Click here to view the pdf version of the November edition of the California Business Law Confidential

Introduction to CA Business Law Confidential

Welcome to the CA Business Law Confidential - our new bulletin focusing on Business Law and Litigation in California. This initial “guest column” is sort of a blended “mission statement” and “introduction.” We at Tressler LLP created this bulletin because we believe there is a large need for a primary source for legal trends and hot topics impacting business and risk managers in California. This bulletin is designed and published with the goal to assist businesses in navigating the often turbulent and legally murky waters of California. In a May 5, 2011, article in the Orange County Register, the view on California business was made pretty clear:

“California is the worst place state [sic] in which to do business, according to a new survey of chief executives by Chief Executive Magazine. It is the third straight year that California is ranked last on the magazine’s list of Best and Worst States. The magazine asked 550 CEOs nationwide to evaluate states on such issues as regulations, tax policies, workforce quality, education resources, quality of living and infrastructure. The CEOs rated California’s quality of life four out of five stars, but its taxes and regulation earned one star and the quality of its workforce, once thought to be the state’s strong point, three stars. ‘ABC - Anywhere But California,’ T.J. Rodgers, CEO of Cypress Semiconductor, a $668 million San Jose chip maker, told the publication. ‘It’s expensive, it’s hostile to business, and environmental regulations are more of a drag on business than protecting the environment.’ Cypress Semiconductor’s staff in California peaked at 1,500. It’s now about 600.”

So there you have it, according to Chief Executive Magazine, California is a great place to live but an extremely difficult place to do business. We are very aware of the difficulties of dealing with the legal environment in California. This bulletin will track business trends, recent case law developments, and also legislative issues all with the purpose of making sure that you can remain on top of any issues impacting your business or clients.

For example, we were recently following California Assembly Bill 267, a bill which would have found choice of law provisions in many employment contracts unenforceable, severely limiting the ability of companies doing business in California from getting around California’s prohibition of non-compete clauses. While Governor Brown vetoed that bill, he signed Senate Bill 459, which adds additional penalties for employers for “willful misclassification” of employees as independent contractors, which impacts many businesses, both large and small. As we all know, there is never a dull moment in Sacramento. At the end of the day, our goal is to make it easier to do business in California, because in our view, it is still the Golden State with unlimited business opportunities.

As a final note, to the extent that any of you have issues or questions that you would like us to address either directly or in a future issue of the CA Business Law Confidential, please contact us—you can find the names and contact information for our California business lawyers on the last page of the bulletin.

Best Regards,

Evan B. Sorensen
Partner, Orange County

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Ninth Circuit Rejects Copyright Misuse Defense Asserted Against Apple Inc.
Authored by:
William J. Rusteen

In Apple Inc. v. Psystar Corp., No. 10-15113, 2011 U.S. App. LEXIS 19707 (9th Cir. Sept. 28, 2011), the Ninth Circuit held that, where a software licensing agreement reasonably restricts the use of the copyright holder’s software, the copyright misuse defense is unavailable so long as the software licensing agreement “does not prevent the development of competing products.”

Apple Inc. (“Apple”) owns copyrights in its Mac OS X operating system (“Mac OS X”). Each version of Mac OS X is accompanied by a Software Licensing Agreement (“SLA”) which limits the use of Mac OS X to Apple computers only.

Psystar Corporation (“Psystar”) manufactures and sells personal computers that can run various operating systems. However, Psystar sells its computers with a pre-installed altered version of Mac OS X and provides its customers with an unopened copy of Mac OS X.

Apple initiated a lawsuit against Psystar asserting various causes of action, including direct and contributory copyright infringement for Psystar’s purported violation of the SLA. Psystar counterclaimed, asserting “that Apple was misusing its copyright in Mac OS X by requiring purchasers to run their copies only on Apple computers.” Specifically, Psystar argued that the Copyright Act protected Apple “against unauthorized copying and distribution of the operating software, but not on its use once it is purchased.”

The district court ruled that Psystar was infringing Apple’s copyrights in Mac OS X and rejected Psystar’s copyright misuse defense. Psystar appealed, contending that its copyright misuse defense should have been upheld, among other arguments. The Ninth Circuit affirmed the district court’s ruling that the SLA was “appropriately used to prevent infringement and control use of the copyrighted material.”

The Ninth Circuit first distinguished the difference between software sales and software licensing agreements. If software is sold, “[t]he first sale doctrine allows owners of copies of copyrighted works to resell their copies without restriction.” However, the first sale doctrine is inapplicable, under section 190(d) of the Copyright Act, “when the copy is transferred through ‘rental, lease, loan, or otherwise, without acquiring ownership of it.’” In other words, “the first sale doctrine does not apply to a licensee.”

A three factor test, articulated in Vernor v. Autodesk, 621 F. 3d 1102 (9th Cir. 2010), provides “that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.” Here, Apple’s SLA clearly informed Mac OS X purchasers that they were licensees and that the SLA imposed use and transfer restrictions on the software.

Courts have permitted the copyright misuse defense in a copyright infringement lawsuit where a copyright holder seeks to enforce its software licensing agreement to restrain the development of competing products. Here, the Ninth Circuit determined that the SLA did “not
restrict competitor’s ability to develop their own software, nor [did] it preclude customers from using non-Apple components with Apple computers.” Rather, the SLA only prohibited the use of Mac OS X on non-Apple computers. Thus, the Ninth Circuit rejected Psystar’s copyright misuse defense.

Tressler Comments:  This Ninth Circuit decision upholds prior case law that permits the use of software licensing agreements when a copyright holder determines that licensing its software to a purchaser, as opposed to selling its software, is the best method of controlling the use of its copyrighted software. However, the copyright holder must ensure that its software licensing agreement is not subject to a copyright misuse defense by only restraining the use of the copyrighted software, rather than prohibiting the development of competing products.

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The Ninth Circuit Holds That an Employee-Driver Restriction on Trucking Operations at the Port of Los Angeles is Preempted Under Federal Law, But Upholds Other Restrictions for Maintenance and Security
Authored by:
Elizabeth L. Musser

In American Trucking Associations, Inc. v. The City of Los Angeles, No. 10-56465, 2011 U.S. App. LEXIS 19609 (9th Cir. Sept. 26, 2011) the Ninth Circuit found that an employee-driver restriction on trucking operations was impermissible under federal law, but upheld various other restrictions on trucks, including maintenance and offstreet parking requirements.

In 2008, the Port of Los Angeles (“Port”) adopted concession requirements for trucks transporting goods from the Port to offsite businesses or transportation hubs. The regulations were part of the Port’s “Clean Truck Program” (“CTP”), which supported the adoption of newer, more environmentally friendly trucks. Among other requirements, the CTP adopted maintenance standards, and restricted parking and truck driver employment.

The American Trucking Associations, Inc. (“ATA”), a national association of motor carriers, challenged requirements that it alleged were preempted by the Federal Aviation Administration Authorization Act (FAAA Act), 49 U.S.C. § 14501, et seq., which prevents states from undermining federal deregulation of interstate trucking. ATA challenged five specific CTP provisions at trial: (1) provisions requiring the use of employee-drivers (as opposed to independent owner-operators); (2) provisions requiring trucks to comply with parking restrictions; (3) provisions requiring trucks to be maintained in accordance with manufacturer standards; (4) provisions requiring trucks to use placards regarding safety and environmental compliance; and (5) provisions requiring that trucking companies show financial capability to comply with requirements.

State provisions are preempted under the FAAA Act if they relate to a motor carrier’s price, route or service, and to the extent they were enacted for purposes of market regulation rather than in the course of market participation. Express exemptions, such as the right to regulate trucking safety, may bring regulations within state purview.

The district court held the challenged provisions were enforceable.

The Ninth Circuit affirmed as to four of the CTP provisions, holding that they do not interfere with marketplace competition, particularly because the Port does not rely on city or county revenues. In addition, maintenance requirements constitute safety regulations. However, the Ninth Circuit held that the employee-driver part of the concession agreement is subject to federal preemption, because there is no justification under the “market participant” doctrine for the Port to interfere with trucking companies’ employment relationships.

Tressler Comments:  As one of the largest economies in the world, California tries to enact legislation that will promote business growth, while remaining responsive to its citizenry’s demand for environmental and social responsibility. More pragmatically, the Port is trying to expand its operations, without creating a nuisance to nearby residents. The concession regulations at issue in this action constitute part of California’s efforts to respond to these demands, as tempered by the FAAA Act, which limits state interference in the trucking industry. A strong dissent penned by Justice N. Randy Smith may provide a basis for ATA to appeal to the Supreme Court. Furthermore, one of the most significant issues in trucking today is whether owneroperator drivers are independent contractors or employees. While the Port of Los Angeles unilaterally attempted to impose employee status on all drivers working in or around the Port of Los Angeles, the Ninth Circuit found this to be over-reaching and an unwarranted intrusion on the carrier-driver relationship. This is considered a “win” in the ongoing argument of the employee or independent contractor status of owner-operator drivers.

411:

Authored by:
Kenneth J. Zielinski

Is J.T. Bringing MySpace Back?

For those who are thinking who or what is J.T., don’t worry, you are probably not alone. In June of this year, Specific Media LLC—a global digital media company headquartered in Irvine—acquired the failing social media networking site MySpace.com for a reported
$35 million. With the rapid decline of MySpace advertising revenues in recent years, the question is “can Specific Media turn the social networking site around?” That’s where Specific Media’s leadership and Justin Timberlake’s star-power come in.

Specific Media has partnered with artist Justin Timberlake to “reinvent the MySpace brand with the intention of bringing the social media company back to what it was meant to be—the digital hub where engaged audiences and entertaining content come together,” and
reestablishing MySpace as the “premiere digital entertainment destination.”  Recently, on October 4, 2011, Specific Media unveiled its marketing plan in front of an invite-only audience as part of Advertising Week in New York. So what exactly is the plan? Well briefly, Specific Media’s vision seeks to simplify, streamline, and capitalize on its extensive cache of music and videos, with the assistance of its new creative director -- J.T. of course. Will they be successful? With his first two solo albums, J.T. has sold more than 17 million
albums worldwide. If that is any indication, J.T. just might bring MySpace back.

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Free Wi-Fi? Great, But at What Risk?

Unless you are still living in the glory days of the 1980s and are only reachable via a personal beeper, you know that wireless hot spots provide Internet access to users in public locations. However, what you might not know is that free hot spots are open networks vulnerable to security breaches—that is, because the data is not encrypted, information can be visible to hackers. Word of advice, if you want to keep confidential information confidential, make your system more secure. So how do you do that?

According to Microsoft, the following are some tips to help protect your information: (1) disable your Wi-Fi adapter when you are not using it, otherwise your computer might connect to a malicious network; (2) choose more secure connections such as a virtual private network; (3) ensure your firewall is activated; (4) monitor your access points, i.e., configure your computer to let you approve access points before your computer connects; (5) disable file sharing; (6) make your folders private; (7) encrypt your files; and (8) consider removing sensitive data from your portable computer. Benjamin Franklin once said “an ounce of prevention is worth a pound of cure.” That still rings true today. Consider protecting yourself and your clients before you access an open network and unwittingly share your confidential information.

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Apple iPhone 5? Wait, iPhone 4S.

On October 4, 2011, Apple CEO Tim Cook took the stage at the company’s headquarters in Cupertino, California, to announce the launch of the new iPhone 5, no wait, the iPhone 4S. While it’s not the highly anticipated iPhone 5 that everyone expected, the iPhone 4S
has some pretty significant technological improvements.

Here’s the 411: (1) it has an 8-megapixel camera; (2) it can record video in 1080p HD resolution; (3) it offers Siri, a digital assistant that can answer questions, send texts and set reminders; (4) it has a dual mode GSM and CDMA radio so that world travelers can use it internationally; (5) a new battery offers eight hours of talk time and six hours of web browsing; (6) it offers iCloud, to wirelessly store and access your music and documents without syncing your iPhone 4S; and (7) a new 64 GB unit.

Not bad, now when is the iPhone 5’s debut?

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This newsletter is for general information only and is not intended to provide and should not be relied upon for legal advice in any particular circumstance or fact situation. The reader is advised to consult with an attorney to address any particular circumstance or fact situation. The opinions expressed in this bulletin are those of the authors and not necessarily those of Tressler LLP or its clients. This bulletin or some of its content may be considered advertising under the applicable rules of the Supreme Court of Illinois, the courts in New York and those in certain other states. For purposes of compliance with New York State Bar rules, our headquarters are Tressler LLP, 233 S Wacker Drive, 22nd Floor, Chicago, IL 60606, 312.627.4000. Prior results described herein do not guarantee a similar outcome. The information contained in this bulletin may or may not reflect the most current legal developments. The articles are not updated subsequent to their inclusion in the newsletter when published.