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Judge Chin Rejects Google Book Settlement With Authors, Publishers

March 22, 2011

Judge Denny Chin of the U.S. District Court for the Southern District of New York on Mar. 22 rejected a proposed agreement to settle class action copyright infringement suits against Google Inc. over its program to scan millions of books for online searching (Authors Guild v. Google Inc., S.D.N.Y., No. 05-CV-8136 (DC), 3/22/11).

As to the ultimate question of whether the proposed deal to settle suits brought against Google by authors and publishers is fair, adequate, and reasonable for purposes of Rule 23(e) of the Federal Rules of Civil Procedure, “I conclude that it is not,” Chin wrote. He said that this settlement raises issues “more suited for Congress than this Court,” particularly because it “would release claims well beyond those contemplated by the pleadings,” and may even violate antitrust law, international law, and Section 201(e) of the Copyright Act.

After Google’s Copying, the Parties Reach a Settlement.

This proceeding combines the unresolved claims of authors and book publishers as initially filed in two underlying actions: Authors Guild Inc. v. Google Inc., No. 05 Civ. 8136 (S.D.N.Y. Sept. 20, 2005) (a class action filed by representative authors and the Authors Guild) and McGraw-Hill Companies Inc. v. Google Inc., No. 05 Civ. 8881 (S.D.N.Y. Oct. 19, 2005) (an action filed on behalf of five publishing companies). These cases were filed after Google, without permission of the copyright owners, digitized about 7 million books and other materials obtained through agreements with library collections at the University of Michigan, Stanford University, Oxford University, Harvard University and the New York Public Library, among others.

Google asserted that the copying was protected by the fair use doctrine Section 107 of the Copyright Act, 17 U.S.C. § 107.

The parties began settlement negotiations in the fall of 2006, and the amended settlement agreement (ASA) was executed in November of 2009.

Under the ASA, Google is authorized to (1) continue to digitize books and inserts, (2) sell subscriptions to an electronic books database, (3) sell online access to individual books, (4) sell advertising on pages from books, and (5) make certain other prescribed uses.

For books and inserts digitized before May 5, 2009, Google will pay $45 million into a settlement fund to make cash payments to rightsholders -- at least $60 per Principal Work, $15 per entire Insert, and $5 per partial Insert, for which at least one rightsholder has registered a valid claim on or before the agreed deadline.

Going forward, the ASA provides for Google to split revenues with rightsholders. For works covered by the ASA, Google will pay to a designated registry, on behalf of Rightsholders, 70% of net revenues from sales and advertising; net revenues reflect a 10% deduction for Google's operating costs.

Rightsholders can exclude their books from some or all of the uses listed above, and they can remove their books altogether from the database. Rightsholders can at any time ask Google not to digitize any books not yet digitized, and Google will use "reasonable efforts" not to digitize any such books.

Google’s book copying and the settlement talks have caused a firestorm of controversy in the publishing community, with many stakeholders supporting and opposing the proposed deal. In a September 2009 hearing before the House Judiciary Committee, Register of Copyrights Marybeth Peters, now retired, opposed the deal, saying in a statement that it “inappropriately creates something similar to a compulsory license for works, unfairly alters the property interests of millions of rights holders of out-of-print works without any Congressional oversight, and has the capacity to create diplomatic stress for the United States.”

Agreement Not Fair, Adequate, and Reasonable.

Observing that Rule 23(e) of the Federal Rules of Civil Procedure requires court approval of a class action settlement, Judge Denny Chin quoted authority indicating that a court may approve a settlement that is binding on a class only if it determines that the settlement is "fair, adequate, and reasonable, and not a product of collusion." Joel A. v. Giuliani, 218 F.3d 132 (2d Cir. 2000). The Second Circuit, he said, examines whether an agreement is fair, reasonable, and adequate under Rule 23(e) based on following factors set forth in City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974): (1) the complexity, expense, and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining a class action through trial; (7) the ability of defendants to withstand greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; and (9) the range of reasonableness of the settlement fund in light of the attendant risks of litigation.

Having looked at these factors, Chin said that “most of the Grinnell factors favor approval of the settlement.” He found that the ASA came about through arm’s length negotiations, that further litigation would be “complex, expensive, and time-consuming,” that a trial would put the plaintiffs at risk of being unable to establish liability or prove damages, and that the financial aspects of the ASA fall “well within the range of reasonableness.”

Still, Chin said that two Grinnell factors weigh against approval of the settlement—the reaction of the class and defendant's ability to withstand judgment. As to the latter, he could find no real risk that a judgment following trial would render Google insolvent.

As to the reaction of the class, however, the court pointed to the following several areas it found “troubling:”

‘Antagonistic Interests.’ There is a substantial question as to the existence of antagonistic interests between named plaintiffs and certain class members, Chin said, having noted that some 6,800 class members have opted out and that some foreign authors and academic authors argue that their interests are at odds with the interests of the representative plaintiffs.

Scope of Rule 23 Relief. While the ASA would in one way release Google from liability for past copyright infringement, it would also “release Google (and others) from liability for certain future acts,” Chin stressed, finding that this second part of the agreement “exceeds what the Court may permit under Rule 23.” Quoting the U.S. Department of Justice on this point, he said that this deal "is an attempt to use the class action mechanism to implement forward-looking business arrangements that go far beyond the dispute before the Court in this litigation." Later noting that this case was brought to challenge Google's use of "snippets" of books for display, Chin stressed that there was no claim that Google was making full books available online, and no dispute over full access to copyrighted works. “The case was about the use of an indexing and searching tool, not the sale of complete copyrighted works.” Chin went on to write that “the establishment of a mechanism for exploiting unclaimed books is a matter more suited for Congress than this Court,” and that the ASA would create a registry and a fiduciary purportedly representing the interests of rightsholders, even those who have not registered but are covered merely because they did not opt out. As to orphan works, whose owners are not identifiable or locatable, Chin said that questions as to who safeguards these books “are matters more appropriately decided by Congress than through an agreement among private, self-interested parties.”  On this point, he cited authority indicating that Congress, not the courts, should decide how best to pursue the Copyright Clause's objectives. Eldred v. Ashcroft, 537 U.S. 186 (2003); Sony Corp. of Am. v. Universal City Studios Inc., 464 U.S. 417 (1984). Further, he questioned the parties’ incentive to identify and locate the owners of unclaimed works, noting that “fewer opt-outs will mean more unclaimed works for Google to exploit.” Certain class members here, Chin added, would be “deemed—by their silence—to have granted to Google a license to future use of their copyrighted works.”

Copyright Concerns. Chin continued by noting that certain objectors make a solid point that the ASA may violate Section 201(e) of the Copyright Act by as the opt-out provisions would grant Google the ability to expropriate the rights of copyright owners who have not agreed to such a transfer. Here, he quoted Section 201’s clear statement that when a copyright owner’s rights have not been voluntarily transferred, “no action by any governmental body or other official or organization purporting to seize, expropriate, transfer, or exercise rights of ownership … shall be given effect.”

Chin added:

In any event, I need not decide the precise question of whether the ASA would in fact violate § 201(e); the notion that a court-approved settlement agreement can release the copyright interests of individual rights owners who have not voluntarily consented to transfer is a troubling one.

Antitrust Concerns. The United States, Amazon, and Microsoft further objected on the ground that the ASA would violate the Sherman Act by giving Google monopoly power over other competitors. This point resonated with Chin, who said that the ASA “would give Google a de facto monopoly over unclaimed works” and “arguably give Google control over the search market.”

International Concerns. For Chin, the ASA also raises international concerns, as many authors and publishers from countries such as Austria, France, Germany, India, and other foreign countries strongly oppose the deal and assert that it would violate international law, including the Berne Convention and the Agreement on Trade-Related Aspects of Intellectual Property Rights. Declining to resolve whether any international laws would be violated, he said that the fact that other nations object to the ASA on these grounds is “yet another reason why the matter is best left to Congress.”

The motion for final approval of the ASA was denied, and the court set a status hearing for April 25.

The Authors Guild and other author plaintiffs were represented by Michael J. Boni and Joanne Zack of Boni & Zack, Bala Cynwyd, Pa.

McGraw-Hill and the other publisher plaintiffs were represented by Bruce P. Keller, Jeffrey P. Cunard, and Richard S. Lee of Debevoise & Plimpton, New York.

Google was represented by Daralyn J. Durie and Joseph C. Gratz of Durie Tangrie, San Francisco.

The United States was represented by Preet Bharara, U.S. Attorney for the Southern District of New York, by Assistant U.S. Attorneys John D. Clopper and Owen Knedler, also of New York, and by Deputy Assistant Attorney General William F. Cavanaugh, U.S. Department of Justice, Washington, D.C.


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