<b><i>Online Exclusive</b></i>Second Circuit Shelves Freelancers' Pact With Publishers and Databases

A federal appellate court has thrown out a class action settlement between freelance writers and online publishers and databases that archived the writers' work without pay, saying that the pact approved by the lower court did not represent the interests of all class members.

A 2-1 panel of the Second U.S. Circuit Court of Appeals panel ruled in In re: Literary Works in Electronic Databases Copyright Litigation, 05-5934 (www.nylj.com/nylawyer/adgifs/decisions/081811walker.pdf), that class members who did not register copyrights for their works were not adequately represented in the settlement. The majority opinion was written by Judge John M. Walker Jr., joined by Judge Ralph K. Winter.

The lawsuit consolidates several class actions filed by writers who sold their work to publications that reproduced them in online archives or licensed them to third-party databases. The plaintiffs accused the publishers and databases of violating their copyrights. The publisher defendants include The New York Times Co., Dow Jones. and ALM Media, which is the parent company of Internet Law & Strategy. The database defendants include Reed Elsevier, owner of LexisNexis, and Thomson Reuters, which owns Westlaw.

In 2005, after three years of mediation, the parties reached a settlement that divided the class into three categories. Category A consisted of writers who registered a copyright within five years of publication, in time to receive statutory damages for infringement. Category B consisted of those who registered a copyright, but too late to receive statutory damages, leaving them eligible only for actual damages. Category C consisted of those who did not register a copyright before the settlement.

About 99% of the class members held only Category C claims, but the named plaintiffs held claims from all three categories. Category C claims received a much lower compensation than the other groups. For example, a claimant could receive $1,500 each for the first 15 works in Class A, while payments for works in Class C were calculated using a formula related to their original sale price and topped out at $60 each for works that originally sold for $3,000 or more.

Southern District of New York Judge George B. Daniels approved the settlement in 2005 over the objection of a group of class members with only Category C claims. The objectors appealed. The Second Circuit originally vacated the lower court's decision on jurisdictional grounds unrelated to the Category C claim holders' objection. The Second Circuit was overruled on the jurisdictional issue by the U.S. Supreme Court.

The Second Circuit heard arguments on the Category C objections in March 2007.

The majority looked to two U.S. Supreme Court decisions involving asbestos class action settlements. In Amchem Products Inc. v. Windsor, 521 U.S. 591 (1997), the Court found a conflict between class members who already had symptoms of asbestos-related diseases and those who had been exposed to asbestos but did not yet have the disease. The former group had an incentive to seek generous immediate payouts, while the latter had an incentive to assure funds were preserved for future claims. Certain aspects of the settlement, like a failure to account for inflation, reflected this unfairness, the Court said, and it vacated the settlement, ruling the two groups should have had separate representation.

In Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), one group of class members was injured when the defendant was insured and another group was injured when it was uninsured. The settlement did not compensate for the difference, and the former group ended up with access to more money. Once again, the Supreme Court vacated on the grounds that the two groups should have been represented separately.

'The ingredients of conflict identified in Amchem and Ortiz are present here,' Walker wrote in the opinion.

Even though the named plaintiffs held claims in all three categories, the judge said, they had no incentive to make sure that Category C claims were compensated fairly.

'To authors who own works in all three categories, how their compensation is allotted among their claims is irrelevant; what matters is the bottom line,' he said. 'Class members who hold only Category C claims, on the other hand, are interested exclusively in maximizing the compensation for that one category of claim.'

'Named plaintiffs' natural inclination would therefore be to favor their more lucrative Category A and B claims,' the judge said.

The majority acknowledged that Category C claims were less valuable than Category A and B claims, since their holders would have to register copyrights if they wanted to sue the defendants. Still, Walker said, that did not answer the underlying question of whether the claimants were adequately represented.

'We know that Category C claims are worth less than the registered claims, but not by how much,' he said. 'Nor can we know this, in the absence of independent representation.'

The panel remanded the case to the district court with instructions to divide the class into subclasses with separate representation.

In dissent, Judge Chester J. Straub said that the disparate treatment of Category C claims reflects 'the relative strengths and weaknesses of the respective claims as well as the practical fact that the overwhelming majority of claims at issue in this case ' 99% ' are C-class claims. Unregistered copyright holders may not maintain a suit for copyright infringement.'

'The defendants are incredibly disappointed,' said Charles S. Sims of Proskauer Rose, who argued the appeal for the publishers and databases. 'We worked hard with the plaintiffs and the authors' groups for four years.'

'We think the dissent got it right,' Sims added. 'We're studying the decision and considering our options.'

Michael J. Boni of Boni & Zack represented the class members who did not object. He could not immediately be reached for comment.

Charles Chalmers of Allegiance Litigation argued for the objecting plaintiffs. 'My clients are of course gratified that the Court accepted their central adequacy of representation objection, which they tried repeatedly to make clear in the district court. They look forward to a revised resolution that insures protection for the 99% of freelance articles involved in the action,' Chalmers said in a statement.

A federal appellate court has thrown out a class action settlement between freelance writers and online publishers and databases that archived the writers' work without pay, saying that the pact approved by the lower court did not represent the interests of all class members.

A 2-1 panel of the Second U.S. Circuit Court of Appeals panel ruled in In re: Literary Works in Electronic Databases Copyright Litigation, 05-5934 (www.nylj.com/nylawyer/adgifs/decisions/081811walker.pdf), that class members who did not register copyrights for their works were not adequately represented in the settlement. The majority opinion was written by Judge John M. Walker Jr., joined by Judge Ralph K. Winter.

The lawsuit consolidates several class actions filed by writers who sold their work to publications that reproduced them in online archives or licensed them to third-party databases. The plaintiffs accused the publishers and databases of violating their copyrights. The publisher defendants include The New York Times Co., Dow Jones. and ALM Media, which is the parent company of Internet Law & Strategy. The database defendants include Reed Elsevier, owner of LexisNexis, and Thomson Reuters, which owns Westlaw.

In 2005, after three years of mediation, the parties reached a settlement that divided the class into three categories. Category A consisted of writers who registered a copyright within five years of publication, in time to receive statutory damages for infringement. Category B consisted of those who registered a copyright, but too late to receive statutory damages, leaving them eligible only for actual damages. Category C consisted of those who did not register a copyright before the settlement.

About 99% of the class members held only Category C claims, but the named plaintiffs held claims from all three categories. Category C claims received a much lower compensation than the other groups. For example, a claimant could receive $1,500 each for the first 15 works in Class A, while payments for works in Class C were calculated using a formula related to their original sale price and topped out at $60 each for works that originally sold for $3,000 or more.

Southern District of New York Judge George B. Daniels approved the settlement in 2005 over the objection of a group of class members with only Category C claims. The objectors appealed. The Second Circuit originally vacated the lower court's decision on jurisdictional grounds unrelated to the Category C claim holders' objection. The Second Circuit was overruled on the jurisdictional issue by the U.S. Supreme Court.

The Second Circuit heard arguments on the Category C objections in March 2007.

The majority looked to two U.S. Supreme Court decisions involving asbestos class action settlements. In Amchem Products Inc. v. Windsor , 521 U.S. 591 (1997), the Court found a conflict between class members who already had symptoms of asbestos-related diseases and those who had been exposed to asbestos but did not yet have the disease. The former group had an incentive to seek generous immediate payouts, while the latter had an incentive to assure funds were preserved for future claims. Certain aspects of the settlement, like a failure to account for inflation, reflected this unfairness, the Court said, and it vacated the settlement, ruling the two groups should have had separate representation.

In Ortiz v. Fibreboard Corp. , 527 U.S. 815 (1999), one group of class members was injured when the defendant was insured and another group was injured when it was uninsured. The settlement did not compensate for the difference, and the former group ended up with access to more money. Once again, the Supreme Court vacated on the grounds that the two groups should have been represented separately.

'The ingredients of conflict identified in Amchem and Ortiz are present here,' Walker wrote in the opinion.

Even though the named plaintiffs held claims in all three categories, the judge said, they had no incentive to make sure that Category C claims were compensated fairly.

'To authors who own works in all three categories, how their compensation is allotted among their claims is irrelevant; what matters is the bottom line,' he said. 'Class members who hold only Category C claims, on the other hand, are interested exclusively in maximizing the compensation for that one category of claim.'

'Named plaintiffs' natural inclination would therefore be to favor their more lucrative Category A and B claims,' the judge said.

The majority acknowledged that Category C claims were less valuable than Category A and B claims, since their holders would have to register copyrights if they wanted to sue the defendants. Still, Walker said, that did not answer the underlying question of whether the claimants were adequately represented.

'We know that Category C claims are worth less than the registered claims, but not by how much,' he said. 'Nor can we know this, in the absence of independent representation.'

The panel remanded the case to the district court with instructions to divide the class into subclasses with separate representation.

In dissent, Judge Chester J. Straub said that the disparate treatment of Category C claims reflects 'the relative strengths and weaknesses of the respective claims as well as the practical fact that the overwhelming majority of claims at issue in this case ' 99% ' are C-class claims. Unregistered copyright holders may not maintain a suit for copyright infringement.'

'The defendants are incredibly disappointed,' said Charles S. Sims of Proskauer Rose, who argued the appeal for the publishers and databases. 'We worked hard with the plaintiffs and the authors' groups for four years.'

'We think the dissent got it right,' Sims added. 'We're studying the decision and considering our options.'

Michael J. Boni of Boni & Zack represented the class members who did not object. He could not immediately be reached for comment.

Charles Chalmers of Allegiance Litigation argued for the objecting plaintiffs. 'My clients are of course gratified that the Court accepted their central adequacy of representation objection, which they tried repeatedly to make clear in the district court. They look forward to a revised resolution that insures protection for the 99% of freelance articles involved in the action,' Chalmers said in a statement.