royalty fees

Are We Entering the Age of Mandatory Compulsory IP Licensing Fees?

By John DiGiacomo

An eye opening opinion was recently issued in the case of ECIMOS, LLC v. Carrier Corp., Case Nos. 19-5436; 19-5519 (US 6th Cir. August 21, 2020). The case involved various breach of contract, copyright infringement and trade secret misappropriation claims related to heating, ventilation and cooling systems. After trial, the jury found in favor of the plaintiff. In particular, the jury found that the defendant had breached various contract provisions, that the plaintiff possessed both copyrights and trade secrets related to database computer sources codes, that the defendant had infringed the plaintiff’s copyright and misappropriated trade secrets related thereto. The jury awarded $7.5 million in money damages.

The plaintiff had also sought injunctive relief from the court such as an order barring the defendant from future disclosure and/or use of the plaintiff’s source code. Normally, such injunctive relief would issue as a matter of course.

However, in the ECIMOS case, the court did NOT issue the typical injunctive relief. Yes, the court DID order the defendant to cease and desist from disclosing or using the database source code, BUT then the court stayed its order with respect to use of the source code. Astonishingly, the court allowed the defendant to continue using the plaintiff’s trade secrets and copyright-protected source code until the defendant could create and implement its own new, non-infringing database as long as the defendant paid court-approved licensing fees. The court appointed a special court officer to oversee the temporary use of the plaintiff’s IP, to determine the adequacy of the licensing fee and to ensure payment by the defendant. The defendant has now been using the plaintiff’s IP under this compulsory licensing arrangement for nearly two years.

The trial court justified this unusual decision by noting that the jury had found that the misappropriation of trade secrets had caused no detriment to the plaintiff. In legal terms, the trade secret misappropriation did not result in recoverable compensable damages. Because of this, the trial court concluded that preventing use of the trade secrets would not help the plaintiff since it would not prevent any additional harm. Somehow, the court then concluded that it could, therefore, order a compulsory licensing arrangement between the parties (with, of course, as licensing fees — as set by the court — being paid)? One wonders if employment relationships could be created in this manner.

Unfortunately for the plaintiff, on appeal, the Sixth Circuit Court of Appeals agreed with the trial court. Without citing legal authority or logic, the court affirmed the US federal courts have the power to order parties into compulsory IP licensing arrangements.

This and other legal trends raise the question of whether we are entering an age of compulsory licensing fees. For example, in the music industry, the Mechanical Licensing Collective (“MLC”) will begin making royalty payments in mid-2021. The MLC was authorized by the Music Modernization Act passed by Congress in 2018. The MLC is a compulsory licensing arrangement between song-writers, musicians, producers and other artists in the music industry with online streaming and downloading services. There is no “opt-out” for the artists and other owners of copyrighted music and compositions. The streaming and download services will have access to and the ability to sell and perform all compositions and will pay royalties over to the MLC. The MLC will then issue royalty payments to artists.

Royalties may sound great, but the compulsory nature of the MLC licensing arrangement — and cases like ECIMOS — should raise weighty concerns about liberty and property rights. Issues with respect to takings and involuntary servitudes come to mind. Could other types of compulsory licensing relationships be ordered under the court’s “no [economic] harm” theory (as long, of course, as licensing fees are paid)?

For more information and/or if you have questions about protecting your copyrights and other intellectual property, contact the business and copyright lawyers at Revision Legal at 231-714-0100.

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