Saturday, January 5, 2008

Second Circuit Vacates Settlement of Freelance Writers' Class Action

A unanimous panel of the Second Circuit Court of Appeals held that the copyright registration requirement is jurisdictional. Therefore, the district court could not exercise jurisdiction over a copyright infringement class action that included claims for the infringement of unregistered copyrights. In re Literary Works in Electronic Databases Copyright Litigation, No. 05-5943-cv(L) (2d Cir., November 29, 2007)

Plaintiffs brought a class action against publishers on behalf of freelance writers who contracted to author works for publication in print media, and retained the copyrights in those works. The complaint alleged that the contracts did not grant the publishers the right to electronically reproduce those works or license them for electronic reproduction by others, but that the publishers did so anyway in violation of plaintiffs' copyrights.

"After years of negotiations," according to the Court, "class and defense counsel finally agreed on a settlement." "Following lengthy motion practice, the District Court for the Southern District of New York certified a class and approved the settlement." Dissenting class members appealed.

According to the Court, "the overwhelming majority of claims within the certified class arise from the infringement of unregistered copyrights." The issue on appeal, as framed by the Court, is "whether the District Court had jurisdiction to certify a class consisting of claims arising from the infringement of unregistered copyrights and to approve a settlement with respect to those claims." The Court held that the district court did not have jurisdiction.

The Court recounted the history of the litigation, which began with New York Times Co. v. Tasini, 533 U.S. 483 (2001), in which the Supreme Court held that §201(c) of the Copyright Act does not permit publishers to reproduce freelance works electronically without specific authorization to do so. After the Court decided Tasini, three class actions that had been stayed pending the decision, were reactivated and consolidated in the Southern District of New York.

According to the Court, the case involved two kinds of plaintiffs—individual authors and trade groups representing authors—and two classes of defendants—publishers of original electronic content, such as the New York Times Co., and companies operating databases that license content from publishers, such as Thomson Corporation, the owner of Westlaw.

Liability having been established by Tasini, the district court referred the parties to mediation regarding damages. Defendants took the position that the case had little settlement value because the vast majority of claims could not be certified in any class because the copyrights had not been registered as required by §411(a) of the Copyright Act, which provides that "no action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title." Based on survey evidence, Defendants estimated that less than one percent of the claims satisfied the jurisdictional prerequisite.

"Despite this looming jurisdictional issue," according to the Court, "the desire to achieve global peace in the publishing industry spurred the parties through more than three years of 'often heated' negotiations until they reached an agreement in 2005." The agreement defines the class, "for settlement purposes only," as follows:
All persons who, individually or jointly, own a copyright under the United States copyright laws in an English language literary work that has been reproduced, displayed, adapted, licensed, sold and/or distributed in any electronic or digital format, without the person's express authorization by a member of the Defense Group or any member's subsidiaries, affiliates, or licensees (a) at any time on or after August 15, 1997 (regardless of when the work first appeared in an electronic database) or (b) that remained in circulation after August 15, 1997, even if licensed prior thereto, including English language works qualifying for U.S. copyright protection under an international treaty (hereinafter "Subject Work").


The settlement established three categories of claims. Category A claims concern copyrights that were registered prior to any infringement, and which are eligible for statutory damages and attorney's fees. Category B claims concern copyrights that were registered after the infringing reproduction but before December 31, 2002, and which only qualify for actual damages. Category C claims, "by far the most numerous," according to the Court, concern copyrights registered after December 31, 2002 or never registered at all.

Under the settlement, Category A claimants receive a flat fee; Category B claimants receive the greater of either a flat fee or a percentage of the original price of the work; and, "by and large, Category C claimants also receive the greater of either a flat fee or a percentage of the original price of the work." However, according to the Court, "importantly, if the cost of all claims (plus the cost of notice, administration, and attorney's fees) exceeds $18 million, then the amount paid to Category C claimants is reduced—potentially to zero—before the claims of Category A and B claimants are affected. This feature is called the 'C-reduction.'"

Plaintiffs and Defendants jointly moved for class certification and approval of the settlement. Objections were filed on the ground, withal, that "the disparate treatment of Category C claimants illustrates that named plaintiffs, who each possess at least some registered copyrights, did not adequately represent those absent class members who possess only unregistered copyrights."

The district court granted class certification and settlement approval in September, 2005, but according to the Court, "the District Court never considered whether it had jurisdiction to certify a class consisting mostly of claims arising from unregistered copyrights, or to approve a settlement resolving those claims."

Objectors appealed, and the Court, "became concerned that the District Court and the parties had passed over a nettlesome jurisdictional question." Accordingly, the Court ordered the parties to file briefs "addressing the issue of whether the District Court had subject matter jurisdiction over claims concerning the infringement of unregistered copyrights."

On appeal, the Court emphasized that the Copyright Act's registration requirement is jurisdictional.
Whether this requirement is jurisdictional is not up for debate in this Circuit. On two recent occasions, we have squarely held that it is. See Well-Made Toy Mfg. Corp. v. Goffa Int'l Corp., 354 F.3d 112, 114, 115 (2d Cir.2003) (affirming dismissal for lack of "subject matter jurisdiction" because section 411(a)'s "registration requirement is jurisdictional"); Morris v. Business Concepts, Inc., 259 F.3d 65, 72, 73 (2d Cir.2001) (holding "that subject matter jurisdiction was lacking because the registration requirement of section 411(a) was not satisfied" and affirming dismissal "for lack of subject matter jurisdiction").


The Court refused to overrule its holdings in Morris and Well-Made. "The short answer to these arguments is that this panel simply cannot overrule a prior panel's holding."

The Court further held that "each claim within the certified class must satisfy section 411(a)'s registration requirement." The Court rejected the argument that jurisdiction is proper so long as the named plaintiffs' works were registered.

First, the Court noted that class action certification under Rule 23 does not offer any alternative source of jurisdiction, citing 28 U.S.C. §2072(b), which provides that the federal "rules shall not abridge, enlarge or modify any substantive right," and Fed.R.Civ.P. 82, which provides that "these rules shall not be construed to extend or limit the jurisdiction of the United States district courts."

Under the language of §411(a), according to the Court, "the question, as we see it, is whether the phrase 'the copyright claim' refers to all the claims within the class or only those claims of the named plaintiffs."

The Court agreed that "on the literal level, the language is not dispositive" because "the phrase 'the copyright claim' does not require, or even tend toward, one reading." The Court found, however, that "case law does provide some useful guidance as to how we should interpret that phrase."

The Court observed that "we have applied Article III's jurisdictional requirements to each member of a class," Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir., 2006); and "since statutory and constitutional jurisdictional requirements are equally binding, … the same approach should hold here."

The Court also cited Zahn v. Int'l Paper Co., 414 U.S. 291 (1973) (result overruled by 28 U.S.C. §1367), which held that the diversity statute requires each class member to satisfy the amount-in-controversy requirement. 414 U.S. at 301. The Court held that the phrase "matter in controversy" in §1332(a) refers to each class member's claim and therefore requires each claim to satisfy the statute's amount-in-controversy requirement.

Similarly, in Weinberger v. Salfi, 422 U.S. 749 (1975), the Court addressed whether a district court properly certified a class of Social Security claimants who asserted that they had been denied benefits wrongfully. Section205(g) of the Social Security Act grants subject matter jurisdiction over only "final" decisions of the Secretary. Reviewing a class certification, the Supreme Court concluded that the named plaintiffs' claims satisfied the finality requirement but that claims of absent class members did not.

According to the Court, "we see no reason to interpret or apply the jurisdictional requirement of section 411(a) any differently."
In light of these precedents, we hold that the phrase "the copyright claim" in section 411(a) refers to each claim within a purported class, and thus requires that each class member's claim arise from a registered copyright. Only when each claim satisfies that jurisdictional prerequisite may the district court utilize Rule 23 to "exercise [its] jurisdiction over the various individual claims in a single proceeding."

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