N.E.2d 685, 688 (N.Y. 1968).

69 Prince, supra note 60, at 463.

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is a need to couple the two.” 70 Unconscionability includes abuse of both procedural and substantive contract terms. 71 In Williams v. Walker-Thomas Furniture Co., 72 the leading case on the subject of unconscionability, in order to demonstrate unconscionability Williams, the petitioner, had the burden of showing “an absence of meaningful choice … together with contract terms which [were] unreasonably favorable to the” defendant. 73 Professor Arthur Allen Leff laid out the test for unconscionability by separating it into two components: substantive unconscionability, which “refers to the actual terms of the agreement,” and procedural unconscionability, which “pertains to the bargaining process.” 74 The “Leff Test” has been applied not only to unconscionability questions covered by the UCC §2-302, but also to those agreements that do not pertain to the sale of goods.75 In most states, both procedural and substantive unconscionability must be found for a contract as a whole to be found unconscionable. 76 1. Procedural Unconscionability Procedural unconscionability consists of the “absence of meaningful choice,” whereby one party has no option but to sign the contract. 77 Often, procedural unconscionability results from “haste and high pressure tactics” or signing “for the sole benefit of the defendants,” ignoring any benefit or necessity of the less powerful party. 78 One common way for courts to find procedural unconscionability is by determining that the contract is a contract of adhesion. “The term [contract of 70

Marrow, supra note 56, at 22.

8 RICHARD LORD, WILLISTON ON CONTRACTS § 18:10 (4th ed.) (substantively unconscionable contracts contain terms that “unreasonably [favor] the more powerful party… or otherwise contravene the public interest or public policy").

72 Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 (D.C. Cir. 1965) (note, this case is a sales-of-goods case).

73 Id. at 449.

74 Prince, supra note 60, at 472-74. See also Arthur Allen Leff, Unconscionability and the Code-The Emperor's New Clause, 115 U. PA. L. REV. 485, 487 (1967).

75 See, e.g., Higgins v. Disney/ABC International Television (Higgins II), No. BC 338017 (Cal. Super. Ct. Jul. 7, 2007), aff’d, Higgins III, No. B200885, 2009 WL 692701 (Cal. Ct. App. Mar. 18, 2009).

76 See, e.g., Soltani v. Western & Southern Life Ins. Co., 258 F.3d 1038, 1042 (9th Cir. 2001); Scovill v. WSYX/ABC, 425 F.3d 1012, 1017 (6th Cir. 2005); Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 322-23 (6th Cir. 1998).

77 Williams, 350 F.2d at 449.

78 Croce v. Kurnit, 565 F. Supp. 884, 893 (S.D.N.Y. 1982).

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adhesion] signifies a standardized contract, which imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” 79 Although contracts of adhesion are used as evidence to demonstrate a disparity in bargaining power, a factor in establishing procedural unconscionability, they are not per se procedurally unconscionable. 80 2. Substantive Unconscionability Establishing substantive unconscionability requires looking “to the terms of the contract itself (the contract's substance), . . . ask[ing] . . . whether those terms are unreasonably favorable to the stronger party.” 81 The Southern District of New York (affirmed by the Second Circuit) in Croce v. Kurnit explained that substantive unconscionability requires that the terms of the contract “shock the conscience” or be “grossly” different from “industry norms.” 82 Being “complex in nature” is not sufficient for unconscionability so long as the terms are not intended to “obfuscate or confuse.” 83 Courts tend to be most hesitant to step in regarding the substantive unconscionability aspect of the Leff Test. Substantive unconscionability is often viewed to be the heart of the unconscionability doctrine and, in some states, is enough to find an agreement unconscionable on its own, although it is often still accompanied by a finding of procedural unconscionability. 84 Factors courts consider when deciding if a contract is substantively unconscionable, include, but are not limited to, commercial setting, bargaining power, opportunities for the signing parties, who requires more protection, as well as to whom rights or privileges are given or payment is made (as specified by the contract in question). This factor-driven test creates a sliding scale, making the plaintiff’s burden of proving unconscionability highly dependent on the importance of the rights involved. When fundamental and constitutional rights are bargained 79

Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 689 (Cal. 2000) (citing Neal v. State Farm Ins. Cos., 188 Cal. App. 2d 690, 694, 10 Cal. Rptr. 781 (1961).

80 Id.; Graham v. Scissor-Tail, Inc., 623 P.2d 165, 172 (Cal. 1981).

81 Richard Craswell, Two Different Kinds of Procedural and Substantive Unconscionability, Law and Economics Workshop, Berkeley Program in Law and Economics, UC Berkeley, 1 (Apr. 12, 2010), available at http://escholarship.ucop.edu/uc/item/0hf7v16t.

82 Croce v. Kurnit, 565 F. Supp. 884, 893 (S.D.N.Y. 1982), aff'd, 737 F.2d 229 (2d Cir. 1984).

83 Id. 84 However, it is still most often accompanies by a finding of procedural unconscionability. 8 RICHARD LORD, WILLISTON ON CONTRACTS § 18:10 (4th ed.).

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away, the context (commercial setting, bargaining power, etc.) is of lesser concern than when other personal privileges are given up as consideration.

Contracts found to be unconscionable, or those that violate public policy, are void or voidable. 85 While public policy violations and unconscionability are technically different theories for voiding a clause or contract, they are interrelated. 86 Furthermore, the idea of voiding a contract or clause because it violates public policy fits into the broader understanding of the unconscionability doctrine, particularly into the concept of substantive unconscionability. 87 3. Application of the Two-Part Test When courts are determining whether a clause is unconscionable, they often combine the procedural and substantive tests into a single analysis. Habitually, courts assume procedural unconscionability in contracts of adhesion and reserve thorough analysis until after the substantive unconscionability discussion.

Consequently, a court will often avoid the procedural analysis altogether because it does not find the clause to be substantively unconscionable. On the other hand, a clause may be so clearly substantively unconscionable that procedural unconscionability is only used to tip the scale. Many courts “have suggested a kind of sliding scale, in which even a small amount of procedural unconscionability, when combined with a high degree of substantive unconscionability, [would] be enough to invalidate a challenged clause.” 88 B. Unconscionability under California Law California, home to Hollywood, is also the site of most of the nation’s entertainment law disputes. As a result, California state law has one of the most developed unconscionability doctrines in the entertainment industry. Most reality 85

See RESTATEMENT (SECOND) OF CONTRACTS §178 (1981); RESTATEMENT (SECOND) OF CONTRACTS §208 (1979) (most states have adopted these provisions of the Restatement or equivalent to apply to all contracts).

86 See RESTATEMENT (SECOND) OF CONTRACTS §208 cmt. (a) (“Policing against unconscionable contracts or terms has sometimes been accomplished ‘by adverse construction of language, by manipulation of the rules of offer and acceptance, or by determinations that the clause is contrary to public policy or to the dominant purpose of the contract.’”)

87 Public policy violation can be a way to void a contract or clause on its own when the first part of unconscionability, procedural unconscionability, is not satisfied. That distinction is probably not an issue for the context of this paper because procedural will not be difficult to satisfy for reality television contestants, since these contracts are standard, non-negotiable contracts of adhesion.

88 Craswell, supra note 81, at 2.

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television shows are California-based, making California state interpretations of the doctrine binding for any unconscionability claims that may arise. The California courts also tend to be less restrained in their application of unconscionability than courts in other jurisdictions. 89 California Civil Code §1670.5 covers the unconscionability doctrine, stating: (a) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. (b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination. 90 The California courts have applied this statute to all contracts. 91 California law requires the finding of both procedural and substantive unconscionability in order to void a provision. 92 The California courts also apply the Leff Test. “The text of §1670.5 is identical to the text of §2-302 of the 1962 Official Text of the Uniform Commercial Code… The purpose of enacting §1670.5 as part of the Civil Code was to make its provisions applicable to all contracts.” 93 In Buchwald v. Paramount Pictures Corp., the court found that when Buchwald signed an agreement with very complicated formulas for the calculation of net profits (or net proceeds), he “had been taken advantage of through a commonly used motion picture industry contract.” 94 The court held the clause to be unconscionable. However because the court in Batfilm Productions v. Warner Brothers, Inc. found the same net profits clause not to be unconscionable, the film 89

Prince, supra note 60, at 493.

CAL. CIV. CODE § 1670.5 (West 1979).

91 See, e.g., Perdue v. Crocker Nat’l Bank, 702 P.2d 503, 516 (Cal. 1985).

92 8 RICHARD LORD, WILLISTON ON CONTRACTS § 18:10 (4th ed.); AT&T Mobility, Inc. v.

Concepcion, 131 S. Ct. 1740, 1746 (2011) (citing Amandariz v. Found. Health Psychcare Servs., 6 P.3d 669, 690 (Cal. 2000)).

93 3 ANN TAYLOR SCHWING, CALIFORNIA AFFIRMATIVE DEFENSES § 55:1 (2013 ed.) (emphasis added).

94 Prince, supra note 60, at 460-61.

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industry has done little to change its practices. 95 Since Buchwald, California courts have been reluctant to find entertainment contracts unconscionable, leaving the case as an outlier in the unconscionability sphere of entertainment contracts.

C. Unconscionability under New York Law New York, another prominent state for entertainment, television, and film activity, is the other state that may eventually play a role in reality television contractual disputes. However, both the New York courts and legislature have been much less active with regards to the unconscionability doctrine than California; thus, there is little precedent to use as a guide. In 1951, the New York Court of Appeals held that an unconscionable contract is one that is “so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms.” 96 In 1962, New York adopted the UCC §2.302 provision and in 1976, incorporated similar language into the state’s Real Property Law. 97 In Gillman v. Chase Manhattan Bank, the New York Court of Appeals held that both procedural and substantive unconscionability are required to find a contract void for unconscionability. 98 “The New York Court of Appeals defined procedural unconscionability as an ‘absence of meaningful choice,’” 99 but also held that a contract of adhesion, without more, is not automatically a procedurally unconscionable contract. 100 Hence, requiring someone to sign a contract in order to participate in a program does not in itself make the contract procedurally unconscionable. 101 Substantive unconscionability in New York, while similar, uses a less stringent standard than is used in California. 102 The court in Gillman determined that the standard of review in New York is the reasonableness of the terms.

95

Id. at 493.

Mandel v. Liebman, 100 N.E.2d 149, 152 (N.Y. 1951).

97 Marrow, supra note 56, at 20.

98 Gillman v. Chase Manhattan Bank, 534 N.E.2d 824, *828 (N.Y. 1988).

99 Ian Brereton, Note, The Beginning of a New Age?: The Unconscionability of the “360 Degree” Deal, 27 CARDOZO ARTS & ENT. L.J. 167, 175 (2009) (citing Gillman).

100 Croce v. Kurnit, 565 F. Supp. 884, 893 (S.D.N.Y. 1982), aff’d, 737 F.2d 229 (2d Cir. 1984) (applying New York state court precedent).

101 Id. (finding that the contract was not per se unconscionable even though the entertainer lacked bargaining power with the publishing and management companies).

102 Brereton, supra note 99, at 175.

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III THE CONTRACTS The only bona fide protection for producers and networks filming reality television shows is through contract. Union collective bargaining agreements provide baselines in scripted television, but do not apply to reality television cast members. Given the extra risk and uncertainty of reality television, producers and networks feel the need to protect themselves from every possibility for legal action fathomable.

A. Measures for Protection of Production Companies and Networks Over time, the size, number, and depth of the reality television contracts and releases has grown significantly. Producers have learned that they need very elaborate contracts to protect themselves. According to Matt Kunitz, Supervising Producer of The Real World, “the second season of The Real World, the contract was 12 pages long, and every year it got bigger and bigger.” 103 Nigel Lythgoe, producer of American Idol and So You Think You Can Dance, described contract formation as having to be complete in its expectation of transpiring events.

“Whenever you do a contract, you have to try to anticipate every angle, because you can’t tell what’s going to happen.” 104 “You’re always dealing with unpredictability,” echoed Chris Sloan of the USA network, leading a practical contract author to ensure protection against all risks. 105 It is clear that comprehensive nature of reality television contracts is a response to the lack of control and unique problems associated with unscripted shows. 106 In addition to the main contract, it is common for contestants to sign a release, full contestant agreement, and non-disclosure agreement. 107 Most contestants also have to submit to a medical examination, background check, psychological evaluation, and personality testing. 108 For example, the Season 4 Beauty and the Geek cast had to sign and complete a thirty-five-page agreement and release, a three-page confidentiality agreement, a two-page medical supplies

103

Lowry, supra note 1.

Id. 105 Id. 106 Id. 107 SAM BRENTON & REUBEN COHEN, SHOOTING PEOPLE: ADVENTURES (2003).

108 Id. 104

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form, and a three-page medical information form. 109 So You Think You Can Dance Season 5 contestant Randi Lynn Strongg (formerly Randi Lynn Evans) said, “[t]he contract that we had to sign once making it onto the show was about 90 pages long.” 110 Contestants also completed “a 450-question psych evaluation along with physical tests with a doctor.” 111 On the first season of The X Factor, the contestants had a thick packet to fill out right after boot camp week. If the contestants “[get] past the judges, they take [the contestants] for a screening with a private investigator and they [ask] [the contestants] everything: what religion you are, what drugs you have done, how many people have you had sex with. It’s scandal protection.” 112 Production companies thoroughly investigate the contestants’ lives, from their relationships and family, to their driving record and where they lived for the last ten years, to avoid any potential surprises down the line.

B. Typical Contractual Language There are several common features to reality television contestant: standard warnings about dangers contestants may face along with liability releases; privacy waivers and permission grants for filming any time and place; warnings and releases regarding reputational damage and embarrassing depictions; commitment or exclusivity clauses; and communication limitations.

Standard warnings about the dangers that the contestants face by coming on the show may be part of a larger contestant agreement or may constitute a separate waiver or release. The intention of these clauses is to warn contestants of potential hazards and to release the production company from liabilities stemming from those risks. 113 Contestants on The Biggest Loser sign an eleven-page release that covers both physical and psychological risks, waiving the right to sue for virtually any liability related to injury or death. 114 Under the release, contestants assume all 109

Applicant Agreement and Release Beauty and the Geek, 3 Ball Productions (Jun. 16, 2007) (unpublished contract) (on file with the author).

110 Email Interview with Randi Lynn Strongg, Former Contestant So You Think You Can Dance Season 5 (Oct. 4, 2012).

111 Id. 112 A member of the group “The Anser,” which was one of the four finalists in the “group” category that worked with Paula Abdul. “The Anser” was eliminated in the Judges’ House portion of the show, the section right before the judges’ final picks go on to the live show.

Telephone Interview with Gray Aydelott, Former Contestant, The X Factor Season 1 (Oct. 3, 2012).

113 Production companies remain liable in instances of gross negligence or where there is a lack of reasonable care on their part.

114 May be unenforceable but that is for another discussion.

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risks, known and unknown, and acknowledge the â&#x20AC;&#x153;diet, exercise, and/or nutritionalâ&#x20AC;? risks associated with the show: 115 It further states: I understand that the Series and my compliance with the Series Rules may cause me mental, psychological and/or emotional distress, and the consents, authorizations of risk and releases set forth in this Agreement and in the Waiver and Release expressly apply to all such potential harms. 116 Similar provisions appear in the contract signed by contestants on the fourth season of Beauty and the Geek: I understand that the Series will involve my participation in physically and mentally strenuous activities that may cause me serious bodily injury, illness or death, including, but not limited to exhaustion, dehydration, fatigue, overexertion and sun or heat stroke. I understand and acknowledge that while conduct giving rise to such situations and activities might otherwise constitute an actionable tort, I have freely and knowingly consented to such conduct and to participating in such situations and activities.

I acknowledge that the foregoing is not an exhaustive list of the risks, hazards and dangers I may be exposed to as a result of the Series activities and I voluntarily and freely accept and assume these and all such other risks, hazards and dangers I may encounter or be exposed to and understand and acknowledge that the waivers, releases and indemnities in this Agreement expressly apply to these risks, hazards and dangers. 117 Similar clauses may also release the producers of liability from association and interaction with the other contestants or guests on the show. On The Real World, guests were required to sign a contract containing the following clause: I understand that Producer does not make any representations or warranties about the cast members in the Program or of any other person whom I may encounter in connection with my participation in the Program, including but not limited to, the mental or physical health of any such person. If I choose to engage in consensual sexual 115

Applicant Agreement, Release and Arbitration Provisions The Biggest Loser Season 11 BL4 Productions, Inc. (Oct. 14, 2010) (unpublished contract) (on file with the author).

116 Id. 117 Applicant Agreement and Release, Beauty and the Geek Season 4, supra note 109.

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behavior or intimate contact . . . I do so voluntarily and knowingly and I assume the risk that by engaging in such activity I may contract certain sexually transmitted diseases . . . . 118 Despite the their ubiquity, Professor Andrejevic of the University of Iowa doesn’t believe that such language provides any sort of warning to the participants, stating that it is “disingenuous for producers to suggest that contestants were adequately warned of the conditions they would face.” 119 Language permitting filming of contestants at any time and place during production is common to most, if not all, reality television contracts. For example: I grant to Producer and its successors, licensees and assigns, the irrevocable right, but not the obligation, with or without my knowledge, to film, tape and/or photograph, record, exhibit, edit and otherwise use my appearance, name, likeness, voice, singing voice, conversation, sounds and biographical data on or in connection with the Program in any manner in Producer’s sole election and discretion, which use shall not entitle me to receive any compensation whatsoever. 120 Contestants often must explicitly give up all rights of privacy while being filmed for the show: . . . [I]f I so choose to enter the case house that hidden cameras and microphones may be used and I have no expectation of privacy anywhere in the house, including but not limited to bedrooms, bathrooms and other places I would typically expect privacy. 121 Relatedly, contestants frequently must consent to any personal information or embarrassing depictions that may be revealed over the course of the show.

These releases prevent suits for frankenbiting, invasion of privacy, reputational injuries, defamation, and other claims involving emotional and non-physical personal injuries. One such contract reads:

118

Voluntary Participation Agreement (Guest Release) The Real World, RW Productions, Inc. (unpublished contract) (on file with the author).

119 Wyatt, supra note 7.

120 “American Idol” Season 12 – Personal Release, American Idol Season 12, American Idol Productions, Inc. (2012) (unpublished contract) (on file with the author).

121 Voluntary Participation Agreement (Guest Release), The Real World, supra note 118.

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I understand that, in and in connection with the Program… I may reveal and/or relate, other parties… may reveal and/or relate, or the Producer may thus edit, information about me of a personal, surprising, defamatory, disparaging, embarrassing or unfavorable nature. I further understand that my appearance, depiction, and/or portrayal in or in connection with the Program, and my actions and the actions of others displayed in or in connection with the Program, may be disparaging, defamatory, embarrassing or of an otherwise unfavorable nature, and may expose me to public ridicule, humiliation or condemnation. I acknowledge and agree that Producer shall have, in its sole discretion and editorial control, the right to include any such information and any such appearance, depiction, portrayal, actions and statements in and in connection with the Program. I understand and acknowledge that while such conduct might otherwise constitute a tort, I have freely and knowingly consented to such conduct and waive any action against Producer. 122 Such provisions are common even in talent competitions; the American Idol Personal Release states: I understand that I may reveal and other parties may reveal, information about me that is of a personal, private, embarrassing or unfavorable nature, which information may be factual and/or fictional.

I further understand that my appearance, depiction and/or portrayal in the Program may be disparaging, defamatory, embarrassing or of an otherwise unfavorable nature which may expose me to public ridicule, humiliation, or condemnation. I acknowledge and agree that Producer shall have the right to (a) include any or all such information and appearances, depictions or portrayals in the Program as edited by Producer in its sole discretion, and (b) broadcast and otherwise exploit the Program containing any or all such information and appearances, depictions or portrayals in any manner whatsoever in any and all media now known or hereafter devised, or for any other purpose, throughout the universe in perpetuity. 123 Various commitment clauses are also common in addition to releases for physical dangers, emotional harm, privacy rights, and other producer liabilities,

122 123

Id. (emphasis added).

“American Idol” Season 12 – Personal Release, American Idol Season 12, supra note 120.

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especially for talent-based shows. Some clauses restrict activity during production, while others cover post-production activities.

Exclusivity during production and run of the show is common. American Idol Season 2 contestants were barred from any sort of vocal performance unrelated to the show during the season’s filming and airing. They “couldn’t sing anywhere but Idol, even family barbeques, while [they] were on the show.” 124 Similarly, The X Factor Season 1 contestants had to wait until seven months after the show aired to perform in other contexts. 125 The Biggest Loser contestants had to obtain the show’s approval for public appearances or speaking engagements for a year after the conclusion of the show. 126 Contracts also have commitments that bind the contestants to some combination of the show, network, management company, or production company for a period of time after the show’s completion. Pursuant to such a release, contestants on the second season of American Idol “were bound to 19 Management for three months after the tour.” 127 For The Biggest Loser family, the commitment is mostly social. Prior contestants “can go back every year for the finale… Devin [Alexander] has a big dinner party at her home. [They] also have an alumni group Facebook page so [they] can keep in touch.” 128 However, The Biggest Loser also has contractual control over contestants for one year after the final episode airs: 129 Producer and Network shall have the right and option to require me to participate in any future unscripted, ‘reality-based’ programs… and all media now known or hereafter devised in which I appear as myself (the “Reality Hold”), according to the following terms and conditions… through the date which is twelve (12) months after the initial exhibition of the final episode of the cycle of the Series in which I appear. 130 In spite of the contracts, contestants on many of these shows felt that they were well-treated and respected during the show, especially contestants from the early seasons. So You Think You Can Dance Season 5 contestant Randi Lynn 124

Telephone Interview with Carmen Rasmusen Herbert, supra note 18.

Telephone Interview with Gray Aydelott, supra note 112.

126 Telephone Interview with Deni Hill, Former Contestant, The Biggest Loser, Season 11 (October 1, 2012).

127 Telephone Interview with Carmen Rasmusen Herbert, supra note 18.

128 Telephone Interview with Deni Hill, supra note 126.

129 Id. 130 Applicant Agreement, Release and Arbitration Provisions, The Biggest Loser, supra note 115.

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stated in an interview that, “[j]ust recently, I attended the Season 9 wrap party and got to see everybody there, including Nigel [Lythgoe] and stuff. That was a lot of fun, and I felt that I was greeted with open arms. I feel like everyone who was on the show will always have a special place with Nigel and friends.” 131 Yet, things appear to be different on some newer shows. During The XFactor’s inaugural season in 2011, the producers required the contestants that made it to the final live shows to sign an additional contract with a seven-year producer right-of-first-refusal clause on activities of the top contestants. 132 Gray Aydelott explained, “[w]e got cut right before the… right of first refusal. That was what scared me the most. If we were offered it, I would have taken it, obviously, but seven years is a long time to be bound.” 133 Aydelott understood how the contract could tie the hands of his group, but felt that the opportunity would have been worth it. 134 It seems that in the wake of American Idol’s missed contractual hold on Jennifer Hudson, who didn’t win but went on to have an Oscar-winning career, producers want to ensure no potential opportunities slip away again. 135 Limitations on contact with the outside world are prevalent; contestants are required to be away from their families and friends for extended periods of time.

Despite the emotional hardship this can entail, many shows compound the separation with clauses pertaining to communication. In some cases the restrictions extend communication limits beyond when contestants actually appear on the show (i.e., after they have been eliminated) to ensure confidentiality and maintain the surprise factor for finales. For example, the release for The Biggest Loser reads: I understand the Series Rules may require me to be separated from my family, friends and regular environment for an extensive period of time, to be present at one or more locations… with or without other participants of the Series, and that I may be subject to limitations or prohibitions on my ability to communicate with my family, friends and others, for up to twenty-four (24) hours a day, seven (7) days a week, for a period of approximately nineteen (19) consecutive weeks

131

Id. Telephone Interview with Gray Aydelott, supra note 112.

133 Id. 134 Id. 135 Id. 132

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(and possibly longer) tentatively scheduled to begin on or about . . . . 136 Ultimately, producers are attempting prepare for the fact that the filming experience may not go as they or the participants anticipated. The production company may reveal information on the show that the contestant never imagined producers would find out, and contestants may do or say unexpected things. All of this is reflected in the contracts.

IV COULD UNCONSCIONABILITY BE USED TO VOID THE CONTRACTS? “Unconscionability is a question of law for the court.” 137 If a clause is found unconscionable, courts may address the solution in a variety of ways, including “red-penciling” out the problematic phrase or clause, voiding the entire contract, or narrowing the meaning of the unconscionable term. Under California state law, unconscionable contracts are subject to severability under CA Civil Code §1670.5(a); hence the entire contract would not be void regardless of a finding regarding an individual clause. 138 Markedly, there is no precedent finding the standard and existing clauses of a reality television contract unconscionable.

Reality television’s contemporary development and the tendency to settle disputes have limited the courts’ exposure to this issue. Only the California Superior Court for Los Angeles County, followed by the Second District of the Court of Appeal for California reviewing the County Court’s cases on appeal, has specifically addressed using unconscionability to void clauses other than the arbitration clause in reality television contracts. The Superior Court exhibited a clear and accurate application of the unconscionability doctrine in the Higgins cases, in particular, Higgins II. A. Unconscionability in Reality Television Contracts According to the Los Angeles County Superior Court and the Second District of the Court of Appeal 1. The Higgins Cases In the series of Higgins cases, a family of orphaned children brought suit against ABC and its affiliates over an episode of Extreme Makeover: Home 136

Applicant Agreement, Release and Arbitration Provisions, The Biggest Loser, supra note

115.

137

Higgins II, No. BC 338017, at 10 (Cal. Super. Ct. Apr. 20, 2007) (citing Vance v. Villa Park Mobile Home Estates, 36 Cal. Rptr. 2d 723 (Cal. Ct. App. 1995)).

138 Id. (citing Abramson v. Juniper Networks, Inc., 9 Cal. Rptr. 3d 422, 438 (Ct. App. 2004)).

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Edition. 139 The four Higgins siblings’ were orphaned and, with the encouragement of their church, agreed to go on Extreme Makeover: Home Edition. Prior to the show, the Leomiti Family had taken the four siblings into their home, thus it was the Leomiti house which was remodeled. Within a year of the remodel, the Leomitis evicted the Higgins children, prompting the siblings to sue the Leomitis and several parties involved in the production of the show, including the production company and the network. 140 In 2006 the children appealed a decision by the Superior Court to the Court of Appeal (Higgins I) arguing that they should not be required to arbitrate with the producers and network because the arbitration clause was unconscionable. The Court of Appeals agreed with the children, overturning the Superior Court decision and finding the arbitration clause unconscionable. 141 Judge Rubin reversed the Superior Court’s requirement to arbitrate, granting the Higgins children’s writ of mandate. 142 In 2007, the children returned to the Superior Court (in Higgins II) with seventeen causes of action against defendants Disney and ABC. Of their many claims, those relevant to this note alleged that particular clauses in their contract were unconscionable and rendered the agreement void. 143 The appeals court disagreed, finding the clauses at issue were not unconscionable. 144 In Higgins II, the Superior Court accepted the ruling of the Court of Appeals in Higgins I, finding that the contract was a contract of adhesion. 145 However contrary to the Court of Appeals’ holding, the Superior Court found that under the procedural unconscionability analysis the fact that font changes and formatting made the contract difficult to read did not alone render the contract

139

Higgins v. Superior Court (Higgins I), 140 Cal. App. 4th 1238, 1241-43 (2006) (on appeal, the court found the arbitration clause to be unconscionable); Higgins III, No. B200885, 2009 WL 692701, at *2-3 (Cal. Ct. App. Mar. 18,2009).

140 Higgins II, No. BC 338017, at 2-3.

141 Arbitration agreements are commonly found to be unconscionable, particularly if they lack mutuality in bargaining (procedural unconscionability). Many arbitration clauses require that any dispute go to mandatory arbitration and that the result there will be binding on the parties. Courts have held this type of language to be unconscionable (substantial unconscionability) when there is also highly unequal bargaining power (procedural unconscionability) because it forces one party to give up the constitutional right to a trial by jury.

Higgins I, 140 Cal. App. 4th at 1241-1243.

142 Higgins II, No. BC 338017, at 2-3.

143 Id. 144 Id. at 13.

145 Id. at 10 (According to the Court of Appeals opinion in Higgins I, 140 Cal. App. 4th, at 1238, this contract is, in fact, a contract of adhesion).

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unconscionable. Therefore, while the contract at issue was a contract of adhesion, it did not meet the requirements for procedural unconscionability. 146 The Higgins children appealed again (Higgins III), this time focusing more specifically on several clauses that they claimed were unconscionable, including the Participation Clause 147 and the Release and Indemnity Clauses. 148, 149, 150 The appeals court affirmed the Superior Court’s decision but focused on the question of substantive rather than procedural unconscionability, holding that the agreement

146

Id. at 11.

The Participation Clauses come at paragraphs 12 and 13 where the participants acknowledge that the show will be recorded and that, as a result, private, personal, and embarrassing matters may be publicly broadcast. The show defendants are granted permission to fully exploit those materials in any way, and they are released from any and all claims that liability based on participant’s right of privacy, intentional or negligent infliction of emotional distress, defamation, and any other torts in any way relating to the disclosure and exhibition of personal information about the participant. These provisions are not highlighted or displayed in boldface and appear in sequence with paragraphs 4 through 19 under the heading PARTICIPATION. Higgins III, No. B200885, 2009 WL 692701, at *11 (Cal. Ct. App. Mar. 18, 2009).

148 Paragraph 56 states that the releasing parties will not sue any of the show participants "for any injury, illness, disease (including, without limitation, any sexually transmitted disease), trespass, damage, loss or harm to me or my property, or my death, howsoever caused, resulting or arising out of or in connection with . . . the [show], . . . whether or not caused by or arising out of the act or omission . . . of the released parties or any of the participants in the program." Id. at *12.

149 Paragraph 57 states that the releasing parties unconditionally release and discharge all show participants and the released parties from "any and all claims, liens, agreements, contracts, actions, suits, costs, . . . and liabilities of whatever kind or nature . . . whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden . . . arising out of or in connection with" the show. The released claims shall include "those based on negligence or gross negligence of any of the released parties or . . . the other participants . . . wrongful death, personal injury, [negligent and intentional] infliction of emotional distress, . . . products liability, breach of contract, breach of any statutory or other duty of care owed under applicable law, libel, slander, defamation, invasion of privacy, violation of any right of publicity or personality, infringement of copyright or trademark, loss of earnings or potential earnings, kidnapping, false imprisonment, and those based on my dissatisfaction with the improvements or my possession or use thereof." Id. 150 Paragraph 58 “sets forth the waiver of Civil Code section 1542 and releases claims that are not known or suspected. It also states that the releasing parties have either been advised by legal counsel or have chosen not to consult counsel.” Id. 147

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failed to “shock” or “surprise” in a manner that rendered it unenforceable. 151 The court noted that the contract was not “permeated with unconscionability” such that the entire contract could be voided, and that the contested terms, when considered in context, were not in and of themselves unconscionable. 152 That these highly restrictive, and fairly common, clauses were not found unconscionable bodes well for producers with similarly drafted contracts. However, the court did make a point to note that it was not making a ruling as to the unconscionability of provisions other than the specific ones contested in the case. 153 Hence, what exactly a conflict-free production contract looks like has not yet been established.

2. The Dr. Phil House Case A second California case that touches on unconscionability in reality television contracts is Dieu v. McGraw, in which the issue stemmed from Dr. Phil McGraw having built a house in which to gather and film viewers who had written to him for advice. 154 The plaintiffs, who were themselves participants, brought claims of misrepresentation and fraud against Dr. Phil and his fellow producers. 155 The Superior Court denied the defendants' motion to strike because the defense had not met its burden of demonstrating that the plaintiffs' complaints arose out of defendants' protected activity. 156 On appeal, the unconscionability arguments were brought out when the defense’s counsel chose to use the plaintiffs’ releases as a means for blocking their claims. The plaintiffs rebutted, arguing the releases were unconscionable and void due to the language. 157

151

The court comes to this conclusion even though they note that one of the contested provisions, based on a footnote of the complaint, releases the Producers from any claims resulting from emergency medical care and is “effectively a modified version of the ‘good samaritan’ laws.” Higgins v. Disney/ABC International Television (Higgins II), No. BC 338017, 11 (Cal. Super. Ct. Jul. 7, 2007).

152 Higgins III, 2009 WL 692701, at *11-12.

153 Higgins II, No. BC 338017, at 13 (“More importantly, the court notes that paragraph 2 (granting the Producers rights to publicity), the first four lines of paragraph 64 (integrating all prior understanding into the contract providing that the contract supersedes them), paragraph 65 (asserting that the contract has not been entered into on the basis of prior promises or representations by the Producers) and paragraph 71 (containing a recitation that the signatory has read the contract) are not alleged to be unconscionable.”).

154 Dieu v. McGraw, No. BC223117, 2011 WL 38031 (Cal. Ct. App. Jan. 6, 2011).

155 Id. at *1-2.

156 Id. at *3.

157 Id. at *2 (“[plaintiffs] will never sue and [plaintiffs] fully release and discharge, [CBS], Peteski Productions, Inc., [McGraw] and/or their respective distributors, assigns, affiliates, licensees, agents, officers, directors, shareholders, employees and attorneys, and each of them for

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The court disagreed with the plaintiffs, finding the release was not unconscionable. 158 However, it should be noted that the court implied that the reason for their holding was that the plaintiffs had not met their burden of proof.

As the appeals court stated: “Plaintiffs have provided no evidence of whether they were relegated only to a take it or leave it scenario with respect to the releases . . . .

On this basis alone, plaintiffs have failed to satisfy their burden to establish that the releases are unconscionable and, therefore, unenforceable.” 159 The court also found that the language of the releases appeared one-sided and may have been substantively unconscionable. However, it never conclusively addressed that issue because the plaintiffs had already failed to establish procedural unconscionability. 160 The Dr. Phil case illustrates how unconscionability suits are likely to arise in the future. Claims of unconscionability are not common in the initial complaint any loss, claims or injuries of every kind and nature which [plaintiffs] may now have or may hereafter acquire arising out of or in connection with the [Program] including without limitation: (a) any claims, demands and causes of action for invasion of privacy or publicity, defamation, infliction of emotional distress and any other tort in connection therewith; . . . (d) because [plaintiffs did] not like the questions, responses or outcome of the [Program]; and (e) because [CBS] did not fully disclose the subject matter of the [Program] or the identity of other guests appearing on the [Program]. [Plaintiffs] voluntarily assume the full risk of any loss or injury (including, without limitation, physical or emotional loss or loss of property or income) to [themselves] . . . that may occur as a result of the production, taping and/or broadcast of the [Program]. . . . [Additionally, the releases provided that:] (1) McGraw does not administer individual, group or medical therapies, and that plaintiffs would not be receiving therapy of any kind from him, (2) no promises had been made to plaintiffs other than those expressly set forth in the releases, (3) no promises had been made to plaintiffs about the final or specific content of the Program, and (4) in signing the releases, plaintiffs did not rely on any representations or statements that were not set forth in the releases.”).

158 Id. at *11 (citing Tunkl v. Regents of Univ. of Cal., 383 P.2d 441 (Cal. 1963)). After determining that the releases were not unconscionable, the court had to determine if the plaintiffs' claims were barred by the release. The defendants argued that the release barred all suits, but the plaintiffs pushed that it was blocked California Civil Code §§1542 and 1668. The court determined that §1542 was not applicable because there was no debtor/creditor relationship. As to §1668, the defendants brought evidence that under this type of case does not apply because §1668 only applies to “public regulation.” The court held that Tunkl only applies to negligence claims and not intentional torts, violations of statutory law, or fraud. Therefore, six of the plaintiffs' eight claims were not barred by the releases. As to the other two, which were negligence claims, the court performed a Tunkl analysis and concluded that these releases are exempt and not considered of “public interest” under Tunkl so the negligence claims were barred by the releases.

159 Dieu, 2011 WL 38031, at *11.

160 Id.

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stage, but are instead brought out at a later stage to try to prevent producers from using the contracts as an affirmative defense. Both this case and Higgins I and II demonstrate the complicated nature of the unconscionability doctrine and the high burden of proof that must be met to win a claim under it. While these two cases were unsuccessful, the Los Angeles County Superior Court and the Second District of the Court of Appeal for California left the door open for future claims so long as they address different contract provisions. If a contestant were to win such a claim, it could drastically alter the nature of reality television contracts and expose the producers and networks to new risks.

B. Applying the Test and Concluding That the Contracts Are Not Unconscionable Though the potential success of unconscionability claims cannot be discounted if producers and networks continue to push the bounds of acceptable television entertainment, there remains a heavy burden on parties bringing such claims. In addition, several factors make winning a case particularly difficult in the current climate of reality television contracts. First, contestants freely choose to participate and, arguably, have the opportunity to make an informed decision before signing the contract, 161 nullifying allegations of procedural unconscionablity. Second, the courts weigh the contractual language “against the background of the contract’s commercial setting, purpose, . . . effect,” as well as industry norms. 162 In the entertainment industry, contracts tend to be over-inclusive and favor production companies because they are assuming the majority of the financial risk. Third, courts must find that the language of the contract meets the high standard of “shock[ing] the conscience” in order for the contestant to succeed.

Finally, the fact that contestants sign the hefty contracts in hopes of an even heftier return makes any unfairness argument weak. They are giving up a substantial number of privileges, but in exchange the studios and networks are risking a lot of money on the contestants and the show while offering the contestants a potentially life-changing opportunity.

1. Free Will and Informed Decisions in the Procedural Unconscionability Analysis “The critical principle to keep in mind is that no one is forcing anyone to participate in these shows,” argues Jonathan Anschell, who represented CBS in a claim brought by Stacey Stillman, one of the original contestants on The Survivor. 163There is no reason, other than desire, for a person to be on reality 161

But see infra notes 165, 175.

Wilson Trading Corp. v. David Ferguson, Ltd., 244 N.E.2d 685 (N.Y. 1968) 163 Lowry, supra note 1.

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television. Those arguing that these contracts are unconscionable should consider the fact that the contestants do not have to be on the shows at all. Many, if not all, of the shows offer the contestants the opportunity to make informed decisions either by consulting an attorney provided by the producers, their own attorney, or another informed party. In 2002, when Carmen Rasmusen was on American Idol “the show hired a lawyer for the ‘Top 12.’ He went over the about fifty-page contract with us . . . They wanted to make sure we understood. I mean they hired a lawyer to spend hours with all of us on speakerphone to make sure we were okay with everything.” 164 Not everyone has had the experience Rasmusen had. “In some cases, reality show contestants may know very little about the contents of the contracts they sign, given their length, the use of boilerplate and legal jargon, and the relatively short time contestants have to review the contracts.” 165 However, contestants do realize that they have little to no bargaining power to change these contracts of adhesion, due to basic economic supply and demand. If they choose not to participate, there is a line of people around the block, literally, to replace them.

They are a highly dispensable piece of the production of the show. Randi Lynn said about participating on So You Think You Can Dance that: “Honestly, they are going to do what they want, and they can, because all the power is in their court. I just wanted to be on the show, no matter what. In the end, I can say that I think everything worked out for me great.” 166 “If you wanted to do the show”, she added, “you played by their rules and had to sign it as it was.” 167 Similarly, Will Frank, a Beauty and the Geek contestant, knew he had no bargaining power. “[T]his wasn’t a negotiation of equals; it was pretty take-it-or-leave-it. I felt the choice was pretty simple – sign and be on the show, or don’t and don’t.” 168 On the other hand, the contestants on reality television shows do not have agents negotiating their contracts, and most of them have little experience negotiating contracts in general, let alone entertainment and reality television contracts which operate under their own set of unconventional industry practices. 169 When combined with the expendable nature of individual contestants, 164

Telephone Interview with Carmen Rasmusen Herbert, supra note 18.

Blair, supra note 43, at 23.

166 Email Interview with Randi Lynn Strongg, supra note 110.

167 Id. 168 E-mail interview with Will Frank, former Beauty and The Geek contestant, Season 4 (Dec. 3, 2012).

169 See Jonathan Barnett, Hollywood Deals: Soft Contracts for Hard Markets (USC Law and Economics Research Paper Series No. C12-9, 2012), available at http://ssrn.com/abstract=2118918 or http://dx.doi.org/10.2139/ssrn.2118918.

165

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this lack of bargaining power makes these agreements contracts of adhesion and increases the likelihood that the terms favor the producers and networks, which could enable the courts to find procedural unconscionability. Even so, the courts are still unlikely to find substantive unconscionability based on these factors alone, and both procedural and substantive unconscionability are required to find a clause or contract unconscionable.

2. Commercial Setting and Industry Norms as Part of the Scrutiny for Substantive Unconscionability Most of the contestants understand what they are getting into and fully expect to “sign their lives away.” 170 They understand that making it in the entertainment world is extremely difficult, has low chances of success, and requires sacrifices in many forms, including contractual obligations. “It’s everything that goes along with. . . entertainment. The publicity, the television, the interviews, the crowd. It’s part of the business.” 171 However, many contestants do feel that “[producers] tried to do what worked for [both] the show and for the contestants. They were looking out for [the contestants’] best interests.” 172 Still, “Hollywood language is . . . difficult.” 173 In a letter to the contestants of Beauty and the Geek containing the contract they were required to sign, the producers tried to limit anxiety by explaining that the contract language was standard. To do this, they included the following in the letter: DON’T PANIC!!!! It is a standard show contract and umbrellas a wide set of scenarios and circumstances that you may, or may not, encounter. Much of the language in this agreement is intimidating and difficult to understand. Read through it carefully and feel free to ask us any questions. A LOT OF THIS LANGUAGE SOUNDS FAR WORSE THAN THE ACTUAL CIRCUMSTANCES YOU WILL ENCOUNTER ON THE SHOW. 174 Why have this language at all if it is an exaggeration of what is necessary?

The answer is that Hollywood is Hollywood –competitive, risky and uncertain.

Those who have invested money have learned that they need to protect themselves 170

Telephone Interview with Gray Aydelott, supra note 112.

Telephone Interview with Carmen Rasmusen Herbert, supra note 18.

172 Id. 173 Telephone Interview with Deni Hill, supra note 126.

174 Letter from Christina Soletti, Production Manager, 3 Ball Productions, LLC, to the contestants of Beauty and the Geek Season 4 (June 8, 2007) (on file with the author).

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against any peril that may befall the show. The contestants have to accept the quirks of the industry that they are entering, which includes the contracts.

As the Higgins court pointed out, analyzing a contract requires viewing it in context of the commercial background and the needs of the trade in question. 175 Thus, when looking at the “nature of the agreement: allowing appellants to appear on the show and receive its benefits in exchange for giving up their publicity rights and limiting respondents’ liability for torts occurring in connection with the show,” the releases are “not surprising or unexpected and, when viewed in the context of the agreement’s primary purpose, were not unconscionable.” Hence, waivers of publicity rights and other rights in exchange for being on a show “is clearly legal.” 176 3. Shocking the Conscience – The Crux of the Substantive Unconscionability Analysis The standard test for substantive unconscionability in California is the “shock the conscience” test. In their case, the Higgins family argued that the contract was one-sided and lacked mutuality. In rejecting their claims, the court made it clear that there is a difference between arbitration clauses, which are often found to be unconscionable, and other provisions pertaining to reality shows.

While [the] Higgins [family] cite[d] two recent decisions concerning unconscionability, the decisions cited typically addressed arbitration clauses, often in the employment context. A contract demanding [a] waiver of the constitutional right to a trial by jury in consideration of allowing the signatory to obtain or keep employment is a far cry from a contract enabling the signatories to participate in the making of an entertainment broadcast carrying with it the potential for fame as well as the potential for cash and other prizes in exchange for which the Producers demand the right to broadcast the program and the waiver of certain liabilities which might arise from the program. As conditions attached to an otherwise completely gratuitous grant of consideration, these waivers do not ‘shock the conscience’ which is the typical test for substantive unconscionability. 177 175

Higgins v. Disney/ABC Int’l Television (Higgins II), No. BC 338017, 12 (Cal. Super. Ct. Apr. 20, 2007) (citing American Software v. Ali, 54 Cal. Rptr. 2d 477 (Cal. Ct. App. 1996)).

176 Higgins v. Disney/ABC Int’l Television, Inc. (Higgins III), No. BC B200885, 2009 WL 692701, at *12-13 (Cal. Ct. App. Mar. 18, 2009).

177 Higgins II, No. BC 338017, at 12 (citing California Grocers Association v. Bank of America, 27 Cal. Rptr. 2d 396 (Ct. App. 1994))

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According to the court, shocking the conscience depends largely on the context of the clause. It is not as shocking to sign away rights of publicity and waive liability as it is to contractually forfeit a constitutional right. Whether something shocks the conscience hinges on what the clause is about considered in light of the other elements discussed in this section such as commercial setting, industry norms, the opportunities available to the contestants, and which party is bearing the risk.

4. Available Opportunities to the Participants Weighing in on the Substantive Unconscionability Analysis Contestants have “various motives” for being on shows. 178 Many, like Carmen Rasmusen are looking for exposure to advance their careers. “This was before Facebook and YouTube. It was a great way to get heard instead of little county fairs in Orem, Utah.” 179 Another advantage for contestants is the opportunity to be on the show itself. Andrew Bonito from the 2005 season of Hell’s Kitchen felt like he had been given the “opportunity to be a part of popular culture.” 180 The motivations that lead contestants to want to be on reality shows vary, and they don’t all come down to simply wanting their fifteen minutes of fame. Some are “excited for the challenge and to prove to [themselves] that [they] could do it.” 181 There are “so many opportunities on the [shows] to work with the best of the best in the business.” 182 Contestants have experiences and develop relationships on the show that they will remember for their entire lives. According to Aydelcott, those involved in the first season of The X Factor “became like… family. Simon and Paula and all of them.” 183 The success of previous participants furthers the belief among potential contestants that they can also be among the small percentage that becomes famous.

It is possible, as many contestants and participants of reality television shows have gone on “to star in Hollywood films, host television programs, . . . and appear as contestants on [other] . . . reality programs. While participation . . . doesn’t seem to lead to an acting career, it does . . . provide a continuation of the observed life,” since participants continue to be tracked by the media. 184

178

Lowry, supra note 1.

Telephone Interview with Carmen Rasmusen Herbert, supra note 18.

180 Wyatt, supra note 7.

181 Email Interview with Randi Lynn Strongg, supra note 110.

182 Id. 183 Telephone Interview with Gray Aydelott, supra note 112.

184 Murray, supra note 8, at 11.

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5. The Production Companies Bear the Financial Risk – Turning Away from Finding of Substantive Unconscionability Another piece of the debate worth emphasizing when considering substantive unconscionability is that all of the risk is born by the network. “Until the program airs, it is virtually impossible to predict its success – sunk costs are high, and so is the risk of failure.” 185 Even though reality television is cheaper than dramas or sitcoms, they are not inexpensive. As of 2005, the average cost of producing a drama or sitcom ranged from $700,000 to $1.25 million. 186 Those numbers are still running about the same, if not cheaper. Scott Manville of TV Writer’s Vault estimates that reality television programs cost between $100,000 and $500,000 depending on the network. 187 It is the production companies and networks that are bearing the entire cost of the shows. The participants on the show are not professional actors risking their reputations; instead they are merely risking their reputational portrayal in exchange for opportunities provided and paid for by the production companies. As in most other areas of contract law, the side bearing the financial risk deserves more protection within the contract.

CONCLUSION Contestants from reality television shows are bringing suits against production companies and networks when the shows do not go according to plan. 188 These lawsuits are relatively unsuccessful due to the hefty contracts the contestants signed which cover most of the claims at issue in the suits. Recently, this has begun to raise the question of whether these contracts are enforceable at all with the broad and sometimes appalling clauses that release the “all-powerful” networks and producers from nearly all liability. As the courts see it, the formation of the contract determines a complaining party’s fate. A contract can only be unconscionable if it is unconscionable at the time of signing. In hindsight, a contestant may wish he had never agreed to this contract, but that is not enough to make the contract unconscionable. This is especially true since reality television contracts are not something anyone needs to sign at all. As Judge Gutman noted in Higgins II, an arbitration clause in an employment agreement may be found unconscionable while another clause in a reality television contract will not. To reiterate: 185

Magder, supra note 10, at 147.

Id. 187 Laura Jerpi, Reality TV – Low Cost Programming that Produces High Ratings, THE TV ISSUE, South Source, Jan., 2013, available at http://source.southuniversity.edu/reality-tv-lowcost-programming-that-produces-high-ratings-119585.aspx.

188 Hopkins, supra note 4.

186

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A contract demanding waiver of the constitutional right to a trial by jury in consideration of allowing the signatory to obtain or keep employment is a far cry from a contract enabling the signatories to participate in the making of an entertainment broadcast carrying with it the potential for fame as well as the potential for cash and other prizes in exchange for which the Producers demand the right to broadcast the program and the waiver of certain liabilities which might arise from the program. As conditions to an otherwise completely gratuitous grant of consideration, these waivers do not â&#x20AC;&#x153;shock the conscience.â&#x20AC;? 189 Contestants are only signing away personal privileges not constitutional rights, thus reality television contracts are not unconscionable. When considering the opportunities contestants gain from participation in the shows, the commercial setting of the contracts, the free will of the contestants in signing the contracts, and the significant risk the networks and producers are taking on, the robust contractual language is completely justified. As currently written and practiced, though complex and comprehensive, reality television contracts are not unconscionable.

189

Higgins v. Disney/ABC International Television (Higgins II), No. BC 338017, 12 (Cal. Super. Ct. Jul. 7, 2007)

THE DISTINCTIVENESS OF A FASHION MONOPOLY HAOCHEN SUN * By focusing on the recent fashion warfare over the red sole used on luxury shoes, this Article reconsiders the implications of trademark protection of single color marks for regulating the development of the fashion industry and the cultural evolution of human society. Courts and commentators have focused on the role of the aesthetic functionality doctrine in deciding whether Christian Louboutin’s red sole mark should be protected by trademark law. This Article takes a different approach. It calls for a social justice–based re-examination of whether the red sole mark is distinctive enough to warrant trademark protection.

Based on a close look at the distinctiveness of the red sole mark, the Article puts forward a social justice mandate that should be incorporated into trademark law.

It contends that social justice should have the trumping power to deny trademark protection of marks even if they are adequately distinctive. It also shows how the new mandate resonates with the equality-oriented protection under the First and Fourteenth Amendments. The Article further addresses practical concerns for implementing the mandate and discusses its merit in solving the problems caused by the aesthetic functionality doctrine.

INTRODUCTION ........................................................................................................143 I. THE DISTINCTIVENESS DOCTRINE AND THE LOUBOUTIN LITIGATION ...........150 A. The Roadmap of the Distinctiveness Doctrine .......................................150 1. Inherent Distinctiveness ....................................................................151 2. Acquired Distinctiveness ...................................................................152 3. The Significance of the Distinctiveness Doctrine .............................154 B. The Distinctiveness of the Louboutin Red Sole Mark ............................155 1. Decision of the District Court ...........................................................156 2. Decision of the Second Circuit ..........................................................157 II. RE-EXAMINING THE DISTINCTIVENESS OF THE RED SOLE MARK ..................159 A. The Tough Roadmap of the Secondary Meaning Doctrine ....................160 1. The Scope of the Consuming Public..................................................161 i. Who is “the purchasing public”? ............................................161 ii. A substantial number of the relevant purchasing public ........162 2. Evidentiary Requirements for Proving Secondary Meaning ............163 B. Questioning the Distinctiveness of the Red Sole ....................................166 *

Assistant Professor of Law and Deputy Director of the Law & Technology Center, University of Hong Kong. I am grateful to Irene Caboli, Susan Scafidi, Madhavi Sunder, and Peter Yu for the helpful conversations.

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1. The Consuming Public ......................................................................166 2. Fulfilling the Evidentiary Burden .....................................................168 III. TOWARD A SOCIAL JUSTICE MANDATE FOR TRADEMARK LAW ....................172 A. Social Justice as a Policy Concern ........................................................173 1. Economic Injustice ............................................................................173 2. Status Injustice ..................................................................................176 3. The Application of the Social Justice Mandate .................................179 B. The Legal Basis of the Social Justice Mandate ......................................182 1. Taking Precedents Seriously .............................................................182 2. Taking the American Legal Tradition Seriously ...............................184 i. Social Justice as a Fundamental Value ...................................184 ii. Social Justice as a Constitutional Value .................................186 C. Practical Concerns about the Mandate..................................................190 1. The Demise of Single Color Marks? .................................................190 2. The Demise of the Luxury Industry? .................................................190 3. The Aesthetic Functionality Doctrine ...............................................193 CONCLUSION ...........................................................................................................195

Fashion is a form of imitation and so of social equalization . . . . It unites those of a social class and segregates them from others.

Georg Simmel 1 In an acquisitive society, the drive for monopoly advantage is a very powerful pressure. Unchecked, it would no doubt . . . register the sun and the moon as exclusive trade-marks.

Ralph S. Brown 2 INTRODUCTION Fashion is the embodiment of beauty and fantasy. Aesthetically, fashion represents the relentless human quest for creative combinations of color, shape,

1

Georg Simmel, Fashion, 62 AM . J. SOC. 541, 541 (1957).

Ralph S. Brown, Advertising and the Public Interest: Legal Protection of Trade Symbols, 57 YALE L.J. 1165, 1206 (1948).

2

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and material. 3 Infusing human creativity with aesthetic imagination, fashion design makes men and women look endlessly appealing with the constant emergence of new fashion trends. 4 But this quest for beauty and fantasy does not come without cost. Rather, to stay in fashion, one needs to ceaselessly acquire new items defined by the latest fashion trends. In this marketplace, fashion has become a very simple idea. It is about money. It is one’s purchasing power that determines whether one can be fashionable. Furthermore, designers have acknowledged that having business acumen has become crucial for faring well, because fashion has been dominated by commercial strategies. 5 It is therefore no wonder that the world of fashion has become a gigantic industry. It is estimated that the 2012 revenue of the fashion industry hit $482.8 billion. 6 With the increasingly rapid commercialization of fashion creativity, trademark law has been adapted to provide stronger protection for famous fashion brands. 7 This is particularly important for the fashion industry because intellectual 3

See generally, ROLAND BARTHES, THE FASHION SYSTEM (Matthew Ward & Richard Howard trans., University of California Press 1990) (discussing fashion as the embodiment of aesthetic signs); see also Alladi Venkatesh et al., The Aesthetics of Luxury Fashion, Body and Identify Formation, 20 J. CONSUMER PSYCHOL. 459, 468 (2010) (discussing “aestheticization of everyday life through fashion and bodily adornment”).

4 See WALTER BENJAMIN, SELECTED WRITINGS, VOL. 4, 1938-1940, at 179 (Howard Eiland & Michael W. Jennings eds., Edmund Jephcott et al. trans., 2003) (describing fashion as “the eternal recurrence of the new.”).

5 See, e.g., LARS SVENDSEN, FASHION: A PHILOSOPHY 155 (John Irons trans., Reaktion Books 2006) (stating that the fashion sector “has done well as advertising, but only on rare occasions as art.”). Tom Ford recently commented that “[h]igh quality global journalism requires investment.

Pure creativity, without the thought of commercial viability, is disappearing. There are many very creative designers, but the process is now vetted by what will actually sell. That is what is necessary to stay competitive in the market.” Wes Gordon, a raising fashion designer star, acknowledged that “[t]he days of being purely a creative area dead, but fashion as a business is bigger than ever.” Elizabeth Paton, Fashion Cents and Sensibility, FIN. TIMES, (August 19, 2013), www.ft.com/intl/cms/s/0/45867618-05e8-11e3-8ed5-00144feab7de.html# axzz2cUJmTGpo. 6 See Nikoleta Panteva, Trends Outfitting the Fashion Retail Sector, IBISWORLD (June 2012), www.ibisworld.com/Common/MediaCenter/Fashion retail special report.pdf; see also, C. Scott Hemphill & Jeannie Suk, The Law, Culture, and Economics of Fashion, 61 STAN. L. REV. 1147, 1148 (2009) (“Fashion is one of the world’s most important creative industries. It is the major output of a global business with annual U.S. sales of more than $200 billion—larger than those of books, movies, and music combined.”).

7 KAL RAUSTIALA & CHRISTOPHER SPRIGMAN, THE KNOCKOFF ECONOMY: HOW IMITATION SPARKS INNOVATION 5 (2012) (pointing out that “[f]ashion trademarks are fiercely policed”).

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property law generally does not protect fashion designs, 8 except for trademarks used to merchandize fashion designs. 9 But how far should trademark law go in strengthening legal protection of the fashion industry? This issue is now more important than ever. Recent years have seen formidable power amassed by some rapidly expanding luxury companies, 10 which has not only overshadowed certain part of the fashion sector 11 but has also threatened free speech 12 and humanitarian 13 initiatives.

The scope of trademark protection looms even larger in the wake of the recent fashion war waged in the United States by two French luxury fashion companies: Christian Louboutin and Yves Saint Laurent. 14 The former has made 8

See Hemphill & Suk, supra note 6, at 1150 (“Despite being the core of fashion and legally protected in Europe, fashion design lacks protection against copying under U.S. intellectual property law.”).

9 See Susan Scafidi, Intellectual Property and Fashion Design, in 1 INTELLECTUAL PROPERTY AND INFORMATION WEALTH: COPYRIGHT AND RELATED RIGHTS 121 (Peter K. Yu ed., 2006) (pointing out that “[t]he most universally applicable and flexible mechanism for the protection of fashion design is trademark law” and thus trademark protection “creates an interesting incentive for fashion houses….”); Jeannie Suk, Little Red (Litigious) Shoes, N.Y. TIMES, January 21, 2012, at SR14, available at http://www.nytimes.com/2012/01/ 22/opinion/sunday/louboutin-and-the-little-red-litigious-shoes.html?_r=0 (“The law does not protect fashion design, but it does recognize the rights inherent in branding.”).

10 With a series of high-profile mergers and acquisitions, the luxury industry has three major global conglomerates: Kering, Louis Vuitton Moët Hennessy (LVMH), Compagnie Financière Richemont SA (Richemont).

11 For example, the French stock market regulator imposed an €8 million fine on LVMH for the “seriousness of the successive breaches of public disclosure requirements, which consisted in concealing each stage of LVMH’s stakebuilding in Hermès.” Scheherazade Daneshkhu, Luxury: Object of Desire, FIN. TIMES (July 8, 2013), available at www.ft.com/intl/cms/s/2/bc275ceae7ae-11e2-9aad-00144feabdc0.html#axzz2csGDaKCb. 12 See e.g., Louis Vuitton Malletier S.A. v. Haute Diggity Dog, 507 F.3d 252 (4th Cir. 2007); see also, Louis Vuitton Malletier S.A. v. Warner Bros. Entm’t Inc., 868 F. Supp. 2d 172 (S.D.N.Y. 2012).

13 See, e.g., Benjamin Sutton, Artist Wins Copyright Case Brought By Louis Vuitton, L MAG. (May 6, 2011), www.thelmagazine.com/TheMeasure/archives/2011/05/06/artist-wins-copyrightcase-brought-by-louis-vuitton; Parody or Trademark Infringement?: Louis Vuitton v. Penn Law, TRADEMARKS & BRANDS (March 12, 2012), www.trademarksandbrands.com /2012/03/12/parody-or-trademark-infringement-louis-vuitton-v-penn-law/.

14 Christian Louboutin S.A. v Yves Saint Laurent Am., Inc., 778 F. Supp. 2d 445 (S.D.N.Y. 2011) (Louboutin I); Christian Louboutin S.A. v. Yves Saint Laurent Am. Holdings, Inc., 696 F.3d 206 (2d Cir. 2012) (Louboutin II); see also Ray A. Smith and Ashby Jones, Color Wars: Luxury Makers Battle Over Red-Soled Shoe, WALL ST. J. (August 11, 2011),

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the red sole the iconic design feature of its women’s footwear. During this fashion war, Christian Louboutin asserted that it should have complete “territorial” control of the red sole, to be landmarked by flags of trademark protection. 15 By focusing on this fashion warfare, this article opens a perspective on the ramifications of the trademarkability of the red sole for the role of trademark law in regulating the development of the fashion industry and the cultural evolution of human society. It argues that we should reconsider whether Louboutin’s red sole mark is distinctive enough to warrant trademark protection. 16 The article proposes that this issue must be examined from the social justice perspective. It contends that social justice should have the trumping power to deny trademark protection of the red sole mark even if it is adequately distinctive. 17 A closer look at the concept of trademark distinctiveness, as this article shows, sheds new light on whether single color marks like the red sole mark merit trademark protection. Since the Louboutin litigation, commentators have overwhelmingly focused on the role of the aesthetic functionality doctrine in deciding the trademarkability of single color marks. 18 Indeed, the courts that decided the Louboutin cases focused heavily on the aesthetic functionality doctrine. 19 This focus, however, may have led both commentators and the courts to take for granted that the Louboutin red sole mark is adequately distinctive. 20 By contrast, paying greater consideration to the concept of trademark distinctiveness will reveal that the Louboutin red sole mark may not be adequately distinctive to warrant trademark protection. This conclusion carries very faronline.wsj.com/article/SB10001424053111904823804576500190678090656.html; Alison Frankel, Louboutin Red-Sole Trademark Case: Color War at the 2nd Circuit, REUTERS (Jan. 6, 2012), blogs.reuters.com/alison-frankel/2012/01/06/louboutin-red-sole-trademark-case-colorwar-at-the-2nd-circuit/.

15 See Suk, supra note 9 (“Louboutin’s claim spotlights the pressure on fashion designers to frame their aesthetic choices as brand identifiers, and the legal contortions that result.”).

16 See infra Part II.B. 17 See infra Part III.A. 18 See, e.g., Margot E. Parmenter, Louboutins and Legal Loopholes: Aesthetic Functionality and Fashion, 40 PEPP. L. REV. 1039 (2013); Suk, supra note 9, (cautioning that “if the color is a useful feature in a product — green for farm equipment or yellow for banana-flavored gum — it can’t be a trademark, even if it is source-identifying, because excluding competitors from a useful feature would be anti-competitive”).

19 See infra Part I.B. 20 See infra Part II.B.

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reaching implications. The red sole warfare is still raging in the fashion arena. In the United States, after its litigation against YSL, Christian Louboutin commenced action against other fashion companies that marketed red-sole shoes. 21 In Europe, Christian Louboutin launched similar legal actions against Zara 22 and Van Haren, 23 two fast fashion companies that have also marketed red-sole shoes. The fashion world still awaits a final answer as to whether Christian Louboutin can legally monopolize the color red on shoe soles by defending the trademarkability of its red sole mark. 24 Moreover, there has been an increasing number of single color symbols registered as trademarks. 25 This raises the question of whether single color marks will hinder competition and harm consumer interests. Statistics show that a number of single color trademarks have been registered in the United States. 26 More surprisingly, familiar colors are protected by registered trademarks. Target 21

See Sarah Tremont & Simon Frankel, Louboutin Launches New Wave of U.S. Trademark Litigation Over Red-Soled Shoes; Charles Jourdan and Alba are Louboutin’s Latest Targets, COVBRANDS (June 10, 2013), http://www.covbrands.com/2013/06/10/louboutin-launches-newwave-of-u-s-trademark-litigation-over-red-soled-shoes/; Louboutin Files One of Its First PostYSL Lawsuits, FASHION L. (May 28, 2013), www.fashion-law.org/2013/05/louboutin-files-oneof-its-first-post.html#.UfiwYFNSbV0.

22 See Camille Pecnard, Supreme Court Invalidates Louboutin's Red-sole Trademark, INT’L L. OFF. (Nov. 12, 2012), http://www.internationallawoffice.com/newsletters/ detail.aspx?g=e7f9ee16-36df-44b1-8108-2e6283f61fa7; Lucy Waterlow and Hannah Roberts, Louboutin Loses Case to Stop Zara Selling Eed-soled Shoes, MAIL ONLINE (June 11, 2012), http://www.dailymail.co.uk/femail/article-2157558/Christian-Louboutin-loses-case-stop-highstreet-store-Zara-selling-red-soled-shoes.html.

23 See Gino Van Roeyen, Dutch Company Van Haren Squashed Underneath the Red Sole of Louboutin, MARQUES (April 21, 2013), https://www.marques.org/Class46/Article.asp?D_ A=20130421&XID=BHA3193.

24 See Suk, supra note 9 (pointing out that Christina Louboutin “seemingly wants to trademark “red” rather than a particular shade of this color”).

25 See Ann Bartow, The True Colors of Trademark. Law: Greenlighting a Red Tide of Anti Competition Blues, 97 KY. L.J. 263, 263 (2008) (“The elevation of color to stand–alone trademark status illustrates the unbounded nature of trademarks within the judicial consciousness.”).

26 See Susan Neuberger Weller, When Can You Claim a Color as Your Trademark?, LEXOLOGY (Sept. 13, 2012), www.lexology.com/library/detail.aspx?g=c47ea3c8-ca3a-4f4cb9e6-acadcac23784 (“Many companies have successfully obtained trademark protection for a single color . . . .”); BELINDA J. SCRIMENTI, A LEGAL KALEIDOSCOPE—SINGLE COLOR TRADMARKS FROM PRE-OWENS-CORNING PINK INSULATION TO LOUBOUTIN RED-SOLED SHOES 17 (2012), available at http://www.pattishall.com/pdf/Single Color Marks from Owens Corning to Louboutin.PDF (“The USPTO register reflects a growing number of [single] color regirations . . . .”).

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owns a trademark for its signature red, Tiffany for its Tiffany blue, UPS for brown, and T-Mobile for magenta. 27 On the other hand, the social justice perspective discussed in this article calls for a theoretical and policy shift in trademark theory. Trademark law has long been shaped by the economic efficiency policy. 28 Following this policy, trademark law serves the economic need to incentivize enterprises to offer high quality goods and to protect the consumer interest in obtaining correct information about the source of goods.29 As utilitarian-based economic calculations are notorious for neglect of distributive issues, conventional trademark theory has also turned a blind eye to the social justice dimension of the law. 30 Nevertheless, this issue awaits acute diagnosis and treatment. Recent decades have seen trademark law evolve from the guarantee of the authenticity of sources of goods and services into a legal instrument with an additional status-conferring function. 31 The statutory insertion of anti-dilution protection exemplifies this shift. 32 27

Aleksi Tzatzev, 10 Colors That Might Get You Sued, BUS. INSIDER (Sept. 29, 2012), http://www.businessinsider.com/colors-that-are-trademarked-2012-9?op=1.

28 See Barton Beebe, The Semiotic Analysis of Trademark Law, 51 UCLA L. REV. 621, 624 (2004) (observing that the economic efficiency-based theory “has been adopted at the highest levels of American law. No alternative account of trademark doctrine currently exists.”) (citation omitted); MADHAVI SUNDER, FROM GOODS TO A GOOD LIFE: INTELLECTUAL PROPERTY AND GLOBAL JUSTICE 23 (2012) (pointing out that “intellectual property is understood almost exclusively as being about incentives.”) (emphasis in origin); Stacey L. Dogan & Mark A. Lemley, The Merchandising Right: Fragile Theory or Fait Accompli?, 54 EMORY L.J. 461, 467 (2005) (“Trademark law . . . aims to promote more competitive markets by improving the quality of information in those markets.”); Mark P. McKenna, The Normative Foundations of Trademark Law, 82 NOTRE. DAME L. REV. 1839, 1844 (2007) (concluding that the conventional wisdom about “the goal of trademark law is—and always has been—to improve the quality of information in the marketplace and thereby reduce consumer search costs”).

29 See Beebe, supra note 28, at 623 (“The Chicago School asserts that trademarks serve two efficiency-enhancing functions: First, trademarks lessen consumer search costs by making products and producers easier to identify in the marketplace, and second, trademarks encourage producers to invest in quality by ensuring that they, and not their competitors, reap the reputation-related rewards of that investment.” (citation omitted)).

30 See Haochen Sun, Can Louis Vuitton Dance with HiPhone? Rethinking the Idea of Social Justice in Intellectual Property Law, 15 U. PA. J.L. & SOC. CHANGE 389, 428 (2012) (pointing out that the utilitarianism-based intellectual property theory has inadequacy in “accommodating and promoting social justice”).

31 Rochelle Cooper Dreyfuss, Expressive Genericity: Trademarks as Language in the Pepsi Generation, 65 NOTRE DAME L. REV. 397, 397 (1990) (arguing that trademarks have begun to serve an additional purpose, of “becom[ing] products in their own right, valued as indicators of

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With worsening social inequalities nationally 33 and globally, 34 this Article argues that social justice must be wholeheartedly embraced as a core value for trademark protection of famous trademarks (especially those famous luxury brands). Without nuanced social justice analysis, trademark theory and practice will continue to shield the rich from the world of poverty. Against this backdrop, the red sole mark as a luxury brand provides a lens through which we can reexamine the social justice issues in trademark law. It further shows the urgent need to inject social justice considerations into the ongoing debate about how intellectual property law should be reformed to encourage fashion design innovation. 35 This Article proceeds as follows. Part I discusses the role of the concept of trademark distinctiveness in the law and how the Louboutin courts dealt with this issue. Part II examines the complexity of weighing the acquired distinctiveness status of marks by courts. It further reveals that the Louboutin courts unduly simplified the inquiry into whether the Louboutin red sole mark had acquired requisite distinctiveness. Based on these discussions, Part III puts forward the social justice mandate that should be incorporated into the judicial scrutiny of the the status, preferences, and aspirations of those who use them.”); Barton Beebe, Intellectual Property Law and the Sumptuary Code, 123 HARV. L. REV. 809, 884 (2010); Alex Kozinski, Trademarks Unplugged, 68 N.Y.U. L. REV. 960, 961 (1993).

32 See Beebe, supra note 31, at 884 (2010).

33 See Emmanuel Saez, Striking it Richer: The Evolution of Top Incomes in the United States, ECONOMOMETRICS LABORATORY SOFTWARE ARCHIVE (Sept.

3, 2013), elsa.berkeley.edu/~saez/saez-UStopincomes-2012.pdf (“Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery.”).

34 Jason Hickel, The Truth about Extreme Global Inequality, AL JAZEERA (Apr. 14, 2013), www.aljazeera.com/indepth/opinion/2013/04/201349124135226392.html (“Global inequality is growing in part because of the neoliberal economic policies imposed on developing countries.”).

35 Fashion design protection through intellectual property law has been for years a subject of controversy among commentators and policy makers. Some have proposed that fashion design can be protected within the current intellectual property system. Others have advocated for sui generis statutory protection of fashion design. See generally Hemphill & Suk, supra note 6.

Several legislative proposals have been considered several times by Congress, although not adopted. See, e.g., Design Piracy Prohibition Act, H.R.2033, 110th Cong. § 2(c) (2007); Design Piracy Prohibition Act, S.1957, 110th Cong. § 2(c) (2007). Other commentators have suggested that intellectual property protection of fashion design is not necessary for the fashion industry.

See Kal Raustiala & Christopher Sprigman, The Piracy Paradox: Innovation and Intellectual Property in Fashion Design, 92 VA. L. REV. 1687, 1775–77 (2006).

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distinctiveness of a mark. It shows that the Louboutin courts shied away from confronting the social injustices that had been caused by the protection of the Louboutin red sole trademark. These damaged social justice values, the Article will further show, have been long cherished by the American liberal tradition and the equality-oriented protections of the First and Fourteenth Amendments.

I THE DISTINCTIVENESS DOCTRINE AND THE LOUBOUTIN LITIGATION A. The Roadmap of the Distinctiveness Doctrine Trademarks are signs that are capable of indicating the sources of goods or services. They inform consumers as to who manufactured or provided a particular product or service. Therefore, trademark law only protects source-indicating signs. 36 The concept of distinctiveness serves as a threshold requirement in trademark law, filtering out signs that are not capable of indicating sources. 37 Conventionally, the distinctiveness of a mark is weighed by the Abercrombie test, which was set forth in Abercrombie & Fitch Co. v. Hunting World, Inc. 38 Following this test, courts frequently classify marks into four categories in order of generally decreasing distinctiveness: (1) arbitrary or fanciful; (2) suggestive; (3) descriptive; and (4) generic. 39

36

The Lanham Act protects any “word, name, symbol, or device, or any combination” that is used “to identify and distinguish” a producer’s goods from those manufactured or sold by others and to “indicate the source of the goods.” Specifically, under the Lanham Act, a person must use or intend to use a mark to “identify and distinguish [his or her goods]…from those manufactured or sold by others and to indicate the source [of the goods].” 15 U.S.C. § 1127 (2006).

37 According to courts: [a] trade-mark is a merchandising short-cut which induces a purchaser to select what he wants, or what he has been led to believe he wants. … Whatever the means employed, the aim is the same to convey through the mark, in the minds of potential customers, the desirability of the commodity upon which it appears.

Once this is attained, the trade-mark owner has something of value. If another poaches upon the commercial magnetism of the symbol he has created, the owner can obtain legal redress.

Mishawaka Rubber & Woolen Mfg. Co. v. S. S. Kresge Co., 316 U.S. 203, 205 (1942).

38 537 F.2d 4 (2d Cir. 1976).

39 Id. at 9. The court also noted that “the lines [between these classifications of marks] are not always bright.” Id.

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Marks falling into any of the first two categories are deemed inherently distinctive and capable of being registered as trademarks. 40 Descriptive marks that comprise the third category can be registered as trademarks only if they acquired distinctiveness through use. 41 Generic marks form the last category of marks. 42 They completely lack distinctiveness and thus cannot be registered as a trademark.

For example, “apple” is a generic mark for apples, as would be “fruit.” 43 Therefore, the Abercrombie test identifies inherent and acquired distinctiveness as two kinds of source-indicating capability that would make signs initially eligible for trademark protection.

1. Inherent Distinctiveness The strongest marks considered inherently distinctive are those that are fanciful or arbitrary. Fanciful marks are invented terms that have no commonplace or dictionary meaning at all. 44 For example, “Kodak” 45 for photographic equipment or “Exxon” 46 for oil and gas products and services. Arbitrary marks are signs with dictionary meanings and in common usage that do not in any respect describe the goods or service to which they are attached. 47 Like a fanciful mark, an arbitrary mark is inherently distinctive, but only “within its product market and entitled to little or no protection outside of that area.” 48 For example, “Apple” is arbitrary for computers, but generic for apples and descriptive for apple-flavored candy, liquor, or pies.

40

Id. at 11 (“If a term is suggestive, it is entitled to registration without proof of secondary meaning. . . . [T]he decision of the Patent Office to register a mark without requiring proof of secondary meaning affords a rebuttable presumption that the mark is suggestive or arbitrary or fanciful rather than merely descriptive.”).

41 Id. at 10; see also Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 851 n.11 (1982).

42 Abercrombie & Fitch, 537 F.2d at 9 (“A generic term is one that refers, or has come to be understood as referring, to the genus of which the particular product is a species.”).

43 However, whether a term is generic necessarily depends on its use in context. For example, “ivory” would be generic as applied to a product made from elephant tusks, but arbitrary when applied to soap. Id. at 9 n. 6.

44 Abercrombie & Fitch, 537 F.2d at 11 n.12 (defining “the term ‘fanciful’, as a classifying concept, is usually applied to words invented solely for their use as trademarks”).

45 Kellogg Co. v Toucan Golf, Inc., 337 F.3d 616, 624 (6th Cir. 2003).

46 Sara Lee Corp. v Kayser-Roth Corp., 81 F.3d 455, 464 (4th Cir. 1996).

47 Abercrombie & Fitch, 537 F.2d at 11 n.12 (holding that “when it is applied in an unfamiliar way, the use is called ‘arbitrary’”).

48 Kellogg, 337 F.3d at 626.

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Suggestive marks are also inherently distinctive and considered strong marks, but less so than arbitrary or fanciful marks. They have a descriptive aspect but differ from descriptive marks in that they merely suggest rather than describe the qualities of the goods or services to which they are attached. 49 The predominant test of whether a mark is suggestive or descriptive is the so-called “imagination test,” which holds that a mark “is suggestive if it requires imagination, thought and perception to reach a conclusion as to the nature of goods” and “descriptive if it forthwith conveys an immediate idea of the ingredients, qualities or characteristics of the goods.” 50 For example, the word “Citibank” is suggestive because it suggests “an urban or modern bank.” Likewise, “Goliath” suggests “a large size” pencil 51 and “Roach Motel” suggests insect traps. 52 2. Acquired Distinctiveness Descriptive marks specifically describe a quality, function, characteristic, or ingredient of a product or a service. For example, they include “After Tan” for post-tanning lotion and “5 Minute Glue” for fast-drying glue. 53 Descriptive marks are not inherently distinctive but may acquire distinctiveness over time and use if the public comes to recognize the mark as an indication of a source, thus granting the mark acquired distinctiveness or “secondary meaning.” 54 For example, the 49

Abercrombie & Fitch, 537 F.2d at 11 (“A term is suggestive if it requires imagination, thought and perception to reach a conclusion as to the nature of goods. A term is descriptive if it forthwith conveys an immediate idea of the ingredients, qualities or characteristics of the goods.”).

50 Stix Prods., Inc. v United Merchs. & Mfrs., Inc., 295 F. Supp. 479, 488 (S.D.N.Y. 1968); see also Zatarains, Inc. v. Oak Grove Smokehouse, Inc., 698 F.2d 786, 792 (5th Cir. 1983) (identifying four separate tests for distinguishing descriptive and suggestive marks).

51 DeGidio v. W. Grp Corp., 355 F.3d 506, 510 (6th Cir. 2004).

52 Am. Home Prods. Corp. v. Johnson Chem. Co., 589 F.2d 103, 106 (2d Cir. 1978).

53 Sara Lee Corp. v. Kayser-Roth Corp., 81 F.3d 455, 464 (4th Cir. 1996).

54 G. & C. Merriam Co. v. Saalfield, 198 F. 369, 373 (6th Cir. 1912). This court described the origin of secondary meaning as follows: It contemplates that a word or phrase originally, and in that sense primarily, incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase had come to mean that the article was his product; in other words, had come to be, to them, his trade-mark. So it was said that the word had come to have a secondary

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word “Best” for milk connotes to buyers an assertion of quality. This descriptive connotation is the “primary” meaning of the word “Best.” Over a period of extensive advertising and sales, however, the word “Best” may acquire a new and different meaning such that milk buyers associate the word “Best” not just with its primary meaning of high-quality milk, but also with a developed “secondary” meaning indicating a particular milk producer. 55 For a descriptive mark to acquire a secondary meaning, it is not necessary for the public to be able to identify the source by name: “it is sufficient if the public is aware that the product comes from a single, though anonymous, source.” 56 The most important factor is whether consumers are able to associate a mark with a producer of goods. 57 However, even if a mark that has acquired a second meaning may not be protectable where the mark is “functional,” that is, where it is essential to the use or purpose of the product or affects the cost or quality of the product. Qualitex Co. v. Jacobson Products Co., Inc., 58 a landmark Supreme Court case, dealt with the functionality doctrine. The mark in question was a green-gold color. Apart from using that color to avoid noticeable stains, the green-gold color served no other function. There was also no competitive need in the industry for such a green-gold color, as other colors were equally usable. Therefore, the Supreme Court held that the color met the legal requirements for a trademark as it “acts as a symbol that

meaning, although this phrase, ‘secondary meaning,‘ seems not happily chosen, because, in the limited field, this new meaning is primary rather than secondary; that is to say, it is, in that field, the natural meaning.

Id. 55

See 2 J. THOMAS MCCARTHY, MCCARTHY ON TRADEMARKS AND UNFAIR COMPETITION § 15:6 (4th ed. 2008); Thomas R. Lee et al., An Empirical and Consumer Psychology Analysis of Trademark Distinctiveness, 41 ARIZ. ST. L.J. 1033, 1052 (2009) (“Source-indicating meaning is ‘secondary’ in the sense that it is second in time. If a word has descriptive semantic meaning that relates to the product in question, its ‘primary’ meaning is the one that pre-dates its trademark use in commerce.”).

56 Union Carbide Corp. v. Ever-Ready, Inc., 531 F.2d 366, 380 (7th Cir. 1976).

57 Flynn v. AK Peters, Ltd., 377 F.3d 13, 19 (1st Cir. 2004); see Abercrombie & Fitch Co. v.

Hunting World, Inc., 537 F.2d 4, 8 (2d. Cir. 1976) (the discrict court held that “Although ‘safari’ is a generic word, a genuine issue of fact exists as to whether the plaintiff has created a secondary meaning in its use of the word ‘identifying the source’ and showing that ‘purchasers are moved to buy it because of its source.’”).

58 Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159 (1995).

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distinguishes a firm’s goods and identifies their source, without serving any other significant function.” 59 3. The Significance of the Distinctiveness Doctrine Under Landes and Posner’s utilitarian model, trademark protection is justified because a distinct mark can minimize the “search costs” that consumers incur in identifying a product. 60 This justification has heavily informed the evolution of major trademark doctrines including the concept of trademark distinctiveness. For example, if the brand “Sanka” had no name, a consumer ordering it in a restaurant would have to ask for “the decaffeinated coffee made by General Foods.” This requires the consumer to remember more and say more, and also requires the waiter to read and remember more than just a “Sanka.” 61 Landes and Posner’s model also identifies “administrative costs” associated with litigating and resolving disputes on questions of protectability. Although courts could always inquire into the economic effects of allowing a particular producer to have exclusive rights to a particular mark, the administrative costs of doing so would outweigh any expected benefits. Therefore, “the law has sorted potential marks into a few broad classes according to distinctiveness and has made classification determinative of legality.” 62 Under Landes and Posner’s model, fanciful, arbitrary, and suggestive marks are inherently distinctive and eligible for trademark protection not because of consumers’ perception of their distinctiveness, but because the “elasticity of supply” of such terms is high, since there are plenty of words for sellers to choose from. Hence, protection of these categories of terms will not impose significant costs on competitors.

59

Id. at 166.

WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF INTELLECTUAL PROPERTY LAW 167-68 (2003); see also New Kids on the Block v. News Am. Pub., 971 F.2d 302, 305-06 nn.2-3 (1992) (“In economic terms, trademarks reduce consumer search costs by informing people that trademarked products come from the same source. . . .

Trademark protection, like other legal protections of property rights, guards against the overuse of resources while also providing incentives for the creation of new combinations of resources.”).

61 William M. Landes & Richard A. Posner, Trademark Law: An Economic Perspective, 30 J.L. & ECON. 265, 269 (1987).

62 Id. at 188.

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On the other hand, descriptive marks are prima facie ineligible for protection because a given product only has so many attributes and protection of a word that describes a key attribute will enable the trademark holder to obtain economic rent by making it “more costly for his rivals to inform their customers of the attributes of their brands without using the same descriptive word.” 63 Hence, protection for such non-distinctive terms would cause social loss and hamper competition.

However, Landes and Posner’s model does not distinguish between a descriptive mark that has acquired distinctiveness and one that is inherently distinctive. As long as the mark is distinctive, the economic model presumes that trademark protection could lower consumers’ search costs by indicating the source of the goods, and hence create net social benefits.

B. The Distinctiveness of the Louboutin Red Sole Mark As noted in Section A, 64 the Supreme Court’s Qualitex decision paved the way for increased registrations of single color trademarks. The recent litigation between Christian Louboutin and YSL raised a question as to whether the red sole could be eligible for trademark protection.

Christian Louboutin, a French luxury company, has used red lacquered outsoles for its high fashion women’s shoes since 1992. 65 It applied to register the red sole mark and the U.S. Patent and Trademark Office approved the application in 2008. In 2011, YSL sold four monochromatic shoe models bearing red outsoles similar to those of Louboutin. After failed negotiations, Christian Louboutin filed a lawsuit against YSL in the Southern District of New York for trademark infringement and sought a preliminary injunction to prevent YSL from marketing the shoes concerned. In response, YSL counter-claimed for cancellation of Christian Louboutin’s trademark on the grounds that it is not distinctive. The District Court ruled in favour of YSL, holding that the red sole mark was a 63

Id. at 189.

See supra Part I.A.1.

65 See Christian Louboutin S.A. v Yves Saint Laurent Am., Inc., 778 F. Supp. 2d 445, 447 (S.D.N.Y. 2011) (Louboutin I) (“Sometime around 1992 designer Christian Louboutin had a bright idea. He began coloring glossy vivid red the outsoles of his high fashion women’s shoes.”); Lauren Collins, Sole Mate: Christian Louboutin and the Psychology of Shoes, NEW YORKER (Mar. 28, 2011), http://www.newyorker.com/reporting/2011/03/28/110328fa_fact_ collins?currentPage=1 (“The sole of each of his shoes is lacquered in a vivid, glossy red.”).

64

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functional aspect of fashion design and thereby not eligible for trademark protection. 66 Christian Louboutin appealed to the Second Circuit, which later overturned the District Court’s decision on the functionality of the red sole mark. 67 1. Decision of the District Court The District Court focused on whether the red sole mark merited trademark protection, a threshold issue in trademark litigation. 68 After considering the special role of the red color in fashion design, the District Court concluded that the registration of the red sole mark should be invalidated.

Although Louboutin’s certificate of registration gave rise to the statutory presumption that the trademark was valid and merited protection, the District Court determined that the presumption of validity may be rebutted. 69 In rebutting the presumption, the District Court turned to the Supreme Court’s Qualitex decision, which held that color might be protectable as a trademark “where that color has attained ‘secondary meaning’ and therefore identifies and distinguishes a particular brand.” 70 However, it may not be protectable where it is “functional,” meaning that color is essential to the use or purpose of the product, or affects the cost or quality of the product. 71 In other words, color can meet the legal requirements for a trademark only if “it can act as a symbol that distinguishes a firm’s goods and identifies their source, without serving any other significant function.” 72 Following the Qualitex decision, the District Court pointed out that trademark protection has been extended to a single color in other industries. However, in the fashion industry, only distinct patterns or combinations of shades and colors that create a distinct recognizable mark were eligible for trademark protection. 73 Applying the law to the facts, the District Court reasoned that given the unique characteristics and needs of the fashion industry, color serves not simply to identify or advertise a commercial source, but possesses ornamental beauty and 66

Louboutin I, 778 F. Supp. 2d 445 (S.D.N.Y. 2011).

Christian Louboutin S.A. v. Yves Saint Laurent Am. Holdings, Inc., 696 F.3d 206 (2d Cir. 2012) (Louboutin II).

68 Starbucks Corp. v. Wolfe’s Borough Coffee, Inc., 588 F.3d 97, 114 (2d Cir. 2009); Louis Vuitton Malletier v. Dooney & Bourke, Inc., 454 F.3d 108, 115 (2d Cir. 2006).

69 Lane Capital Mgmt., Inc. v. Lane Capital Mgmt., Inc., 192 F.3d 337, 345 (2d Cir. 1999).

70 Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 163 (1995).

71 Id. at 165.

72 Id. at 166.

73 Louis Vuitton Malletier, 454 F.3d at 116.

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performs a creative function, aiming to please, beautify, and be useful. The District Court quoted Christian Louboutin himself, who acknowledged significant, nontrademark functions for choosing red for his outsoles, such as showing “sex appeal” 74 and “energy.” 75 Furthermore, adding a red lacquered finish to the shoe also made the cost of production higher than the cost for those without the same ornamental finish. 76 Therefore, Christian Louboutin’s trademark registration for use of a single lacquered red color on outsoles was “functional,” and had affected the cost and quality of the shoes and also significantly undermined competitors’ ability to compete in the fashion industry. 77 On these grounds, the District Court ruled that a single color can never serve as a trademark in the fashion industry, 78 rendering the red sole mark ineligible for trademark protection.

2. Decision of the Second Circuit The Second Circuit, however, overturned the District Court’s decision on the functionality of the red sole mark. It argued that the District Court’s decision categorically excluding a single color from trademark protection for fashion design was based on an incorrect understanding of the doctrine of aesthetic functionality. 79 The Second Circuit pointed out that the doctrine denies trademark protection only where “an ornamental feature is claimed as a trademark and trademark protection would significantly hinder competition by limiting the range of adequate alternative designs.” 80 However, “distinctive and arbitrary arrangements of predominantly ornamental features” 81 that do not “significantly

74

Louboutin I, 778 F. Supp. 2d 445, 453-54 (S.D.N.Y. 2011) Id. at 453.

76 Id. at 454.

77 Id. (“Because the use of red outsoles serves nontrademark functions other than as a source identifier, and affects the cost and quality of the shoe, the Court must examine whether granting trademark rights for Louboutin's use of the color red as a brand would ‘significantly hinder competition,’ that is, ‘permit one competitor (or a group) to interfere with legitimate (nontrademark-related) competition through actual or potential exclusive use of an important product ingredient.’”(quoting Qualitex Co. v Jacobson Prods. Co., 514 U.S. 159, 170 (1995))).

78 Id. at 457.

79 Louboutin II, 696 F.3d 206, 218-24 (2d Cir. 2012).

80 Id. at 222 (quoting Forschner Grp., Inc. v. Arrow Trading Co., 124 F.3d 402, 409–10 (2d Cir.1997)).

81 Id. at 222 (quoting Fabrication Enterprises., Inc., v. Hygenic Corp., 64 F.3d 53, 59 (2d Cir. 1995)).

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undermine competitors’ ability to compete in the relevant market” 82 are nonfunctional and thus eligible for trademark protection.

After rejecting the District Court’s blanket exclusion of single color fashion marks from trademark protection, the Second Circuit proceeded to determine whether the red sole mark was distinctive enough to merit trademark protection.

The Supreme Court has held that color marks “can never be inherently distinctive.” 83 They can only be protected as trademarks if they have acquired secondary meaning. 84 The Second Circuit followed the Supreme Court’s decisions by directly examining whether the red sole mark has gained sufficient secondary meaning in the minds of the public. 85 The Second Circuit pointed to evidence submitted by Louboutin that included substantial advertising expenditures, widespread media coverage, and prominent sales success. 86 The combination of these evidential facts demonstrated that Louboutin’s color mark had requisite secondary meaning so as to merit trademark protection when used as a red outsole contrasting with the remainder of the shoe. 87 The Second Circuit, however, found that without the contrast with the remainder of the shoe, the Louboutin’s red sole mark had not acquired requisite secondary meaning. 88 In particular, the court ruled that it had not done so “in an application of a red sole to a red shoe.” 89 Therefore, it held that YSL’s use of the

82

Id. at 222 (quoting Knitwaves, Inc. v. Lollytogs Ltd., 71 F.3d 996, 1006 (2d Cir.1995)).

Qualitex Co. v Jacobson Prods. Co., 514 U.S. 159, 162-63 (1995); Wal-Mart Stores, Inc. v.

Samara Bros., Inc. 529 U.S. 205, 206 (2000).

84 Qualitex, 514 U.S. at 163.

85 Louboutin II, 696 F.3d at 225 (“Although a single color, standing alone, can almost never be inherently distinctive because it does not ‘almost automatically tell a customer that [it] refer[s] to a brand,’ a color as used here is certainly capable of acquiring secondary meaning.” (citation omitted) (quoting Qualitex, 514 U.S. at 162–63 (emphasis omitted); and Mana Prods., Inc. v.

Columbia Cosmetics Mfg., Inc., 65 F.3d 1063, 1070 (2d Cir.1995))).

86 Id. at 226-27.

87 Genesee Brewing Co., v. Stroh Brewing Co., 124 F. 3d 137, 143 n.4 (2d Cir. 1997) (quoting Centaur Commc’ns, Ltd. v A/S/M Commc’ns, Inc., 830 F.2d 1217, 1222 (2d Cir. 1985)).

88 Id. at 227 (“We further hold that the record fails to demonstrate that the secondary meaning of the Red Sole Mark extends to uses in which the sole does not contrast with the upper—in other words, when a red sole is used on a monochromatic red shoe.”).

89 Id. at 228.

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red sole on its monochrome shoes did not constitute use of the Louboutin red sole mark. Nor had it caused likelihood of confusion.90 The court further held that the evidence presented by Louboutin failed to demonstrate that the secondary meaning of the red sole mark extended to uses in which the sole did not contrast with the remainder of the shoe. In particular, Louboutin’s own consumer surveys show that when consumers were shown YSL’s monochrome red shoe, nearly everyone misidentified the red sole of the shoe as Louboutin’s, rather than its red color generally. 91 Therefore, the Court held that Louboutin’s trademark protection was limited to the use of contrasting red lacquered outsoles only. And since Louboutin sought to enjoin YSL from using a red sole as part of a monochrome red shoe, the District Court’s order to deny preliminary injunction to Louboutin was affirmed in part.

II RE-EXAMINING THE DISTINCTIVENESS OF THE RED SOLE MARK As discussed in Part I, the Second Circuit upheld the validity of the red sole mark, although it restricted protection to the red sole when contrasted with the upper parts of the shoe. However, both courts did not dispute that the red sole mark was distinctive enough to merit trademark protection, for it had acquired secondary meaning through use.

But is it true that the red sole mark is distinctive enough to merit trademark protection? This Part will argue against the courts’ decisions on the distinctiveness of the red sole mark. It will first reveal that a showing of secondary meaning is a rigorous judicial inquiry combining facts and law. This Part will then demonstrate that neither the District Court nor the Second Circuit conducted rigorous inquiries into whether the red sole mark has acquired requisite secondary meaning.

Therefore, a rigorous application of the distinctiveness requirement is a vital step to shape trademark law in a manner conducive to the promotion of social justice by filtering away any marks (single color marks included) not desirable for trademark protection.

90 91

Id. Id.

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A. The Tough Roadmap of the Secondary Meaning Doctrine As noted in Part I, 92 the doctrine of secondary meaning allows a user of a non-inherently distinctive symbol to receive trademark protection if his attempts are effective enough to achieve consumer recognition of the symbol as sourceidentifying. 93 Therefore, plaintiffs (senior mark users) must furnish evidence showing the acquisition of secondary meaning. 94 Although courts have applied slightly different standards of review, 95 they have taken the following two steps to examine the existence of secondary meaning. 96 First, courts consider the scope of the purchasing public that may associate a mark with the producer. Second, courts determine the effectiveness of a plaintiff’s promotional efforts in creating secondary meaning among the purchasing public.

92

See supra Part I.A.1.

See Abercrombie & Fitch Co. v. Hunting World, Inc., 537 F.2d 4, 8 (2d Cir. 1976) (“Although ‘safari’ is a generic word, a genuine issue of fact exists as to whether the plaintiff has created a secondary meaning in its use of the word ‘identifying the source’ and showing that “purchasers are moved to buy it because of its source.” (quoting Abercrombie & Fitch Co. v.

Hunting World, Inc., 327 F. Supp. 657, 662 (S.D.N.Y. 1971))); MCCARTHY, supra note 55, § 15:30 (“In one sense, the seller is attempting to get the buyer class to associate a new, secondary meaning with a common designation or shape—whether it is descriptive, geographically descriptive, a personal name, or any of the other types of symbols that require consumer recognition for protection. The trier of fact, like a lexicographer of modern slang, must attempt to find out what meaning the public now attaches to a designation that already has a primary meaning in the language.”).

94 See, e.g., In re Owens-Corning Fiberglas Corp. 774 F.2d 1116, 1125 (Fed. Cir. 1985) (“An evidentiary showing of secondary meaning, adequate to show that a mark has acquired distinctiveness indicating the origin of the goods, includes evidence of the trademark owner's method of using the mark, supplemented by evidence of the effectiveness of such use to cause the purchasing public to identify the mark with the source of the product.”); MCCARTHY, supra note 55, § 15:30.

95 See MARY LAFRANCE, UNDERSTANDING TRADEMARK LAW 57 (2d ed. 2009).

96 MCCARTHY, supra note 55, § 15:30.(“The legal problems surrounding the issue of secondary meaning are mainly those of evidence. That is, how does one prove, in the adversary, litigious context, the state of mind of buyers? How does one prove, as a fact, that a substantial number of prospective buyers do associate the mark with only one seller of those goods?”).

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1. The Scope of the Consuming Public i. Who is “the purchasing public”?

In applying the doctrine of secondary meaning, courts often have to ascertain whether the purchasing public has associated the mark in question with a particular source through an acquired secondary meaning. Courts have decided that the successful acquisition of secondary meaning hinges on whether “in the minds of the public, the primary significance of a product feature . . . is to identify the source of the product . . . .” 97 It is therefore important to identify the relevant purchasing public. In most cases, the purchasing public consists of consumers.

However, if the relevant buying class consists of both dealers and ultimate consumers, then the state of mind of the dealers would also be important. 98 Case law has adopted the notion that it is the mental association of the mark in the minds of current as well as prospective buyers that matters. This precludes asking merely what a casual and disinterested potential consumer thought. 99 For example, in Levi Strauss & Co. v. Blue Bell, Inc. the court asserted that “[t]he basic element of secondary meaning is, thus, the mental association by a substantial segment of consumers and potential consumers between the alleged mark and a single source of the product.” 100 Specifically, courts have ruled that the purchasing public refers to a specific segment of the general public. For example, in Centaur Communications, Ltd. v.

97

Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 851 n.11 (1982) (citing Kellogg Co. v. National Nat’l Biscuit Co., 305 U.S. 111, 118 (1938)). The courts look to the mental associations of consumers to determine whether secondary meaning has been established, often referencing the language in Inwood and Kellogg. See, e.g., Borinquen Biscuit Corp. v. M.V. Trading Corp., 443 F.3d 112, 116 (1st Cir. 2006) (quoting Inwood Labs., 456 U.S. at 851 n.11); Abraham Zion v. Lebow, 761 F.2d 93, 104 (2d Cir. 1985) (requiring an association “in the mind of the public”); Walt-West Enters. v. Gannett Co., 695 F.2d 1050, 1057 (7th Cir. 1982) (quoting Kellogg, 305 U.S. at 118); U.S. Search, LLC v. U.S. Search.com Inc., 300 F.3d 517, 523 (4th Cir. 2002) (protection of descriptive mark requires secondary meaning “in the minds of the public”).

98 Thomas & Betts Corp. v. Panduit Corp., 138 F.3d 277, 295 (7th Cir. 1998) (“[W]hen . . . the relevant market includes both distributors and ultimate purchasers, the state of mind of dealers is important in determining if secondary meaning exists . . . .”).

99 See Am. Luggage Works, Inc. v. U.S. Trunk Co., 158 F. Supp. 50, 52 (D. Mass. 1957) (considering whether the relevant buyer class, and not necessarily the whole public, associated the term with the plaintiff’s products).

100 778 F.2d 1352, 1354 (9th Cir. 1985).

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A/S/M Communications, Inc., 101 the relevant segment of the purchasing public for determining whether secondary meaning exists for the title of a marketing trade magazine was defined as “executives in the international marketing and advertising community in the United States.” The court further declared that, “[i]t is only necessary to show that a substantial segment of the relevant group of consumers made the requisite association between the product and the producer.” 102 ii. A substantial number of the relevant purchasing public The Restatement (Third) of Unfair Competition indicates that it is not necessary for a majority of the relevant purchasing public to associate the mark with a single source. 103 It is only necessary that a “substantial part” of the purchasing public or a “significant number” of prospective purchasers identify the term as a trademark. 104 Case law has followed this guidance. 105 For instance, the court in Folmer Graflex Corp. v. Graphic Photo Serv. specified that “[w]hat is required is that a substantial section of the purchasing public should be proved to identify the trade name of the plaintiff's goods, and that this should be true of the district in which the defendant's trade is done.” 106 Moreover, another court in North Carolina Dairy Foundation, Inc. v. Foremost-Mackesson, Inc. confirmed that

101

830 F.2d 1217, 1222 (2d Cir. 1987).

Courts have stated that the relevant segment includes “architects, designers, decorators and upscale sophisticated customers” for proving secondary meaning in the design of a particular desk lamp. See Lon Tai Shing Co. v. Koch + Lowy, No. 90 Civ. 4464(DNE), 1991 WL 170734, *9 (S.D.N.Y. Jun. 20, 1991). “[I]ndividuals broadly associated with other institutions of higher education in a given geographic area” sufficed as a relevant group among which the secondary meaning of a college’s name had been established. See President & Trs. of Colby College v.

Colby Coll.-N.H., 508 F.2d 804, 808 (1st Cir. 1975).

103 See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 13, cmt. e (1995).

104 See id.

105 In cases where the defendant's activities are confined to a limited geographical area, the plaintiff only needs to prove that secondary meaning exists among buyers within that area such that confusion is likely. See Shoppers Fair of Ark., Inc. v. Sanders Co., 328 F.2d 496, 501 (8th Cir. 1964); see also Oakford Co. v. Kroger Co., 157 F. Supp. 453, 458 (S.D. Ill. 1957) (holding that both parties acquired secondary meaning for their respective trade names in different parts of the same state). However, in a case where the remedy was a nationwide importation exclusion order, the International Trade Commission required proof of secondary meaning throughout the United States. See In re Sneakers with Fabric Uppers & Rubber Soles, Inv. No. 337-TA-118, USITC Pub. 1366 (Mar. 9, 1983) (Final).

106 44 F. Supp. 429 (D. Mass. 1942) (quoting HARRY D. NIMS, LAW OF UNFAIR COMPETITION AND TRADE-MARKS 296 (3d ed. 1929)).

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“[p]roof of secondary meaning is sufficient if it is shown that a substantial segment of the buying population associates the mark with a single source.” 107 Courts have defined in different ways what a “substantial number” of the purchasing public means. Some courts have emphasized that secondary meaning requires proof that more than a “relatively small number of people” associate the designation with the applicant for registration. 108 Other courts have required “more than proof of the existence of one person or even a relatively small number of people who associate the term with a single source.” 109 In Norm Thompson Outfitters, Inc. v. General Motors Corp., 110 the court pointed to the “sparseness of people” who associate the mark with plaintiff in holding that acquisition of secondary meaning had not adequately been shown.

Where a survey has been conducted to ascertain the percentage of people for whom the mark has acquired secondary meaning, courts have been vague in defining what the minimum acceptable percentage is. However, it is clear that a percentage below 10 percent is generally insufficient. In Roselux Chemical Co. v.

Parsons Ammonia Co., a survey showing that ten percent of users associated the name with a single source was deemed insufficient. 111 Likewise, in Citizens Banking Corp. v. Citizens Financial Group, Inc., an eight percent identification with the plaintiff’s mark was found “insufficient to demonstrate secondary meaning.” 112 2. Evidentiary Requirements for Proving Secondary Meaning After determining the scope of the purchasing public, courts need to examine whether the promotional efforts made by the senior mark user were effective in establishing secondary meaning to identify the source of his products or services.

Proof of secondary meaning entails meeting rigorous evidentiary requirements. 113 To determine whether a term has acquired secondary meaning, courts usually require the senior mark user to submit direct evidence in the form of direct 107

154 Cal. Rptr. 794, 801 (Ct. App. 1979).

See Roselux Chem. Co. v. Parsons Ammonia Co., 299 F.2d 855 (C.C.P.A. 1962).

109 See Wembley, Inc. v. Diplomat Tie Co., 216 F. Supp. 565, 583 (D. Md. 1963).

110 448 F.2d 1293, 1297 (9th Cir. 1971).

111 299 F.2d 855, 862 (C.C.P.A. 1962).

112 No. 07-11514, 2008 WL 1995104 (E.D. Mich. May 6, 2008), aff'd, 320 F. App’x 341 (6th Cir. 2009).

113 See Boston Beer v. Slesar Bros. Brewing Co., 9 F.3d 175, 181 (1st Cir. 1993); Yankee Candle Co. v. Bridgewater Candle Co., 99 F. Supp. 2d 140, 156-57 (D. Mass. 2000).

108

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consumer testimonies and/or consumer surveys. Courts also consider circumstantial evidence such as: (1) exclusivity, length, and manner of use; (2) amount and manner of advertising; (3) amount of sales and number of customers; (4) established place in the market; and/or (5) proof of intentional copying. 114 Direct evidence in the form of consumer testimonies and professionally conducted surveys is important because it directly reflects buyers’ state of mind.

The Eighth Circuit stated that “[c]onsumer surveys are recognized by several circuits as the most direct and persuasive evidence of secondary meaning.” 115 The Ninth Circuit also deemed consumer surveys “the most persuasive evidence of secondary meaning.” 116 If a case is unclear, a survey is usually necessary to prove secondary meaning. However, survey evidence is “not a requirement for such proof,” 117 and the “absence of consumer surveys need not preclude a finding of acquired distinctiveness.” 118 In fact, secondary meaning is more often proved by circumstantial evidence, which is “sufficient to meet a party's burden of proof to establish a claim.” 119 Circumstantial evidence of the seller's efforts in advertising the mark routinely consists of evidence of the size of the seller, the number of sales made, large amounts spent in promotion and advertising, the scope of publicity given to the mark, and any similar evidence showing wide exposure of the buyer class to the mark in question. 120 However, in determining whether a mark has acquired secondary meaning, the crucial issue is not the promotional efforts made by a

114

Echo Travel, Inc. v. Travel Assocs., Inc., 870 F.2d 1264, 1267 (7th Cir. 1989); see also Bristol-Myers Squibb Co. v. McNeil-P.P.C., Inc., 973 F.2d 1033, 1041 (2d Cir. 1992) (“Among the factors that we have found relevant to this inquiry in the past are advertising expenditures, consumer studies, sales success, unsolicited media coverage, attempts to plagiarize and length and exclusivity of use . . . . There are undoubtedly other types of evidence that would also be relevant to a claim of secondary meaning.”).

115 Co-Rect Prods., Inc. v. Marvy! Adver. Photography, Inc., 780 F.2d 1324, 1333 n.9 (8th Cir. 1985).

116 Vision Sports, Inc. v. Melville Corp., 888 F.2d 609, 615 (9th Cir. 1989).

117 Comm. for Idaho's High Desert v. Yost, 92 F.3d 814, 822 (9th Cir. 1996).

118 Yamaha Int’l Corp. v. Hoshino Gakki Co., 840 F.2d 1572, 1583 (Fed. Cir. 1988).

119 Heartland Bank v. Heartland Home Fin., Inc., 335 F.3d 810, 820 (8th Cir. 2003).

120 See American Scientific Chem., Inc. v. Am. Hosp. Supply Corp., 690 F.2d 791, 793 (9th Cir. 1982).

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senior mark user, but the effectiveness of those efforts.121 As the Federal Circuit put it, “[t]he test of secondary meaning is the effectiveness of the efforts to create it.” 122 For example, in Tonawanda Street Corp. v. Fay's Drug Co., Inc., the court held that long and exclusive use without evidence of consumer recognition was insufficient in proving secondary meaning. 123 And in Genovese Drug Stores, Inc. v.

TGC Stores, Inc., the court held that “[t]he expenditure of large sums of money alone does not establish secondary meaning ‘unless the [trademark proprietor] explains how its efforts were effective in causing the relevant group of consumers to associate the mark with [a single source].’” 124 As to the minimum sufficiency of evidence required to prove secondary meaning, the general rule is that the more descriptive the term, the greater the evidentiary burden to establish secondary meaning. In other words, the less distinctive the term, the greater the quantity and quality of evidence of secondary meaning needed to prove the requisite degree of distinctiveness. 125 For example, in Supreme Wine Co. v. American Distilling Co., the court found that, “the word ‘supreme’ is so totally lacking in distinctiveness, originality and uniqueness that, in the absence of compelling proof that it has acquired a secondary meaning to the buying public, it is not entitled to trademark protection.” 126 Moreover, in Commerce Nat. Ins. Services, Inc. v. Commerce Ins. Agency, Inc., the court held that for a highly descriptive term, “the evidentiary bar must be placed somewhat higher.” 127 For example, if survey evidence was used for 121

See, e.g., Chas. D. Briddell, Inc. v. Alglobe Trading Corp., 194 F.2d 416, 418–19 (2d Cir. 1952) (An advertising expenditure “measures plaintiff’s efforts to establish a secondary meaning, but does not determine its success . . . . Large expenditures for advertising do not compel a conclusion that the task has been accomplished” (quoting Gen. Time Instruments Corp. v. U.S. Time Corp., 165 F.2d 853, 854–55 (2d Cir. 1948))).

122 Braun Inc. v. Dynamics Corp. of Am., 975 F.2d 815, 827 (Fed. Cir. 1992) (quoting First Brands Corp. v. Fred Meyer, Inc., 809 F.2d 1378, 1383 (9th Cir. 1987)).

123 842 F.2d 643, 648 (2d Cir. 1988).

124 939 F. Supp. 340, 347 (D. N.J. 1996) (quoting FM 103.1, Inc. v. Universal Broad. of N.Y., Inc., 929 F. Supp. 187, 196 (D. N.J. 1996)).

125 See Goodyear Tire & Rubber Co. v. Interco Tire Corp., No. 96,404, 1998 WL 998958, at *16 (T.T.A.B. Sept. 11, 1998) (stating “that the greater the degree of descriptiveness which a design possesses, the heavier is a party's burden of proving that such a design has in fact become distinctive of the goods with which it is associated”).

126 Supreme Wine Co. v. Am. Distilling Co., 310 F.2d 888, 889 (2d Cir. 1962).

127 Commerce Nat’l. Ins. Servs., Inc. v. Commerce Ins. Agency, Inc., 214 F.3d 432, 440–41 (3d Cir. 2000).

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a highly descriptive mark, then the evidentiary proof of secondary meaning would correspondingly require a higher percentage of survey respondents who could recognize or associate the mark with the seller.

This approach is also taken by the Federal Circuit, which ruled that the burden to prove secondary meaning “becomes more difficult as the mark’s descriptiveness increases.” 128 The Restatement also observes that “[h]ighly descriptive terms . . . are less likely to be perceived as trademarks and more likely to be useful to competing sellers than are less descriptive terms. More substantial evidence of secondary meaning thus will ordinarily be required to establish their distinctiveness.” 129 B. Questioning the Distinctiveness of the Red Sole As shown in the preceding section, the application of the secondary meaning doctrine is a fact-laden process that requires courts to scrutinize whether secondary meaning has been established by senior mark users’ marketing and promotional efforts. 130 This section will demonstrate that the Louboutin courts have failed to take seriously the two key issues in the secondary meaning inquiry as discussed in the preceding section. The courts’ upholding of the distinctiveness of the red sole mark is thus dubious, a point that has not yet been raised by many commentators.

1. The Consuming Public As the preceding section showed, a mark owner must acquire requisite secondary meaning for his mark among a substantial number of the relevant segment of the consuming public. Because the red sole is a mark applied to shoes, the relevant segment of the consuming public should be shoe consumers. One may argue that only the existing luxury shoe consumers—a much smaller group of people—should be counted as the relevant segment because Christian Louboutin markets luxury footwear with exclusive pricing, but the preceding section showed that the inquiry into secondary meaning should also include prospective consumers. That is, those who are likely to purchase goods after they can mentally associate the goods with the relevant marks. The prospective consumer requirement should not be limited to consumers of luxury shoes as that would preclude potential consumers who may buy such luxury shoes in the short- or 128

Yamaha Int’l Corp. v. Hoshino Gakki Co., 840 F.2d 1572, 1581 (Fed. Cir. 1988).

RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 13 cmt. e (1995).

130 See, e.g., MCCARTHY, supra note 55, at § 15:29 (“Whether or not a designation has acquired secondary meaning is a question of fact, not an issue of law.”).

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medium-term future. Another concern is that the distinctiveness of a mark is a factor used by courts to determine the outcomes of likelihood-of-confusion infringement suits. 131 In this process, courts consider whether prospective consumers will likely be confused about sources of goods or services. For example, in American Luggage Works, Inc. v. United States Trunk Co., the plaintiffs failed to prove that retail dealers would likely be confused by the defendant’s hand luggage bag designs, because they tended to make a purchase “only after [a] detailed talk with a manufacturer’s salesman or upon careful inspection of a manufacturer’s catalog or both.” 132 The court held that, “the issue is not whether the goods would be confused by a casual observer, (trained or untrained, professional or lay,) but the issue is whether the goods would be confused by a prospective purchaser at the time he considered making the purchase.” 133 Although the District Court in the Louboutin litigation invalidated the red sole mark, it indirectly acknowledged that the mark had acquired secondary meaning as follows: Film stars and other A-list notables equally pay homage, at prices that for some styles command as much as $1,000 a pair. And even at that expense, a respectable niche of consumers wears the brand, to the tune of about 240,000 pairs a year sold in the United States, with revenues of approximately $135 million projected for 2011. When Hollywood starlets cross red carpets and high fashion models strut down runways, and heads turn and eyes drop to the celebrities’ feet, lacquered red outsoles on high-heeled, black shoes flaunt a glamorous statement that pops out at once. For those in the know, cognitive bulbs instantly flash 131

The Trademark Dilution Revision Act also identifies a non-exhaustive list of six factors that courts “may consider” when determining whether a mark is likely to cause dilution by blurring. 15 U.S.C. § 1125(c)(2)(B) (2006). These six factors are: (1) “[t]he degree of similarity between the mark or trade name and the famous mark”; (2) “[t]he degree of inherent or acquired distinctiveness of the famous mark”; (3) “[t]he extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark”; (4) “[t]he degree of recognition of the famous mark”; (5) “[w]hether the user of the mark or trade name intended to create an association with the famous mark”; and (6) “[a]ny actual association between the mark or trade name and the famous mark.” Id. § 1125(c)(2)(B)(i)-(vi).

132 American Luggage Works, Inc. v. United States Trunk Co., 158 F. Supp. 50, 54 (D. Mass.

1957).

133 Id. at 53.

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to associate: “Louboutin.” This recognition is acknowledged, for instance, at least by a clientele of the well-heeled, in the words of a lyrical stylist of modern times [in Jennifer Lopez’s “Louboutins” song]. 134 With this presentation of facts, the District Court quickly concluded that the red sole mark had morphed into a brand with “worldwide recognition at the high end of women's wear.” 135 The Second Circuit agreed with the District Court’s line of reasoning in this regard. 136 The passage quoted above, however, merely shows that only a small number of famous people like film stars and A-list notables were counted as the consuming public for the secondary meaning inquiry. The mention of the “Louboutins” song, again, indicates only that high-profile people like Jennifer Lopez are regular consumers of red-soled Louboutin shoes. Although the District Court referred to the fact that around 240,000 pairs of shoes were sold in America in a particular year, it did not direct Louboutin to prove who bought their shoes. Are the buyers only those celebrities who are rich enough to buy many pairs for red-carpet events?

Or are they wealthy women living in gated suburbs? Or could they be college students who dream of finding jobs in Wall Street and wear red-soled Louboutin shoes to impress their future employers? Neither the District Court nor the Second Circuit delved into this issue by specifying the relevant segment of the consuming public for the secondary meaning inquiry.

2. Fulfilling the Evidentiary Burden As the preceding section showed, plaintiffs (senior mark users) should bear the burden of proving that their promotional efforts were effective in creating secondary meaning of a mark in the mind of the consuming public. Therefore, plaintiffs should furnish direct evidence such as consumer testimonies and consumer surveys and/or circumstantial evidence that includes exclusivity, length and manner of use, amount and manner of advertising, and the amount of sales and number of customers.

134

Louboutin I, 778 F. Supp. 2d 445, 448 (S.D.N.Y. 2011).

Id. 136 Louboutin II, 696 F.3d 206, 226–27 (2d Cir. 2012).

135

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The District Court pointed out that the presumption of the validity of a registered trademark is rebuttable 137 and a showing of secondary meaning is required in weighing whether a single color mark can qualify for trademark protection. 138 Nevertheless, nothing else in the District Court’s decision addressed whether the evidence presented by Christian Louboutin showed their promotional efforts had been effective in creating secondary meaning. Instead, the District Court invalidated the red sole mark by relying on the functionality doctrine. 139 While the Circuit Court overturned the District Court’s ruling with regard to the functionality doctrine, it deferred to the District Court’s ambiguous ruling on the acquisition of requisite secondary meaning by Christian Louboutin. In doing so, the Circuit Court quickly concluded as follows: The record before the District Court included extensive evidence of Louboutin’s advertising expenditures, media coverage, and sales success, demonstrating both that Louboutin has created a “symbol” within the meaning of Qualitex, . . . and that the symbol has gained secondary meaning that causes it to be “uniquely” associated with the Louboutin brand . . . . There is no dispute that Louboutin originated this particular commercial use of the lacquered red color over twenty years ago. As the District Court determined, in findings of fact that are supported by the record and not clearly erroneous, “Louboutin invested substantial amounts of capital building a reputation and good will, as well as promoting and protecting Louboutin’s claim to exclusive ownership of the mark as its signature in women's high fashion footwear.” . . . And there is no dispute that Louboutin’s efforts were successful “to the point where, in the high-stakes commercial markets and social circles in which these things matter a great deal, the red outsole became closely associated with Louboutin,” . . . and where unsolicited media attention to that red sole became rampant. 140

137

Louboutin I, 778 F. Supp. 2d at 450 (“Louboutin's certificate of registration of the Red Sole Mark gives rise to a statutory presumption that the mark is valid . . . . However, that presumption of validity may be rebutted.” (citations omitted)).

138 Id. (“In short, color can meet the legal requirements for a trademark if it ‘act[s] as a symbol that distinguishes a firm's goods and identifies their source, without serving any other significant function.’” (quoting Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 166 (1995))).

139 See supra Part I.B.1.

140 Louboutin II, 696 F.3d at 226–27 (citations omitted).

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This passage showed that the Second Circuit heavily relied on the District Court’s finding that the red sole mark had acquired secondary meaning. However, this inference is arguably inappropriate. Elsewhere in its decision, the Circuit Court quickly confirmed that “[w]here, as here, the record contains sufficient undisputed facts to resolve the question of distinctiveness—not to speak of facts found by the District Court that are based upon evidence of record and not clearly erroneous— we may do so as a matter of law.” 141 However, the District Court, as I showed earlier, did not delve deeply into the secondary meaning inquiry. It simply repeated some of the promotional facts submitted by Louboutin, but did not conduct an evidential inquiry to weigh whether promotional efforts were actually effective in creating secondary meaning. 142 Because of the District Court’s focus on the functionality doctrine, the overall decision ignored the necessity of applying the secondary meaning doctrine rigorously, leading to an incomplete application of it in the Louboutin decision. It did not ascertain the relevant segment of the consuming public that would designate the red sole mark as the symbol for identifying source. Nor did it discuss whether Louboutin had presented sufficient evidence to show the effectiveness of its promotional efforts in establishing the secondary meaning of the red sole mark.

Moreover, it was also inappropriate for the Second Circuit to cite the Warner Bros., Inc. v. Gay Toys, Inc. 143 decision to support its treatment of the acquired secondary meaning of the red sole mark as a matter of law rather than a factual inquiry. 144 This is because the Warner Bros. court did not appropriately apply the secondary meaning doctrine. It did not consider the relevant segment of the consuming public, nor did it require the plaintiff to show evidence proving the effectiveness of its promotional efforts. 145 141

Id. at 226.

Cf. Ann Bartow, Likelihood of Confusion, 41 SAN DIEGO L. REV. 721, 723, 772 (2004) (pointing out that that trademark law has developed on the basis of “personal intuition and subjective, internalized stereotypes,” not on “specific and persuasive evidence about consumer behavior”).

143 Warner Bros., Inc. v. Gay Toys, Inc.,724 F.2d 327 (2d Cir. 1983).

144 Louboutin II, 696 F.3d at 226.

145 It seems that the court in Warner Bros., Inc. v. Gay Toys, Inc. decided on whether secondary meaning had been acquired in unnecessary haste: The symbols on the “General Lee” just as clearly have a secondary meaning in the eyes of the consumer of the toy car. There was ample evidence—indeed Gay Toys' sales of its imitations are themselves proof—that the public did associate the “General Lee” with the “Dukes of Hazzard” television series. Its distinctive 142

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Against this backdrop, the Second Circuit did not point out that the District Court had erroneously ignored the need to apply the secondary meaning doctrine.

Nor did the Circuit Court provide sufficient analysis of the effectiveness of Louboutin’s promotional efforts in creating secondary meaning. In the single passage quoted above, the Second Circuit did not explain why Louboutin’s advertising expenditures, media coverage, and sales success would necessarily lead to the creation of secondary meaning. 146 For example, regarding sales success, the Second Circuit must have noticed that the District Court cited the fact that 240,000 pairs of shoes were sold in America in a particular year. But what is critical in the secondary meaning analysis is “whether the public is moved in any degree to buy an article because of its source.” 147 Therefore, the Second Circuit should examine whether the public’s purchase of Louboutin was motivated by their recognition of the red sole as the indicator of Louboutin being the producer the red-soled shoes.

Like the District Court, the Second Circuit, however, did not consider at all why people purchased Louboutin shoes. Was it because people were attracted by the Christian Louboutin brand only, or by the overall design of its shoes? Or was it because consumers were motivated to buy on the basis of their mental association between the red sole and Louboutin shoes? In other words, the Second Circuit should have responded specifically to the third question and then considered why sales success could show that the red sole mark had acquired secondary meaning in the marketplace. It pointed out that unsolicited media attention to the red sole mark had become rampant, but it did not discuss whether Christian Louboutin had furnished any data to show the extent of media coverage. Worse still, it did not consider whether media coverage was actually effective in helping Christian Louboutin acquire secondary meaning.

Another issue the Louboutin courts failed to deal with was whether a heightened evidentiary burden should be placed on Louboutin. As discussed above, the more descriptive a mark is, the greater the evidentiary burden to establish

markings and color made it a “Dukes of Hazzard” car, or a toy depicting that car. It is because of that association, the identification of the toy car with its source, Warner's television series, that the toy car is bought by the public. That is enough.

724 F.2d at 334.

146 See generally, Lee et al., supra note 55, at 1037 (cautioning that courts should treat the examination of existence of secondary meaning seriously and arguing that “questions of distinctiveness are matters that can and should be informed by the theoretical and empirical tools employed by those who undertake a careful, scholarly study of such issues”).

147 American Footwear Corp. v. General Footwear Co., 609 F.2d 655, 663 (2d Cir.1979).

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secondary meaning. 148 As YSL counter-argued, â&#x20AC;&#x153;[r]ed outsoles are a commonly used ornamental design feature in footwear, dating as far back as the red shoes worn by King Louis XIV in the 1600s and the ruby red shoes that carried Dorothy home in The Wizard of Oz.â&#x20AC;? 149 The common use of red outsoles may indicate that they function to describe certain aesthetic features. Therefore, the Louboutin courts should have considered whether the red sole mark was highly descriptive or not. 150 If it was, then Louboutin should have presented more evidence to prove that the red sole mark had acquired requisite secondary meaning.

III TOWARD A SOCIAL JUSTICE MANDATE FOR TRADEMARK LAW The preceding Part discussed why the Louboutin courts failed to properly apply the distinctiveness doctrine to decide whether the red sole mark was registrable as a trademark. Without such a crucial consideration, the red sole mark may have turned out to be just a mark that has some referential sense but whose primary purpose is independent of its source-identifying character. Therefore, a rigorous application of the secondary meaning doctrine is crucial to guarantee the sensibility of trademark law toward the dynamics of social justice as a public policy.

But what if Christian Louboutin furnished sufficient evidence showing the red sole mark has acquired requisite secondary meaning? This Part will argue that courts should apply a social justice mandate to override the showing of secondary meaning and refuse to uphold the registration of the red sole mark as claimed by Louboutin. The application of this mandate would help courts identify any social injustices that would be caused by the protection of single color trademarks. The Part will further discuss the theoretical and Constitutional basis on which the social

148

See supra Part II.A.2.

'You didn't invent red soles': Yves Saint Laurent kicks back at Christian Louboutin, DAILY MAIL (May 23, 2011), http://www.dailymail.co.uk/femail/article-1390229/You-didnt-invent-redsoles-Yves-Saint-Laurent-kicks-Christian-Louboutin.html.

150 For discussions on the descriptiveness of color marks, see Kevin M. Jordan & Lynn M. Jordan, The Unanswered Question: Can Color Ever Be Inherently Distinctive? 85 TRADEMARK REP. 371 (1995); Michael B. Landau, Reconciling Qualitex with Two Pesos: Ambiguity and Inconsistency From the Supreme Court, 3 UCLA ENT. L. REV. 219 (1996); James L. Vana, Color Trademarks, 7 TEX. INTELL. PROP. L.J. 387 (1999); Laura Vistine, Note, The Registrability of Color Per Se as a Trademark After Qualitex Co. v. Jacobson Products Co., 40 ST. LOUIS U. L.J. 611 (1996).

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justice mandate is founded. It will also address some practical concerns about the application of the social justice mandate.

A. Social Justice as a Policy Concern This Section will first show that the registration of the red sole mark has run counter to the social justice ethos, causing economic and status injustices. Based on this finding, the courts may adopt a social justice mandate, and rule that the red sole mark should not be protected as a trademark even if it has acquired sourceidentifying secondary meaning.

1. Economic Injustice It should be noted that what motivated Christian Louboutin to bring YSL to court was its plan to monopolize the red sole in the footwear industry. Once YSL’s use of the red sole is ruled out by the court, any third party’s use of the red sole in commerce may trigger the infringement of Christian Louboutin’s color mark rights. What makes this monopolization possible is trademark law, which entitles Christian Louboutin to prevent others from using the red sole in the commercial process of merchandizing shoes. The concept of trademark distinctiveness opened the door for that monopolization, because the red sole mark became trademarkable once its acquisition of requisite secondary meaning in the market was shown.

Christian Louboutin is a luxury company that merchandizes its shoes at astronomically high prices, ranging from $495 to $6,000. 151 Media coverage about fashion has been rife with the discussion about how expensive Christian Louboutin shoes are. It was reported that a pair of Lady Spiked Leopard-Print Platform Pumps with a 5 3/4-inch heel cost $1,595, 152 a pair of black boots $2,645, 153 and a pair of crystal-encrusted shoes $6,000. 154 Journalists and online commentators complain about high prices in a whimsical vein. For example, a New York Times 151

See Sharyn Alfonsi & Nikki Battiste, Red Sole Man: Christian Louboutin's Signature Shoe Has Made Him an Icon, ABC NEWS (Nov. 18, 2011), abcnews.go.com/Business/red-soleman-christian-louboutins-signature-shoe-made/story?id=14983446.

152 See Eric Wilson, Going Toe-to-Toe in Stilettos, N.Y. TIMES, June 19, 2013, at E1. available at www.nytimes.com/2013/06/20/fashion/shoe-battles-going-toe-to-toe-in-stilettos. html?ref=style&_r=0.

153 See Charlotte Cowles, Christian Louboutin on Why Shoes Are So Damn Expensive These Days, N.Y. MAG. (June 20, 2013), www.nymag.com/thecut/2013/06/louboutin-on-why-shoesare-so-damn-expensive.html.

154 See Alfonsi & Battiste, supra note 151.

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essay lamented that “Versions of [Louboutin] shoes in exotic skins, like crocodile, can cost as much as $4,645, which, it is strange to say, is anything but exceptional in this world.” 155 Unsurprisingly, a direct consequence of red-sole monopolization is that other fashion houses and ordinary shoe makers will not be allowed to use red soles on the bottoms of their shoes. This will lead to an indirect consequence, that medium- or low-income people will not be able to purchase and consume red-soled shoes since the red-soled shoes are all priced very high after they are attached to the red color mark and the Christian Louboutin word mark.

The economic injustice caused by the red-sole trademark carries two major implications. On a legal level, the red-sole trademark would deprive the poor or even middle-income people of the privilege of buying/wearing shoes with red soles. Louboutin’s red sole trademark would prohibit any other shoe maker from making shoes with red soles or even clothes and handbags imprinted with pictures of non-Louboutin red-soled shoes. Any use of the red sole, in this context, would trigger violation of trademark law, thanks to the likelihood of confusion doctrine 156 or the trademark dilution doctrine. 157 When Christian Louboutin dominates the market with its trademark power, no other shoe makers are allowed to make and sell shoes with red soles. Poor women will not be able to buy cheap shoes with red soles. Poor men will not be able to afford to gift their beloved women with shoes with red soles. If poor persons desire to own red-soled shoes, they will have to save 155

Wilson, supra note 152.

This doctrine holds that even if consumers are not confused at the point of sale as to the true source of the goods, other consumers may be confused as to the source of those goods after the sale. In Landscape Forms, Inc. v. Columbia Cascade Co., the Court claimed that “[t]he likelihood of confusion test concerns not only potential purchasers but also the general public.”

113 F.3d 373, 382 (2d Cir. 1997). A brand’s reputation for exclusiveness is damaged by postsale confusion—the damage to the original brand owner in such a case is that consumers could acquire the prestige value of the luxury product by buying and using counterfeits or knockoffs.

Even though the knowledgeable buyer knew that he/she was getting an imitation third parties would be confused. Therefore, consumers may be discouraged from purchasing genuine luxurybranded goods, as the brands seem to be too commonplace and no longer possess the prestige and social status associated with them. In Ferrari S.P.A. Eservizio v Roberts, the court noted that “Ferrari intentionally limits production of its cars in order to create an image of exclusivity” and if there are many vehicles out in the market, they will no longer be unique. 944 F.2d 1235, 1237 (6th Cir. 1991).

157 Anti-dilution is a form of trademark protection that guards against blurring the distinctiveness of brands and tarnishing the reputation of brands. 15 U.S.C. § 1125(c) (2006).

156

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up for a long while while sacrificing spending on other goods in order to afford a pair of Louboutin shoes. Alternatively, they can put their red-sole dreams on hold, aspire to become rich first, achieve wealth, and then buy Louboutin shoes as a declaration of their finally being rich. But how many poor people can achieve that in contemporary American society with its increased concentration of social wealth among the top 1 percent 158 while the laws are being changed increasingly in favor of big companies like Christian Louboutin? 159 Moreover, on the ethical level, the red-sole trademark would legitimize egoist luxury spending behavior without due regard to the suffering of the poor. By upholding the red-sole trademark registration, the court signaled its implicit endorsement of pricey red-soled shoes that can only be merchandized by Christian Louboutin. Because luxury goods protected by trademarks only target people with deep pockets, it makes sense for luxury companies like Christian Louboutin to exclude those who still struggle for bread and butter from owning red-soled shoes.

One may point out that this pure economic or monetary calculation is fine when trademark law is applied in its literal sense, but it may not be as permissible if ethical considerations are channeled into the legal analysis. Ethically speaking, is it still fine that as long as Louboutin has acquired secondary meaning, the red-sole color mark should be trademarked as a symbol catering only to the rich? Many people may respond in the negative. The judicial recognition of the red-sole trademark, in fact, has caused a profound ethical consequence. It will translate into an implicit endorsement of the luxury strategy that makes red-soled shoes “patently, obscenely, even self-destructively overpriced.” 160 Consequently, other 158

See, e.g., G. William Domhoff, Wealth, Income, and Power, WHO RULES AMERICA? (Feb. 2013), www2.ucsc.edu/whorulesamerica/power/wealth.html (“In the United States, wealth is highly concentrated in a relatively few hands. As of 2010, the top 1% of households (the upper class) owned 35.4% of all privately held wealth, and the next 19% (the managerial, professional, and small business stratum) had 53.5%, which means that just 20% of the people owned a remarkable 89%, leaving only 11% of the wealth for the bottom 80% (wage and salary workers)”).

159 See, e.g., Jessica Litman, Breakfast with Batman: The Public Interest in the Advertising Age, 108 YALE L.J. 1717, 1727 (1999) (“There has been inexorable pressure to recognize as an axiom the principle that if something appears to have substantial value to some, the law must and should protect it as property.”).

160 Wilson, supra note 152 (“The designer shoe industry, to some extent, relies on the willful suspension of rational thinking, the giving over to a more primal urge (to shop, that is) in order to move merchandise that common sense would suggest is patently, obscenely, even selfdestructively overpriced.”).

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shoe makers’ attempts to lower the prices of red-soled shoes for low-or-middleincome people by making and selling them without the Christian Louboutin tag would be penalized as a violation of trademark law.

2. Status Injustice Apart from the economic injustice as discussed above, Louboutin’s monopolistic control of the red sole mark would also cause status injustice. When Christian Louboutin sued YSL, it bluntly asserted: Louboutin actively polices the Red Sole Mark to shut down copyists.

This task will become impossible if competitors can copy the Red Sole Mark at will, as YSL has done here. Already another competitor has signaled its intent to follow suit. A flood of red soles in high fashion women’s footwear creates the danger that Louboutin’s goodwill, market prominence and fame will be destroyed, thus threatening its entire business. 161 This statement, however, begs the question why Christian Louboutin as a commercial entity only desires to use red-soles to serve rich and famous people.

The reason is very simple. Louboutin has marketed the red sole by adding the luxury aura to the energy and passion signaled by the color red. The red sole, therefore, is elevated as a luxury symbol for a luxury company that caters to the rich and famous.

Conspicuous consumption describes the behavior of consuming luxury goods where less expensive substitutes bring the same or even higher functional utilities. Rich people showcase their pecuniary strength through conspicuous consumption to affirm their social status. To explain the relationship between luxury goods and conspicuous consumption, Thorstein Veblen argued that it is not the accumulation of wealth that confers status but the evidence of wealth which 161

Plaintiffs’ Reply Memorandum Of Law In Support Of Application For A Preliminary Injunction at 9, Christian Louboutin S.A. v. Yves Saint Laurent Am., Inc., 778 F. Supp. 2d 445 (No. 11 Civ. 2381 (VM)), available at trademarkem.com/docs/2011-07-19-Louboudin-reply.pdf.

As commentators point out, “Louboutin … argued that if an injunction is not issued the floodgates will open to competitors. Presumably this will result in the non-rich and famous being able to purchase shoes with red soles. Once this style is available to the common unkempt masses, Louboutin’s signature style will be forever tarnished.” Court Rules Louboutin's Red Soles are Fashion, not a Trademark, TRADEMARK ‘EM (Sept. 3, 2011), trademarkem.com/courtrules-louboutins-red-soles-are-fashion-not-a-trademark.

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requires its wasteful exhibition. 162 The possession of luxury goods which are priced much higher than their non-luxury equivalents connotes affluence and generates superiority as consumers consider themselves one of the few who can afford the goods. 163 Conspicuous consumption has been highlighted as a major selling point in modern luxury merchandising. Luxury companies use high prices as a marker of quality, craftsmanship, and design of their products, and limit possession of luxury goods to those who can afford them. Therefore, they allow their customers to publicly signal their status in society and to gain the esteem of others. 164 The registration of the red sole as a trademark has entrenched this mark as part of the conspicuous consumption of luxury goods.

While price connotes social status, price itself, however, does not determine the desirability of a brand. 165 Consumers have the propensity to associate a particular brand with the “type” of consumers who buys that brand.166 Louboutin can monopolize the red-sole and dominate the red-sole market serving the likes of Wall Street and Hollywood. During the litigation against YSL, Christian Louboutin flaunted a long list of celebrities who had been his loyal consumers. 167 162

THORSTEIN VEBLEN, THE THEORY OF THE LEISURE CLASS 63-64 (Oxford University Press

2007).

163

See Richard T. Garfein, Cross-cultural Perspectives on the Dynamics of Prestige, 3 J. SERVICES MARKETING 17, 18 (1989).

164 E.g., Young Jee Han, Joseph C. Nunes & Xavier Drèze, Signaling Status with Luxury Goods: The Role of Brand Prominence, 74 J. MARKETING 15 (2010), available at https://msbfile03.usc.edu/digitalmeasures/jnunes/intellcont/Brand%20Prominence%201-12-101.pdf.

165 See, e.g., Birger Wernerfelt, Advertising Content When Brand Choice is a Signal, 63 J. BUS. 91, (Jan. 1990) .

166 Albert M. Muniz & Thomas C. O’Guinn, Brand Community, 27 J. CONSUMER RES. 412 (March 2001).

167 Declaration in Support of Acquired Distinctiveness Under Section 2(f) at 2, Louboutin I, 778 F. Supp. 2d 445 (S.D.N.Y. 2011) [hereinafter Louboutin Declaration], available at http://www.counterfeitchic.com/Images/Louboutin%202f%20statement%20in%20trademark%2 0application.pdf (“My shoes are worn by many famous actresses, musicians and other celebrities including royalties. In the U.S., famous wearers of the CHRISTIAN LOUBOUTIN red-soled shoes include Madonna, Halley Berry, Salma Hayek, Kate Hudson, Jennifer Lopez, Sarah Jessica Parker, Mishca Barton, Jessica Simpson, Mary Kate Olsen, Carmeron Diaz, Gwyneth Paltrow, Kirsten Dunst, Angelina Jolie, Gwen Stefani, Destine's Child, Tina Turner and Janet Jackson. Other celebrities who wear the red-soled CHRISTIAN LOUBOUTIN shoes

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The message is very clear: wear Louboutin high heels with red-soles, and you will be seen by the public as a member of the Wall Street and Hollywood elite. From this perspective, the red sole has become a public passport to allow people to declare their affiliation with Wall Street and Hollywood.

While the red sole is reserved only for the rich to show off their wealth and status, 168 the judicial validation of the red-sole mark will be an ethical failure. It highlights the stark contrast between the rich and the poor, mirrored by a luxury economy where luxury stores shine bright in the centers of major cities that nonetheless struggle with high income inequality. Luxury capitals like New York, 169 London, 170 and Hong Kong 171 have prospered as their poverty rates and include Diane von Furstenberg, Nicole Kidman, Catherine Deveuve, Cate Blanchett and Princess of Caroline of Monaco.”).

168 See Collins, supra note 65, at 1 (“Like Louis XIV’s red heels, they signal a sort of sumptuary code, promising a world of glamour and privilege.”).

169 Same Roberts, Income Data Shows Widening Gap Between New York City’s Richest and Poorest, N.Y. TIMES, Sept.

20, 2012, at A22, available at, http://www.nytimes.com/2012/09/20/nyregion/rich-got-richer-and-poor-poorer-in-nyc-2011data-shows.html?smid=tw-nytmetro&seid=auto&_r=0 (“The rich got richer and the poor got poorer in New York City [in 2011] as the poverty rate reached its highest point in more than a decade, and the income gap in Manhattan, already wider than almost anywhere else in the country, rivaled disparities in sub-Saharan Africa.”).

170 See Carla Power, Great Divide: How the City of London Widened the Gap between Britain's Rich and Poor, TIME MAG. (May 14, 2012), http://www.time.com/time/magazine /article/0,9171,2113703,00.html#ixzz2PxwVA5W0 (“With 95% of the neighborhood's children living in poverty, the area ranks among England's poorest. Half a kilometer away is St. John's Wood, home to bankers, football managers and former Beatle Paul McCartney. … With the top 10% of the population worth 273 times the bottom 10%, London ranks as one of the most unequal cities in the developed world, trumping even New York City, notes Danny Dorling, an expert in urban inequality at the University of Sheffield.”); Clara Ferreira-Marques & Kate Holton, Rich and Poor: London's tale of two cities, REUTERS (Apr. 12, 2010), http://www.reuters.com/article/2010/04/12/us-britain-election-povertyidUSTRE63B57620100412 (“Residents of the decaying Robin Hood Gardens estate, where grimy windows punctuate concrete, prison-like corridors, say they feel no connection with those living a short walk away in the luxury Canary Riverside complex.”).

171 See In Wealthy Hong Kong, the Poorest Residents Live in Metal Cages, N.Y. DAILY NEWS (Feb. 10, 2013), http://www.nydailynews.com/news/world/wealthy-hong-kong-poorestlive-metal-cages-article-1.1258661 (“For many of the richest people in Hong Kong, one of Asia’s wealthiest cities, home is a mansion with an expansive view from the heights of Victoria Peak. For some of the poorest, like Leung Cho-yin, home is a metal cage.”); Benjamin Gottlieb & Kristie Hang, Hong Kong's poorest living in 'coffin homes’, CNN (July 26, 2011), http://edition.cnn.com/2011/WORLD/asiapcf/07/25/hongkong.coffin.homes/index.html

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luxury-spending rise, resulting in the coexistence of slums and luxury stores.

Beneath this worsening economic inequality lies an ethical crisis. This ethical crisis is caused by rich luxury consumers’ indifference to the sufferings of poor people. Luxury goods are by no means necessary goods for survival. 172 No luxury consumer would die or suffer physically if he or she stopped purchasing or consuming luxury goods. But the diversion of money from purchasing luxury goods to aiding the poor could yield profound humanitarian benefits. In 2011, the rich spent $250 billion in total on luxury goods. 173 In the same year, around 15 million children died from hunger. 174 Against this backdrop, I raised a question in a recent article about whether many luxury consumers are civilized enough to call themselves human beings based on their sensitivity, and insensitivity, to the suffering of the poor. 175 3. The Application of the Social Justice Mandate To address the economic and status injustices caused by the registration of the red-sole trademark, a social justice mandate should be incorporated into the judicial scrutiny of the distinctiveness of marks. Courts can apply it to override the acquired distinctiveness of a mark if the trademark protection of the mark would cause social injustice. (“Through Mak's eyes, there are two Hong Kongs: The one seen through his only window, personified by the glitz and glamour the city is famous for. And the one inside, that has allowed less fortunate citizens to fall through the cracks.”).

172 Pierre Bourdieu divides consumption of goods with two kinds of tastes: “the tastes of luxury’ and “the tastes of necessity.” PIERRE BOURDIEU, DISTINCTION: A SOCIAL CRITIQUE OF THE JUDGEMENT OF TASTE 175 (1984). Bourdieu also observes that the working-class lifestyle is characterized by both “the absence of luxury goods, whisky or paintings, champagne or concerts, cruises or art exhibitions, caviar or antiques" and by "the presence of numerous cheap substitutes for these rare goods . . . .” Id. at 386.

173 BAIN & CO., LUXURY GOODS WORLDWIDE MARKET STUDY 3 (10th ed. 2011), available at www.slideshare.net/Ikusmer/luxury-goods-worldwide-market-study.

174 World Hunger Statistics, STATISTIC BRAIN (May 7, 2013), www.statisticbrain.com/worldhunger-statistics/.

175 Haochen Sun, Can Louis Vuitton Dance with HiPhone? Rethinking the Idea of Social Justice in Intellectual Property Law, 15 U. PA. J.L. & SOC. CHANGE 389, 432 (2012) (“Although social justice is a value central to humanity and civilization, we live in an unequal society polarized by the unfair distribution of resources. People still live in poverty and even die from the lack of food. Other people, however, are rich enough to shop happily in luxury stores without regard for those who die of hunger. This stark contrast questions whether luxury consumers are civilized enough to call ourselves human beings or instead lack the ability to sense the pain of our peers.”).

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The Second Circuit ruled that Christian Louboutin had acquired secondary meaning over the red-sole contrasted with “the remainder of the shoe.” 176 Therefore it could only have trademark protection over “the contrast between the sole and the upper [portion of the shoe].” 177 But this ruling did not invalidate the red sole trademark at all. Instead, it still preserves trademark protection over the red-sole. At this point, the Second Circuit added that “Louboutin has not established secondary meaning in an application of a red sole to a red shoe. . . . The use of a red lacquer on the outsole of a red shoe of the same color is not a use of the Red Sole Mark.” 178 Therefore, the Second Circuit only deprived Christian Louboutin of its trademark rights over the red sole use on a red shoe. It kept the door open for Louboutin to claim trademark rights over the use of the red-sole on shoes of any color other than red.

The application of the social justice mandate, however, would reverse the Second Circuit’s decision. Social justice should be a factor that can override the finding of acquired distinctiveness through the secondary meaning inquiry. As discussed above, the red-sole mark carries social justice consequences. 179 From this perspective, the Louboutin courts have also failed to consider the social justice issues that should be integrated into their scrutiny of the distinctiveness of the redsole mark. Although the battle was waged between two luxury companies, Christian Louboutin and YSL, the litigation has the potential to have tremendous impacts on other fashion companies and particularly consumers.

Therefore, the application of social mandate reflects the fact that weighing the distinctiveness of a mark always has an impact on other relevant marks and their consumers. As Professor Barton Beebe points out, “[I]t is … a mark’s distinctiveness from other marks, its salience, that makes consumers aware of it and that will affect whether consumers are likely to confuse it with a junior, similar mark.” 180 Following this mandate, courts should not simply isolate the scrutiny of distinctiveness to a mark itself. Rather, they should consider the larger impact of protecting a distinctive mark on other marks and their consumers.

For example, courts should note that the trademark protection of the red-sole mark may cause serious social injustices. If the red-sole is trademarkable, should 176

Louboutin II, 696 F.3d 206, 225 (2d Cir. 2012).

Id. at 227.

178 Id. at 228.

179 See supra Part III.A.1-2.

180 Beebe, supra note 28, at 672.

177

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we also protect red collars and cuffs that may acquire secondary meaning after being strenuously marketed? The same question applies to other colors that are basic ingredients of fashion design 181 and marketing. 182 From this perspective, the trademark protection of the red sole may open a floodgate for increasingly allowing simple fashion symbols to be protected as luxury brands, leading to greater social injustices.

Moreover, courts should consider the social justice implications of granting trademark protection in non-fashion contexts. Can Facebook register the blue, long stripe that constantly appears on its website and has become a “distinctive” feature of Facebook operation? The same question can be raised for CNN’s extensive use of the red stripe for its website operation. 183 In this context, courts must vigilantly consider from the social justice perspective whether single color marks of that type merit trademark protection even if they have acquired sufficient secondary meaning.

181

Fashion houses often use “color stories” to offer new fashion designs. Color stories are the “selected colors that signal the personality of the collection.” EVELYN L. BRANNON, FASHION FORECASTING 156 (2d ed. 2005).

182 Research has revealed that color plays a defining role in the fashion industry. For instance, in the survey on consumer’s perception on color, consumers were interviewed for choosing colors that represent “high quality” of products. 43% of the consumers chose black and 20% chose blue. Thus, it shows that color has a close relationship with people’s cognitive perceptions of fashion products. See FABER BIRREN, COLOR PSYCHOLOGY AND COLOR THERAPY (Citadel 1978); see also Akiko Fukai, The Colors of a Period as the Embodiment of Dreams, in FASHION IN COLORS 12, 15 (Esther Kremer ed., 2005) (“When we choose the clothes that we wear, we are fully convinced that we are selecting the colors that we like. However, in examining the eternal theme of color, it is evident that our color choices are made within the restrictions of a certain period. That is to say, we are limited to the choices offered by the market at any given time; after all, the market itself is strictly controlled by the economics of fashion trends and the structure of the industry.”); Sunila Sreepada, The New Black: Trademark Protection for Color Marks in the Fashion Industry, 19 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 1131, 1145 (2009) (“Colors generate specific associations in the minds of consumers that can be harnessed by sellers to influence decision making in the marketplace.”).

183 John Villasenor, Can a Company Trademark the Colors On Its Web Site?, FORBES (Sept.

15, 2012), www.forbes.com/sites/johnvillasenor/2012/09/15/can-a-company-trademark-thecolors-on-its-web-site/ (“Consider the thick, red, horizontal stripe at the top of CNN’s web site.

A person seeing a computer from the other side of a room who might not be able to read the print on the screen would nonetheless be likely to recognize that it was displaying a page from the cnn.com domain. In the context of online news sites, CNN’s red stripe placed across the top of the screen plays an important role in brand identification.”).

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There are two ways in which the court can apply the social justice mandate.

First, the mandate allows a defendant to assert social justice factors to request a court disprove or override the distinctiveness of a mark. If the court can identify the specific social injustices (economic and status injustice as revealed above) based on the evidence submitted by the defendant, it can invalidate the registration of a mark like the red-sole mark, unless its owner furnishes further evidence to refute the allegations that the mark runs counter to the social justice mandate.

Alternatively, the court may opt to protect a mark in a different manner that is less likely to perpetuate social injustice. For example, the court can protect the red sole color mark only when it is used together with the “Christian Louboutin” word mark. This option only recognizes that the red sole mark has acquired secondary meaning when it is combined with the “Christian Louboutin” word mark.

Therefore, the use of the red sole mark by others with their own brands would not trigger infringement liability.

B. The Legal Basis of the Social Justice Mandate This Section will explore the legal basis for channeling the social justice mandate in the judiciary scrutiny of trademark distinctiveness. It will demonstrate that the application of this mandate not only fits with the traditional trademark practice but also with liberal justice theory and Constitutional mandates.

1. Taking Precedents Seriously The precedents that the Louboutin courts followed, in fact, left room for courts to use the social justice mandate. The Louboutin courts heavily relied on Supreme Court’s Qualitex decision in determining whether a single color is protectable as a trademark. But the Louboutin court neglected to take advantage of a crucial opportunity that the Supreme Court noted in Qualitex. In that decision, the Supreme Court considered whether a green-gold color mark constituted a symbol, and whether it had acquired the requisite secondary meaning, if protecting the trademark prevented competitors from using a necessary functional aspect. 184 The Court concluded by noting that “unless there is some special reason that convincingly militates against the use of color alone as a trademark, trademark law would protect Qualitex's use of the green-gold color on its press pads.” 185 Following this statement, the Supreme Court proceeded to examine whether there were any additional “special reason[s]” for invalidating the mark concerned. The 184 185

Qualitex Co. v. Jacobson Prods. Co., 514 U.S. 159, 166 (1995).

Id.

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Court considered whether the protection of single colors would result in shade confusion, making it difficult for courts to settle color-related trademark cases. 186 It also considered whether single color trademarks would cause color depletion in ways that no alternative colors are left for competitors to use in a particular industry. 187 Only after reviewing these two additional issues did the Court affirm the validity of the green-gold mark concerned. Therefore, it is clear that the Supreme Court allows lower courts to use additional policy factors to determine the trademarkability of single color marks.

Moreover, the Supreme Court has emphasized the importance of public policy in deciding difficult trademark cases. In Wal-Mart Stores, Inc. v. Samara Bros., 188 the Supreme Court dealt with the tough question as to whether trade dresses should be treated as inherently distinctive or need to acquire secondary meaning to warrant trademark protection. At the end of its decision, the Court highlighted the “great consumer benefit” 189 that would be derived from requiring a showing of secondary meaning of a trade dress. The social justice mandate centers on consumer benefits. The mandate is intended to protect more consumers from the harms caused by the registration of single color marks. Therefore, it is a policyoriented factor commensurate with the consumer benefit test. 190 Last but not least, courts have carved out the heightened evidentiary requirement necessitated by the social justice mandate. As single color marks are highly descriptive marks, owners of such marks, according to some courts, are required to shoulder a heavier burden of proof. For example, the court in In re Owens-Corning Fiberglas Corp., a landmark color mark decision, required that the evidence submitted by the applicant must be substantial because “by their very nature color marks carry a difficult burden in demonstrating distinctiveness and 186

Id. at 167.

Id. at 168-69.

188 Wal-Mart Stores, Inc. v. Samara Bros., Inc., 529 U.S. 205 (2000).

189 Id. at 215 (“To the extent there are close cases, we believe that courts should err on the side of caution and classify ambiguous trade dress as product design, thereby requiring secondary meaning. The very closeness will suggest the existence of relatively small utility in adopting an inherent-distinctiveness principle, and relatively great consumer benefit in requiring a demonstration of secondary meaning.”).

190 Brown, supra note 2, at 1167 (“[W]hat appear to be private disputes among hucksters almost invariably touch the public welfare. We shall therefore be concerned to ask, when courts protect trade symbols, whether their decisions further public as well as private goals.”); Litman, supra note 159, at 1728 (“[T]he essence of [trademark law] is to divide . . . the valuable stuff that, precisely because of its importance, is reserved for public use.”).

187

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trademark character.” 191 The Federal Circuit applied Third Circuit law to drive home the point that claimed owners of single color marks should present more evidence of secondary meaning than mere long-time use and advertising. 192 2. Taking the American Legal Tradition Seriously The social justice mandate, as discussed above, is in line with Supreme Court trademark jurisprudence and practical rules adopted by lower courts.

Meanwhile, the mandate also reflects the equality principle that undergirds the American legal system. i. Social Justice as a Fundamental Value It is widely recognized that all human beings are equal individuals with equal worth. 193 Nevertheless, disparities exist in all modern societies. For example, income inequality exists in many societies and continues to worsen. 194 Against this backdrop, social justice has been championed as a human value to minimize the impact unequal distribution of resources has on the disadvantaged. The following statement by John Rawls captures the essence of social justice as a fundamental human value: Justice is the first virtue of social institutions, as truth is of systems of thought. A theory however elegant and economical must be rejected or revised if it is untrue; likewise laws and institutions no matter how

191

In re Owens-Corning Fiberglas Corp., 774 F.2d 1116, 1125, 1127 (Fed. Cir. 1985) (holding that section 2(f) of the Lanham Act, 15 U.S.C. § 1052(f) and thus leaving the determination of the degree of proof necessary to demonstrate distinctiveness to the judgment of the Patent Office and the courts).

192 ERBE Elektromedizin GmbH v. Canady Tech. LLC, 629 F.3d 1278, 1290-91 (Fed. Cir. 2010).

193 E.g., Article 1 of the Universal Declaration on Human Rights states that, “[a]ll human beings are born free and equal in dignity and rights. They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.” Universal Declaration of Human Rights, G.A. Res. 217 (III) A, U.N. Doc. A/RES/217(III), at 72 (Dec. 10, 1948).

194 See Ilyana Kuziemko & Stefanie Stantcheva, Our Feelings About Inequality: It’s Complicated, N.Y. TIMES (Apr. 21, 2013), opinionator.blogs.nytimes.com/2013/04/21/ourfeelings-about-inequality-its-complicated/?ref=opinion (“Since the 1970s, income inequality in the United States has increased at a historic rate. In 1970, the richest 1 percent of Americans enjoyed 9 percent of total national pre-tax income. In 2011, by contrast, that share had risen to 19.8 percent.”).

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efficient and well-arranged must be reformed or abolished if they are unjust. 195 Hailed as a fundamental human value, social justice measures the degree of inequality a society accommodates through its institutions. According to Rawls, social justice has two major principles. Called the equal liberty principle, the first principle directs that “each person is to have an equal right to the most extensive basic liberty compatible with a similar liberty for others.” 196 The second principle of social justice has two sub-principles. The first one is called the difference principle. It dictates that social inequalities are justified if and only if they work to the benefit of the least advantaged in society. 197 The second sub-principle, labeled the equal opportunity principle, requires that “offices and positions must be open to everyone under conditions of fair equality of opportunity.” 198 The Rawlsian theory lends strong support to the incorporation of social justice into the secondary meaning inquiry. First, it places social justice as a supreme value to assess the legitimacy of institutional decisions and rules.

Embodied with this supreme value, the social justice mandate can be used as the final arbiter in deciding whether a single color mark should be granted trademark protection.

Second, the difference principle highlights the distributive concerns that judges must consider. Rawls suggests several ways of defining the most disadvantaged group. 199 An easy way, as he emphasizes, is to consider an individual’s “place in the distribution of income and wealth.” 200 This 195

JOHN RAWLS, A THEORY OF JUSTICE 3 (rev. ed. 1999).

Id. at 53.

197 Id. at 65 (stating that “the higher expectations of those better situated are just if and only if they work as part of a scheme which improves the expectations of the least advantaged members of society”). Rawls pointed out that “social order is not to establish and secure the more attractive prospects of those better off unless doing so is to the advantage of those less fortunate.” Id. Applying the principle to the “likely medical needs” of the least advantaged, Rawls stated that “[w]ithin the guidelines of the difference principle, provisions [of medicines] can be made for covering these needs up to the point where further provision would lower the expectations of the least advantaged.” JOHN RAWLS, JUSTICE AS FAIRNESS: A RESTATEMENT 173 (Erin Kelly ed., 2001).

198 RAWLS, supra note 195, at 47.

199 Id. at 82 (“I suppose, then, that for the most part each person holds two relevant positions: that of equal citizenship and that defined by his place in the distribution of income and wealth.”).

200 Id.; see also Philippe Van Parijs, Difference Principles, in THE CAMBRIDGE COMPANION 196

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characterization of the most disadvantaged group is “in terms of relative income and [wealth] with no reference to social positions. For example, all persons with less than half the median may be regarded as the least advantaged segment.” 201 Applying the difference principle, judges may consider that the protection of single color marks should function to provide benefits to the least advantaged citizens in terms of their incomes. Therefore, the social justice mandate would require Christian Louboutin to furnish evidence to prove that the protection of the red sole mark would benefit poor people. ii. Social Justice as a Constitutional Value Moreover, the social justice mandate comports with the constitutional tradition in America. The Preamble of the Constitution highlights the need to establish social justice and promote public welfare: “[w]e the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity . . . .” 202 The ethos of social justice is further carried forward in the Equal Protection Clause of the Fourteenth Amendment. Watershed constitutional decisions that have reshaped the political and social landscape of the country have relied upon the idea of social justice to apply the Equal Protection Clause 203 in politically hostile social conditions. For example, in Brown v. Board of Education, the Supreme Court declared state laws establishing separate public schools for black and white students unconstitutional. 204 In Loving v. Virginia, the Supreme Court invalidated laws prohibiting interracial marriage. 205 By championing the cause of social justice, these cases denounced not only laws but also social attitudes that supported “the inferiority of the negro group” 206 or white supremacy based on “invidious TO RAWLS 200, 212 (Samuel R. Freeman ed., 201 RAWLS, supra note 195, at 84.

202 U.S. CONST. pmbl.

203 See U.S. CONST. amend. XIV, § 1.

204

2003).

Brown v. Bd. of Educ., 347 U.S. 483 (1954).

Loving v. Virginia, 388 U.S. 1 (1967).

206 Brown, 347 U.S. at 494 (“Segregation of white and colored children in public schools has a detrimental effect upon the colored children. The impact is greater when it has the sanction of the law; for the policy of separating the races is usually interpreted as denoting the inferiority of the negro group. A sense of inferiority affects the motivation of a child to learn. Segregation with the sanction of law, therefore, has a tendency to [retard] the educational and mental development of negro children and to deprive them of some of the benefits they would receive in a racial[ly] integrated school system.” (alteration in original) (citation omitted)).

205

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racial discrimination.” 207 It is true that the protection of the red sole mark does not impose legal barriers preventing the poor from buying and owning red-soled shoes. After all, red-soled Louboutin shoes are circulated in the market and made available to whoever can afford them. The trademark protection of the red sole, therefore, does not “racially” discriminate against the poor who cannot afford Louboutin shoes.

But one should note that what the Brown and Loving courts intended to eradicate were the social disorder that first determined people’s attitudes toward their perceived-inferior peers and then transformed their attitudes into racially discriminatory laws. Similarly, there is a social disorder underlying the protection of the red sole mark. The social disorder has encouraged people to privilege the rich “angels” who can afford Louboutin shoes in the fashion paradise and disprivilege the poor “devils” who only deserve to wear black-soled shoes in the non-fashion hell. The earlier discussion about the economic and status injustices (especially the conspicuous consumption point) caused by the red sole mark has evinced that simmering social disease. 208 Hence, this social disorder should at least be morally blamed for establishing a new practice of social profiling based on personal wealth or the ability to buy luxury goods.

Moreover, the freedom of expression protected by the First Amendment supports the social justice mandate. The First Amendment protects the equal liberty to have public spaces to perform free speeches. 209 Central to the public forum doctrine is the notion that resources used for speech must be held as public property for the general welfare of the people at large. 210 Public properties such as 207

Loving, 388 U.S. at 11 (Stewart, J., concurring) (“There is patently no legitimate overriding purpose independent of invidious racial discrimination which justifies [the ban on inter-racial marriage]. The fact that Virginia prohibits only interracial marriages involving white persons demonstrates that the racial classifications must stand on their own justification, as measures designed to maintain White Supremacy.”).

208 See supra Part III.A.1-2.

209 Rebecca Tushnet, Domain and Forum: Public Space, Public Freedom, 30 COLUM. J.L. & ARTS 597, 600 (2007) (“Public forums allow speech supporting the ‘poorly financed causes of little people’ to be disseminated where it is likely to be heard, in public spaces where the public often goes.” (quoting Martin v. City of Struthers, 319 U.S. 141, 146 (1943)); see also, Philip M. Napoli & Sheena T. Sybblis, Access to Audiences as a First Amendment Right: Its Relevance and Implications for Electronic Media Policy, 12 VA. J.L. & TECH. 1, 5 (2007).

210 Lyrissa Lidsky, Public Forum 2.0, 91 B.U. L. REV. 1975, 2008 (2011) (“The government must hold open the traditional forums such as streets and parks for the benefit of speakers who would otherwise lack the resources to reach a mass audience.”).

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public squares, parks, beaches, and utility poles, are a “medium of communication [that] is particularly valuable.”211 Courts have highlighted the need to make public forums equally open to all to exercise the free speech right. According to courts, a public forum open for free speech “entails a relatively small expense in reaching a wide audience, allows flexibility in accommodating various formats, typographies, and graphics, and conveys . . . message[s] in a manner that is easily read and understood by [the] reader or viewer.” 212 As a pillar of the American legal tradition, courts have protected intangible public forums for conducting speech activities and symbolic speech actions. 213 For example, Rosenberger v. Rector of the University of Virginia 214 found that a public university’s student activities fund was a “forum more in a metaphysical than in a spatial or geographic sense, but the same principles are applicable.” 215 Moreover, courts have also protected symbolic speech activities that purposefully and discernibly convey a particular message or statement to those viewing them.

Therefore, wearing black armbands overlaid with a white peace sign 216 and waving an American flag with the words “America the red, white, and blue, we spit on you” 217 were protected by the First Amendment as symbolic speech.

Free speech protection raises two concerns as to whether all Americans deserve equal protection to use the red sole as a speech activity. First, shall we treat fashion as an intangible public forum where people can express their thoughts and comments about many political and social issues and even personal matters?

Fashion designs or trends are all publicly displayed. Many fashion shows communicate political and cultural messages. 218 As fashion largely deals with 211

Members of City Council v. Taxpayers for Vincent, 466 U.S. 789, 819 (1984) (Brennan, J., dissenting).

212 Id. 213 Tushnet, supra note 209, at 599 (pointing out that “the Supreme Court recognized a ‘metaphysical’ or intangible public forum”).

214 Rosenberger v. Rector & Visitors of Univ. of Va., 515 U.S. 819 (1995).

215 Id. at 830.

216 Tinker v. Des Moines Indep. Cmty. Sch. Dist., 393 U.S. 503 (1969).

217 Texas v. Johnson, 491 U.S. 397, 399 (1989).

218 James Kilner, New York Fashion Week Cancels Show By Uzbek President's Daughter, THE TELEGRAPH (Sept. 11, 2011), www.telegraph.co.uk/news/worldnews/asia/uzbekistan/ 8755351/New-York-Fashion-Week-cancels-show-by-Uzbek-presidents-daughter.html (“Organisers of New York Fashion Week have cancelled a show by the daughter of Uzbek president Islam Karimov after pressure from newspapers and human rights groups who accuse him of torture”).

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creative and artistic ideas, it can be deemed to be an intangible public forum for making aesthetic expressions. Against this backdrop, can we privatize the color red, a basic ingredient in fashion design, 219 as a private property? From the free speech protection perspective, such a privatization affects the ability of fashion to serve as an intangible public forum.

Second, a trickier question is whether we can treat wearing red-soled shoes as a symbolic speech action that conveys particular meanings and messages. Mr. Christian Louboutin has acknowledged that he selected red because it is “the color of passion.” 220 What then if some Wall Street investment bank analysts and associates make red-soled shoes by themselves and wear them to wage a protest against their employers’ long-hours working policy that has sapped their passion and energy? Does this kind of symbolic speech action using the red sole violate trademark law? The color red also conveys anger as a human feeling. If nonLoubutin red-soled shoes were worn to express anger in similar protest scenarios, would this kind of symbolic speech action be penalized by trademark law? A larger and thornier question is related to the fact that many women and fashion designers have long seen the color red as a conveyor of messages about beauty and fashion itself. 221 For example, the young Valentino was stricken by “an opera-goer in a red velvet dress” in Barcelona, which made him believe that “if [he was] ever going to become a designer, [he] would do lots of red.” 222 Then how should the trademark protection of the red sole deal with this kind of symbolic speech routinely performed by women and fashion designers?

All these questions carry highly sensitive free speech values. Judges should pay attention to the fact that symbolic speech cases mostly involve use of colors. 223 With this hindsight, judges should realize that they should be vigilant in 219

See supra text accompanying notes 181 to 183.

Louboutin Declaration, supra note 167.

221 See Anita Bhagwandas, Beauty for Darker Skins: The Perfect Red Lipstick, THE GUARDIAN (June 24, 2013), www.theguardian.com/fashion/fashion-blog/2013/jun/24/beautydarker-skins-red-lipstick (noting that red lipstick has been a beauty trend for centuries).

222 Valentino, VOGUEPEDIA, www.vogue.com/voguepedia/Valentino (last visited Oct. 29, 2013).

223 See, e.g., Tinker v. Des Moines Indep. Comty. Sch. Dist., 393 U.S. 503, 509 (1969) (noting, in a symbolic speech case, that “students at one of the high schools were heard to say they would wear arm bands of other colors if the black bands prevailed."); see also Texas v.

Johnson, 491 U.S. 397, 428 (1989) (Rehnquist, J., dissenting) (noting that most state statutes against burning the American flag, determined by this Court to be symbolic speech, explicitly mention color).

220

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considering the potential free speech values in the free use of the red sole.

C. Practical Concerns about the Mandate The preceding Section discussed the legal foundation of the social justice mandate. This Section will first tackle two practical concerns about whether the mandate would sound the death knell for single color marks and the luxury industry that heavily relies on trademark protection for business success. It will then further consider whether the aesthetic functionality doctrine can address the social justice concerns embedded in the mandate.

1. The Demise of Single Color Marks?

The social justice mandate would by no means kill single color trademarks.

In fact, a normal single color mark would not necessarily cause social injustices.

During the past decades, courts have approved the use of a single color as a trademark for industrial products. For example, green-gold for pads used on dry cleaning presses, 224 pink for fibrous glass insulation, 225 and most recently purple for chocolates. 226 Products labeled with these single color marks are marketed to the mass public. As household products, their prices are relatively low enough so that nearly every family can afford them. Unlike luxury products that are purposefully designed to cater to the rich, they are available to virtually everybody not in palace-like stores but in places such convenience stores and supermarkets.

Being marketed with this “serving everybody” principle, these single color marks may not cause social injustice to the poor. Therefore, the social justice mandate would not permit undesirable judicial activism, invalidating single color trademarks all the time.

2. The Demise of the Luxury Industry?

With its rapid development, the luxury industry has played an important role in many modern societies. Economically, it is estimated that global luxury goods sales in 2011 reached around $250 billion. 227 The luxury industry has long hailed intellectual property protection as key to the industry’s success. Representatives from the industry always argue that adequate protection of intellectual property 224

Qualitex Co. v. Jacobsen Prods. Co., 514 U.S. 159, 160 (1995).

In re Owens–Corning Fiberglas Corp., 774 F.2d 1116, 1123 (Fed. Cir. 1985).

226 Société Des Produits Nestlé S.A. v. Cadbury UK Ltd., [2012] EWHC (Ch) 2637 (Ch) (Eng.) 227 Han, Nunes & Drèze, supra note 173, at 27.

225

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functions to ensure that luxury companies can recoup their investments in the creation and dissemination of product design and marketing. But given the very weak copyright and patent protection, trademark protection has become core to the luxury industry. Anti-confusion protection empowers luxury brands to attempt to wipe out counterfeits. Anti-dilution protection serves to preserve and enhance the exclusivity and quality reputation that are vital to luxury goods. 228 Therefore, two other practical concerns should be raised as to whether the social justice mandate would significantly weaken the luxury industry or even cause this industry’s demise in the marketplace. First, it seems that the mandate has created an exception only to luxury brands. Second, the mandate may enable fast fashion brands to obtain registration of single color marks and then use their popularity to eclipse luxury brands.

As to the first concern, the social justice mandate is not intended to create an unfavorable exception applied only to luxury brands. Trademark law, as shown above, does protect single color marks. It also protects simple trademarks like the Adidas three-stripe and Nike swoosh marks that have appeared in various colors.

Undoubtedly, all these marks have acquired sufficient distinctiveness. They are also used for marketing products to the mass public. As discussed above, these marks are far less likely to cause social injustices. 229 However, luxury brands are different. They are used to market products or services to the rich. To a certain extent, they are used to accommodate unequal distribution of social wealth.

Therefore, the status of luxury brands determines that they should be treated in a way different way. Moreover, even if luxury brands like the red sole mark are invalidated by the social justice mandate, luxury companies still have other powerful trademarks to use in merchandizing their products or services. Christian Louboutin still keeps the “Christian Louboutin” word mark, and as long it is used together with the red sole, it will signify passion and energy. Last but not least, it should be noted that the color red is a basic ingredient of fashion design. 230 Therefore, the trademark protection of red marks including the red sole mark may cause more far-reaching impact on the development and dissemination of fashion design. By contrast, color combination marks such as the Louis Vuitton monogram

228

See Sun, supra note 30, at 402-05.

See id. at 422-34 (arguing that the “shanzhai” phenomenon, as it applies to brands like Adidas and Nike, can redistribute resources).

230 See supra text accompanying notes 181 to 183.

229

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can be trademarkable. A primary reason, in this context, is that they are no longer basic ingredients of fashion design.

Second, the social justice mandate does not necessarily favor fast fashion brands by potentially enabling them to obtain registrations of single color marks.

Indeed, fast fashion companies like H&M, Forever 21, and Zara have competed with luxury companies on various fronts. As fast fashion products are relatively cheap, they are affordable products for the mass public. If fast fashion companies apply for single color mark protection, they will not be subject to the social justice mandate and could obtain registrations of their marks after passing secondary meaning muster. Fast companies may then rely on their single color marks to prevent luxury companies from using those colors as Louboutin did against its luxury peer YSL and lower market competitor Zara. Therefore, the mandate might turn the luxury world upside-down by favoring fast fashion brands.

However, that is an unnecessary concern. First, no fast fashion companies would be able to show the requisite secondary meaning of their single color marks.

Fast fashion is a heavily competitive industry. Copying and being copied are the heart and soul of this industry. Once a design element by a fast fashion company is fashionable, or has the potential to become fashionable, it will be quickly copied and incorporated by other fast fashion companies. Moreover, fast fashion companies copy from luxury companies. Therefore, it will be exceedingly difficulty for a fast fashion company to prove that one of its design elements has created source-identifying secondary meaning informing consumers that it is the producer or designer of the design element.

Moreover, the nature of fast fashion determines that no companies in this industry would strategize to fix a red soleâ&#x20AC;&#x201C;like design element to highlight their products. Fast fashion is defined by very rapid changes in trends. Being a trendsetter with constantly changing new designs is the rule of the game for most fast fashion companies. Without any permanent highlighting design elements, fast fashion companies will not be able to apply for single color mark protection.

Lastly, it should be noted that luxury companies still preserve the core brands for their business. The 2012 Top 100 Brands ranking highlighted leading luxury brands, including Mercedes-Benz, BMW, Louis Vuitton, Gucci, Cartier, Tiffany & Co., Porsche, Burberry, Ralph Lauren, Prada, and Ferrari. 231 The 231

Best Global Brands 2012, INTERBRAND (2013), www.interbrand.com/en/best-globalbrands/2012/Best-Global-Brands-2012-Brand-View.aspx.

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ranking shows that the value of these brands ranged from approximately $9 to $75 billion. 232 What is central to luxury companies are word marks that directly advertise corporate identities to the public. Subject to the social justice mandate, Christian Louboutin would not receive protection of signs like the red sole mark, but it still would have full control of the “Christian Louboutin” word mark.

Moreover, the social justice mandate also gives courts an option to protect the red sole mark together with the “Christian Louboutin” word mark. 233 If courts opt for this combination mark approach, both marks would still be protected by trademark law.

3. The Aesthetic Functionality Doctrine The third practical concern is that the social justice mandate may not be necessary because the aesthetic functionality doctrine can address the policy concerns on its own. According to the aesthetic functionality doctrine, 234 a design feature merits trademark protection only if it can be shown to perform no significant function other than acting “as a symbol that distinguishes a firm’s goods and identifies their source.” 235 In other words, certain design features may be so valuable for facilitating market competition, that it would significantly hinder competition if a single manufacturer were granted trademark monopoly over it. 236 An example of aesthetic functionality would be the heart-shaped candy box. The heart shape is “an important factor in the appeal of the product” and such functionality is both independent from source-identification and important to

232

Id. See Sun, supra note 30, at 411. (suggesting that the social justice mandate allows companies to offer products with the same functions as their high-profile counterparts, as long as the trademark name (e.g., Apple or Nokia) is not also replicated).

234 Aesthetic functionality is a subcategory of the functionality doctrine. According to the Restatement (Third) of Unfair Competition, “[w]hen aesthetic considerations play an important role in the purchasing decisions of prospective consumers, a design feature that substantially contributes to the aesthetic appeal of a product may qualify as ‘functional.’” RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 17, cmt. c (1995).

235 Qualitex Co. v. Jacobsen Prods. Co., 514 U.S. 159, 166 (1995). Before Qualitex, the Supreme Court ruled that a product’s feature is functional “if it is essential to the use or purpose of the article or if it affects the cost or quality of the article.” Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 850 n.10 (1982).

236 See Qualitex, 514 U.S. at 170 (noting that the policy goal of the Qualitex doctrine is to protect and advance fair competition in the market by preventing any one entity from claiming exclusive ownership over design features that are competitively valuable).

233

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effective market competition. Thus, the heart-shaped box is aesthetically functional and, consequently, does not qualify for trademark protection. 237 Aesthetic functionality doctrine is not designed to address social justice issues directly related to the poor. First, the doctrine does not intend to make a design feature relatively affordable. Instead, its primary function is to make design features available for producers of goods to compete in the market. The policy goal of the doctrine, as recognized by the Supreme Court in its Qualitex decision, is to protect and advance fair competition in the market by preventing any one entity from claiming exclusive ownership over design features that are competitively valuable. 238 Indeed, competition is likely to improve quality, or lower the price, of goods or services. But it does not guarantee that it would drive the price of a particular product to make it relatively affordable for everybody to afford it. In some industries, competition would not necessarily bring down prices of products.

For example, the luxury industry is a highly competitive industry but the overall prices of luxury goods remain very high. Because it is designed to promote competition, the aesthetic functionality doctrine primarily benefits companies that market goods or services.

Second, it is difficult to apply the doctrine to fashion designs. As the Supreme Court noted in TrafFix Devices, Inc. v. Marketing Displays, Inc., where a feature is aesthetically functional, its exclusive use must threaten to put competitors at a “significant non-reputation-related disadvantage.” 239 Therefore, under the doctrine the court must find that the anti-competitive consequences of granting trademark protection to aesthetically functional features would be significant. However, it is unclear what magnitude of aesthetic functionality would be considered as “significant.” The Louboutin case proves this difficulty. In applying the aesthetic functionality doctrine, the District Court found that the red sole served significant non-trademark functions by imbuing the shoes with “energy” and a certain sexiness and appeal. 240 In other words, the red sole was found to be aesthetically appealing at some unquantifiable level sufficient to disqualify it from trademark protection. However, whether “red” may make a design sexy and appealing is more a matter of subjective taste rather than being objectively judged. On the other hand, it is also difficult to distinguish between 237

RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 17, illus. 8 (1995).

See Qualitex, 514 U.S. at 170.

239 TrafFix Devices, Inc. v. Mktg. Displays, Inc. 532 U.S. 23, 23 (2001).

240 Louboutin I, 778 F.Supp.2d 445, 453 (S.D.N.Y. 2011).

238

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reputation-related disadvantages and other competitive disadvantages. This is particularly true in the fashion industry, where creativity is difficult to distinguish from commercial success, and demand is also difficult to distinguish from reputation. 241 Third, where design features are deemed to have acquired secondary meaning, it is difficult to prove that any aesthetic appeal they possess is not reputation-related in nature. For example, in the Ninth Circuit’s Au-Tomotive Gold decision, Audi’s logo of four interlocking rings was claimed to be functional because of an “aesthetic quality to the marks that purchasers are interested in having.” 242 The court, however, determined that “the alleged aesthetic function is indistinguishable from and tied to the mark’s source-identifying nature.” 243 Akin to the Audi case, the Second Circuit in Louboutin had difficulty sorting out the secondary meaning of a mark from its functional aspects. The court implied that the color red is functional for fashion design. 244 However, it still ruled that the modified version of the red sole mark, namely the red sole contrasted with the upper part of a shoe, had acquired secondary meaning and therefore become trademarkable. 245 This twist raises an important question: why did the Second Circuit uphold the validity of the modified red sole mark even after it determined red to be functional for fashion design? A possible answer is that the court may have had difficulty distinguishing between the functional and source-identifying aspects of the color mark.

CONCLUSION In her seminal book The Second Sex, Simone de Beauvoir points out that fashion binds female liberties. Women themselves are not able to define their freedom. Instead, it is determined by those who gain the power to design and judge fashion. 246 In the contemporary world of fashion dominated by giant trademark 241 242

See supra text accompanying notes 5-6.

Au-Tomotive Gold, Inc. v. Volkswagen of Am., Inc., 457 F.3d 1062, 1066 (9th Cir.

2006).

243

Id. at 1073–74.

See Louboutin II, 696 F.3d 206, 225 (2d Cir. 2012). The decision did, however, clarify that in the Second Circuit—where New York City is located—fashion brands can successfully acquire distinctiveness in a color in some configurations and protect those designs.

245 Id. at 227.

246 SIMONE DE BEAUVOIR, THE SECOND SEX 682 (H.M. Parshley, ed., trans. 1989) (“Precisely because the concept of femininity is artificially shaped by custom and fashion, it is imposed upon each woman from without . . . The individual is still not free to do as she pleases in shaping the 244

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owners, we should ask whether they have the monopoly power to control fastevolving fashion symbols and then further exercise power over the freedom of women’s and even men’s lives. The same question, as this Article shows, looms large in the context of the Louboutin red sole trademark. When a fashion symbol evolves into a luxury brand shielded by the giant red trademarked façade, it completely segregates the fancy world of luxury from the suffering world of poverty.

When the “Christian Louboutin” word mark is already protected as a luxury brand, is it necessary to increase this protection with the additional boost of the red sole trademark? As argued by the article, social justice should be considered in responding to this question. Yet, the Louboutin courts turned a blind eye to the social justice issues embedded in the red sole mark analysis. To correct the Louboutin court’s approach, this article proposes that a social justice mandate should be incorporated into the judiciary’s future application of the secondary meaning doctrine that assesses whether a descriptive symbol is ultimately trademarkable.

The social justice mandate, by its nature, would prevent any trademark owner from monopolizing some elements that are basic ingredients for the fashion industry and other industries as well. It would permanently block the floodgate that was created by the red sole trademark to allow the registration of red collars, red cuffs, and red CNN website stripe as trademarks, if they are exclusively marketed by a luxury company to acquire requisite secondary meaning. This would protect the poor from being swept away from the ordinary fashion trends that they are entitled to participate in. Simple things like red soles, collars, and cuffs should belong to the people of both Wall Street and Main Street. Both designers of fashion products 247 and the trademark system should embrace this principle for the betterment of society.

concept of femininity.”); see also TORIL MOI, SIMONE DE BEAUVOIR: THE MAKING OF AN INTELLECTUAL WOMAN 210 (Oxford University Press, 2d ed. 2008) (1994) (pointing out that de Beauvoir discovered fact that “'[F]emininity becomes an external set of rules for how to dress, behave, etc. . . . . .”).

247 Vogue magazine’s report on Valentino, a legendary fashion designer, exemplifies the use of red as a basic element in the fashion industry. The report notes that “[o]n a visit to Barcelona, an opera-goer in a red velvet dress makes a lasting impression. ‘She was unique, isolated, fiery— the perfect heroine,’ [Valentino] will later recall. ‘I told myself that if I were ever going to become a designer, I would do lots of red.’” Valentino, supra note 222.