“BitTorrent’s software currently sits on 80 million computers, and Internet service providers say that file trading on the service — most of it illegal — now accounts for 40 percent of all online traffic”,

reports Brad Stone in the New York Times on November 29, 2006, noting that fat video files that might take an hour to download on iTunes can take just minutes over BitTorrent if other, nearby users have the file on their hard drives.

Rather than resisting that huge flow of traffic, media companies by the dozen such as 20th Century Fox, Kadokawa, Lionsgate, Palm, Paramount, Starz Media, MTV, Warner Bros. Home Entertainment, Egami Media, Hart Sharp, Koch Entertainment and The Orchard (according to BitTorrent’s press release) are increasingly attracted to the large online ‘audiences’ of technologies like BitTorrent. And rather than suing, are attracted to the idea of a co-operation deal, where the technology provider agrees to filter the network by removing infringing content from search indexes on the network thereby enabling the content provider to upload (seed) legal copies to the network with content management encryption keys that work within everyday browsers so that, other than the digital content itself, all that’s really being distributed is user id’s and passwords that can be purchased in bricks and mortar stores or online depending on how the content provider wishes to market the release.

I juxtapose this with the LimeWire case, which I discussed in an earlier post, where LimeWire was unable to find many allies in the music industry. A few years back, the major labels thought they should control the means of online distribution by rolling out successive, proprietary platforms modeled, it seemed, after old-time record clubs, resulting in fragmentation of supply and dysfunction. Both sides largely failed in their efforts, with the end-game now playing itself in that case, where infringement claims are pitted against claims that the major labels have conspired to destroy innovation.

Denied a veto in the U.S. over technological innovation, to use the terminology of the Electronic Frontier Foundation in its detailed analysis of industry briefs filed in the U.S. Supreme Court, and humbled likely by the sheer distributive force of BitTorrent-type open source file sharing, the major movie studios and other major content providers are now anointing BitTorrent with their approval in order to transform its platform from ‘illegal’ to legal.

To my mind there are two types of know-how: (i) our own personal, legitimate accumulation of experience in an area; and (ii) the asset called “know-how”. The first is subjective, cradled in the notion that the advancement of civilization is hobbled when people are unduly constrained from practicing their trade or calling. The second is objective, being a method, technique or (patentable or non-patentable) process that can be used, shared, licensed, assigned, etc.

It is clear that to the extent know-how is a trade secret, it should be protected from misappropriation. But what is a misappropriation in the context of subjective know-how?

A party disclosing know-how at arms’ length would protect it from misappropriation in a confidentiality and non-disclosure agreement (NDA). In a more intimate legal relationship governed by an employment agreement, long-term consulting agreement, etc. where know-how would be expected to be accumulated over time as part of the legitimate accumulation of experience, “non-competition” protection would be added to temper the ability of the employee or consultant to walk away with the accumulated know-how in his or her head and to begin using it immediately. The non-competition clauses (which would have to be reasonable in scope and duration) would augment the NDA protection, establishing a no-usage period, but once that period had expired, the subjective know-how then could be used because the recipient would be free to compete with the discloser. This would strike a balance between the rights of the individual to use his or her accumulated experience legitimately, with the rights of the discloser to own and control the use of the objective know-how for so long as it remained a trade secret.

A party to an NDA or non-competition agreement that tried, in a heavy-handed or overly-restrictive way, to control trade secrets that had legitimately become subjective know-how, thereby would run the risk of having the agreement found unenforceable. By the same token, just because a recipient can remember the trade secret, does not mean it has become a legitimate accumulation of know-how.

A counterclaim filed against major U.S. record label plaintiffs on September 25, 2006, by peer-to-peer (“P2P”) technology defendant Lime Wire LLC adds a twist to the familiar cocktail of copyright issues facing distributors of music and videos over the Internet.

The plaintiffs, which include Universal Music Group, Warner Bros. Records, Sony/BMG and Capitol/EMI, allege in their August 4, 2006 lawsuit in the U.S. District Court, Southern District of New York, that Lime Wire should be held liable for the allegedly “staggering” scope of copyright infringements over the Lime Wire network, enabled by the so-called Gnutella file sharing protocol. The record labels allege that Lime Wire has positioned itself as successor to P2P platforms such as Napster, Aimster, Kazaa, and Grokster, which previously have been found liable for copyright infringements over similar P2P platforms. These infringements relate to the unlawful Internet downloading and uploading of master recordings, as opposed to the musical compositions embodied in those master recordings.

Lime Wire argues in its defence that the development of digital technology no doubt disrupts the major record labels’ traditional distribution models and that in an effort to maintain a firm grip on the marketplace, the labels unfairly have resorted to anticompetitive tactics. That is, aside from its many lines of defence relating the nature of the technology, where for example, Lime Wire’s open source software uses a “bootstrap” method of connecting to other peers and therefore does not rely on hubs or servers which might transmit, copy or cache unlicensed copies of works, Lime Wire relies on the affirmative defence that the labels are misusing their intellectual property rights with the result that those rights should be unenforceable.

Given the expansive nature of secondary liability for copyright infringement in the U.S., Lime Wire’s defence efforts in court will be no party, especially in view of the September 27, 2006, judgment in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd. in the U.S. District Court, Central District of California. In that case, on a summary judgment motion, the court demolished Grokster’s argument, similar to Lime Wire’s, that copyright holders had leveraged their copyright in an anticompetitive manner. In that case, the court concludes that as an affirmative defence, misuse of copyright is limited to areas where creative activities might be impaired. The court observes for example (page 57) that “[p]rice fixing, in and of itself, does not restrict competitors or the public from engaging in creative activities.” The result is that antitrust violations are not, without more, sufficient to trigger the defence of misuse of copyright.

This makes the main ingredient of Lime Wire’s legal position its counterclaim, which Lime Wire no doubt will try to maintain as a separate, stand-alone argument. That is, Lime Wire has little choice but to spike its legal position, and its negotiation position for any settlement, with a distinctive and juicy counterclaim, alleging that the major record labels have conspired to commit illegal and anticompetitive activities in the market for the online distribution of music.

The flavor of Lime Wire’s allegations against the major record labels by now should be recognizable, both to music industry insiders and members of the music-enjoying public. However, if the Lime Wire case proceeds to trial, this will be a rare occasion where those allegations are tested in a way that could have significant financial repercussions for the major labels. That is, even if the record labels prevail in their action against Lime Wire, it is possible that Lime Wire could prevail in its counterclaim. Lime Wire would seek to set off damages that might be awarded against it in the dispute. The damages awarded to Lime Wire in the counterclaim, could be greater than the damages awarded to the major record labels in the main action.

However, Lime Wire’s mix of defence and counterclaim will not go down well if the U.S. court applies a Canadian way of thinking to the clash between the intellectual property rights of master recording owners and the rights of others in the marketplace to license those masters from them. In the case of Canada (Director of Investigation and Research) v. Warner Music Canada Ltd. (1997), 78 C.P.R. (3d) 321, where the copyright holder, Warner Music, refused to license master recordings to BMG, its intellectual property rights trumped BMG’s restraint of trade complaints. Warner was found entitled to refuse to deal with BMG. The competition tribunal stated that, “… the right granted…to exclude others is fundamental to intellectual property rights and cannot be considered to be anti-competitive…”.

Of course, every case turns on its unique circumstances, so it is too early to predict the outcome of the Lime Wire case. Once thing is certain however, this mixture of issues is bound to remain a juicy one.

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