January 2019
1. Patents
Australia
Computer Implemented Business Method Found to Involve Patentable Subject Matter
In the recent Federal Court decision Rokt Pte Ltd v Commissioner of Patents [2018] FCA 1988 a computer implemented business method was found to involve a technical solution to a technical problem and so was found to have patentable subject matter.
Rokt’s patent application, which was filed just prior to the 2013 ‘Raising the Bar’ amendments to the Patents Act 1990, involves a digital advertising system and method. Claim 1 of Rokt's patent application concerns a computer-implemented method for linking a computer user to an advertising message by way of an intermediate engagement offer which is operable to drive a higher level of engagement with the advertising message than if the advertising message was presented without the offer. After obtaining acceptance the application was re-examined and found to lack patentable subject matter. Despite amendments thereto, by decision of a Commissioner’s Delegate Rokt’s application was denied grant on the basis that claim 1 is a mere scheme or business innovation rather than being a technological innovation and that the other claims do not add any patentable subject matter.
In overturning the Delegate’s decision the Judge applied the precedent of the Full Court in Commissioner of Patents v RPL Central Pty Ltd, which held that business methods can be patentable if they “involve the creation of an artificial state of affairs where the computer is integral to the invention, rather than a mere tool in which the invention is performed. Where the claimed invention is to a computerised business method, the invention must lie in that computerisation.”
The Judge criticised the Respondent’s emphasis on the similarities between isolated features of the claimed invention and the prior art, noting that such an approach is prone to losing sight of the claimed invention’s combination of techniques and components in innovative and previously unknown ways so as to provide a technical solution to a technical problem.
The Judge was satisfied that the Applicant’s expert evidence established that the invention introduced a dynamic, context-based advertising system, involving the introduction of a distinction between an engagement offer – not having a direct advertising benefit, and an advertisement designed to lead directly to the sale of the product. Such a method was held to be an improvement in computer technology and one that necessarily involved the use of computer technology as it could not otherwise provide a solution to the business problem on the intended scale.
I find that there was a business problem of attracting the attention of the user and having the user choose to interact with the advertiser, but this problem was translated into the technical problem of how to utilise computer technology to address the business problem. The invention aimed to solve this technical problem through the introduction of the engagement offer and identifying what steps the software needed to execute in order to modify dynamically the website that the user was browsing while they were browsing it to, first, implement in the web browser or device the concept of the engagement offer, second, to implement in the computer system the necessary software for selecting engagement offers and advertisements for the given user based on the previous interactions with the system and the interactions of other similar users and, third, to have that system interact with the widget in the web browser in real time.
In the appeal the Respondent amended its notice of contention so as to introduce insufficiency as a ground for rejecting the application in the event that it was found to involve patentable subject matter. The Applicant argued that it was inappropriate to introduce such a ground so late in pre-grant re-examination proceedings and that it would be more appropriate for it to be raised in revocation proceedings. Nonetheless, the Judge was satisfied that the Applicant’s expert could be considered a person skilled in the art and that their evidence demonstrated that the disclosure was sufficiently enabling.
2. Trade Marks
Australia
Feedback Sought on Draft Trade Mark Amendment Regulations
IP Australia has released draft regulations for public comment. Apart from some minor clarifying amendments, the draft regulations would allow for the division of international registrations designating Australia that are still pending – not yet registered by IP Australia. Currently directly filed Australian trade mark applications can be divided, whereas Madrid Protocol trade marks can only be divided via application to the International Bureau in respect of all designated countries. As recently announced, from February 2019 changes to the Madrid Protocol regulations will allow division to occur before individual designated countries. While the Australian regulations will not be amended in time so as to commence in February 2019, division of Madrid Protocol applications designating Australia will be possible from 6-months after the regulations are registered. Submissions are requested by 1st March 2019.
United States of America
Agreements Not to Use Competitors Trade Marks for Search Engine Advertisement Purposes Held Anti-Competitive
By majority judgment the Federal Trade Commission (FTC) effectively and controversially held that agreements which prevent competitors from bidding for their competition’s trade marked terms as search engine ad generating keywords are anti-competitive.
1-800 Contacts Inc, which is the largest online retailer of contact lenses in the USA, actively sought to protect its trade marks by entering into agreements with rival online contact lens sellers who had used 1-800 Contacts’ trade marks as search engine ad generating keywords. The agreements prohibit the parties thereto from using the other party’s trade marks as search engine keywords and also require each party to designate the other party’s trade mark as a negative search engine keyword – which prevents the search engine from generating an ad even though the advertiser did not select the keyword. However, the majority of the agreements allow the use of the other party’s trade marks for non-infringing uses, such as comparative advertising and parodies.
The majority judgment ruled that the agreements between 1-800 Contacts and fourteen online sellers of contact lenses constitute unfair methods of competition, in violation of Section 5 of the FTC Act. The agreements were found to prevent online contact lens retailers from bidding for search engine result ads that would inform consumers that identical products are available at lower prices. It was held that the agreements harm competition in bidding for search engine keywords, artificially reducing the prices that 1-800 Contacts pays, as well as the quality of search engine results delivered to consumers. It prohibits 1-800 Contacts from imposing such internet search advertising restrictions on other contact lens retailers or to limit their participation in search advertising auctions.
The majority judgment gives preference to the increasingly ubiquitous nature of the electronic marketplace and the importance of competition in online search bidding for both consumers and for competitive entry by online sellers of goods and services and sought to curb any restrictions on that competition.
Noting the Supreme Courts statement that advertising “serves to inform the public of the availability, nature, and prices of products and services, and thus performs an indispensable role in the allocation of resources in a free enterprise system”, the majority emphasised and sought to maximise modern technologies capacity to provide consumers with robust, accurate, and intelligible price competition information. It found that the agreements had the effect of withholding such information from consumers, which was held to contravene the FTC Act on the basis that advertising restrictions can be harmful to competition and consumers. The majority acknowledged that trade mark rights have pro-competitive functions of reducing the likelihood of consumer confusion, assuring consumers of consistent quality and reducing consumer costs of making purchasing decisions. However, the majority held that these considerations are outweighed by the benefits from consumers having ready access to market information – a conclusion that seems unjustified given that modern technology also allows interested consumers to readily compile such information themselves or find it by using non-trade mark keywords. As noted in the dissenting judgment people who search with a trade marked term most likely do so for navigational rather than cost comparisons reasons and, by allowing for comparative advertising, the agreements achieve their goal of preventing trade mark infringement while balancing the need to permit non-infringing advertising.
The majority justified its finding on the basis that there is no precedent for the act of bidding on trade mark keywords being held to constitute trade mark infringement and that, absent consumer confusion regarding an advertisement’s source, sponsorship or affiliation, nor has a consequently generated advertisement. The majority further considered that the risk of consumer confusion could be mitigated by a brief statement in the ad identifying the ad sponsor and/or disclaiming affiliation with 1-800 Contacts. The majority also argued that even if the agreements were within the scope of 1-800 Contacts enforceable rights that does not mean that the agreements are immune from antitrust considerations, using as an example the antitrust finding made against pharmaceutical patentees who made reverse payments to generics not to compete. The majority also noted that the terms of contracts between private parties are similarly not immune from antitrust considerations.
In addition to its trade mark infringement claims 1-800 Contacts also claimed that the agreements were justified for preventing trade mark dilution, unfair competition and unjust enrichment. However, the majority held that those claims are co-extensive with and so stand or fall with the trade mark infringement claims. While this is not obviously the case in regards to the wide ranging doctrine of unjust enrichment the majority judgment noted as a footnote the statement from an earlier District Court judgment involving 1-800 Contacts that if they were able to obtain payment under unjust enrichment, common law would effectively expand the scope of statutory protection. However, such reasoning does not allow unjust enrichment to be recognised as a ground in its own right and so does not allow for the possibility that a party can be unjustly enriched from the use of another party’s trade mark whether or not that use also constitutes trade mark infringement.
The dissenting Judge considered that the majority judgment will create uncertainty for parties considering settlement, deter enforcement, capture and chill procompetitive behaviour, and reduce the incentive to build brands. The Judge noted that 1-800 Contacts began entering into the settlement agreements in 2004 after Google allowed third parties to bid on others trade marks. In a meeting between 1-800 Contacts and Google at that time Google encouraged 1-800 Contacts to enter into such agreements with its competitors. 1-800 Contacts only entered into three such agreements prior to a 2009 precedential Second Circuit opinion holding that using trade marks as keywords in paid search advertising constitutes a “use in commerce” – meaning that litigation was required for the highly fact-specific inquiry into whether the use was likely to cause confusion among customers. However, a further 10 agreements were entered into subsequently. This background and the exclusions in the agreements such as for comparative advertising led the dissenting Judge to find that the majority were wrong to analyse the agreements using the “inherently suspect” framework – a truncated framework that is used where the practices in question are considered to have a likely tendency to suppress competition. While the majority also found anti-competitive effects on a fuller rule of reason analysis based on a showing of direct effects, the dissenting Judge found that the evidence upon which they rely fails, both as a matter of law and as a matter of fact, to meet the legal requirement that such effects must be actual, sustained, and significant or substantial.
3. Copyright
United States of America
System for Resale of Digital Files Held to Infringe
In the recent Court of Appeals for the Second Circuit (CASC) decision 16-2321 Capital Records LLC v ReDigi Inc a system for the resale of digital files that sought to address copyright infringement concerns was nonetheless still held to be infringing.
Subject to various exceptions section 106 of the Copyright Act 1976 gives copyright owners the exclusive right to authorise in respect of their copyrighted works their reproduction, distribution, performance, display or the preparation of derivative works.
One of the exceptions is section 109 which is the legislative enactment of the exhaustion of rights following first sale principle and concerns the effect of transferring a particular copy or phonorecord. Section 109(a) provides that, despite the copyright owner’s distribution rights, the owner of a particular copy or phonorecord can sell or otherwise dispose of it. Section 109(b) provides that such disposal for direct or indirect commercial advantage cannot be by way of or in the nature of rental, lease or lending unless authorised by the copyright owner.
It is accepted that the owner of a digital music file that is fixed in a material object who sells that particular phonorecord does not infringe the copyright owner’s distribution right. The point of contention in respect of the resale of copyrighted works in digital form is whether such sale infringes the copyright owner’s right of reproduction, which section 109 is silent on.
ReDigi designed and operated a digital music file resale system that it considered would allay copyright infringement concerns. Owners of digital music files from iTunes could resell those files by first installing ReDigi’s “Music Manager” software, which then analyzes the digital files intended for resale and verifes that they were properly purchased from iTunes. The owner could then transfer the intended files to ReDigi’s remote “Cloud Locker” via a “data migration” file transfer method which separated the digital music file into small packets and then created a “transitory copy” of each packet and then deleted that packet from permanent storage on the device. The transitory copies in the user’s buffer, which existed for less than a second, were then sent to ReDigi’s server and then deleted from the user’s buffer. During the data migration process, the original digital file could not be accessed or played. The transferred packets were then re‐assembled into a complete music file on ReDigi’s server. Until the music files were resold the owner could continue to listen to them by streaming audio from the Cloud Locker. Upon resale the new purchaser would have exclusive streaming access to the file and if they choose to download it then it would be deleted from ReDigi’s server. ReDigi argued that this process meant the entire file never existed in two places at once.
If the seller kept a duplicate file on their hard drive or a connected device Music Manager would detect it and prompt the user to authorize ReDigi to delete it. If such authorization was not granted, then the user’s account with ReDigi would be suspended. However, this check would not detect whether prior to installing Music Manager the seller had duplicated the files onto mediums or devices unconnected to the device that has Music Manager installed. This defect was particularly concerning to owners of more expensive material that can be reduced to digital files, such as motion pictures.
In earlier District Court proceedings ReDigi was held to have infringed the copyright owner’s reproduction right in their copyright works as well as consequential infringement of the copyright owner’s distribution right given that the unlawful reproductions do not qualify for the distribution exception. Due to the disruptive potential of ReDigi’s system, on appeal both sides were joined by other parties in support of their respective cases.
The CASC readily found that ReDigi infringed the reproduction right given that ReDigi’s process for enabling the resale of digital files inevitably involves the creation of new phonorecords by reproduction. In being received and stored on ReDigi’s server and likewise on a purchaser’s device the digital file is fixed in a new material object creating a new phonorecord and so amounts to a reproduction. This conclusion was held to be unaffected by ReDigi’s process of simultaneously deleting the digital file packets from the uploading computer or server.
Further, such reproduction was held not to qualify as a fair use exception. The CASC found there to be nothing transformative about ReDigi’s reproductions of the copyrighted works:
It provides neither criticism, commentary, nor information about it. Nor does it deliver the content in more convenient and usable form to one who has acquired an entitlement to receive the content. What ReDigi does is essentially to provide a market for the resale of digital music files, which resales compete with sales of the same recorded music by the rights holder.
ReDigi’s system used the entirety of the digital file in a way that affected the copyright owners market for their works. The resale of such works amounted to an effective substitute of the originals given that they would not be subject to deterioration and so potential purchasers would be likely to prefer the resale version as its only effective difference from the original is its cheaper price. Due to the strength of the competition factor the CASC found that its fair use analysis would still favour Capitol Records even if ReDigi’s use of the copyrighted material was credited with some transformative effect.
The CASC also noted ReDigi’s technological neutrality argument that its use of the copyrighted works should be allowed on common law principles, on the basis that purchasers of digital files should not be disadvantaged compared to purchasers of more physical mediums of the same copyrighted works. However, the CASC declined to rule on this on the basis that it amounts to questions of economics that are outside the competence of the Court, although also noting that ReDigi’s system would be likely to unduly favour purchasers of digital files.
At a more general level ReDigi also argued that the common law doctrine of exhaustion by first sale has wider application than that enacted in section 109(a). However, the CASC found that making such a finding was outside its jurisdiction. While noting that some provisions of the Copyright Act, such as Fair Use, are open to development by the Courts of the common law, the CASC found that section 109(a) is not one of them. As such, although Congress’s enactment of section 109(a) is narrower in scope than the common law doctrine of exhaustion, section 109(a) dictates the scope within which Courts can rule on such matters and so any change thereto needs to be made by Congress.
However, the resale of digital files may not require legislative change. While not a subject of the appeal the CASC noted a development in ReDigi’s system that was made during the earlier proceedings. Under ReDigi 2.0 a purchaser of a music file from iTunes has the option of downloading the file directly to ReDigi’s cloud locker. It also allows users to download the digital file from the cloud locker, although it was noted that this again created infringement of the reproduction right. While the subsequent injunction against ReDigi is wide enough to prevent it from providing ReDigi 2.0, it has yet to be tested in Court as to whether a third-party could provide a system like ReDigi 2.0 without infringing copyright. Namely, whether they could allow a purchaser of a music file from iTunes to download the file to their server, from which the purchaser then has exclusive streaming rights to that file - until they resell it to another party who would then have the exclusive streaming rights.