• Last week, the Justice Department filed suit in DC District court to block AT&T’s $39 billion acquisition of T-Mobile, arguing that the merger violates antitrust laws. Sprint has since filed its own lawsuit in DC District court to block the proposed deal.
• The Senate debates the America Invents Act on Patent Reform (H.R.1249). These proposed reforms to the patent system are expected to be passed and signed by President Obama within the next two weeks. Many argue that the new laws will harm small inventors and venture capital funded companies.
• TechCrunch reports on Google CEO Eric Schmidt’s own take on improving the quality of issued patents through crowdsourcing.
• Groupon is considering delaying its initial public offering due to recent public market uncertainty.
• The Electronic Frontier Foundation provides analysis on the recent Capitol Records v. MP3Tunes opinion issued by the New York Southern District.  The court held that file de-duplication on cloud-based music services falls within the safe harbor provisions of the DMCA.  The decision will lead to reduced costs for online music locker service providers.

The Sony Reader and the Amazon Kindle

The Sony Reader and the Amazon Kindle are portable media devices designed to carry and display e-books and other electronic documents. Kindle has a mobile broadband function that allows users to browse online content and download e-books while on the go. Alternatively, the Sony Reader requires users to download and manage their library of e-books via a home computer.

The contentious characteristic of both products is that they bar users from sharing their e-books with other users. For example, Kindle’s license agreement grants a “non-exclusive right to keep a permanent copy…solely for your personal, non-commercial use.” Consequently, Kindle users may “not sell, rent, lease, distribute, broadcast, sublicense or otherwise assign any rights to…any third party.” The Sony Reader has similarly restrictive language in its license, but does allow users to copy e-books to several other Readers as long as they are registered to the same account.

The First Sale Doctrine

Some users have argued that these license restrictions violate the “first sale” doctrine. Under the Copyright Act, the first sale doctrine allows the owner of a particular copy of a work to sell, lease or rent that copy to anyone they want at any price they choose. These rights only apply, however, to the particular copy that was purchased; any unauthorized reproduction or copying of that work constitutes copyright infringement. For instance, you can’t give away photocopies of Harry Potter and the Deathly Hallows, but you can auction your paperback on eBay when you’re finished with it.

When it comes to digital works, however, two complications arise: first, consumers might only hold a license to the content, rather than all of the rights that come from a sale; second, without a traditional physical container for each purchased work, consumers may not practically be able to sell their “particular copy” at all.

License vs. Sale

The first sale doctrine only applies to the “owner” of a copy of a work, so end users who acquire content by license do not enjoy the right to resell their copies. Whether a transaction is a license or a sale is a factual question determined by courts—even if a publisher calls it a license, if the transaction actually looks more like a sale, users will retain their right to resell the copy. However, as more commercial transactions involve the transfer of digital content—particularly commercial software—courts have struggled to consistently make the distinction between license and sale. Software is increasingly transferred with highly restrictive licensing terms, but federal case law has not clearly determined whether these types of transfers are licenses or true sales.

Kindle and the Sony Reader are following this licensing trend and creating restrictive licenses that users must agree to upon using the product. If these agreements are found to be enforceable licenses, they could serve as the legal authority to limit users from selling or otherwise transferring the e-books they download.

Amazon vs. Sony

Both license schemes are equally restrictive, but each product limits use in a slightly different manner. Amazon Kindle’s use license expressly limits the extent and use of both the device and the digital media. The Sony Reader’s restrictions operate in two steps: a license to use the device and a second license to use the e-book library software (created by Sony). In both devices, users are not allowed to circumvent or alter the pre-installed software on the device.

For digital media, Kindle’s agreement allows users one permanent copy. The Reader, on the other hand, allows one user to posses multiple copies as long as they are all registered to that user. Both regimes are equally restrictive on the distribution, copying, and sharing of purchased e-books (to other users).

The reason for the differences in these restrictions is a result of their technical characteristics. Amazon’s wireless store requires the terms to be agreed on initially, while the Sony Reader’s reliance on iTunes-like software allows a separate use agreement. In effect, both agreements accomplish the same level of restriction, but you have a little more leeway with the number of copies with the Sony Reader.

Hard Copies vs. Digital Copies

Another possible complication stems from the inherent difference between transferring an e-book and transferring a hard-copy book. The transfer of a hard-copy book is just that; the physical transfer of one copy. The transfer of an e-book, however, requires the digital recreation or copying of that e-book. Because the first sale doctrine allows transfers of only your particular copy, and not reproductions or recreations, a digital transfer of an e-book is probably impermissible. Thus, users of Kindle and the Sony Reader can only legally transmit works by selling the physical media on which they are stored—be that the e-book readers themselves or the users’ hard drives.

While the restrictions on e-books may initially seem inconsistent with the rights granted for hard-copy books, these differences are the consequence of new digital products outgrowing traditional copyright doctrines. Such issues are currently being examined by legal scholars and industry insiders, but only time will tell whether this degree of control over digital media is acceptable to society.

By Rajiv Batra, John Padro, Seung-Ju Paik and Sarah Calvert; originally published at Gizmodo.

With much fanfare, Amazon entered into the online music distribution business on September 25, 2007. Its major selling points? DRM-free music that is cheaper than Amazon’s biggest online competitor – iTunes. What is DRM, and why does it even exist? How else is Amazon’s new store different from iTunes? And what will the competition likely do to the music industry?

A Brief History of File Sharing

To understand why DRM exists, a bit of history is in order. Precursors of modern day file sharers have been quietly sharing digital files for decades – first through bulletin board systems and later through Internet relay chat. Then Napster debuted in 1999 and blew the doors off of a previously low-key file sharing scene. Utilizing a clean graphical interface as well as a centralized server, Napster brought file sharing to the masses.

Unfortunately, Napster also enabled massive copyright infringement, and this infringement did not go unnoticed by the major record labels. The Recording Industry Association of America (RIAA) blamed digital file sharing and mass copyright infringement for plunging sales. Court battles ensued, and Napster was shut down in July of 2001.

The Rise of iTunes

Napster left a void in the online music distribution market, and other music software as well as large corporations rushed to fill it. Apple, leveraging the iPod’s popularity, debuted its iTunes Online Music Store in April of 2003. Using the iTunes software, one can browse the catalog and buy singles or whole albums with only one click of the mouse. The songs are then downloaded to a computer and can be uploaded to an iPod.

iTunes is wildly successful, selling, to date, over three billion songs. It is now the third largest music retailer in the country. Unlike Napster, Apple negotiated with the record labels for licenses to distribute music and agreed to cut them a share of iTunes’ revenue.

Digital Rights Management

The RIAA, however, had not forgotten what file sharing programs like Napster can do. It feared that copies of music purchased on iTunes would still be illegally distributed. Thus, the RIAA continued to pursue a two-fold strategy of continued legal action against file sharers as well as development of technologies to discourage and prevent file sharing. Collectively, these technologies are called Digital Rights Management, or DRM. While the name ostensibly implies increased freedom on the part of purchasers of products incorporating DRM, in practice, DRM has served to restrict consumer usage of digital music in order to prevent or discourage file sharing.

For example, Fairplay is the form of DRM that can be found on the majority of music sold through iTunes. Fairplay imposes several restrictions on usage: it allows a track to be played on up to five computers simultaneously and permits a particular music playlist containing a protected track to be copied onto a CD up to seven times. Most significantly, Fairplay-protected tracks cannot be copied onto the vast majority of rival digital audio players including models produced by Microsoft and Creative. Other popular DRM methods include audio track watermarking or copy protection software bundled with audio CDs.

Amazon Music Store Versus iTunes Music Store

The new Amazon music store is different from iTunes in three important respects. First, the two stores are structured differently. Second, Amazon’s songs are not protected by DRM. The final major difference is a difference of price.

In terms of structure, Amazon demands only a web browser – unlike Apple’s music shop, which requires the iTunes software. Buying a track on Amazon, however, is more complicated – a three-step process that requires selecting the song, confirming a credit card and then confirming a “shipping address,” even though the song is delivered online. Although Amazon permits one-click purchases of an entire album, there is no equivalent to another convenient Apple feature: check boxes next to individual tracks. Amazon’s downloader, however, downloads faster than any similar utility available, and its songs are generally higher in quality than its competitors’. Better yet, Amazon will automatically add newly purchased songs to one’s iTunes or Windows Media Player library – which means they are available to your player immediately.

The second major difference is that all of Amazon’s songs are DRM-free, so they can be uploaded onto a device of a user’s choosing, including an iPod. Songs from iTunes, on the other hand, are protected by Apple’s DRM so that they can only be played on Apple devices. DRM-free songs can also be purchased on iTunes, but the price for such songs is higher than that of protected songs. While this difference in versatility may make Amazon songs seem like the better option, there is a trade-off. Because Amazon does not protect the songs it sells through DRM, many record companies are hesitant to sell their music through the Amazon store. Only two of the four major labels, EMI and Universal Music, are participating. The other two, Sony BMG and Warner, appear reluctant to offer music without DRM protection. As a result, Amazon has a much narrower song selection than iTunes.

It should be noted, however, that while Amazon’s songs are DRM-free, customers are still limited in how they can use the music. Instead of using software for protection, the restrictions are in the user agreement, a contract you automatically agree to when you buy the songs. Amazon’s agreement states that you “agree that you will not redistribute, transmit, assign, sell, broadcast, rent, share, lend, modify, adapt, edit, sub-license or otherwise transfer or use the Digital Content.” This is clearly not as protective or easily enforceable as DRM methods of protection.

The final major difference between Amazon and iTunes is price. Amazon is currently selling its DRM-free songs at $0.89 each; iTunes, on the other hand, sells DRM-protected songs at $0.99 each and DRM-free songs at $1.29. The $0.40 difference gives Amazon a competitive advantage that should not be underestimated.

How Will This Affect the Industry?

Once Apple announced in April of this year that it would make DRM-free tracks available through the iTunes Store, it seemed likely that other DRM-free stores would open. The logic is that if you are going to put your music out there in a way that can be infinitely duplicated, you might as well offer near-infinite ways of collecting money for it. So, the announcement of the Amazon store is not much of a surprise (particularly since rumors had been circulating since at least April of 2007).

Many reviewers have commented that the Amazon store, with its low-cost, DRM-free, higher-quality tracks, presents a compelling alternative to the iTunes Store. Moreover, Amazon already has many customers’ credit cards stored on its servers, and owns a powerful recommendation engine technology, which will recommend tracks that you might like based on what you have downloaded in the past. The only major drawback, as previously discussed, is that Amazon offers only about one-third of the tracks available on iTunes.

There seems little doubt that Amazon is a serious competitor to iTunes, and it seems that, as always, customers will ultimately benefit from this competition. If Amazon sells billions of MP3s, the two major labels that have so far resisted selling DRM-free tracks will likely feel pressure to join Amazon. But Apple will benefit from a successful Amazon store, too. The more digital tracks available in the marketplace, the greater the need for digital music players like iPods and iPhones, where Apple makes its real profit; neither device, nor the iTunes jukebox software itself, has faced a serious competitor.¹

Update October 18, 2007:

By Marc Friedenberg From the Columbia Science and Technology Law Review: On October 16, Apple announced that it has lowered the price of its iTunes Plus songs, which are not DRM-protected, from $1.29 to $0.99. In addition to songs from the EMI library, tracks from a number of independent record labels are also available as iTunes Plus downloads. Clearly, this move eliminates some of the allure of the Amazon offering; nevertheless, many of Amazon’s songs are still cheaper, costing only $0.89.

Although iTunes Plus songs now cost the same amount as DRM-protected iTunes songs, Apple is charging $0.30 cents per song to upgrade previously-purchased songs to DRM-free status.

By Marc Friedenberg, Michael Nguyen, Ehi Oviasu, Zen Zhang and Sarah Calvert. Originally published at the Columbia Program on Law and Technology blog.

1. The profitability of the iTunes Store has been a subject of some controversy. There seems little doubt, however, that the iPod and iPhone lines are far more profitable.

What fair use is, and how it works alongside the DMCA

“Fair use” is a doctrine under US copyright law that permits certain acts that might otherwise be considered copyright infringement. Copyright law gives authors the right to exclude others from their work, and can sometimes get in the way of the ultimate goal of copyright, which is to promote progress in art and science. The theory here is that without copyright protections, many artists and authors would be discouraged from distributing their work. The fair use exception allows copyright protections to remain in place while enabling consumers some degree of freedom in their use of purchased media. For example, it was generally understood that ripping CDs for personal use was legal because it fell under the fair use exception. However, fair use was dealt a serious blow with the enactment of the DMCA in 1998 and the widespread use of DRM protections. Indeed, fair use is not a defense to a DMCA claim.

The DMCA specifically prevents someone from “circumvent[ing] a technological measure that effectively controls access to [copyrighted works]” without permission from the copyright owner (17 U.S.C.A. § 1201(a)(1)(A) & (3)(A)). It also prohibits a person from, among other things, making such a tool or offering it to the public (17 U.S.C.A. § 1201(b)(1)). This provision has given content providers the power to take legal action against virtually anyone who tampers with their DRM protections, even those who would have otherwise been protected under the fair use doctrine — often times consumers like you.

A prime example of how courts have used this DMCA provision to strike down a DRM-removing technology involves DeCSS. As you might know, DeCSS removes the DVD content protection, or Content Scrambling System (CSS), essentially enabling anyone with a computer and a little know-how to rip DVDs. In the frequently cited case of Universal City Studios v. Corley 273 F.3d, 429 (2d Cir. 2001), the Second Circuit Court of Appeals affirmed a district court’s ruling that barred Eric Corley — aka Emmanuel Goldstein, publisher of the infamous 2600 hacker quarterly — from making DeCSS available for download on 2600.com, or posting links to other websites offering the program for download. Among other things, the court rejected the idea that DeCSS could be protected under the fair use doctrine, reasoning that fair use is concerned with how one uses a copyrighted work, not how someone obtains the work in the first place. Thus, the court concluded that the right to view a DVD does not create a right to decrypt the DVD.

Because the DMCA doesn’t distinguish between types of media involved or how protections are circumvented, the Corley case will most likely play a role in any future legal battle over DRM-stripping software. So far as FairUse4WM is concerned, the fair use doctrine would appear not give Viodentia (or users or distributors of the program) any protection against alleged DMCA violations, and FairUse4WM could suffer the same defeat in a US court as DeCSS. The European Union has enacted similar legislation to the DMCA, namely the 2001 EU Copyright Directive (EUCD). But Microsoft has admitted that it doesn’t know Viodentia’s location and has recently initiated action with Yahoo and Google to investigate. Legal defeat, however, has not at all magically eliminated the availability of DeCSS on the web. This may give some insight as to how effective current legal relief in the US will be once internet users take hold of a desirable new technology.

Have we seen the end of fair use? Current law still leaves a little wiggle room. While programs specifically designed to circumvent copyright protections have little chance of overcoming the DMCA, manual workarounds may still be legal. For example, most downloadable music services (begrudgingly) allow users to burn audio CDs from the music they buy. Doing so also strips the files of their DRM, but because users have permission to copy to CD, this use is acceptable under the DMCA. Re-ripping the CD back into unprotected audio files for personal use is probably acceptable under fair use or by some other right (the RIAA allows copying of CDs for personal use but not because of fair use). Whether courts would view this multi-step process as DRM “circumvention” under the DMCA has yet to be seen.

So where will the line between fair and illicit use eventually be drawn? The current legal incongruity between manual DRM workarounds and blatant DRM hacks reflects the questionable post-DMCA state of the fair use doctrine. Will this be enough to encourage lawmakers and courts to rethink their position on the DMCA? Only time will tell.

Microsoft takes legal action

On September 22, Microsoft filed a complaint against “John Does 1-10, a/k/a ‘Viodentia’,” alleging that Viodentia created and distributed software, FairUse4WM, that incorporates code from Microsoft’s Windows Media Format SDK v. 9.5. Microsoft argues that Viodentia should therefore be held liable for copyright infringement. Filing an action against a John Doe is somewhat tricky in the American legal system; we have an adversarial legal system, and when you file against a John Doe, you’re suing somebody whose identity you don’t know and who’s therefore not represented in court. One of the first steps, then, when suing a John Doe is to find out just exactly who you’re suing. This is done through a third party discovery motion, which needs to be approved by the court. Accordingly, Microsoft filed a Motion for Leave to Conduct Third Party Discovery on September 26.

In granting the motion for third party discovery to identify Viodentia, Judge John Coughenour set explicit limits on who can be subpoenaed and what can be requested. Judge Coughenour allowed discovery against two named e-mail providers, Yahoo! and Google. Microsoft may only look for information that is reasonably likely to lead them to identify the user of the targeted IP address(es). Judge Coughenour also authorized a limited second level of discovery that works as follows: if Microsoft’s Google and Yahoo! discovery uncovers an IP address relevant to the identification of Viodentia, Microsoft is permitted to issue subpoenas to the ISP that operates or issued that IP address in order to determine the identity of the user.

If Microsoft is unable to procure useful information from Google or Yahoo!, or if they run into a dead end at the ISP level, it will need to find some other means of identifying Viodentia. To expand the scope of its search, Microsoft would need to seek and receive further permission from the court. The present order gives Microsoft only 120 days to discover Viodentia’s identity. Although Microsoft can seek a time extension, if it cannot name an actual person in its suit before Judge Coughenour’s patience wears out, the case will likely be thrown out.

If Microsoft does identify Viodentia, the case can proceed. This would entail service of process and would involve thorny jurisdictional questions if Viodentia does not reside in or have sufficient ties to the US. In that case, even if the infringing acts alleged in the lawsuit occurred in the US, unless Viodentia can be prevailed upon to come to the US and be properly served, the case would likely be dismissed on grounds of forum non conveniens (inconvenient forum).

The critical importance of the subpoena power to Microsoft’s case against Viodentia explains the otherwise-mysterious question of why Microsoft has filed a suit for copyright infringement rather than for circumvention of DRM. The subpoena power is a little-noticed feature that the DMCA added to copyright law. In the old days, ISPs often refused to disclose the identities of their users. Then along came the DMCA’s 17 U.S.C. 512(h)(1), which enables a content owner to subpoena an ISP and demand user identities. This is crucial because ultimately, it is the only way to maintain a lawsuit and force a user like Viodentia to stop. But here’s the problem: 512(h)(1) applies only to copyright violation and not to DRM circumvention. If it were only a matter of hacking WM, Microsoft would not be able to use a subpoena to identify Viodentia. Therefore, Microsoft must claim copyright infringement, whether or not that actually is the case.

In the meantime, Microsoft is issuing cease-and-desist letters to websites hosting FairUse4WM, alleging the same copyright infringement as alleged against Viodentia. It remains to be seen if Microsoft will attempt to advance its copyright argument against these websites by filing suit, or whether it will focus its efforts on Viodentia. Since websites hosting FairUse4WM cannot hide behind the fair use doctrine as noted above, those that are within Microsoft’s legal reach will likely heed Microsoft’s threats rather than be ensnarled in a costly legal battle. However, it is important to note that legal defeat has not magically eliminated the availability of similar DRM-stripping programs like DeCSS on the web. This may give some insight as to how effective current legal relief in the US and abroad will be once internet users take hold of a desirable new technology.

Is all of this still relevant if Microsoft intends to turn its back on PlaysForSure? Absolutely. Zune or no Zune, PlaysForSure is supposed to live on for its current partners. What’s more, Microsoft’s case against Viodentia will likely establish important legal precedent for actions against the creators of other current and future DRM-stripping programs. If you thought Microsoft’s lawyers were scary, wait until you see Apple’s.

Legal analysis courtesy of Scott McMillan, Zachary Sharpe, and Trevor Adler. Reposted from Engadget.